Facebook Cash Flow Positive

For the first time in its history, Facebook is free cash flow positive. The company is financing its own growth rather than using investor money. This is good news for the 300 million Facebook users who can breathe a sigh of relief they will not be charged for using Facebook in the foreseeable future, a rumor that has circulated over the past year causing outrage around the world.

Subscription models are never popular, especially when put in place after users have enjoyed a site for free. Last week, Rupert Murdoch announced coming fees for both The Wall Street Journal and Hulu content delivered on cell phones. No applause for that one.

Facebook achieved double digit revenue growth through advertising. Not a revolutionary strategy, but one that Facebook has implemented far more successfully than other sites. While other social networks rely on traditional banner advertising, Facebook created an ad program tailored to its site. Self-service ads were launched earlier this year. From the advertiser’s perspective, I have never seen a more simple app for creating an ad, choosing a target market, and tracking performance.

But the real success can be attributed to Facebook’s design guidelines and unobtrusive placement. Unlike every other website I can think of with ads that compete with the content, Facebook ads do not interrupt the user’s experience. As a matter of fact, ads are confined to the right side of all pages and conform to the size of highlights and Facebook alerts, and all use the same font, same layout. Facebook enforces rigorous copy guidelines, so you won’t see all caps, deceptive offers or misleading photos.

Last year, the company brought in a total of between $280 million and $300 million. In July, Business Insider and investor-blogger Fred Wilson both said they’d heard revenue was growing fast, to around $550 million. Both reported revenue being broken down as follows:

• $125 million from brand ads
• $150 million from Facebook’s ad deal with Microsoft
• $75 million from virtual goods
• $200 million from self-service ads.

Significant growth comes from self-service ads used by brands to acquire more fans on their Pages and by local businesses that are starting to discover they can reach their customers in Facebook. CPMs are low and impressions can be high. And if the ads are the “Become a Fan” type, companies can establish an open line of communication with their constituents, rather than the click and vanish characteristic of banner advertising.

So what is Facebook doing with their money? Paying the bills. Earlier this week, Data Center Knowledge reported that Facebook is making a big new investment in its existing Virginia facility. The publication cited analysts who estimated that the center could cost up to $125 million over the course of several years. Inside Facebook reports it’s not clear how Facebook is accounting for that expenditure, but the term “free cash flow positive” signifies that the company is able to cover its own capital expenses.

Company spokesperson Larry Yu said, “The company was "free cash flow positive" as opposed to "operationally cash flow positive. Facebook took in more cash from its business alone than it spent on capital expenditures last quarter.” Facebook is a privately held company and Mr. Yu went on to say there are no plans for an IPO. But I’d put a little aside just in case.

Read TopTenREVIEWS' in-depth review of Facebook, ranked #1 in the social networking category.