Facebook's Positive Cash Flow: Social Media Means Business

Well, we don't have Facebook to kick around anymore. By recently turning cash flow positive a year ahead of plan with more than 300 million global users and scale that advertisers crave, it has taken a major step to transforming social media from a fad into a business.

Taking in more cash than it is paying out can be a precursor to profitability. If Facebook can crack the code to generating lots more revenue from its highly diverse and fickle member base, then its bottom line is sure to soar as quickly as its user count. Where consumers go, advertisers usually follow.

A steady stream of new applications and features has helped Facebook attract 100 million new users in just the past nine months. By comparison, it took television 13 years and Apple's iPod three years to each attract 50 million users to their cause.

That is the lightning-fast speed with which Facebook is leading the social media revolution out of the reach of traditional big media whose TV networks, magazines and newspapers are still learning what it is to be interactive. The social networking phenomenon that is leaving "old" media breathless is captured in a lively YouTube video created by Socialnomics blogger Erik Qualman.

Pali Capital analyst Rich Greenfield showcases the video on his blog, where he deftly questions "whether any of today's major media companies are capable of adapting to the coming change." So far, the answer is "No." Too often, as in the case of News Corp.'s acquisition of MySpace, traditional media expectations and mechanics (such as preachy mass advertising) are imposed on an intimate social network created by and for the people.

On his Facebook blog Tuesday, founder Mark Zuckerberg said the cash flow positive milestone "sets Facebook up to be a strong independent service for the long term." With refreshing aplomb, Zuckerberg goes on to say it will be "fun... rethinking the current systems for enabling information flow across the web."

Even as the five-year-old social network seeks to reinvent itself, it is intensifying the pace of change at Twitter, YouTube and other online social rivals seeking a path to profits.

Greenfield offers a glimpse into the future of the social Web with a slide presentation from Brand Infiltration, an integrated marketing agency, with eye-popping statistics and promises of more mobile interactivity, reliable friend recommendations and relevant search.

It will be interesting to see how Zuckerberg leverages Facebook's growing clout as the "social utility connecting people" he invented as a Harvard undergrad. By continuing to rapidly innovate (next up is voice-over-Internet protocol communications between users), keeping expenses low and advertising revenues flowing, Facebook could be on its way to establishing a sustainable new business media for social media.

Until recently, Facebook had an estimated $10 billion private valuation based on a morphing user base, about $300 million in annual revenues and huge losses. Although Facebook recently began posting earnings before interest, taxes, depreciation and amortization (EBITA) , it did not expect to go cash flow positive on an operating basis until 2010. By comparison, Twitter has been mustering its first revenues also as a privately funded, explosively growing micro blog. By 2010, eMarketer expects 16 percent of all adult Internet users in the U.S. will be using Twitter on a variety of platforms.

Earlier this year, MySpace was leveraging its nearly 870 million unique users to generate an estimated $800 million in revenues, about one-third of which is a product of its waning Google search alliance. Google's YouTube has monetized its 1.2 billion unique visitors and only about 3% of its inventory to the tune of $200 million in annual revenues, according to Park Associates.

In less than a year, Facebook has demonstrated how quickly all that can change.

More than half of all young adults and teenagers in the U.S. adopting social networking profiles, according to the Pew Internet and American Life Project, has not gone unnoticed by America's first virtual president. Barack Obama last week warned ninth graders he was visiting in Arlington, Va, "be careful about what you post on Facebook, because in the YouTube age, whatever you do, will be pulled up again later somewhere in your life."

That doesn't seem to faze the more than 76 million social network users in the U.S., expected to morph to more than 95 million by 2013 and to generate $3 billion in advertising revenues (up from about $700 million in 2009), according to Parks Associates. Those financially profiting from social networking today -- such as Craigslist, LinkedIn and Amazon -- have demonstrated that they get how it works.

We can add Facebook to the list.