Has social networking lost its mojo? Everyone and their great-aunt are now on Facebook or MySpace. Yet there are worrying signs about the sector’s financial potential. Last week News Corp. said MySpace’s revenue this year will fall short of earlier promises. And on Monday Facebook said it is borrowing money.
The collegiate website champ says that it’s borrowing $100 million from TriplePoint Capital to spend on server farms. If the site wants to keep attracting more scrabble-playing, zombie-chomping denizens, this is a necessary cause. Indeed, its traffic has increased 41% over the past year, according to Compete.
The firm argues that borrowing money is a sign of maturity. Perhaps. But without knowing the terms of the financing—Facebook won’t provide them—this claim is tough to judge. That the financing came from Silicon Valley’s version of a loan shark, rather than a bank, suggests the money came with some tight conditions.
With its Microsoft Corp.-led $15 billion valuation, Facebook could have issued little more than 0.5% of its equity to raise $100 million. That it may have resorted to high-priced debt financing instead may suggest investor scepticism that Facebook will one day become a money-making machine. Though the company is looking to generate $50 million of earnings before interest, tax, depreciation and amortization this year, it’s expecting a negative cash flow of about $150 million. Potential investors may be spooked by MySpace’s experience. News Corp. boss Rupert Murdoch said he expects Fox’s interactive unit, whose largest property is MySpace, to miss its $1 billion revenue goal for the year because of difficulty selling ads on the site. MySpace is the third most-visited website in the US, according to Alexa, but these eyeballs aren’t translating into dollars.
That MySpace has not become the gold mine to match its popularity may explain why News Corp. was so willing to entertain discussions with Yahoo Inc. and Microsoft as part of the former’s attempts to wriggle free from the latter’s hostile takeover offer.
Why all the trouble in social networking land? Facebook and MySpace are finding that it’s exceedingly difficult to make money. The hundreds of millions of users who visit the sites are going there to look at their friends’ vacation photos, not find things to buy. Until this problem is solved they should expect investors to ignore the hype.