The Biggest Cost of Facebook's Growth

Running the world's largest social network will be a technical and financial challenge as it grows.

Data store: Facebook’s data center in Prineville, Oregon, is one of several that will help the company cope with its always growing user base.  Facebook

Facebook is the gateway to the Internet for a growing number of people. They message rather than e-mail; discover news and music through friends, rather than through conventional news or search sites; and use their Facebook ID to access outside websites and applications.

As the keeper of so many people's social graph, Facebook is in an incredibly powerful position—one reason its IPO this week is expected to be the largest ever for an Internet company.

But potential investors should take note that there's a flip side to Facebook's explosive growth and power; that flip side, as one analyst put it, is its bid to become a core piece of the Internet's infrastructure. Facebook's own technology infrastructure is expensive to build and operate, and it must scale rapidly.

Infrastructure is Facebook's biggest cost, and to support growing traffic and network complexity, it will have to spend even more. What's less clear is whether Facebook's revenues will likewise increase—especially if additional traffic comes from less lucrative visitors, such as people accessing the site from their phones or from outside North America and Europe.

To date, Facebook has been up to the infrastructure challenge. In less than eight years it has grown to host 526 million daily users, 300 million daily photo uploads, and nine million applications.

Two metrics highlight Facebook's success in this respect.

First, Facebook spent $860 million, or about $1 per active monthly user, to deliver and distribute its products last year. The bulk of that money was related to data center equipment, staff, and operating costs. That is up from about 80 cents and 60 cents per user in the two previous years. For the moment, however, Facebook's revenue, currently at $4.30 per user, is growing at an even faster clip. That's a good sign for any potential investor.

Second, Facebook is not only the Web's biggest social media site, it is also consistently the fastest. In 2010, Facebook's response time averaged one second in the U.S., but had improved to 0.73 seconds by mid-2011, according to AlertSite. By comparison, LinkedIn, the next fastest, took nearly double the time to load. Twitter's site was a full two seconds slower.

Facebook has come a long way since it was first hosted in Mark Zuckerberg's dorm room and expanded as he rented additional servers for $80 a month. By late 2009, Facebook disclosed it was using about 30,000 servers, and since then, the number has more than doubled.

As it has grown, the company's engineers have had to innovate to keep costs down and process a growing volume of data. For example, Facebook designed minimalist custom servers that are cheaper for it to build and run than off-the-shelf ones. It also built a program to optimize the performance of its code, cutting the computing demand on its Web servers by 50 percent. It has open-sourced many of its software innovations and also created the Open Compute Project to widely share its new server designs, with the hope that others could contribute useful innovations.

Today, Facebook is building its own data centers in Oregon, North Carolina, and Sweden. Last year it spent nearly a third of its revenues, $1.1 billion, in capital expenditures on networking equipment and infrastructure. It plans to spend as much as $1.8 billion on such costs this year.

These infrastructure investments are a good sign, says KC Mares, a data-center energy expert and the founder of MegaWatt Consulting; owning and operating rather than leasing data-center space will help Facebook save money in the long term. Other growing tech companies such as Google have pursued this same strategy.

But as Facebook's IPO filing makes clear, there is also a risk to investing in a global infrastructure to serve all users, regardless of their short-term profitability. It is a balancing act.

"If you add too much, it's a big cost that eats into your revenues. If you don't add fast enough, it's an opportunity cost of customers you can't serve," says John Pflueger, a board member of the Green Grid, an IT industry group.

Coming to the wrong conclusions about how to invest in infrastructure can have major consequences. Just look at Friendster, a social network founded before Facebook and MySpace. Friendster had more than 100 million users, but it quickly fell behind as Facebook came to dominate the landscape.

Jim Scheinman, head of business development at Friendster until 2005, says Friendster made product decisions that required too much computing power. For example, it tried to calculate up to six-degree connections between all users. As a result, the site slowed to a crawl. Today, big Web companies often calculate exactly how much revenue they lose when a page is slow to load, even down to tenths of a second.

Facebook, of course, is long past its early days and has more than a critical mass on its platform: almost half of the world's population of Internet users. But to stay relevant as it battles companies like Google, it'll have to stay on the cutting edge, and it will need the computing power to support that.

The question, says Scheinman, is less about costs and capital and more about engineering challenges: "When they have a billion people, and as people use the product more, does that create scaling issues they haven't yet seen before?"

By Jessica Leber Newscribe : get free news in real time  

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UK bank governor warns of eurozone debt crisis 'storm'; Eurozone 'very close to collapse'!

The Bank of England has cut its growth forecast for this year to 0.8% from 1.2%, saying the eurozone "storm" is still the main threat to UK recovery.

The eurozone was "tearing itself apart" and the UK would not be "unscathed", said its governor Sir Mervyn King.

He also confirmed that the Bank has been making contingency plans for the break-up of the euro.

The rate of inflation will remain above the government's 2% target "for the next year or so", the Bank said.

