A Cash-Flow Positive Facebook Helps the Industry

Facebook is making money. It shouldn’t be shocking, we know.

But let’s be honest—social media is an industry that’s been more often rich in potential than profits. And no social media platform embodies this gap more than Facebook.

Despite the site’s massive growth, Mark Zuckerberg’s enterprise—launched in a Harvard dorm room five years ago—has actually struggled to break even. 300 million users (traffic has tripled from just 100 million a year ago) means a massive advertising base, but it also means prohibitive bandwidth and operations costs (a growing percentage of users come from developing countries, where advertisers are reluctant to invest).

But for the first time since the site hit the mainstream, enough cash is flowing in for the ballooning site to cover its operating expenses and continue to expand. It’s not quite profit, and major questions remain, but it could be a landmark step in the right direction.

So how should we—the social media community—read this latest news?

Facebook as the “Bellwether”

A profitable Facebook is good for the social media industry, primarily because an unprofitable Facebook could be devastating.

Look at it this way: While Facebook’s success would signify a well-run, innovative company capitalizing on an unprecedented user-base, Facebook’s failure would say more about systemic, industry-wide limitations. If a massive, efficient, innovative, pioneering company can’t turn profits, how are smaller ventures supposed to earn investor confidence?

In other words, with 300 million users, Facebook profits seem to some almost inevitable. But if even Facebook falls short on the bottom line, investors could see the basic premise of social media success—profits via advertising embedded in free content—as too inherently flawed to overcome any significant amount of operating costs.

It all comes down to targeted advertising, and the fact that Facebook has appeared to finally figure it out bodes well for the rest of the industry.

Investment Capital is Coming

Improved confidence should only signal an easing in venture capital, and the hard numbers appear to be particularly welcoming: $240 million from Microsoft in 2007. $200 million from Russian investment group Digital Sky last May.

Overall, since its 2004 launch, the site has raised nearly $600 million, and — with expected revenues of $500 million this year — appears to be in much better shape for a potential IPO in 2010.

“This is important to us because it sets Facebook up to be a strong independent service for the long term,” said Zuckerberg on his blog.

Belief in the system — and belief that the potential can, in fact, turn into real profits — boosts social media and internet marketing ventures industry-wide. Bellwether Facebook is again leading the way.

Stuart Frazier | Operations Manager for Masterlink Interactive