Emerging Technology

Facebook files for IPO: The five keys to its future success

Patrick Stafford /

Facebook has finally filed for an IPO this morning, confirming months and years of rumours the social network would eventually go public.

All the financial revelations are intriguing, including the fact the network made $US3.7 billion in revenue last year and $US1 billion in profit.

But that’s not all. There’s plenty of information contained in Facebook’s filing to suggest this company has a long-term strategy for its success. Let’s take a look at five reasons why Facebook’s success won’t be slowing down any time soon:

Expanding the app platform

It’s encouraging for investors to see Facebook isn’t very keen to depend on just one product or service. And although advertising revenue sits at 85% of all business, apps are making their way in – in fact, Zynga produced 12% of the company’s revenue for 2011.

As Facebook moves away from just advertising, it will become critical to obtain new sources of revenue. Convincing app developers to build on its platform worked for Apple, it worked for Google, and as long as Facebook continues treating people right, it will work for them too.

Pumping the R&D spending

In any technology company R&D is essential to staying fresh. And it’s encouraging to see Facebook hasn’t forgotten that when a company is at the top of its game, it can easily become complacent and let someone else take over.

In 2011 alone, it spent $US388 million on research and development. Before that, it spent $144 million and $87 million.

That R&D spending represents 10% of revenue.

Who knows what they’re working on. One rumour suggests an entire team is looking at desktop-software, and it seems to be heading that way after releasing a Windows messenger app late last year.

What’s important is that this research exists at all. And given so much money is being pumped into the company this way, it’s a fair bet it’ll be a while before a challenger can outtake Facebook’s advantage.

Maintaining the culture

It’s fascinating to watch Facebook’s growth over the past eight years. Moving from a simple dorm room project to a multi-billion dollar technology giant is incredible to behold – which is all the more reason why maintaining its culture has been so impressive.

“We hope to strengthen how people relate to each other,” Zuckerberg said in a letter within the S-1 filing.

“Personal relationships are the fundamental unit of our society. Relationships are how we discover new ideas, understand our world and ultimately derive long-term happiness.”

It would be easy for Facebook to become a money-hungry entity, forgoing the very reason it became successful. But as long as Zuckerberg keeps his vision intact, the company should continue in its success.

Extending the reach

It’s become cliché to speak of how far Facebook reaches across the globe, but the figures are truly inspiring. Eight years ago, this company barely existed outside of a dorm room at Harvard University.

Currently it has:

·         845 million active users every month

·         483 million daily active users

·         100 billion friend connections

·         2.7 billion “likes” and comments per day

Whichever way you view that growth, it’s incredible. But even more crucial is the fact it’s been able to get out of the Facebook.com domain and into the internet itself.

Hundreds of thousands of websites now have comment boxes powered by Facebook, plugins where users can see which friends “like” that particular page, and the ability for users to be updated on that webpage through their Facebook account just by clicking a button.

Facebook calls this “the social graph”, and it’s the key to its future. Facebook doesn’t want to dominate its own domain – it wants to dominate the entire internet. Eventually, it won’t even matter if you don’t have a Facebook account, as you’ll be encountering the company in one way or another.

Maintaining a healthy margin

Maintaining a health margin is the key to a good business. It’s something retailers have to deal with constantly, and in that industry, and breaking above 10% is likely to give you some handsome results.

Facebook has blown that figure out of the water, however, and is now trading with a solid 27% margin. That’s even more than Google’s own net profit margin, slightly lower at 26%.

To be fair, Facebook isn’t a retailer and it’s easy to maintain a higher margin when you have no physical products. But it also speaks to the company’s fantastic management – almost certainly due to Sheryl Sandberg’s keen eye and experience – and the growth of its advertising platform.

Advertisements are Facebook’s main source of revenue at 85%. The IPO figures suggest Facebook has been able to maintain that 27% figure for some time, especially as its user tracking becomes sophisticated.

This is the technology that allows the right ads to be shown to the right users. Given Facebook’s massive database of information, it makes sense ads would become better targeted over time. And as long as users keep sharing their data, the more effective they’ll be and the more money Facebook will make.

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Patrick Stafford

Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.

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