Facebook: Business Model, Hardware Patents and IPO (analysis and infographic)

Just because Facebook is getting a huge valuation doesn’t guarantee its ongoing success. The heart and soul of a tech company — excepting Twitter, perhaps — is its business model.

Facebook says it is in the “advertising” business in its public disclosure docs. What does that really mean? Surely, the anonymizing of user data for more precise ad targeting is the way Facebook, Google and other social giants around the world lean.

Facebook does rely on regular old ad revenue. That’s the same model that has supported editorial efforts for decades. But with a twist that relies on data aggregation more and more each day.

Infographic credit: Statista

With its recent patent purchases, Facebook has another revenue source, too. Licensing. Its patent portfolio has wildly expanded in recent weeks, in part due to its counter suit over patent claims with Yahoo. Our intellectual property expert, Tom Ewing, has helped us evaluate Facebook’s expansion from 45 patents to thousands of them from Microsoft and IBM. From IBM alone, Facebook now has a wide range of hardware patents to capitalize on. Will Facebook go into the mobile hardware business? I’m betting on it.

Chris Dixon today posted an intriguing comparison between Facebook and Google. Definitely worth a look as Facebook opens up to the public markets …

Startups usually succeed because of a single major product or business innovation. Google is unusual in that (it) succeeded because of two major innovations: (its) core search product and (its) keyword advertising business model. Back in 2000, when Google was wildly popular but generating no revenue, the conventional wisdom was that their business model was uncertain. Then Overture invented keyword advertising and Google adopted the same model. This turned out to be both wildly profitable and also, remarkably, (it) created a better experience for both advertisers and users.

Facebook relies on an old internet business model: display ads. Display ads generally hurt the user experience … and are also not efficient at producing revenues. Facebook makes about (one tenth) of Google’s revenues even though they have (twice) the pageviews. Some estimates put Google’s search revenues per pageviews at 100-200x Facebook’s. The good news for Facebook is there is a lot of room to target ads more effectively and put ads in more places. The bad news is that, if there is one consistent theme in both online and offline advertising, it’s that ads work dramatically better when consumers have purchasing intent. Google makes the vast … MORE HERE.