Sir Mervyn was presenting the Bank's quarterly inflation report.

He told a news conference that the euro area posed the greatest threat to the UK recovery, and there was a "risk of a storm heading our way from the continent".

"We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

"The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic," Sir Mervyn said.

“Start Quote

European policymakers, I suspect, will not rush to thank him for his kind and timely advice”

Stephanie Flanders Economics editor

• Read more from Stephanie
• Flanders: Sir Mervyn, the UK and the euro
• PM: Euro to 'make-up or break-up'
• UK unemployment falls by 45,000

A 'mess'

Andrew Balls, the managing director in London of global investment firm Pimco, said it was reasonable for Sir Mervyn and other policymakers to plan for a Greek exit.

"Yes, maybe they should plan for an exit, but the thing is, speculating about it can make the event more likely, so the Europeans really do have a mess there," he told the BBC.

"If Greece is to slide out of the euro and collapse, how are they going to protect Ireland, Portugal, Spain and Italy?"

Separately, Prime Minister David Cameron also spoke of the financial storm clouds across Europe, warning that eurozone leaders must act swiftly to solve its debt crisis or face the consequences of a potential break up.

He said during Prime Minister's Questions in the House of Commons: "The eurozone has to make a choice. If the eurozone wants to continue as it is, then it has got to build a proper firewall, it has got to take steps to secure the weakest members of the eurozone, or it's going to have to work out it has to go in a different direction,

"It either has to make up or it is looking at a potential break up. That is the choice they have to make, and it is a choice they cannot long put off."

The Bank's report said, however, that the eurozone crisis was not the only issue weighing on the UK economy, with volatile energy and commodity costs, and the squeeze on household earnings also having an impact.

Andrew Balls, of global investment firm Pimco says, "a disorderly outcome for Greece is going to be bad for the global economy". 

It all meant that the UK economy would not return to pre-financial crisis levels before 2014, Sir Mervyn said.

Nevertheless, he remained optimistic about the longer term. "We don't know when the storm clouds will move away. But there are good reasons to believe that growth will recover and inflation will fall back," he said.

On quantitative easing, he said that no decisions had been made whether or not to continue pumping money into the economy. The last stimulus programme was still "working its way through the system".

'Outlook is probably better'
 
Sir Mervyn's comments came on the day that official unemployment figures showed a fall in the jobless rate, underlining recent surveys that the private sector had become more confident about hiring labour.

He said the fall in joblessness was consistent with the expected gradual recovery in the UK economy.

But Graeme Leach, chief economist at the Institute of Directors, said of the Bank's report: "Talk about kicking an economy when it's down.

"On top of the euro crisis and a double-dip recession, the Bank of England is now saying inflation may not fall fast enough to permit more quantitative easing.

"Actually we think the inflation outlook is probably better than the Monetary Policy Committee (MPC) thinks, with the impact of the euro crisis, declining real incomes and weak money supply growth suggesting inflationary pressures may recede later this year and into 2013.

"After many years of underestimating inflationary pressure let's hope the MPC is now making the opposite mistake by overestimating it".

Ed Balls, Labour's shadow chancellor, said: "The Bank of England has once again slashed its growth forecast for Britain, but despite this the government says it will just plough on regardless with policies that are hurting but not working.

"The governor is right to warn of a coming storm from Europe. That is why we warned George Osborne not to rip up the foundations of the house and choke off Britain's recovery with spending cuts and tax rises that go too far and too fast.

"What happens in the eurozone in the coming weeks and months will have an impact on our weakened economy," Mr Balls added.-  BBC

Eurozone was 'very close to collapse'

Eurozone was 'very close to collapse'

 

17 May 2012Last updated at 00:36 GMT

A European Central Bank board member has conceded the ECB may have "saved" the eurozone banking system and eurozone economy in Autumn 2011 by providing one trillion euros of emergency loans to hundreds of European banks at an interest rate of just 1%.

ECB Executive Board member, Benoit Coeure, told Robert Peston: "We were very close to a collapse in the banking system in the euro area, which in itself would have also led to a collapse in the economy and deflation, And this is something that the ECB could not accept."

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Teach and Learn!

To teach is to learn for Leong 



GEORGE TOWN: Lecturer Leong Kit Hong wants to go on teaching. And to do that, he will go on learning.

The 67-year-old INTI International College Penang physics lecturer is now pursuing a degree in Telecommunication in Wawasan Open University here.

He already holds a degree in Physics, Mathematics and a Master's in Physics.

Meaningful gift: Leong (second right) and other lecturers choosing their syngonium plant at the Teachers Day celebration at INTI International College Penang Wednesday.

 

Leong, who joined the teaching profession 40 years ago, said the best way for him to serve the community was to be a good educationist, and he felt that all educationists should have the right blend of skills and the latest knowledge.

Leong, who is one of the college's pioneer lecturers, said his greatest satisfaction “is seeing my students do as best as they can be”.

