One nugget of information Facebook leaked out to press last week during the Gideon Yu fiasco: the company has been EBITDA profitable for five quarters, but doesn’t expect to generate positive cash flow until 2010. Why the discrepancy? There’s only one answer to that – Facebook is paying out big dollars for something that must be depreciated over time. If they could just write off the expense in full as they paid it they’d be having much bigger losses now that matched cash flow, and they’d hit profitability sooner. But accounting rules let them pay cash now and recognize the expense later on. In early leaked projected financials, there was a $200 million difference in 2008 cash flow and EBITDA profitability (or lack thereof).
What have they been buying? Stuff to serve up all these massive page views, and photos in particular. In our post last October, when Facebook was fishing for dollars in Dubai, we noted some of their expenses, including a massive ongoing outlay for NetApp storage systems that cost $2 million each:
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.
As we noted in February, Facebook is the largest photo application on the web (forgetting everything else they do). More than 850 million photos uploaded to the site each month, and these things chew up bandwidth and storage like crazy. And it’s even more expensive to serve photos in poorer countries where Facebook is getting all its growth (and little revenue).
Enter Haystack
Haystack is Facebook’s way of substantially lowering the cost of storing and serving photos, and the rollout of the new internal infrastructure was recently completed. See Niall Kennedy for a technical overview of what Haystack is and why it’s so much more efficient than third party solutions they’ve used to date, as well as this 2008 presentation by Jason Sobel.
What isn’t clear is if Haystack will really help Facebook control costs outside of the U.S., particularly in Asia. But it’s a step in the right direction for cost control, and is certainly being factored in Facebook’s estimates of cash flow profitability by next year.
lol facebook is so awful
no idea why people still use that garbage
@wendy Well, it’s not so awful, i use it because lots of my friends are there.
All i do is mostly chatting with people who i don’t see so often or to check on pictures that friends are uploading.
Michael makes point first time in his all posts about facebook bankruptcy, that is about photos. But leaves us to external link to learn about efficiency of Haystack for facebook.
Maybe facebook should limit no. of images per album? Too many photos in album means nobody goes through them. Also they discard higher image resolutions?
It’s limited to 60 per album.
Facebook limit the resolutions of pictures available. In fact the biggest one available is only 604px * 604px (0.36 Megapixels). Where as Flickr lets you view the original resolution.
It’s awful because it’s the same old idea pushed over and over again by smart marketers. The whole buzz over Facebook means just that – there is nothing new or exiting in the Web recently and the idea of novative Web is dead like Rock, Classic Music or Communism. From Romanism to Cynicism.
i agree..Facebook is just boring to read about. It is a big bubble
You must work at myspace to say that facebook is so awful. Bitter, aren’t we?
I guess if they implement a file search system it’ll be be called “needle”?
Lol, that’s brilliant
hahaha thts funny
Between Goggle, Facebook and Twitter they’re all changing the world. Myspace has been left behind. Logged in to myspace a week ago and seen they are trying to adapt but it’s just not going to happen they reacted way too late. Besides, who wants to go threw all those ads and pop ups.
Blessing Facebook
Perhaps, Facebook should seek for a business model in photo storage industry.
Let’s say they allow users to upload up to 20 photos for free and if they want more, they should pay.
This way they could turn their biggest money sink into a gold mine. I don’t think they would loose to much users if they realized this idea the way I put it.
The only problem is that no one will pay to host more then 20 photos.
I will just put 20 of my best pictures in there and call it a day.
Flickr does it.
True, but flicker caters to a completely different demographic (photographers) who have genuine interest in using their ‘pro’ service.
Mike another great post. I guess you really work well at night too. Anyway, Twitter seems more interesting to read now….all Twitter needs are a few more actors and basketball players using it to move it forward…the same situation that Courtney Love did with AOL which made AOL a leading new media company.
One last thing…what about he likes of Slide and Rock You with regards to photo storage? Facebook.com should just encourage user to plant their images there going forward and let these two eat up the cost.
Also, can Facebook.com lower it’s storage cost with the likes of either Isilon Systems and Data Domain?
Why would face book use a third party ad driven service to host one of their main content?
That will just look really ghetto on their part.
wonder what they spend on video compared to photos.
If Facebook had seamless Flickr integration they wouldn’t need to host any of my photos. Then again, I doubt Flickr has the anything like the infrastructure required to cope with Facebook sized loads.
For MA this story about firing and lies had become a source of a sudden revelation. He’s in a state of announcing eternal troughs these days… Like:
Gosh! Hype is all lies… Hype costs money… Gosh, big hype costs big…
This is a good state. It is called clear/unobscured vision and clear/unbiased thinking. Stay in it. You will become comfortable with it very soon and TC will become a real media source then.
Isn’t EBITDA BEFORE depreciation? Did the post mean to say Facebook had positive net income but negative cash flow/EBITDA?
