When Facebook raised $240 million from Microsoft in 2007, and another $235 million in debt and equity in 2008, everyone thought they had plenty of cash to get through their big growth phase. With that kind of cash, the company could hire as many people as it needed to and not worry about profitability or going public until at least 2009, as board member Jim Breyer said in 2007.
But a confluence of factors may be conspiring to throw those assumptions out the window and force Facebook back to the capital markets much earlier than they originally planned. We’ve heard from multiple sources that they are testing the capital markets right now, in fact, and may be considering a near term capital raise at terms that could be much more favorable to investors than the previous $15 billion round that Microsoft kicked off in October 2007.
Facebook Is Growing, But So Are Costs
There’s no doubt that Facebook is growing at a breathtaking pace. A year ago, according to Comscore, they had just 74 million unique monthly visitors and 35 billion page views. Today those numbers have grown by 118% and 74%, respectively, to 161 million unique visitors and 61 billion page views per month.
Facebook’s growth, thanks to all these user-created translated versions of the site, has probably exceeded even their own internal projections. And running this engine isn’t cheap.
The company is likely spending well over a $1 million per month on electricity alone, say experts we’ve spoken with. Bandwidth is likely another $500,000 or more per month on top of that. The company has earmarked $100 million to buy 50,000 servers this year and next. And sources say they’ve been buying one NetApp 3070 storage system per week just to keep up with all this user generated content. At up to $2 million each, that adds up quickly – we’ve heard estimates that they may have spent as much as $30 million this year alone with the company. And the icing on the cake – earmark another $15 million per year in office and datacenter rent payments.
And don’t forget those human assets. With 750 employees and growing, Facebook is spending at least another $10 million per month on payroll.
It costs a couple of hundred million dollars a year just to keep the lights on at Facebook. But the real problem is keeping up with growth, particularly storage needs. Add another $100 million or more per year for capital expenditures, and you’ve got a company that’s doing exactly the opposite of printing money.
So How ‘Bout Those Revenues?
eMarketer estimates $265 million in revenue for Facebook in 2008. That’s great, right? Well, not really. The company is still losing money – lots of it – at current revenues. And it’s not clear that revenue will grow as robustly as costs.
Most of Facebook’s growth is outside of the U.S. A year ago, according to Comscore, Facebook had 31 million U.S. visitors, about 42% of the total. Today, U.S. visitors have grown to just 41 million.
19 million live in Africa and the Middle East. 26 million are in Asia. Europe, with 48 million Facebook users, has a larger share than the U.S. Another 16 million are in Latin America.
Just one in four Facebook users come from the U.S. today.
As we wrote last summer, most of these international users can’t be monetized today. And to make things worse, bandwidth costs in those countries is generally much higher than the U.S. So the users cost more, and they don’t bring in any revenue.
That international growth might be ok if U.S. growth remained strong. But the U.S. market just seems to be tapped at this point, and gaining market share from MySpace is a battle. As we wrote in August, at current growth rates it will take Facebook 18 years to overtake MySpace in the U.S.
Uh Oh, The Economy
So costs are skyrocketing, and revenues can’t keep up. Ok, But Facebook still has plenty of money, right?
Wrong.
The economy isn’t looking so hot, and it may get worse. If revenues don’t grow substantially, the company’s runway of cash gets much shorter. 2008 revenues are likely $100 million less than the company anticipated a year ago. If the economic train really derails, Facebook could be in big trouble.
A big chunk, probably a majority, of the roughly $500 million the company has raised is already gone. Even more will be spent next year, particularly if international growth rates remain constant (and there is lots and lots of room to grow internationally). Facebook could be down to just a year’s worth of cash at this point, with no IPO horizon in sight.
And even if they have cash into 2010 (its nearly impossible to figure out exactly how much they’re burning), the economic downturn is likely to be much, much worse than they anticipated. If they don’t grab the money now, it may not be available later on.
Which Explains Why CFO Gideon Yu Is In Dubai
Sources have told us that Facebook CFO Gideon Yu was in Dubai this week, possibly meeting with Dubai International Capital, exploring fundraising options.
