Markets

Three Reason's Facebook's Revenue Surge Is Even Better Than It Looks

By Catharine Taylor

Updated on: December 17, 2010 / 11:35 AM EST / MoneyWatch

If TIME Magazine didn't tell you already, 2010 was the year of Facebook, but not just because its founder, Mark Zuckerberg, had a newsworthy year, no matter how you slice it.

It also turns out that Facebook made an even greater leap forward in revenue than predictions of even a few months ago, which were pegging the year-end tally at about $1.5 billion. Bloomberg, which seems to have the best sources on the matter, now says that revenue will come in at $2 billion. (In case you haven't figured it out, Facebook is private -- unidentified sources are as good as it gets.)

That more than doubles the $800 million the company made in 2009. There are several reasons this is perhaps even more impressive than it looks:

1. It was only a couple of years ago that advertisers were questioning whether ads in social media could even work. The thinking was that when people go to a place like Facebook, they are looking to connect with people, not brands, so ads there wouldn't be as effective.

2. That $2 billion figures doesn't include the ubiquitous advertiser fan pages, which are free, though a fair amount of Facebook revenue does come from non-advertising sources, like virtual gifts.

3. The ad rates on Facebook have remained steady despite huge leaps in inventory as more users come onto the site. Plus, the site works differently than older sites like Yahoo, because there's no place for the big, expensive home page takeovers, served up to millions on major sites. Social networking sites -- because they serve up unique pages to every individual -- have lots more inventory, which, unless managed properly, can depress ad rates.

However, to put it in perspective, Facebook has a long way to go before it can rival older players in the revenue game. Yahoo, which is still the king of display ads (even if the crown is slipping), had $1.6 billion just in its third quarter. Google, which obviously has the strongest ad model in the online ad world, had $7.5 billion in the quarter. Still, as Facebook long ago answered the question of whether it could become a mass phenomenon -- now it's answering in the affirmative about whether it can be an revenue phenomenon too.