Positive EBITDA, but negative cash flow.
“EBITDA also ignores the impact of changes in working capital. Increases in working capital consume cash and a business could have great EBITDA numbers but terrible cash flow numbers and could be on the verge of going out of business. To have a meaningful picture of the cash flow, acquirers need to review working capital changes to see if there are growth related issues or other working capital changes of significance and adjust cash flows accordingly.”
http://ezineart...s&id=998175
“accounting rules let them pay cash now and recognize the expense later on”
makes it sound like accounting rules are somehow to blame. The rules just recognize that some payments have a future value and should be spread over a number of years. If Michael is going to talk about accounting, he should consult an accountant!
D.
EBITDA is basically earnings minus a bunch of big expenses like interest on loans, taxes, etc. If you borrowed a lot of money, and are selling the product made by equipment you bought with the borrowed money, your EBITDA is like what your earnings might be if you owned the equipment outright. Of course in real life you have to pay interest and taxes etc. – so it is not a very good measure of what’s going on. The idea of EBITDA is to show that once the loan is paid off, the business will be very profitable, but by then there will typically be new equipment to buy, so it’s not predictive of future earnings any more than it’s a clear indicator of present earnings. It’s a phony way to make earnings look better than they are. No wonder EBITDA is not GAAP.
Just positive or very positive? how much is this EBITA?
I think he was talking about cash outflows for servers that are not shown on the income statement.but this actually isn’t the only reason as mike suggests. They could also be paying back debr less likely buying back some stock.
Wow, 850 Million Photos a month. That’s amazing. What I find amusing however is the continued issues with their Terms of Service. Facebook can do whatever they want to with those photos including license them… ouch
Why Facebook doesn’t take Michael Arrington as one of their board of directors. You see, how facebook would be flooded with money if they would have listened to Michael Arrington!!
Come off it, Micheal is a good publicist but I take it your new around here since you dont seem to know micheals business track record.
He isnt the best investor out there.
seems like he did ok with his first startup that sold for $30+ million
It sounds like the burn rate is very high. Can FB sustain without little or no capital raising? Or is FB Bubble about to burst?
interesting…
What happens when Facebook runs out of money? It would seem that people are starting to realize that there isn’t anything particularly special about Facebook’s services and that they could in fact be the next Friendster. What happens if they can’t get inverstors to provide them with more funding? Is that the point at which the bubble starts to deflate?
Facebook has like 200 million active users and is still growing very quickly. AOL peaked at 30 million users in 2000. That’s way more than enough to have access to capital markets even in this economy.
They’re changing out the CFO for someone who can take them public. After that they’ll have billions of dollars in the bank and could mismanage the company for ten years before they have any meaningful financial troubles. They do NOT need to worry about money, except how long it will take them to count it all.
Hold on a sec, Haystack cuts costs for storing photos, period. Now or later. It’s not about EBITDA or recognizing expenses now vs. later, right? Had me fooled with your intro…
I guess I don’t understand why Facebook wouldn’t outsource their photo storage to Google (with Picasaweb) or Yahoo (with Flickr), and pay them accordingly? Not only would you be letting photo-storage people do the job that they do best, but you would gain users, portability, cross-brand promotion, and you could do so with a clear, fixed or sliding-scale budget.
It seems to me that spending this much time and money on re-inventing the wheel forces Facebook to ignore their key role, which is building social networks.
In six months they’ll have more photos than anyone else, and they already have almost five times as many as Flickr. A few years from now Facebook may be the one hosting photos for other sites. They’ll probably have enough money to buy Yahoo/Flickr in just a few years.
Photos are just more data. If Facebook doesn’t host the users’ data then what are they? A gigantic list of links to outside content? That’s not how the social network business model game is played. He who owns the data owns the customer. Why do you think people are beating on their doors to free the data, because they want to make money from data they don’t have to pay to host.
I see lots of duplicates of pictures, one person takes a picture of a group of 10 friends and emails it to them all, 5 of them upload it to their facebook profile. Some savings there with de-dupe technology.
Facebook could maybe get away with dropping the quality of uploaded pictures, Facebook isn’t Flickr and doesn’t generally need to have ultra hight quality pictures.
Never mind that FB doesn’t store the photos. They push them out to and serve them from their akamai or limelight cdn. Just look at the urls or ask their techs.
User data storage is another story–theirs and in-house.
And akamai ain’t cheap.
I’m not buying it. EBITDA profitable for 5 quarters? Is that what you’re saying? You gotta be shittin’ me. How do they recognize revenue over there? Every piss break Zuck takes, rings up a few million. Brilliant. Seriously! They didn’t even have an ad platform 5 quarters ago. Sounds like a very un-GAAP-like set of numbers coming out of there. Facebook’s accounting department must be where all the innovation takes place.
850 million photos uploaded a month onto facebook? Planning to buy 50,000 servers? This is really crazy! Facebook really has traffic!
exactly