Facebook's financials: Not looking so hot?

TechCrunch's Michael Arrington has a solid analysis of Facebook's current financial system, and his outlook isn't good. To boot, he says, Facebook Chief Financial Officer Gideon Yu has been spotted in Dubai, possibly meeting with investors to raise more cash for the company.

Here are Facebook's current problems, per Arrington: Three-quarters of its users are now outside the U.S., many in countries where bandwidth and server costs are more expensive and advertising dollars are less reliable. Hardware costs, while they're lower than they were in the original dot-com era, are still expensive. He's right on pretty much all counts.

The ironic thing is that everything we've heard points to CEO Mark Zuckerberg running a tight ship at Facebook. It's no Southwest Airlines, but for Silicon Valley, Facebook's cheap. Zuckerberg's hardly the picture of Valley excess, with frequent anecdotes describing his fleece-and-sandals dress code, fast-food diet, and spartan living accommodations. Facebook's employees' salaries aren't high by Valley standards--the company attracted talent in part based on the opportunity to work for a buzzworthy company with a potentially huge cash-out down the road. We've also heard that Facebook's goal of hitting 1,000 employees by the end of 2008 has been scrapped, and that for the near future it'll stay where it is now (between 750 and 800). The company admirably steered clear of goofy Google-like perks (like the whole "free food" thing) even when it was at the top of the Valley pecking order with no recession in sight.

But the site is growing so fast and getting so big that it's going to be expensive no matter how many company parties are catered by pizzerias instead of sushi bars, and the albatross around Facebook's metaphorical neck is its advertising-dependent business model. As Arrington wrote, Facebook may not be currently in a position where it can keep its bank accounts up to speed with its growth. Everyone's predicting that ad spending is going to take a nosedive in 2009, and social networks are a fresh enough destination in the ad industry so that advertiser confidence in them just isn't up to speed yet. In other words, Facebook's revenue already isn't good, and Zuckerberg recently said he hoped the company would be profitable in three years. At this rate, the company might not have three years.

Facebook responded to the jittery press on Friday afternoon: "As a matter of policy, we don't comment on market speculation or rumor about our finances," a company statement read. "Facebook is well positioned both financially and within the market and any thoughtful attempt to model our business should reflect that. Our advertising business has great depth and breadth. While no ad business can ever be 100 percent recession proof, the breadth of our advertiser base and the innovative products we offer bolster our position in the current cycle. We've also been closely managing the business so we can continue to hire great people and scale. While we've achieved certain milestones, we are deeply committed to even greater business success in the future."

For the past year, there has been some moderate buzz about "Facebook Wallet," a PayPal-like transaction system that could give the social network an alternate revenue source. But the last we heard, a source in the app development space said that when Google Checkout veteran Ben Ling left his short stint at Facebook, it was still nowhere near completion.

Update: "Facebook is not currently in a position where it can keep its bank accounts up to speed with its growth" was changed to "Facebook may not be currently in a position where it can keep its bank accounts up to speed with its growth." Since Facebook is a privately-held company and does not disclose much of its financial data, it's more accurate to not be quite so definitive.

The post was also updated at 1:38 p.m. PT with comment from Facebook.

[MosX]

All facebook has to do is charge somewhere between $5 and $20 a year to access facebook with no ads, some kind of badge or something saying they're special and support facebook, and maybe some other little perk. A lot of people (including me) would do it, and it seems to work well for a lot of sites.

[Kelly_Evans]

If, say 10 million people paid $10, that would only be $100 million. That wouldn't help them that much. And that would be 10 million less people to whom they could deliver ads.

[basraw]

There are ads on FB? hahaha

[doublethought84]

I would pay for it. I use it more than my cell phone. It is my primary source of communication with most people... and it's the same for most of my friends.

[humanssssss]

If facebook starts charging, i will close out my 12 accounts I have on the site. Facebook is garbage. Flooded with spam.

[kieranmullen]

People like you make it garbage! 12 accounts? Most people have 1, 2 at more (the other for work)

[manualfunky]

he has 12 accounts... and he's probably only friends with all 12 versions of himself.

you only get spam if you add the retarded applications that most people do, so you deserve spam.

[Trovado]

The proposal stated that paying would mean you *don't* see ads. It's easy to miss the concept, though, if you aren't in the habit of thinking as quickly as you create new accounts.

[drezjohnson]

I do use Facebook but I just can't see myself spending money for it. Personally I don't really notice the ads so much. If Facebook starts charging for access then people will just leave and go elsewhere.

[sukhijatt]

Facebook sucks...has too much crap on it...i've closed my accoutn already.. its not worth it...

[Kelly_Evans]

If Facebook charged $10 a year to view the site with no ads, and 10 million people did it, that would only be $100 million. That wouldn't help them that much. And then there would be 10 million less people to whom they could deliver ads. Myspace reported an earning of $800 million. With about 100 million people, that's roughly an average of $8 a person.

[kieranmullen]

Block non usa users. They are bogging down the system, costing them money and not generating revenue for the companyl.

[WeCanDoBIZ]

I think you'll find NO-ONE is generating revenue for the company. That's the point. How is banning non-US traffic going to help, other than reducing its size (by any metric) by 40%?

Ian Hendry
CEO, WeCanDo.BIZ
http://www.wecando.biz

[NYCmicah]

Well, one thing Facebook could do is follow Apple's App Store revenue model. For people to use apps on Facebook, the developers can start charging one time fees or recurring service fees. This will increase the developer interest in Facebook while providing Facebook with a great revenue generating model that does not eliminate its free service.

[3rdalbum]

Facebook should put in a new terms of service for applications, where Facebook can fine an application developer if their application spams users. Facebook could easily make $500 million dollars virtually overnight, and eventually Facebook users could get less application spam. Let's do it!

[WeCanDoBIZ]

I guess Facebook figures that if Dubai can warrant buying Aston Martin in a global recession, and investing in Barclays in a banking crisis, then it will find a welcome for a social network with no obvious strategy for making money other than advertising at a time when marketing departments have a smaller budget than McCain's victory celebrations.

Ian Hendry
CEO, WeCanDo.BIZ
http://www.wecando.biz

[Collin1000]

The "Wallet" You speak of was rolled out last night.... go and buy a gift.

Facebook now has a site-wide currency, called "Credits"

I expect to see it rolled into apps very soon.

[atish505]

Facebook is all hype and not much matter.
If the company would make its financials available its valuation is likely to go done by a tenth.

They are in a loss and unable to match expenses with revenue and hence the hunt for capital - in Dubai.

[insitevc]

Facebook should start a dating service. It would crash the competition and the revenue should be pretty good from it.. This is really the main use of facebook anyways..

[knowles2]

Yeah, I bet that will not drive people away to other services. I certainly not be using it if they did that.

[JohnBarbagallo]

Great article. I see Facebook making more of a profit in the coming years on their selling of user trends/data instead of direct marketing.

[U. Tripps]

There is too much crap on Facebook for it to survive as anything other than an ad-based business.

However, Facebook is giving lots of distribution to various content sites. I post directly to my FB profile from the NYT all the time. It is extremely easy, and I imagine it provides NYT with a fair amount of click-through. Does FB get any revenue for this?