Facebook Revenue Sources Essay

Facebook Revenues Up to $700 Million in 2009, On Track Towards $1.1 Billion in 2010 Facebook is tight-lipped about its revenue numbers, which is typical of private companies. The most it has said publicly is that it became â€Å"free cash-flow positive† as of last September. At the time, we estimated it was set to bring in around $550 million for the year in revenues based on previous reports that we and others had heard, and from our own calculations. But how did the year actually end? Somewhat higher. And sources estimate the company could make between $1 billion and $1.1 billion in total revenue this year. It ended 2008 making between $280 million and $300 million, according to many reports. The company’s revenues likely reached between $600 million and $700 million for 2009, according to a variety of industry sources we spoke with. The estimates match what we heard in September, which was that $550 million was looking too low – 2009 was clearly a big year for the company in terms of building its business, as we’ve been covering. The company has been roughly doubling its revenues every year — 2007 came in at $150 million. We expect that trend to continue for the foreseeable future, making Facebook a multi-billion dollar company within the next few years. The question is becoming how Facebook can hit the inflection point where its revenues increase much more quickly. Of course, it is not commenting on this story, except to provide the following statement: Facebook is a private company, and we do not publicly disclose our financial results. We understand there is a great deal of interest and curiosity in our past and potential financial performance. However, external attempts to forecast revenue are fundamentally speculative and should be treated as such. We’re focused on building our business to be successful over the long-term. 2009 Revenue How did Facebook make money last year? By growing multiple revenue sources, mostly around advertising. Here’s the revenue we estimate for each component, followed by our analysis. Note that the 2009 run-rate numbers in the table circulated went around the financial community last summer, and were publicly reported by investor-blogger Fred Wilson and Business Insider. We’ll get into the 2010 projections further down. Want more updates from Inside Facebook on Facebook revenues? Sign up here to be notified of future reports. Brand Advertising: Facebook’s internal sales force made a big push here throughout the year, building on past efforts. It made very public entreaties to advertisers with many millions in budgets, like its big presentation to Madison Avenue last year. There, it also announced a deal where Nielsen started providing better advertising data to help firms track campaign results. Facebook also continued to upgrade Pages and its home page advertising units, testing out a range of new features like engagement sampling ads. Meanwhile, the site grew to more than 350 million monthly active users at the end of 2009 from 150 million or so at the beginning of the year — that’s a lot of new eyeballs for advertisers to try to reach. Out of those users, around 100 million were in the US and another 100 million were in Europe: These two markets are where brand advertising br ings in the most money. Brand ads revenue also expanded for a couple more reasons we’ll get into below. Between what we’ve heard from sources and our estimates, we think this category increased considerably over the course of the year, from the $125 million rumor in July to roughly $225 million by the end of the year. The bigger question is if major advertisers are starting to spend more than â€Å"experimental† budgets on Facebook, and according to sources this just started to happen over the course of last year. Microsoft Advertising: Revenue in this area is not clear. Microsoft has been running banner advertising on Facebook for years, one of the perks of its which it started doing when it made a strategic investment in the company. But the two ended the international component a year early, on January 1 of 2010, instead of the same time next year. While that obviously won’t impact Facebook’s 2009 revenue, we also hear that it already took over a sizable portion of Micr osoft’s ad inventory during 2009. Meanwhile, sources familiar with the matter suggest that the July rumor about Microsoft $150 million number is half wrong, in the sense that it is gross revenue, including Microsoft’s cut. So Facebook’s would have been significantly less — the exact percentage it would get is not known, as revenue sharing terms have never been disclosed for the deal. Virtual Goods: This number is especially confusing, in part because Facebook accounts for branded virtual goods as part of brand advertising. Virtual goods revenue source, in terms of Facebook’s accounting practice, only means direct  Credits sales. The result is that the revenue source is significantly lower than what many have expected, coming in potentially as low as $10 million, according to sources familiar with the matter. While the Facebook gift shop has appeared to be popular with users, Credits has otherwise been in testing mode throughout the year. The use of the virtual currency in third-party applications has been minimal, and that only started changing in December. Most industry sources have estimated revenue for virtual goods at around $75 million for the year, which has roughly corresponded with the July rumors and followed from previous estimates for gift store revenue. Certainly, Facebook’s accounting method — which we don’t have many details on — alters some part of that estimate. But outside rumors and estimates have been bullish because social games and other applications brought in hundreds of millions to developers on the Facebook platform last year. At $10 million a year, the gift shop would be bringing in $25,000 a day, which seems extremely low considering the size of the Facebook audience. But, Facebook has promoted virtual gifts pretty lightly over the past couple of years. Performance Advertising: As the biggest success so far in terms of monetization, we believe performance advertising grew by roughly $150 million above the July rumors, and for a few reasons. FarmVille, Zynga’s hit farming game, saw sharp traffic growth after launching in June, partly because the company aggressively advertised on Facebook. Other social gaming companies followed suit. Social games accounted for a substantial minority of all spending on performance advertising, according to sources — between a third and half, some say. However, other types of performance-focused advertisers, including direct marketers and local businesses, also increased their spending, from what many in the industry have said. Growth was especially strong growth in international markets, in part because companies like Techlightenment, TBG London, Tradimax and 77 Agency began using Facebook’s advertising API to sell ads in bulk. These companies are based in Europe, and used Facebook’s precise ad-targeting features to reach users across the fast-growing region’s diversity of nationalities and languages. However, Facebook has rolled out its advertising API program more slowly than we’ve been expecting in general. 