How We Know Facebook Is Vastly More Profitable Than Twitter

Last Updated Sep 29, 2011 8:05 PM EDT

Facebook is likely to be vastly more profitable than Twitter, according to recent estimates of revenue at the two social media brands by eMarketer. That suggests the microblogger might not be well placed to survive a slowdown in the social media business.

eMarketer adjusted downward its total revenue estimates for Twitter today. It expects the microblogger to earn $139.5 million in global ad revenues this year, up 210% from $45 million in 2010. Ninety-six percent of that revenue comes from ads, making Twitter's total 2011 revenue around $148.4 million.

The analyst did the same thing with Facebook on Sept. 20, reducing its estimate of total revenues to $4.27 billion, $3.8 billion (89 percent) of which comes from ads. Previously, eMarketer had said its annual ad revenue would be $4.05 billion, implying total revenue of $4.55 billion.

It's not a surprise that Facebook is a bigger business than Twitter, but it is interesting because, as eMarketer's Debra Aho Williamson says, they compete:
"Twitter is looking to compete for the same advertisers that made Google and Facebook's self-serve advertising platforms smash hits," Williamson added. "Self-serve advertising accounts for about 60% of Facebook's ad revenue--that's a pinnacle Twitter will hope to reach as well."
Neither Facebook nor Twitter has formally disclosed revenues, so this is all guesswork. Nonetheless, if we assume eMarketer's estimates are within the right ballpark, we can calculate that Facebook is likely to be a monstrous money-printing machine, whereas Twitter is only modestly profitable. Here's the math:

Facebook's $4.27 billion in sales are generated by 2,000-plus employees. In media, a majority of a company's operating costs are likely to be staffing salaries. Facebook will certainly have IT and server maintenance costs as well, plus general overhead. If we divide the revenues per employee, it turns out that Facebook earns $2.2 million per employee. Clearly, unless Facebook's IT costs are hopelessly out of whack, the company is profitable.

It's a different story at Twitter. That company has 600 employees. On eMarketer's numbers, they only earn $247,333 each in revenues. An average staff salary is probably in the upper five figures. Add to that another small five-figure sum for benefits, real estate and overhead. It soon becomes obvious that if Twitter's IT and server costs are anywhere above $100,000 per employee then it cannot be profitable.

So, Facebook is probably winning this fight. Williamson added:
This slight revision downward for 2011 should not be taken as a sign that Facebook's overall business is losing momentum.
That's fine for Facebook -- it's already profitable. But note that Zynga's growth also slowed in Q2 2011. This looks like an across-the board slowdown in the social media sector.

Given that some of these companies -- Pandora (P) and Groupon (GRPN) for instance -- are dependent on cashflow gimmicks, equity sales and venture investors rather than underlying business fundamentals for their survival, that suggests we could be about see a bit of a shakeout.

Related: Images by danilo ramos and eldh, CC.

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