U.S. investors, including VCs and hedge funds, aren’t interested or aren’t able to invest at the valuation Facebook expects. That leaves Sovereign Wealth Funds as the only viable funding solution. And the window to get money from them may fast be closing, too.
Which explains why Facebook may be looking for money sooner rather than later. If they don’t raise a big chunk of money now from someone who’ll pay whatever it takes to own a piece of Facebook, there may be a heavily dilutive down-valuation round for Facebook in the next 12-18 months.
there is no way Facebook.com is worth $15 billion. This is extremely over-hyped….there are much better sites (e.g. orkut, myspace) …. who should be worth much more.
http://www.livbit.com
I used facebook a few times and got tired of it. I don’t like the clunky interface that always get in my way. All these news posting are cluttering.
I get spam on it like crazy. I don’t know from who but it’s getting annoying.
They obviously aren’t building their data centers the right way. I heard that youtube pushes 10X the traffic at 1/10th the cost. They are just throwing money at the problem and not building the application in a leaner/smarter way. They need to step back and think abotu how to grow smarter. 750 employees and a in house Chef now too!
A chef?
grr, my didn’t show
i fail.
Well said. The Data Centers need work. They need to use cheap servers and build better clusters; when a server breaks switch it out and move on.
I don’t understand why facebook doesn’t just take over ad serving on Apps instead of allowing third party app networks to monetize on their users.
There are always multiple options, but what’s better:
1. 71 million users producing only X in revenue and Y in profits, and that Y is negative. Or,
2. 37 million users producing 5X in revenue and Y in profits, and that Y is positive.
FB should have by now introduced premium features, no doubt. But if you’re also blinded by big numbers on the user side, without more care for the P&L, you’re just a bad manager.
You can’t assume times will always be prosperous and free is always necessary.
Good post, very informative. All we ever hear about is Facebook this and Facebook that and how they are growing and taking over the world. We never hear the behind the scenes from a business stand point. This is another example of how in the web and social media world, many people are too focused on the idea and less focused about the business model. I didn’t realize their expenses were so high to keep all the servers running. They need to stop worrying about development and start worrying about how to be most cost effective. Why have they not gotten an IPO yet and do you think they will try to go public soon to get cash?
Craig
http://www.budgetpulse.com
It would be great if they could IPO – then we’d see their balance sheet. But its for that reason that they are unlikely to do it.
I think they should apply for relief from the federal government, as they are clearly too big to fail. Perhaps some of this new TARP relief can be directed towards free gifts for everyone on facebook.
So why is facebook loosing so much money? Is headcount *the* factor or bandwidth?
If we all believes that Facebook is bringing value to our day to day, would we be willing to pay for this service and how much?
great post.
Let’s see how this plays out. This is the perfect storm for Facebook:
1) FB huge growth numbers
2) IPO market is shut
3) Private Equity won’t over pay
4) Hedge Funds are blowing up
5) VC’s don’t have the cash for this type of round
6) Investment banks won’t invest now
6) Microsoft over paid so nobody else would try to get in
There is a HUGE down round coming. My guess a valuation of $3B (approx 5x ‘09 revenues)
Microsoft may end acquiring Facebook sooner than anyone thought.
Public companies with lots of cash:
*Cisco
*Microsoft
*Apple
*Intel
*Google
i agree 3 billion seems in the ball park.
I truly believe this was Microsoft’s strategy all along. Remember, they’ve been through this before. FB is run by seemingly arrogant first-timers who don’t have that experience. They were seduced by the praying mantis and now they’re going to get eaten!
I believe it was also. It was the ultimate Google cock block. And it worked. Give them a $15 Billion valuation, because any one with an interest in making money knows it’s not worth it.
Why would anyone pay $3 Billion for a machine that burns $250 million a year. It’s a cash incinerator with no end in sight.
Note to Facebook. STOP trying to be Google.
wow, really insightful post. they need to focus on first on monetizing US users better, then shift that model to international users where they can really win big. on the growth side they mirror that rapid scale of google but the monetization systems are vastly inferior. if/when they get this right it going to be an amazing money minting machine, but if the cannot create that special balance between quality and revenue it could be one of the most dramatic flameouts in silicone valley history. either way it will be interesting to watch.
Some solutions from my pov.