2010 Revenue Estimates Overall, we expect many of the same advertising trends to continue. Brand and  self-serve advertising should increase — but so will virtual goods revenue. A wide variety of sources we spoke to expect Facebook to pass $1 billion in revenue this year, possibly reaching $1.1 billion. This is significant growth, but likely still the start of the hockey stick. Here’s a quick look at what’s happening now. Note that these estimates are very rough, and based on our understanding of the market and conversations with sources — we don’t have enough data on Facebook’s traffic to model each revenue stream. Brand Advertising: Facebook is continuing to invest in its sales team here, opening new offices in the US and abroad, and cutting deals with regional advertising agencies in other parts of the world. Its traffic appears to still be growing — although how much is a big question for the year. The result is that ad inventory and the value to big b rands will likely continue to increase, potentially to $350 million, we believe. We don’t think big brands will switch major offline or portal budgets to Facebook en masse this year, but we’ll see more money coming over, with the big budgets likely to follow later. Microsoft Advertising: It’s hard to see Facebook maintaining much Microsoft advertising, because it can now monetize better on its own. It may maintain a token amount in some markets. Microsoft won’t mind about losing Facebook here, because it already has a big strategic investment in the company that will only get more valuable as Facebook builds its own business. And, Microsoft has other deals, like Bing within Facebook, and search ads to go along with the search engine. Virtual Goods: More than ever, Facebook is making Credits a more relevant part of its developer platform. We’ve been covering in detail as the company has recently gotten most big developers using the virtual currency as an option; it has also gotten one, CrowdStar, using Credits exclusively. One way it has done this is by giving games that use Credits prominence within the Facebook interface, appearing in the â€Å"suggested† window of its Games Dashboard, for example. We’ve also been hearing rumors — for months — about Facebook making Credits the mandatory, exclusive virtual currency in applications. It’s not clear that this will happen, and everything we’ve heard coming out of the company suggests no big decisions have been made yet. In fact, our understanding is that Facebook will continue to try to focus on advertising this year. Still, we expect Facebook to start to figure out how to tap into the virtual goods business in a big way. It takes 30% of Credits revenue, so  any developers it funnels through Credits will make it money. Performance Advertising: Social games need to advertise now more than ever to reach Facebook users, due to new inhibitions on viral growth, and more competitors. They’re going to be spending more on Facebook than they have been. So will many other types of performance advertising. Some, from our understanding, have figured out ways of getting a good return on their advertising investment, making additional advertising a way for them to make more money. Facebook’s ongoing efforts to build features for the Ads API, the development of third-party tools providers, and interest from more advertisers should bring this category continue to grow well, past half a billion and possibly towards $600 million. Conclusion: Look for the Most Revenue Growth After 2010 While many people have questioned Facebook’s ability to make money, it is innovating in multiple areas, in ways that we believe will work for the long-term. Brand and performance advertising benefit from being targeted on users’ real-life data, from appearing in Facebook’s engagement-rich environment, and from reaching its hundreds of millions of users. The company will, in our view, gradually chip away at brand advertising spending on other big web sites, including Yahoo and MySpace. The optimistic case for Facebook, in terms of its brand advertising revenue, is that it will get most of this advertising and bring it alone up into the billions range, eventually. Performance should also continue to expand. We expect social gaming as well as a wide variety of performance advertisers and local businesses to help the company make more money here for many years to come. This ecosystem could mature to look something like search engine marketing. Google’s AdWords and other contextual ads appear to be better than Facebook in terms of reaching users looking to buy things; some industries are struggling to make money on Facebook, including travel and insurance companies, from what we hear. We’re not prepared to make an estimate for how big this revenue source might become in future years, except to say that it looks the most promising out of any. Beyond 2010, Credits could potentially expand beyond Facebook apps. Facebook intends to have it be a virtual currency on the site for now, but many have speculated it could turn Credits into a web-wide virtual currency, and integrate it with Connect so other web  sites could include it as a payment option. That is possible — it’s an idea that’s been floating around for years. Some have also speculated that Facebook is going to get deeper into the payments business, instead of partnering with other payment service providers who currently manage Credit purchases. But in order to do payments itself, it would have to build out a PayPal-sized backend to support this. Right now, it uses PayPal, mobile payments from Zong, and direct payments via credit cards, instead. All in all, Facebook’s future looks good, in terms of its ability to continue growing revenues. We’ll of course keep tracking everything closely.