Government Bailout and Facebook

The government bailout for the auto and bank industries has an odd similarity to the capital investments poured into Facebook. In both instances, bad money is being thrown after bad money. After the House of Representatives recently passed the bill to continue government bailouts to states – states that are known to be wasteful in spending - and other industries, I was reminded of Facebook’s failure to show a profit. In essence, the government handout intended to lift-up business is parallel to the funds keeping a profit-less company afloat.

It is a well-known fact that Facebook has failed to produce a profit since its inception. Moreover, as reported in a BusinessWeek article in the fall, Facebook runs in a negative cash flow. Such poor financials does not detract the over-zealous Zuckerberg and company from aggressively expanding across the globe for new users or from capital investors offering more cash to fuel their ambitions. The latest installment of 500 million dollars is intended to keep Facebook charging ahead for the next three years.

While the latest efforts of the company in a time of economic downturn have exponentially grown their user base, revenues of MySpace (whom who have half the user base) double that of Facebook. Admittedly, Zuckerberg says that Facebook needs to refine its business model – since they currently do not have one. A culprit for a profitless Facebook traces back to the dim results of online advertising. Other social media networks, such as LinkedIn, that have a subscription tend to operate in the black. Since this concept would not hold-up well in the market of Facebook users, the company needs to innovate their revenue model.

For a company valued in the billions that rolls around in red ink, investors sure do love pouring money into the company. It may the glamour of the idea or the potential that such a social phenomenon has that keeps those investors coming back, but undoubtedly investors should be crying for a clear business and revenue model – and soon.