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Why Facebook Needs Big Money

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gavel.gifAll these rumors about Facebook getting a massive investment from one corporate behemoth or another have got to make you wonder: Why would a company that is expecting revenues of $150 million, and profits to boot, need fresh capital? Why would a company whose dominance of the social networking space is being touted as some sort of manifest destiny possibly need this sudden influx of cash?

That is the real $300 million to $500 million dollar question. The Wall Street Journal thinks it’s to build an advertising platform to cash in on its fast growth. And while that might be so, there are other, more pressing needs for all that money. The biggest one: Andrew Cuomo.

The New York attorney general has started investigating the safety measures Facebook has put in place, and based on his preliminary investigations, he is not happy. His staff has found sexual predators and a wide variety of pornographic material, including images and videos, prompting him to issue a subpoena.

“My office is concerned that Facebook’s promise of a safe website is not consistent with its performance in policing its site and responding to complaints,” Cuomo said in a press release.

“Parents have a right to know what their children will encounter on a website that is aggressively marketed as safe.” Cuomo is angered by the fact that Facebook has “ignored several — and repeated — complaints from our undercover investigators concerning persons who made inappropriate sexual advances to underage users.”

Call me a conspiracy theorist, but the way it looks to me, Facebook needs money for what is clearly a big crisis facing the company. MySpace, the company the FB-crew used to mock, has already had to deal with a similar mess, both legal and image-wise, which not only proved to be a major disruption to their business but cost a ton of money. And that was without a subpoena.

Facebook’s subpoena is going to require some serious legal resources and even more serious dough. Today it’s New York, tomorrow it could be attorney generals from any of the other 49 states. What if the European Union gets on board? Who’s going to foot the bill then? Who is going to make up for the loss of advertising revenues if the brand advertisers deem Facebook unacceptable? Ergo, time to find an outside funder.

MySpace had already found its corporate sugar daddy, News Corp. (NWS), when its mess started to unfold. In its case, sporadic articles in local media became a national story that led to Fox Interactive hiring a safety czar and implementing a plan that costs the company tens of millions of dollars every year.

A similar scenario might be awaiting the Z-meister and his crew. And the fact that it would involve a flip-flop wearing, young Harvard dropout running the hottest web site on the planet? That would be just too good of a story for the mainstream media to resist.

Facebook will have to do some nimble dancing here and come up with technologies/methods that add layers of safety to their network. Scanning for pornographic images and videos, developing technologies that prevent predators and other such issues are something Facebook will have to deal with — they cannot be wished away.

Never mind that the not-for-profit groups (and there are many) would want them to undertake educational programs and what not — just like in the case of MySpace. To do so, the company will have to boost its headcount, which already stands at 250. And more staff means more real estate for which it’s going to have to pay. As a comparison, MySpace has over 1,000 people working for them.

Do the math: it all adds up. No wonder Facebook needs money… fast.

41 Responses to “Why Facebook Needs Big Money”

  1. I think those of you who think Facebook is safe overestimate the level of understanding of many users. A whole bunch of my young female students use Facebook and were amazed to discover that I could see their profiles just because I am in the same network. They certainly hadn’t worked out that they could set their own privacy settings. And as someone else said, there are phone numbers, addresses etc. on people’s profiles. I wonder why the ‘friends only’ setting isn’t the default on Facebook. That way the complacent or the net-unaware might be a little safer.

    • I really wish I could use something like Facebook to connect with colleagues. However, I live in tremendous fear that an employer can and will use anything I say against me. That whole Cisco Fatty incident is unnerving.

      Unless I am a total free agent who gives up any thoughts of ever working for a corporation again, I’m not convinced of putting my name out there. Having my name erroneously tied to an online sexual harassment incident makes me even more worried. Maybe I’m missing out on a lot by not personal branding myself on Facebook and beyond, but I’m still not convinced it’s for me. This is really sad because I grew up and love technology which I always hope would make us more face-to-face with a name like Facebook.

  2. jonathan frate

    I’m doing the math in my head, and I think fb needs the money for operations.

    The deal with microsoft guarantees them 150 mil in revenue but has anybody actually tried to advertise on fb lately?

    Its pretty bad conversions! An order of magnitude lower than through google. So who knows what ratchets msft has on fb for their deal, but I doubt the 150 mil rev number just when I look at the advertisers on fb! They’re almost all junky grad finder ads, how can that pay the bills? For what its worth people I’ve talked to have said fb is doing 5-7 mil/month in revenue.

    On the operations side: 250 people, that’s 25mil in the valley. Hardware, software, pr, add in another 10-15mil, or 40’ish mil a year to run it.

    Newsflash: maybe they need the cash to grow their business… Just like everyone else.

  3. Any fear that the influx/advertising model will bring Facebook “down” to the level of a MySpace with gratuitous advertising all over the place. I hope Facebook sees what I believe is one big reason they’re hot now … non-intrusiveness. Interested in your thoughts.

  4. Marc,

    I didn’t say it was “opportunism” on the part of NY AG. I think it is a very real problem that is going to be distracting, costly and time consuming. People don’t want to believe that but it happened in the recent past. MySpace went through precisely these things.

    I don’t hate FB, I actually use it quite a lot. I am just making an argument which no one wants to address.

  5. “state attorney general doesn’t issue a subpoena without a reason

    Although that reason may have much more to do with politics and personal ambition than are real public good issue.

  6. Don,

    it is not just the legal battles. it is all the stuff they have to do in addition to it – basically that is going to cost some serious money.

    Legal battles, putting protection mechanisms and other stuff is going to cost some serious cash.

    I am also working on a post (part ii) on their infrastructure requirements, and how that costs money.

