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Facebook is under particular pressure to make ads effective and bring in marketers. The $240 million stake Microsoft acquired in Facebook on Oct. 24th put the private company's estimated valuation at $15 billion [BusinessWeek.com, 10/25/07]. To be worth that much, Facebook would have to generate $2.5 billion in revenue in three years, estimates Anant Sundaram, an expert on mergers, acquisitions, and finance at Dartmouth's Tuck School of Business. [Sundaram adds that Microsoft's investment at that valuation probably had more to do with strategy, such as keeping Google (GOOG) out of Facebook and preserving its own relationship with the social network than Facebook's actual value.]
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Facebook is on track for $30 million in profit this year on $150 million in revenue, say people familiar with the matter. About half of that revenue is expected to come through an ad deal with Microsoft Corp. that lets Microsoft sell many of the major display ads on Facebook's U.S. site. The deal will likely bring in $200 million to $300 million for Facebook through 2011, and potentially much more if Facebook's traffic grows rapidly, say people familiar with the matter.
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In February 2007, Facebook added a new gift feature to the website. Friends could send "gifts" -- small icons of novelty items designed by former Apple designer Susan Kare -- to each other by selecting one from Facebook's virtual gift shop and adding a message. Gifts given to a user appear on the recipient's wall with the giver's message, unless the giver decided to give the gift privately, in which case the giver's name and message is not displayed to other users. Additionally, all gifts (including private gifts) received by a user are displayed in the recipient's "gift box" (right above their wall on their profile), marked with either the first name of the user (for public gifts) or the word "Private." An "Anonymous" option is ... available, by which anyone with profile access can see the gift, but only the recipient will see the message. None will see the giver's name, and the gift will go in the recipient's gift box but not the wall.
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[I]n August 2006 Facebook signed a three year deal with Microsoft to provide and sell ads on their site in return for a revenue split. The deal followed an announcement from Facebook’s direct competitor MySpace who signed a similar deal with Google. The youthful demographic that both the services attract is highly prized amongst advertisers and should return a good amount of revenue for both the services to stay alive - and profit. Another deal which made news in July was Facebook’s agreement with Apple to give away 10 million free iTunes samplers to Facebook users. A deal has ... been signed to provide Facebook credit cards.
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Historically, social networking sites have had a hard time monetizing their traffic through traditional CPC and CPM ads, though Facebook is rumored to perform better than most social networking sites in general. It appears that Google’s initiative with MySpace lit a fire under Microsoft BD leading to what are likely favorable terms for Facebook. No word yet on guaranteed payouts over the life of the deal.
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Emily Riley, a social networking analyst for Jupiter Research, predicts that the number of Facebook members who leave the site as a result of Social Ads "is not going to be too substantial." If anything, Riley says, some members might choose to quit Facebook because all of its new applications, which she argues create the kind of "clutter" generally associated with MySpace. Riley says "Facebook should weigh the reasons why users might be leaving. However, it is an ad-supported site, so if a small group of users chose to leave, Facebook might have to make that sacrifice."
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