‘Home Page / Welcome Page’ has no adds, CPM ads can do very well there.
20% of users visit apps.facebook subdomain(i.e use apps) so FB should charge the App companies rather than the user as some readers suggest.
Text adds like in Gmail can do well
Search should be monetized with some sort of contextual CTR based model.
You think they didn’t think of that?
but ‘Thinking’ does not makes any difference, if they really are bleeding like this post mentions then these are steps that can pull them out pretty quickly.
After spending a wee bit of time inside FB, I can tell you the revenue being talked about here is fairly accurate.
The problem on charging for access is that you might get 1/10 to pay, yet your ad revenue will drop by more than 1/10 because the one’s who will pay are the more active members of the community (and don’t think advertisers are dumb enough to miss that).
The exec team seems naive (and they won’t admit they don’t have the answer)… so for the immediate future it’s “grow users, and we will figure the rest out later…” (or for those of you well versed in South Park lore – this is fondly know as the “underpants collecting strategy”)
Damning – but how do we know you have the inside scoop… you could be a twelve year old, a talking monkey, come from Iceland or been working in Afghanistan for the CIA for the past 25 years for all we know – no offence meant but that’s the net and anonymity.
Mike,
Great post with lots of analysis and thoughts. Fb may survive but a positive cash flow seems like a distant thing to me.
sheryl sandberg i read all the posts and i didn’t see her name mentioned anywhere. she was supposed to be the big savior but seem so far she hasn’t delivered . maybe its time to replaced her. she looked like a superstar @ google because they had all the best minds in the business around her and the company actually had a true business model . now @ facebook she isnt looking so stellar. i bet meg whitman could turned facebook around too bad she is retired.
http://kara.all...heryl-sandberg/
Paid/premium content is a when not if scenario online…. i wrote something about this on Huffington Post a few months ago. I think once a user base is created, you can keep it free but offer something extra for a fee. Historically, people wil pay for it.
You can search me on huff post if you want to see the article
but i definitely think paid content is coming to a site near everybody soon. it has to. ad revenue blows.
Honestly my first reaction to this story is “what an INCREDIBLE waste of money”. Like others I keep going back to the 750 employees, I can’t imagine why they would need so many people.
The comments about charging a small fee are interesting – I think they would lose college users for sure, which are probably the bread and butter of the advertising money.
Does anyone know how MySpace is doing financially? Are they profitable?
they are expecting 1 billion in revenue this year.
revenue != profit
There have been a lot of rumors floating around on VentureBeat about their valuation. To me, it sounds like they’re dominating the competition. I mean, check out this story: http://ventureb...efies-downturn/
A lot of the international themes in this analysis are teased out more fully in this White Paper “America’s Shrinking Presence on the Global Internet”
see: http://www.glob...om/download.htm
FB has become a great example of a Company that grows too fast. As Timmons said: You have Lemons and Pearls. FB might be a pearl, but how long before it becomes a Lemon?
It was Microsoft’s strategy all along. Put 250 million into Facebook at a completely ridiculous valuation (15 billion). This freezes out future investors when FB would eventually need more cash–which is what is happening now. Consequently, FB can only go to Microsoft for help. Microsoft has them right where they want them! Microsoft is such a methodical company!
Microsoft looked at FB’s inept business model and management. Microsoft new they would waste the 250 million cash in two years. They knew no one else could invest in FB effectively at the 15 billion valuation. This freezes out the competition and leaves FB for Microsoft’s taking. Bill Gates is a genius.
interesting although it was always a battle beween MS and Google with Myspace and Facebook as battlefronts. Really interesting question is do MS really want Facebook as the basis of an MS Office cloud… They are heading into dangerous free online word processing/office application territory if they do. Or maybe the will just buy FB to make sure google don’t use it to open another attack on MS Office.
Ultimately its a shame if the social web becomes a corporate web and that’s where we’re heading – unless Zuckerberg does the smart thing – sells soon and puts his great technical mind to the task of using social media for social good.
The thing about the economy is, is that internet usage, specifically Facebook usage isn’t going to be going down anytime soon. Their click rate for advertising may go down, but the actual usage probably won’t. So Facebook still has to run/add more servers and use more electricity now, but are going to be paid less for advertising. I think that they may feel this economic crisis harder than anyone.
