Types of costs involved in Facebook’s business operations.

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  • Post last modified:April 18, 2020

Facebook is a leading social media channel with a global presence and a large audience composed of billions of monthly users from the various corners of the globe. The company has experienced massive growth in its audience and revenue during recent years. The main factors driving the growth of Facebook’s audience include the growth in the use of 4G smartphones in the emerging markets as well as increased user engagement across the entire platform. The Asia Pacific region has been driving much of Facebook’s growth in recent years. While the average revenue per user from this region may be comparatively lower as compared to the US & Canada or the European region, still the vast surge in users from the Asia Pacific has made it a lucrative operating segment of Facebook. 

While on the one hand, Facebook is experiencing enormous growth, on the other the costs related to its global operations have also continued to rise driven mainly by the growth of the global audience and higher focus on user experience. There are several types of costs involved in running a website that serves billions of users each month worldwide. Apart from the compensation of human resources and maintaining a global infrastructure, there are many other types of costs involved in running a tech business like Facebook. Marketing, as well as research and development, are also attracting higher expenses each year due to the growth in audience, higher competition and increased expectations of the marketers placing ads on the platform.

Currently, research and development expenses are the largest group of expenses incurred by Facebook to run its global tech empire followed by the cost of revenue and G&A expenses.

Facebook’s operating expenses are classified into four main categories:

Cost of revenue –

The cost of revenue mainly includes the expenses related to the delivery and distribution of Facebook products. The expenses related to the operation of Facebook’s data centers fall under this category. Apart from it, the costs related to the technical infrastructure like the facilities, and server equipment depreciation also fall under this category. Further, the cost of revenue includes the salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. However, there are many more types of costs that also fall under this category like the traffic acquisition and content acquisition costs as well as credit card and other transaction fees related to processing customer transactions, and the cost of consumer hardware devices sold.

Research and development:

Not just Facebook, but for other tech giants too, this category represents one of the largest costs related to the operation of the business. Amazon is currently the leading spender in terms of research and development in the entire industry and not just tech. Facebook’s research and development expenses were a little larger than one-third of what Amazon spent on R&D in 2019.  Facebook’s R&D expenses are mainly related to the staff who are a part of its research and development team. They include the salaries and benefits, share-based compensation, and facilities-related costs for employees in its engineering and technical teams. These people are responsible for creating new products as well as improving the existing products.  

Marketing and Sales:

Despite being a well-known brand, Facebook spends a large fortune in marketing and sales. The most obvious reason behind it seems to be the growing competition from YouTube and others. These expenses are related mainly to the staff working in the marketing, sales and customer service functions apart from the promotional expenditure. Facebook’s marketing and sales expenses include the salaries and benefits, and share-based compensation for its employees engaged in sales, sales support, marketing, business development, and customer service functions. These expenses also include the costs related to advertising and promotions as well as the costs of professional services like content reviewers who support the Facebook community and product operations.

General and Administrative Expenses:

The General and administrative expenses of Facebook include the legal related costs salaries and benefits, and share-based compensation for certain of its executives, as well as its legal, finance, human resources, corporate communications and policy, and other administrative employees; and professional services.

Operating Expenses of Facebook in 2019:

Facebook’s total costs and expenses grew to $46.7 billion from $30.9 billion last year; yoy growth of around 51%. Total costs and expenses represented 55% of the company’s revenue in 2018 which grew to 66% in 2019.  

The company experienced highest growth in its general and administrative expenses of all the costs and expenses. The company’s cost of revenue grew to $12.8 billion in 2019 from $9.36 billion in 2018. In 2019, cost of revenue was 17% of Facebook’s net revenue which grew to 18% in 2019. 

The research and development expenses of Facebook also experienced significant growth of around $3.3 billion in 2019 compared to 2018. Facebook’s R&D expenses grew to $13.6 billion in 2019 from $10.3 billion in 2018. In 2019, R&D expenses were 18% of the company’s net revenue which grew to 19% in 2018. 

The marketing and sales expenses of Facebook which were at $7.85 billion in 2018 grew to $9.9 billion in 2019. These expenses remained at 15% of the net revenue in 2019 just like the previous year.

The general and administrative expenses of Facebook saw the most significant growth in 2019 rising to more than treble the previous year’s level. These expenses grew by more than $7 billion in 2019 compared to 2018.  The general and administrative expenses of Facebook grew to $3.5 billion in 2018 to $10.5 billion in 2019. In 2018, the G&A expenses of Facebook stood at 6% of the company’s net revenue and grew to 15% in 2019.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.