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Facebook reaps R&D saving

PALO ALTO: Facebook has enjoyed a profits boost from spending proportionally less on R&D than many of its tech rivals, new analysis has indicated.

Bloomberg reports that the social network has increased earnings by maintaining a relatively tight innovation budget, with its R&D spend equivalent to just 10% of total sales.

Partnerships with external affiliates such as Zynga allow Facebook to offer new products, such as FarmVille and Words With Friends, without adding to its R&D costs.

Instead, these costs are borne by the external firms. Zynga, for example, spent 25% of its revenues on R&D in 2010, while analysis from PrivCo suggests that this proportion could have risen to around 30% in 2011.

According to Facebook's own figures, Zynga accounted for 12% of the $3.71bn in revenues the social network generated last year. More broadly, sales of virtual goods accounted for $557m, or 15%, of the 2011 total, up from $106m in 2010.

Facebook's profit margin grew from 19% of revenues in 2010 to 27% in 2011, a rise partially due to its relatively low engineering costs.

Analysts told Bloomberg that the social network's innovation strategy was similar to that of fellow tech giant Apple, which spends less than 2% of sales on R&D.

Ron Adner, a professor at the Tuck School of Business, commented: "We don't see any of the R&D spend by the app developers in Apple's numbers, but we see it in the result of the innovativeness ... Same thing with Facebook."

Both Facebook and Apple have also benefitted from rapid business growth over recent years, which has organically limited innovation budgets as a proportion of total revenues. 

Though its engineering spend is low by the standards set by its peers, Facebook has nevertheless recently tapped its innovation budget to develop several significant new products and features in-house.

These include its Timeline, which will be rolled out over all profile pages over the months to come, and a range of location-based services such as Places.


Data sourced from Bloomberg; additional content by Warc staff, 20 March 2012

 
 

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