  7. I don’t but the big money for legal battles argument. Businesses generally like to put legal hassles behind them by settling, which in this case may mean more investment in online controls. I bet it is more for continued growth initiatives.

  8. As someone who works as a community facilitator, the one question that keeps ringing in my head was ‘why does Facebook ignore these complaints?’ The team I work with can get caught up in development and fun, positive stuff about running a social site, but the moment something like sexual harassment comes into play, we wouldn’t think twice about handling the situation immediately.

    And that’s why I can’t understand how FB has gotten itself to the point of drawing lawmaker attention over its own inactivity on this front. It just seems like a no-brainer to deal with it head-on.

  9. I really feel strongly against all that is being said in the article. It smacks of dishonesty and people just wanting to bask in the glow that is facebook by stirring up some opportunistic opportunity to run up the hits and trackbacks

    i use facebook everyday to keep in touch with my siblings partner close friends and business contacts
    my privacy settings is such that only my friends can see it
    no one sees anything without me wanting them to see it
    i use adblock in firefox n zone alarm security suite
    i update my wordpress blog stumbleupon delicious n nowpublic all from within my facebook profile amongst many other things

    zuckerberg built a quality neighbourhood n there is adequate mechanisms in place to keep undesirables off my lawn

    just because of that fact i say all this talk is really meaningless and ill-intentioned
    ps. I have a nine year old daughter n fourteen year old younger sister whose got fb profiles n neither them or their friends have had any of this kind of nonsense

  10. There seems to be a building momentum coming from conservative circles that the web needs tighter regulation and playing into people’s inherent fears of sexual predators and worse stalking social networks only fuels this – it’s legislation of ‘if’s’ and ‘but’s’ where the one weirdo dictates how we should all access information – sure Facebook will have it’s whack jobs, but then so does my local gym! Mark Z’s come from nowhere to challenge the web incumbents like Yahoo and Microsoft and that’s going to win him a lot of enemies.

  11. funny article….

    A company which has $150M in hand looking to raise somemore money?

    150M can get so many dog-hours of facebook engineers developing technology…

    marc is just greedy..thats it..

  12. They cant go IPO right now because they have only one major client (MSFT) and therefore no scalable commerce model that is proven. When they eventually get the model down pat, we dont know if the valuations are going to be as high. So if someone is offering them big bucks now and they can stay private – why not? Makes perfect sense – without trying to justify it in terms of rising costs.

    As to the other point of social abuse…
    …Any social network, no matter the level of privacy controls available, will facilitate social abuse. By definition the default privacy controls in a social network will be skewed towards being more open. No matter how much faceBook tells us how to use these controls, most users dont touch these settings because that is not the reason they joined in the first place. Even business folks/adults are joining because it is a cool place to hang out. Naturally, you will find social abuse in such an open “let it all hang out” environment.

    The only way to get around this problem is to seed any new network with the correct DNA right from the start, allowing people to clearly demarcate different facets of their life – be it private/public or whatever in-between. You have to inculcate early habits.

    There is no way faceBook can mutate to a safe place given its starting DNA. You will have to contain the growth of the organism, or it has to move into a bigger host.

  13. While I understand the article, the suit itself is ludicrous. Cuomo wants to follow up Spitzer and doesn’t have the goods, so instead he picks a random headline- Facebook- and pursues it. With Facebook’s privacy settings, this whole issue is even sillier than it was on MySpace.

  14. Facebook is not actively recruiting funding of any kind. Quite the opposite in fact. These rumors stem from the alleged offers of various corporations (Yahoo, Microsoft, etc). The most logical reason is to implement their ad platform.

    If you watch Michael Arrington’s (TechCrunch) recent interview with Mark Z, Mark clearly states that Facebook is not looking for funding.

  15. Oops… forgot to finish my point:

    One wonders whether it is the pretend-children or the “predators” who are the real perverts.

    Either way, it’s clearly becoming a cottage industry and a delightful way for lawyers and politicians to benefit from the growth of social networking.

    Unless you’re Mark Foley.

  16. All the Social Networking sites are being manipulated by groups like “Perverted Justice” which are the folks behind the gross entrapments perpetrated by Dateline: NBC.

    The so-called “undercover investigators” quoted by the Attorney General are not police officials or FBI. They’re “volunteers” who gleefully linger on chat groups and social networking sites pretending to be children, attempting to lure folks, some of whom may actually be pedophiles, into lurid conversations and rendezvous using any method possible.

    As both Vanity Fair and Wikipedia have pointed out, most of the charges are eventually dropped.

    There are probably many more fake teens soliciting sex online than real ones.

  17. Ryan

    If this issues expands to other states, the money Facebook is going to need to fight is going to be serious. It will need to staff up, which also means spending more money. A lot more money.

    And this along with the money they have to spend on infrastructure and new technologies – it will add up pretty quickly.

    This has happened before – MySpace is a good example, where legal and other issues escalated the spending.

  18. Dennis

    You should spend some more time on Facebook and you will find that these problems do exist, and are a very real issue. Much as we might like to think that this is political opportunism, still a state attorney general doesn’t issue a subpoena without a reason.

  19. The great thing about the porn and spam problems is that they don’t really exist on Facebook. Just the sheer fact they have everyone use their real name makes it that much safer than most sites. It keeps people from doing stupid things.

    And if myspace is actually doing anything to help with the safety problem its definitely not showing. The site is riddled with porn accounts and the experience is worse than ever.

  20. Are you really saying that they need a half billion dollars to fight predator lawsuits? Even though there is no precedent for these networks being held responsible for that? They aren’t the Tobacco Companies. This whole article is absurd. They want money because they’re being told that they “need” money and money is hard to turn down.

    Why would Facebook need to go public at all? It can’t “expand” it has no stores, it doesn’t need capital for business, period. It wants it for ego and for the hell of it.