How Has The Operating Leverage In Facebook’s Business Evolved?

by Trefis Team
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Facebook (NASDAQ:FB) is the world’s largest online social network. Other than the year of its listing in 2012, due to employee stock expenses, Facebook’s operating leverage has always been positive. The company’s recent troubles with privacy and user data misuse allegations has prompted Facebook to increase its investments in its platform health management. The increase in fixed costs is likely to temper Facebook’s operating leverage, which has declined in 2018 from its 2017 levels.

Our interactive dashboard on Operating Leverage In Facebook’s Business outlines our estimates for the impact to Facebook’s revenue. You can modify any of the key drivers to visualize the impact of changes, and see all Trefis technology company data here.

Due to the benefit of scale available given the reach of Facebook’s platform, the same fixed costs (labor, equipment and others) can be used to service a theoretically unlimited number of users.

Operating Leverage In Facebook’s Business

The degree of operating leverage (DOFL) attempts to measure the operating risk in a company owing to the structure of the fixed and variable costs. Given the marginal cost needed to add incremental users to an existing virtual platform, the need to grow fixed costs along with user growth is limited. DOFL is also defined as the ratio of percentage change in operating income to the ratio of change in revenue.

Facebook’s intrinsically low-spend business – where users essentially market the company to other users for free, and also create the content for consumption – had long allowed the company to keep increasing its ad load on users. In its quest to increase advertiser ROI, Facebook deployed data mining algorithms that could mold popular opinion due to the reach of the system. While the company continues to battle perception issues in light of Facebook’s role in enabling the dissemination of fake news and propaganda, in addition to other malicious use, Facebook has committed to invest heavily to ensure that its platform is not used for unfair gains. These additional costs will likely weigh on its margins, but we do not expect them to have a material long-term impact on the company’s results.

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