Is Facebook Figuring It Out?

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New kinds of advertising could lead to a projected $500M year.

When reports appeared Thursday that Facebook CEO Mark Zuckerberg and his board of directors had rejected two offers of capital infusions to the company, it was the first unqualified good news the social media company had generated in a while.

Facebook has had its feet to the fire, with persistent user grumbling about the site’s redesign, constant media speculation that the company is cash-strapped and a high-profile firing of its CFO that drew loud boos from the tech press.

And when the privately held company announced last week that it had reached the 200-million user mark, that just triggered a round of doubts about whether it had the revenues to support the extra technology required to service its vast army of users.

But when two funding offers which valued the company at $2 billion and $4 billion were rejected, it suggested that Facebook is doing OK financially.

The company almost broke even last year, making just under $300 million in revenues, and this year had projected that it would make $400 million but is on track to make over $500 million.

In an email to TheWrap, Facebook spokesperson Larry Yu said, "Because of the ongoing, inaccurate speculation about the state of our finances, we’ve decided to take an unusual step and confirm reports that we’re on track to grow revenue by 70 percent this year.  In addition, we’ve been EBITDA profitable for the past five quarters, and we expect to be cash-flow positive in 2010."

Yu was referring to such press coverage as a recent report in Business Week claiming that the company needed to raise $100 million to pay for new equipment.

Also typical was Mashable’s Ben Parr, who wrote last week in a post that made it onto Digg: "Despite a torrent of growth, (Facebook) has not been able to keep its revenues ahead of its bulging technology costs."

The rejected offers led some to guess that the company is — or should be  — getting ready for an IPO. But the more interesting possibility it suggests is that Facebook just may be figuring out how to monetize social media after all, with its new kinds of advertising.

The majority of revenue comes from ads — with some from selling “virtual gifts” such as tattoos for your Facebook profile. Where the company may be hitting its stride is with the development of its so-called “engagement ads,” which go beyond traditional banners by integrating advertising into user content and emulating the natural activities of Facebook users.

Users who click on an engagement ad go to a page that is much like a regular Facebook fan page. Once there, they can leave comments– which spread to their friends via their newsfeed — or purchase virtual gifts.

The ads seem to work especially well for movies and TV, where users are inclined to visit fan pages anyway.

Universal has had a positive experience with engagement ads for movies such as “Fast & Furious” and “Last House on the Left,” Doug Neil, senior vice president of Digital Media, told TheWrap. “I think they’re a positive step forward for Facebook marketing solutions,” Neil said. “They get the audience interested in the films, and then their activity with the ad is ‘resocialized’ out to the users’ friends.”

Facebook did not respond to requests for comment about the success of engagement ads, so it’s impossible to measure their value yet. But Venture Beat’s Eric Eldon sounded a note of cautious optimism: “It’s not clear exactly how successful those ads have been, and the company’s still experimenting,” he said. “But it might be working."

Still, advertisers seem happy — especially compared to previous options. “Before the engagement ads, there was a pretty large disappointment with the performance of other ads in Facebook,” one media executive said.

“Typical ad opportunities that are successful for other content sites don’t always translate well in social networking environments,” said Jason Klein, President and Co-CEO of Special Ops Media, a digital agency. “Users navigate and use these networks differently and therefore need to be engaged differently. So Facebook’s engagement ad platforms are a stride in taking Facebook closer to a more appropriate offering.”

 

Now, Facebook just has to worry about its users.

Grumbling continues in the blogosphere about the cluttered, Twitter-ish redesign. And this is the week we’re supposed to learn the results of its poll on changes to the site — an "election" that was spurred by a virtual revolt over changes to the site’s terms of service that implied that Facebook owned users’ data in perpetuity.

If Facebook can make 200 million users sprawled across the globe happy with the new rules, that will in itself be an achievement.