Investors and users beware: Facebook is all about IT


By now, every statement in Facebook’s Wednesday-afternoon S-1 filing has been pored over to death, published and analyzed. But there is a simpler way of summing it up: Facebook is all about infrastructure. The ad revenue and user experience it relies on to exist mean Facebook can’t afford to take it easy on IT, which means shareholders and users will both find plenty of reasons to get upset with the soon-to-be-hottest stock on Wall Street.

To get a sense of just how important infrastructure is to Facebook, check out the numbers from the S-1:

  • $388 million. The amount of money Facebook spent on research and development, which it describes as “salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products”
  • 10. The percentage of total revenue Facebook spent on R&D
  • $606 million. The amount Facebook spent in 2011 on “servers, networking equipment, storage infrastructure, and the construction of data centers”
  • $1.6–$1.8 billion. The amount Facebook expects to spend on capital expenditures in 2012

Why all the spending? My colleague Barb Darrow already covered the user experience aspect. Long story short: If Facebook doesn’t provide the best-possible user experience, its users might start looking at competitive services. In theory, better infrastructure, better architectures and better software mean a better experience. You can’t handle the activity of 800 million users or store (or ingest) 100 petabytes of user photos and videos without dropping some cash.

But there might be a more important number that tells the story of Facebook’s infrastructure investments: 85. That’s the percentage of Facebook’s 2011 revenue that came from advertising. As most everyone should be aware of now after the ado over Google’s new privacy policy last week, platforms like Facebook and Google try to keep their advertisers happy by helping them target ads at users who might actually be interested in them. That type of targeting requires a lot of spending on analytics.

And while Facebook hasn’t gone into great detail about exactly what technologies power its ad-targeting systems or other analytic efforts, we do know it maintains a Hadoop cluster that currently weighs in at 30 petabytes. At least a part of this volume is for a massive data warehouse the company uses for web analytics.

In the short term, this is bad news for some shareholders and users, because Facebook isn’t about to slow down on infrastructure, R&D, targeted advertising, analytics or infrastructure for targeted advertising and analytics. For shareholders, that means earnings are put right back into improving its IT system instead of creating dividends — something Facebook warns them about. Amazon and Google have similar approaches, and shareholders aren’t always happy about it.

For users, it likely means their privacy concerns aren’t going anywhere. Don’t want Facebook using your data to roll out new, possibly creepy features? Tough. That’s how it keeps ahead of the competition. Don’t want Facebook using your data to appease advertisers? Tough. That’s how it pays the bills. And it will have to drum up even more money every year if it is going to keep spending like crazy on infrastructure.

But if Facebook ends up even partially as successful as Amazon or Google, those complaints will never get too loud. Investors will ultimately relish their highly valued stock, users will gladly sacrifice some privacy for an increasingly social experience, and techies will continue to marvel at the cutting-edge infrastructure that makes it all happen.

Feature image courtesy of Facebook/Chuck Goolsbee.

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