Facebook is Profitable. Again.

Facebook just announced that they are, more or less, profitable. Money coming in exceeds money going out. This is not the first time: in a 2005 interview, Mark Zuckerberg discusses how the company made a profit before they decided to focus on growth.

Last time Facebook was profitable, they were a small, lean startup. Now, they’re an institution. They used to run generic banner ads—when you’re competing with Myspace but not letting users stream music, you don’t have to try too hard.

When Facebook took funding, they stopped running banner ads, switched from “TheFacebook.com” to plain Facebook, and started to add new services instead of new revenue sources. Pre-funding Facebook was arguably a completely different company: a low-cost competitor to existing social networks, not something special.

But low costs and lots of capital gave Facebook the chance to be whatever it wanted. Taking over the world is rarely a viable strategy, and even when it’s possible, the most likely result is failure.

But from the perspective of a newly-funded Facebook, it’s aneasy decision to make (at least, it is for the kind of person who drops out of Harvard to run his we site): they had a low cost structure, and VCs willing to value them on users and not revenue. So why make a million a year from banner ads (until some other site comes along) instead of aiming for a 1% chance to be worth billions some day?

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| September 16th, 2009 | Posted in internet culture |
  • BRK

    Facebook did not say they are “profitable”. They said they had a few quarters of positive cash flow. There is a significant difference between profitability and cash flow positive.

    of course, the Facebook PR machine wants all the bloggers who don’t understand the difference to take their statement and run off with grand speculations, like this post.

    http://www.investopedia.com/articles/01/110701.asp

  • BRK

    Facebook did not say they are “profitable”. They said they had a few quarters of positive cash flow. There is a significant difference between profitability and cash flow positive.

    of course, the Facebook PR machine wants all the bloggers who don’t understand the difference to take their statement and run off with grand speculations, like this post.

    http://www.investopedia.com/articles/01/110701.asp

  • Byrne

    That’s true. They are not profitable in an accounting sense. But positive cash flow and negative profits are more sustainable than negative cash flow and positive profits. Especially if you look at their cash cycle—they buy servers and depreciate them, and the money they get for ads gets paid in upfront. Which means that if they’re cash flow positive now, they’re likely to be profitable later. The only exception would be if they were depreciating assets in a weird way, or something like that.

  • Byrne

    That’s true. They are not profitable in an accounting sense. But positive cash flow and negative profits are more sustainable than negative cash flow and positive profits. Especially if you look at their cash cycle—they buy servers and depreciate them, and the money they get for ads gets paid in upfront. Which means that if they’re cash flow positive now, they’re likely to be profitable later. The only exception would be if they were depreciating assets in a weird way, or something like that.