Why Facebook Needs Big Money

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.


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