Facebook isn't just a tool for college students to socialize.
Now every demographic uses the website, making the service a key way for companies to reach consumers.
What better way to target ads than with the information you give about yourself on your profile?
Just five years ago CEO Mark Zuckerberg started Facebook in his dorm room, in 2006 opening the service to everyone, and allowing anyone to create applications for the site. Now things are decidedly different. Zuckerberg started off 2009 with the resolution to wear a tie to work every day, which seems to reflect a mature focus on revenue and profit. Zuckerberg sticks to his commitment to building a utility to help people around the world connect, but now he's increasingly acknowledging the question - What's Facebook really worth?
Facebook is growing revenue 70 percent a year and is on track to be cash flow positive in 2010. Board member and venture capitalist Marc Andersen says he expects Facebook to generate over $500 million in revenue this year. In 2007 Microsoft struck an ad sales deal with the site and invested $240 million in Facebook, giving it a $15 billion valuation. Then this May the Russian Firm Digital Sky Technologies invested another $200 million in the site for a two percent stake, giving the company a $10 billion valuation. In July DST offered to buy up $100 million in shares from employees, allowing them to cash out. This also gives DST an additional percentage and a half of the company without requiring Facebook to give up any more control.
Allowing employees to cash out removes some pressure on the company to go public. But all signs point to Facebook preparing for an eventual IPO. Chief Operating Officer Sheryl Sandberg is working on developing revenue models. This September a new CFO, previously CFO of Genentech starts as Chief Financial Officer of the company. In the June press release Zuckerberg points out that he was Genentech's CFO while revenue tripled, and "his success in scaling the finance organization of a fast growing company will be important to Facebook."
So where will Facebook's revenue come from?
Ads on Facebook range from the simple text ads to complex corporate campaigns.
Facebook's automated online system that allows anyone to buy a targeted Facebook ad has seen its business triple in the past year. Facebook also works with big brands like Starbucks and Adidas, to help them pair ads with their profiles to best communicate and connect with consumers. There's something inherently appealing about ads in a social context if the company can manage that fine line between being helpful and being intrusive. Forrester Research's Josh Bernoff points out that friends are much more influential when it comes to marketing than plain old marketing messages from a company. If Facebook can get Facebook users to recommend products to each other, and place ads with those recommendations, it could be a gold mine.
Facebook doesn't want its success to be tied to luring users to its website: it wants your network and profile to follow you throughout the web. The more connected you are, the more valuable you are to advertisers. "Facebook Connect" has signed up 15,000 sites, devices and applications, which allow users to share with their Facebook friends without ever going to the social network's site. Sharing from the go should also give Facebook a better sense of which advertisers would be most appealing.
Facebook is working on a few other revenue streams. It makes a bit of money from virtual gifts and it's working on establishing a micropayment credit system for games and other aps. I think that once Facebook gets your credit card information, they could easily get people hooked making tiny purchases, the equivalent of Apple's iTunes store. But there's no question that for the near term ads will provide the majority of Facebook revenues.
CEO Zuckerberg has juggled his fair share of challenges. Lawsuits, criticism, controversy over privacy settings. The list goes on. So now the big question is, what's next?
Some hot topics to watch: how will Facebook look to compete with Twitter? (Watch for the site to encourage users to broadcast their status updates to a broad audience.)
How will it keep users' friend groups personal despite its ever-growing size? (Friend "lists" will become increasingly important.)
And of course, watch out for more, more targeted ads.
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