They can not start charging now. People would just flood back to myspace.
Maybe Hank Paulson and Ben Bernanke will bail them out with a line of credit from the US Gov’t???
C’mon Facebook is vital to the growth of the US economy…….
Found the answer… MySpace has gone on the record saying they’ve been profitable for awhile. What a contrast…
Michael is completely correct. Fox has said it has 800M of revenue in total, of which MySpace is 500M. The 500M is probably divided into: Brand Direct ($1-$5 CPM, 150M) Remnant Networks ($0.20 CPM, 150M) and Google $200M. Most of the revenue 90% is probably US based, non US is all remnant. Numerous accounts are saying remnant is in serious trouble so the $150M is at risk and brand sales have pricing pressure at $2-5 CPMs
Facebook is roughly 37M visitors in US vs MySpace has 75M, the page views are similar so Facebook is roughly half the reach and size of MySpace in US.
The break down of Facebook revenue then looks like: 100M from Microsoft, $60-100M direct, $50-100M from remnant/self serve and $25-50M non media like classifieds or gifts. Sounds like $200-250, instead of the $400M that was thrown around earlier. Self serve is still new to Facebook, and with beacon as a complete failure, targeted brand sales can’t be sustained at $2-8 CPM’s.
The problem is expenses for social networks and user gen video like YouTube which is rumored to be losing $100M a quarter!!! The cost of running the network is HUGE and unlike cable there are no monthly dues. With 800 employees and Server farms, they are probably spending $150-2050M in expenses. As soon as MySpace Google deal ends — that Google has said does not work for them, and Microsoft — Facebook deal, that creates a 100M a year hole for Facebook. All cash at hand goes to zero in 18 months or less. Unless they can raise more money or do a massive layoff and slow server farms.
The problem is communication utilities- like email, facebook have very high bandwidth and server costs, and in Yahoo/MSN days could be monetized by keeping users in their portals with high home page CPM’s $20-$50. In Facebook’s case, there is no high brand CPM inventory as most time is spent inPhotos (28M or 37M users in US, mobile, email, and communicating) The utility part of Facebook has no monetization value- just replaces Outlook or Yahoo Mail and is a good Photo App. Also, the users are heavily teens, most advertisers don’t want to go after teens,specially in down markets, as parents give lesser to them to spend! This combination of younger demo and utility is a killer in a recession.
“The problem is communication utilities- like email, facebook have very high bandwidth”
Do you know what you are taking about? these things take the least of bandwidth..
Please go back to your Excel spreadsheet and work with numbers – don’t mess around with technical details. Thank You very much.
Social Networks require the MOST bandwidth, servers and co-location costs along with video sites like YouTube and Brightcove. If you take the time to read the post, the bandwidth of the user is not the issue as you suggest — they require little bandwidth — it is the server and hosting needs of the social network.
Why? Most social networks limit the friend of friends connections to 2-3, instead of 6 as it takes so much computing power that is really not affordable. How quickly the lessons of Friendster are forgotten — it died as they had technical and hosting issues. Facebook has scaled well- like YouTube, but the costs have got to be killing the company. The point is, the stuff that takes the most expense — the utility part or connecting people, email servers, etc– has ZERO value to advertisers and does NOT MAKE ANY MONEY AT ALL! Microsoft and Google can be in the business of doping things that are free for other reasons, startups like Facebook in a downturn will get killed if they continue to.
I read all the comments, since it’s relevant for my company. This is one of only two smart comments out of nearly 200. Arianna, what do you do?
Social Media Lawyer: Given that I still work at FB I’m not about to out myself here. However – if you get your hands on the list of insiders trading in vested shares “soon” – then you might figure it out…
The fact that you suggest that hedge funds invest in start-ups like Facebook indicates that you have no idea what you are writing about. You clearly don’t even know what a hedge fund is. This evidences your clear lack of knowledge in the area and undermines your other contentions.
Furthermore, your blanket claim that most overseas users cannot be monetized is wrong. Go to overseas websites (e.g. timesonline.co.uk) and you’ll be served US-specific ads. There is no reason why Facebook and other social networks cannot do this.
