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Facebook IPO is a testament to its profit margins

The numbers for Facebook’s forthcoming IPO (share offer) are truly staggering: the offer of a tiny tranche of stock could raise $10bn, the company might be valued at around $100bn and founder Mark Zuckerberg (pictured) will be worth around $27bn, making him one of the richest people in the world.

And the company only started eight years ago. Here’s a neat resume of the Facebook phenomenon.

It’s good old advertising that is driving Facebook’s growth of course, accounting for over 80 per cent of its $3.7bn revenue in 2011 even though many advertisers are sceptical about its value and others unsure how to use it effectively. But that actually doesn’t matter, not to Facebook anyway. Just like Apple and Google’s search operation, Facebook is incredibly big (834m users) and staggeringly profitable (margins of around 25 per cent). So a small slice of big advertisers’ budgets is OK.

When you’re this profitable you can say to advertisers and their media agencies: do it our way or don’t do it at all. And Facebook, politely, does just that.

Just as importantly, Facebook made $557m last year from payments and other commissions, showing clearly the growth of an another important revenue stream as game developers, entertainment brands and others who need Facebook’s numbers just as much as advertisers, cough up.

Are there any clouds on Facebook’s glossy horizon? Tech giants come and go remarkably quickly – look at AOL and Yahoo – but Facebook’s numbers and the sheer popularity of the free service with young people around the world should act as obstacles to disaster. And its sky-high margins mean that, unlike other online media owners, it doesn’t need to introduce money-making wheezes to its offer that turn away its zillions of fans.

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About Stephen Foster

Stephen is a former editor of Marketing Week and London Evening Standard advertising columnist. He wrote City Republic for Brand Republic and is a partner in communications consultancy The Editorial Partnership.
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