Quo Vadis Facebook – Financial Trouble Ahead

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The social networking company is looking for money – lots of money. How many do they really need and what then?

2007 estimated headcount 450

2008 estimated headcount 800
2008 estimated cash flow negative $150MM
Above numbers reported by TechCrunch

2009 estimated headcount 1,200
That translates to a cost structure of roughly $200,000,000 (200MM)
With revenues (I don’t see more than 100MM) this is $100MM under.
Now add the enormous cost of data centers that need to stream the videos, the photos and the rest of the application.

The clock is ticking. So what options has Facebook?
1) Cut Cost / Layoff
Either cut staff in half to get to break even
That’s possible but hard to do. But better saving 50% than losing all.
It would also mean the company is getting profitable and may do an IPO in a year or two.
2) Double revenue
But with advertising? That’s so much harder when even advertising machine Google admits that ad revenue is flat – meaning it’s probably going down. After all, the world is beginning to realize that the advertising model is not a business model after all.
3) Additional Funding
Get $500 Million to survive 5 more years, freeze hiring and use the time to develop a product/service value based business model – probably the hardest but still possible. In MHO the only way to keep current investors happy. Remember Jack Walsh: “Shareholder value is the dumbest thing in the world:”
4) Sell
OK then there is the option to sell the whole package – better now than never. Maybe for a billion or two – again remember Jack Welsh.

Then there is competition (possible acquirer):
1) Google with $16B cash in the bank has some nice little wiggle room
2) Less aggressive but more stable LinkedIn could weak up (I know hard to believe) and with just a few smart tactical moves get really dangerous.
3) MySpace – don’t underestimate those guys. They are less strategic more like a news paper driven network – but they have 3 things: a) Huge momentum, b) Financial backing c) the option to break into business (they are just a bid sleepy in that regard)
4) Microsoft? Not really. No vision, totally a-social DNA, no momentum… just money and then we could list any other company with money.
5) The SAP / Oracle world. Hmm interesting. Unlike Microsoft, they haven’t burned their name in social media yet. Just two massive companies but may become an interesting contender in the game in the next two years.

Disclosure: The above numbers are just rough estimates.
But you get the idea

@AxelS

Axel Schultze
CEO of Society3. Our S3 Buzz technology is empowering business teams to create buzz campaigns and increase mentions and reach. S3 Buzz provides specific solutions for event buzz, products and brand buzz, partner buzz and talent acquisition buzz campaigns. We helped creating campaigns with up to 100 Million in reach. Silicon Valley entrepreneur, published author, frequent speaker, and winner of the 2008 SF Entrepreneur award. Former CEO of BlueRoads, Infinigate, Computer2000. XeeMe.com/AxelS

7 COMMENTS

  1. I think it would be beautifully ironic if Twitter would lead a group to buyout Facebook. But, you make a nice point about LinkedIn – what a powerful combination that would be.

    Obviously, the Facebook team made a huge mistake of not engaging their users PRIOR to making changes to their interface, one that ultimately could be their downfall. I recently got a tweet from one FB user who said she is leaving the community do to this very reason. I see a possible emerging case study unfolding before our eyes.

    Tim Moore
    sayitsocial.com

  2. Facebook, like so many community sites, is stuck in the ‘advertisers pay for eyeballs’ model, but surely will have to begin charging members for services, sooner or later. I wonder how many times each week this very subject is heard being discussed around the water coolers of Palo Alto. Of course the big fear is that there would be a mass exodus to a competitor. But would this really happen?. I for one do not want to start all over again with a new social site. If 100m users would pay just $5 per year, that’s half a billion dollars. Then add the advertising revenue as more upside. There are lots of ways to charge, but how about a model where basic membership stays free, but you pay for having more than, say, 30 friends (Facebook knows its user base and the average numbers of friends etc, so the actual ‘free’ number to choose would be obvious to them). The one big problem with this approach? How do youngsters without credit cards pay? Hmmm, another office cooler problem for Facebook managers.

  3. Interesting view, Axel. I think a combination of linkedin and facebook can do wonders if they can integrate without hassle. I always wondered why facebook is taking the pain to host videos instead of allowing the user to utilize any of the existing video hosting services. At the same time I still believe in business model which can generate advertising revenue based on free quality services to users.

  4. The Web 2.0 bubble is beginning to pop just like the financial bubble. I think we’re in for a Dot Bomb 2.0, because just like the first dot com bust, there’s been too much investor enthusiasm for public social networking sites, despite very limited success in monetizing all those “friends.”

    But Facebook, just like AIG and other large financial institution bailed out by US taxpayers, may be “too big to fail.” I think selling to Google might be a last-ditch resort. I’m betting investors will continue to pump money into FB for the next couple of years, hoping for the big score.

    Today’s SF Chronicle reported that FB’s head of finance Gideon Yu has departed for “undisclosed reasons” (what, not going to spend more time with the family?) and that the company was looking for a CFO with “public company experience.”

    Hard to imagine an IPO right now, but perhaps they’re looking towards next year. Or, “planning” an IPO could be a move to bring investors, or even buyers, out of the woodwork.

    The financial news is not all bad, according to the SF Chronicle:

    Facebook has continued its phenomenal growth and is approaching 200 million users globally. Although it has struggled at times to capitalize on its user base through online advertising, it has made significant progress, according to a person familiar with the matter.

    Facebook has turned in five consecutive quarters of profits, under the accounting formula of EBITDA, or earnings before interest, taxes, depreciation and amortization, according to the source. Revenue is expected to increase at least 70 percent in 2009; the company is expected to be cash flow positive in 2010.

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  5. You are right Bob – there is some bad news in front of us. I think the Facebook CFO just recognized the consequences.
    Web Guild reported “Facebook run out of money…. – CFO out”
    http://www.webguild.org/2009/04/facebook-running-out-of-money-needs-100-million-cfo-out.php
    It’s amazing how private companies do “controlled leaks” of financial information nobody can actually trust. In particular if major suppliers cut the credit lines….

    I guess it is not a web 2.0 bubble per se but an advertising bubble.
    Just me 2 cents

  6. According to this post, YouTube is losing nearly $500M per year.

    And Google won’t solve this problem by laying off people. They spend $1M per day in bandwidth and 36% of expenses are for content licensing.

    So, not much of a return yet on Google $1.65 billion investment.

    And this is one of the success stories in social media!

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

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