Facebook Finds Profitability Despite Nascent Advertising Model

With 300 Million Users, the Social Network Is Making Money

by Michael Learmonth
Published: September 15, 2009

NEW YORK (AdAge.com) -- Scratch Facebook from the list of web 2.0 startups that don't make money: The world's largest social network said today it has become profitable.

Co-founder and CEO Mark Zuckerberg said Facebook had crossed the 300 million registered-user milestone and that it had become "cash-flow positive" in the second quarter, ahead of schedule. Previously, Facebook had said it was targeting profitability "sometime in 2010."

Facebook's brand pages, such as this one for Pizza Hut, are popular with marketers

This is significant for a number of reasons, but mostly because it has done so without a fully developed advertising business.

Indeed while Facebook pages and groups are popular among brands, Facebook itself is still figuring out the right ad model for social networking, beyond low-cost display ads. Facebook's other revenue models are also nascent, including virtual gifts, commerce and a payments system now in testing phase.

Strong audience growth
The threshold also shows that despite anecdotes of young people abandoning the service as their parents (and grandparents) join, Facebook is still growing at a furious rate. In July, the company said it had 250 million users, meaning it added 50 million users in two months. Facebook had 200 million users in April.

Key to Facebook's profitability has been its ability to keep its headcount low. Mr. Zuckerberg points out in his blog post the company employs one engineer for every million users. The company has only 1,000 employees serving a user base that is quickly surpassing the population of the United States.

Revenue is also accelerating, growing from $150 million in 2007 to about $350 million in 2008 and a predicted $500 million in 2009, according to Facebook board member Marc Andreesen.

Revenue guarantee
Facebook's most solid revenue stream is a guaranteed advertising deal with Microsoft, which is worth an estimated $150 million a year. By comparison, in its best year, News Corp.'s MySpace had about $900 million in revenue. At that site, however, revenue dropped off in the latter half of 2008 and 2009.

The irony of Facebook's model is that there are plenty of applications makers selling ads on Facebook but they don't share revenue with the social network. At least one, Zynga (maker of Texas Hold'em), claims $100 million in revenue.

So, Facebook is profitable, for now. That could change if it decides to staff up, increase spending on technology or infrastructure, or invest in new international territories that are quickly moving online. But it's sign Facebook is, indeed, a business.