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Summary:

Depending on how Facebook intends to evolve, both performance considerations and data privacy laws might make additional infrastructure investment a good idea. Regardless of its rationales, however, the time to do so is now — before the company goes public and must answer for every dollar spent.

Facebook's Prineville data center.

Rich Miller at Data Center Knowledge wrote this morning that Facebook should use its latest shot of investment cash to invest in more infrastructure, perhaps an overseas presence to serve the large percentage of users who live outside the United States. Depending on how Facebook intends to evolve, both performance considerations and data-privacy laws might make this a good idea — but regardless of its rationale for further infrastructure investment, the time to do so is now. If Facebook does indeed go public, it will likely find that analysts and shareholders aren’t too keen on major capital expenditures.

As Om lamented upon hearing that Google was once again ramping up its infrastructure spending, Wall Street analysts have a tendency to wring their hands over such investments. Despite the fact that advanced infrastructure helps companies like Google, Amazon and Facebook continually evolve and stay ahead of the competition — Facebook, in fact, is renowned for its infrastructure — the money required to maintain that edge can have a fairly significant effect on quarterly revenues a company’s balance sheet. And if there’s one thing shareholders don’t like, it’s companies that don’t maximize their profits — even if it’s just a short-term hit that will reap rewards in the long term. But as Facebook tries to fend off competition from sites like Foursquare and Twitter, and perhaps to steal some of Google’s traffic, infrastructure to support new services and new users is arguably critical.

What will make the bottom-line watchers most nervous once Facebook is a publicly traded company: the occasional capital expenditure splurge on a new data center, spates of lengthy outages or smaller, nimbler competitors rolling out new services with which Facebook can’t compete? I don’t know that there is a correct answer, but I do know that the first item can help ensure the latter two don’t happen, which is a good thing. So, Facebook, if more infrastructure is needed, spend those millions now before every dollar goes under the microscope.

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  1. “…the money required to maintain that edge can have a fairly significant effect on quarterly revenues. And if there’s one thing shareholders don’t like, it’s companies that don’t maximize their profits — even if it’s just a short-term hit that will reap rewards in the long term.”

    Capital expenditures do not affect revenues from an accounting/reporting perspective. They do affect cash flow and cash on the balance sheet though.

    Not trying to be snarky, it’s an important difference.

    1. Derrick Harris DD36 Monday, January 3, 2011

      That’s a good point. We just don’t often find out the exact numbers until quarterly earnings statements come out.

  2. Couldn’t agree more. But this topic merits a more detailed introspection as infrastructure spending covers a lot of areas.
    Recommendation is to have follow-up article on dos and donts as far as FB is concerned. i.e. intersected with it’s traditional strengths and weaknesses and business needs.

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