Facebook Steals a Page from Apple’s Book

Facebook is hungry for success, and what better company for the social media giant to emulate than the world’s most valuable company, Apple (NASDAQ:AAPL). Apple’s primary strategy is to keep costs low and rely on outside developers for research and development, a strategy Facebook is mimicking by spending a smaller percentage of revenue on engineering than other Internet companies.

Last year, Facebook devoted only 10 percent of its sales to research and development, a smaller percentage than most companies holding recent initial public offerings, including  Zynga (NASDAQ:ZNGA) and LinkedIn (NYSE:LNKD). Facebook encourages other companies to add features to its site, resulting in lower expenses that allow for bigger profit margins than the typical IPO. Facebook is planning its own IPO this year.

Facebook is looking for the same stunning financial results that Apple has by keeping customers loyal to the product without spending revenue on R&D. Apple develops its own technology and lets outside developers create hundreds and thousands of apps that run on its devices. Apple devoted 1.6 percent of sales to R&D last quarter.

Both Facebook and Apple have seen booming sales despite small R&D budgets. Facebook’s revenue almost doubled to $3.71 billion last year after expanding more than 150 percent the previous year. Currently, Facebook is topping the 14 percent average gain for companies in the Standard & Poor’s 500 Index. Facebook’s profit margin in 2011 was 27 percent, up from 19 percent in 2010 and 16 percent in the previous year. Investors are hoping to see margin expansions well after the company goes public.

Facebook’s challenge is to maintain its growth amid competitors like Google (NASDAQ:GOOG) and smaller startups. Competitors may force Facebook to increase its research spending. Facebook’s main source of revenue is from advertising, but Google is taking the lead in the market for U.S. display ads. Google is advancing in display advertising and its social networking site Google+ has attracted 100 million users. Facebook may have to spend 15 percent of revenue on engineering to keep up with current or future rivals.

Facebook still invests in future products and is rolling out new products, such as its revamped timeline feature and mobile services. The company will remain effective as it focuses on its main business of leading the social media space.

To contact the reporter on this story: Diallah Haidar at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com