Asserting that SWFs are the only viable method of raising capital is also false. I’m sure MSFT (with over $20b in cash) would take another chunk, as would plenty of other US and international companies.
Regular old FB user here and I’ll just say this: Users were already pissed off that they changed the format, they aren’t going to pay for the service on top of that. A lot of people (myself included) will go elsewhere if they start to charge.
The one thing I never understood about FB was why the let users upload so much. It’s like they want to be Flickr/MySpace/YouTube/ETC…, but they obviously didn’t plan for it given the numbers I’m reading here.
If they fall they fall. I don’t think anyone will be crying over losing one of how many social networking sites? In fact, in my opinion, there are too many as it is. Facebook should have kept to the college crowd.
I’m pretty sure that someone out of the 700 employees they have will eventually come up with a viable monetization plan.
What’s Blake Ross up to anyway with Parakey code? FB Insider – show yourself! Maybe there is something brewing.
they should rethink the way they get money
apparently putting ads on the side is not enough
There’s no doubt that Facebook is growing at a breathtaking pace. However this kind of problem should be for other companies like youtube.
======================================
Joseph
wide circles
I wish they would hurry up and go public so I could short them.
This is absolutely insane. Man – this is either a hoax to bring down the evaluation keeping in mind the stock buyback they announced or they are really bleeding. But assuming they are bleeding this is crazy. If storage is their fundamental issue they just open sourced Cassandra to run on commodity hardware.
I work for a ad network company and we recently came up with hardware estimates for using Cassandra. This dramatically reduced our cost by hundreds of thousands of dollars over conventional storage like Netapp/EMC. This is the way to go for us to keep costs down. If Facebook isn’t doing this it is insane or some random political hubris.
hey kids, like i said before, we are creating the NEXT BIG THING that will blow away all social networks. we sincerely thank employees, users and investors of Facebook and other SN’s for undertaking the grunt work. we only need a few Angels who desire to create the best thing on the Internet. a modest goal to start.
SOMEBODY explain to me how to monatize users in Nigeria? You clowns that keep saying internaitonal is worth it. What exactly are you going to sell to users in Nigeria? Besides the key to my safety deposit box which is full of 10 million dollars, money left over from the late dr. boonga moonga joonga, 1 million of which is yours if you…
They will need to find a source of financing sooner or later. In the current economic climate finding investors just got even harder. Can we expect them to close operations if they are unable to raise money at their intended valuation?
I can hear the Facebook spokesperson now: “Don’t worry – we’re losing a buck per user per day, but we’ll make it up on volume!”
Sure they need more money…but they problem remains the same: how to make so much money online via advertisment?
I think they have to work on their business model. Could be a freemium model. Also selling the (anynomous) database profile data for market intelligence etc. But the ads itself are not enough too pay such costs. Normally, in a recession companies try to safe marketing cost. We they should make ads when nobody buys a car because nobody has money?
I don’t think Facebook can just rely on ads to get revenue. They need other revenue sources.
Facebook has too many people that’s dependent on their platform, as users and also as developers. It won’t sink, but this ship is definitely getting way too big!
Btw
Check out http://www.jobstaxi.com
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David Kirkpatrick, who’s working on a book called The Facebook Effect for Simon & Schuster, contentds that Arrington is wrong about Facebook’s finances – http://www.new...._id=34262653253
So many people complain and say No User Fees.
Those same people bitch and whine and say No Advertising.
Every one wants everything for free.
We should call them Socialist Networking Sites.
You want me to pay for your services?! How offensive!
FaceBook !!!
Fabulous
I dont care if people move out of facebook or not, but where the hell is the money going to come from?? I dont really think what they earn from ads is gona be enough to sustain something as big as this!
If they decide to charge developers, who are creating applications that drive users to facebook, you can start counting the days to facebooks demise.
Google ads are what generates most of their profit. Facebook could do similar things. Charge to have your app show up, when keywords are searched. Ad more advertising or charge for some of the application advertising (maybe the do already).
If craiglist seems to be doing just fine. How do they make money? T-shirt sales?
IMO, Facebook is making money — they’re just trying to make more (any business would). Charging developers might be the biggest mistake they could make. I’ll start paying companies to go work for them too.
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