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Does Facebook need to revamp?
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Facebook’s rapid rise to one of the premier social networking platforms, has created an image of a company with an innovative and successful business model at its core. With over 200 million active users, the online social networking utility connects users across the world using profiles and has proven to be a true powerhouse amongst the top businesses in terms of name recognition and future potential. However, after reviewing the financial statements of this privately owned company, I came across some surprising numbers that provide a much different tale of Facebook’s business model.
Since its inception in February of 2004, Facebook has managed to connect people and businesses across the world in ways never seen before. However, the company has yet to turn a profit in over 5 years of service. How can this be you ask? How has the company managed to become so prevalent in connecting people and implementing new ways to communicate amongst users, and still have a business model with no proven history of profitability? While it is true most businesses don’t swing a profit in their first years of operation, Facebook and its rapid widespread expansion instilled in those unaware of its financial situation a portrait of a company with a strong business model. In light of the company’s difficulties in seeing green, I have examined the flaws in the business model currently implemented by the social networking giant and offer insight into some possible solutions to turn things around.
Facebook simply expanded its employee base too quickly. In 2007, Facebook employed a headcount of 450. In 2008, the company more than doubled its workface to nearly 1000 employees. A move of this type can be successful if the company has the resources and more in particular, the funding to implement such a move, but Facebook’s financial situation doesn’t allow for such a bold increase in workforce. Facebook should retool its business model in regards its number of employees because this creates a strain on other business ventures, investments, and other financially dependent operations such as marketing and advertising the online social networking platform.
How does Facebook make money? A majority comes from ad revenue and companies choosing to pay top dollar for precious ad space on Facebook’s site. Other financial contributions come from users purchasing online gifts, which in turn can be given to other users. Furthermore, Facebook has a wide range of investors with a stake in the company and its future potential. These investors provide millions of dollars of cash flow, capital that is used to pay for other business operating costs and development of the platform. With ad revenue earning top dollar, and users buying gifts for other users, along with investor contributions, Facebook has been able to stay afloat in its 5 years of operation. But not making a profit in 5 years reemphasizes the fact that a change to the business model and direction of the company is necessary. Facebook should look at other social networking sites that are not as well known to the United States, but are a huge success in the global market, and in particular the business model of the leading Asian social networking giant, Tencent QQ (QQ).
QQ is the leading instant messaging program and online social networking platform in China. With over 300 million active accounts, the company has a proven track record of an innovative and profitable business model that differentiates itself from Facebook and other social networking sites. Tencent QQ has taken advantage of its popularity and name recognition of the QQ brand, and has opened Q-Gen stores that sell QQ branded merchandise such as bags, watches, clothing and toys. The addition of physical retail stores to the company business model has proven to be a successful addition to QQ as profits are now made both online and in store. If Facebook invested in merchandising product, and take a page out of what QQ has accomplished thus far, a new avenue of financial gain can be had. Even if physical retail stores are out of the scope of what Facebook is trying to accomplish, an online store that sells more than just gifts should be a welcome addition. With the recent success stories of Apple’s AppStore, Facebook should capitalize on the premise that people are willing to spend money on products as long as the services offered are convenient and easy to use. Facebook offers free applications and games through its site, but should seriously contemplate an online store for games, gifts, and apps that are capable of generating large amounts of money, with relatively low costs to develop and operate.
QQ’s services manage to turn a profit from other innovative online developments to the norm of social networking. According to Benjamin Joffe, Managing Director of Asian Internet consultancy “QQ makes most of their money from digital goods - from background music to personalization, avatars or casual games. The introduction of an online currency supported by a variety of payment systems has helped lower the payment and monetization barriers dramatically”. Joffe believes digital goods add value to an online community. “It is certainly a great way to monetize a community. The West has been slow at catching up but digital goods are a proven monetization method on the Internet. Casual games are also a great money maker: imagine users were offered attractive high-quality Facebook applications for 10 cents. Many would pay, but today they have no way to.” Those thinking that free is better, and that Facebook services should remain free, must realize that social networking is a business and the measure of success is usually gauged by the amount of profit.
Joffe further explains other differences between Facebook and QQ and outlines the importance of having a focus not set on the number of pageviews a site can receive, but rather on making the services better. Joffe believes that Facebook is looking to garner high number of pageviews, and are not as focused and determined on offering better services. He states “[u]sers are mere "eyeballs", while the real clients are advertisers. The revenue mix defines the service DNA. We even came up with a new metric: ARFU for "Average Revenue From Users" (rather than per user, for ARPU). With this in mind, ARFU for Facebook is almost zero, while ARFU for QQ is 87% Internet [and] mobile combined.” So what can be learned from the ARFU? According to Joffe, the ARFU figures indicate “[f]irst, that users are willing to pay for services - even in China! Second, several companies in Asia have already solved a number of headaches on how to make it work and can help save a lot of time by adapting their best practices.”
Should Facebook consider changing its business model in order to generate a profit, it should look to already established and profitable companies such as Tencent QQ. If profits are not at the forefront of a business model, then the business will continue to struggle financially. While the number of users a site has is an exciting number to report, it does not indicate the underlying factors in determining the success of a company. Other factors need to considered when implementing a business model, and Facebook would be wise to take note of other business models integrating methods for earning profit, something the premier social networking site has yet to accomplish.
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