How exactly is Facebook making money?

Facebook proudly says it's bringing in enough cash to cover most of its day to day business costs. But how? The answer lies in self-serve advertising and virtual goods

The news that Facebook has tripled in size in the past year has grabbed headlines, but the real news was that the social network is now - in Mark Zuckerberg's words - "free cash flow positive". That piece of accounting jargon indicates that, after more than five years, the site has taken the first major step towards becoming an honest-to-god profit-making company and (perhaps) indicates that a stock market launch could finally become a possibility.

But the news that the site has money coming in needs to be examined a little closer. While it's a little difficult to discern exactly what this "free cash flow" constitutes for a private company like Facebook, one spokesman told Reuters that it "does not include any cash from private investment". That might indicate that Facebook is now making more than enough money to cover its taxes, capital expenditure and the cost of around 700 staff - but that the money put into the company by its backers (such as the $300m recently raised from Russian group Digital Sky Technologies) doesn't count.

If all that extra money isn't being used to shore up vital day-to-day Facebook operations, that's probably good news - but whatever the case, the site hasn't hit the high notes quite yet.

However, the fact that Facebook is making any money at all might come as a surprise to some, given that many are sceptical that social networking sites have real money-making potential (and for good reason, given the history of the dotcom bubbles and here-today, gone-tomorrow social websites).

However, after throwing around all kinds of ideas - some good, some not so good - Zuckerberg and company now seem to have settled on a number of ways to bring in the money:

• Self-serve advertising allows marketers to decide precisely who they want to appeal to, and buy ads to put in front of users who fit the profile. This has already proved appealing for some big brands: right now, I can see ads from 3 Mobile and Peugeot on my Facebook homepage, for example.

• It's not just big advertisers, either. Almost anyone can walk up and buy space on the site if they have the cash - and that includes other Facebook users, who try to direct you to their profiles, fan pages or elsewhere in order to get you to follow their cause or buy their product.

• There are also the gifts and other virtual property that users can buy and give to each other. This still seems like a crazy idea to some people, but it can prove a highly profitable business in the right circumstances - virtual goods prop up all kinds of online games, and nobody ever thought ringtones could be so profitable.

In addition, the company is known to be working on a micropayments system (no doubt a money-spinner if they can pull it off) that will almost certainly allow it to take a slice of any transaction that takes place through the site. Whatever it is, there appears to be a business here, something even critics like Andrew Keen are now admitting.

Now, that's not to say that Facebook can continue unabated. Even if its products are making money today, there are few guarantees for tomorrow.

After all, at the height of its powers a couple of years ago, rival MySpace was boasting that it was making almost $1m a day simply from selling adverts on its homepage. Since then, it has struggled to keep up momentum and found itself needing to slash jobs and refocus its business.

For now, Zuckerberg and friends appear to be doing a lot of things right - but there are still plenty of lessons they need to keep in mind.

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