“When they do well in their studies, they will be able to serve society well later on,” he added.

Asked about his retirement plans, the grandfather of two said he would continue to teach as long as his health allowed him.

Leong, who has been teaching at the college for the past 18 years, was among the lecturers who joined the Teachers Day celebration at the college yesterday.

College chief executive principal Dr Michael Yap Sau Moi said 80 full-time lecturers were presented with a syngonium plant each.

“Teachers plant seeds of knowledge that grow forever,” he said. “As such, we chose to honour our lecturers with this plant instead of the usual roses.”

By KOW KWAN YEE
kowky@thestar.com.my

Fresh graduates not suitable and are ‘liabilities’, said employers

KUALA LUMPUR: Employers consider fresh graduates liabilities as many require additional training before they can perform.

Companies would rather hire experienced and skilled professionals who can bring instant returns, said Kelly Services marketing director for Singapore and Malaysia Jeannie Khoo.

She said employers felt many fresh graduates lacked communication skills and had poor English and needed to improve before they could add value to the business.

“This means additional costs for the company. Employers are looking for people who can hit the ground running,” she said after launching the Kelly Services Professional and Technical Salary Guide 2012 here yesterday.

Khoo said the 27 polytechnics in the country generated thousands of skilled workers every year but many of them needed to be retrained by their employers.

She advised fresh graduates to be less choosy and to have realistic expectations on salary and remuneration.

“You are unlikely to earn RM3,000 in your first job.

“Be willing to learn. If you are offered an internship, take it,” she said.

Kelly Services Asia Pacific head of professional and technical, Mark Sparrow, said demand was growing for professionals with experience and niche skills.

He said there was a global shortage of talent in specialised areas of engineering, accountancy, technology and financial services.

“There is high demand for engineers, especially in the Asia-Pacific region, such as Indonesia and Thailand which are rebuilding their cities following natural disasters,” he said.

He added the “hot jobs” in Malaysia included risk management specialists, construction and environment engineers, software development specialists and marketing and sales personnel who are fluent in English.

By P. ARUNA aruna@thestar.com.my

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How will JPMorgan's $2 billion loss affect American banking rules? Senior executives to leave!

 
A JPMorgan office building is shown, Monday, May 14, 2012, in New York. JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money. (AP Photo/Mark Lennihan)

   

WASHINGTON—The $2 billion trading loss at JPMorgan Chase has renewed calls for stricter oversight of Wall Street banks. Two years after Congress passed an overhaul of financial rules, many of those changes have yet to be finalized.

JPMorgan's misstep gives advocates of stronger regulation an opening to argue that regulators should toughen their approach.

The Obama administration has argued that it went as hard on banks as possible without further upsetting global finance. Now Democratic lawmakers and administration officials say JPMorgan case proves that more change is needed.

Still, many in the industry warn against reading too much into one trading loss. They say losing money is an inevitable part of taking risk, as banks must.

Some fear that after JPMorgan's announcement, regulators will greet industry concerns with more skepticism as they flesh out key parts of the overhaul law.

Here's a look at four key parts of the financial overhaul and how they might be affected by JPMorgan's losses:

THE VOLCKER RULE

This provision restricts banks' ability to trade for their own profit, a practice known as proprietary trading. It is named for former Federal Reserve Chairman Paul Volcker.

-- Battle lines: Banks say it disrupts two of their core functions: Creating markets for customers who want to buy financial products and managing their own risk to prevent major losses.

They say proprietary trading was not a cause of the 2008 financial crisis and the rule is a means of political revenge on an unpopular industry. Advocates of stronger regulation argue that the rule would have prevented JPMorgan's loss. They say the trades were made to boost bank profits, not to protect against market-wide risk.

-- State of play: A draft of the rule satisfied neither side. It includes exceptions for hedging against risk and for market-making, but banks say they the exceptions are too narrow and difficult to enforce. It's nearly impossible to tell whether a bank bought or sold something for itself or for customers.

-- JPMorgan effect: Attitudes about the Volcker rule are likely to shift as a result of JPMorgan's disclosure, experts say. Even if JPMorgan's trades truly were a failed attempt to protect against risk, the resulting loss strengthens the argument that regulators should err on the side of scrutinizing trades.

ENDING `TOO BIG TO FAIL'

During the 2008 financial crisis and the bailouts that followed, the government was unwilling to let the biggest banks fail, for fear of upending the financial system. As part of the overhaul, Congress created a process to shut down financial companies whose failure could threaten the system.

-- Battle lines: Most players agree that this is a good idea, despite some differences on the details.

-- State of play: The Federal Deposit Insurance Corp., the agency responsible for closing smaller banks that falter, has taken the lead on writing rules to shut down big firms. Most observers believe that the FDIC, under acting chairman Martin Gruenberg, is on track toward creating a system that markets would trust to close a big bank.

Banks have been working with regulators to create "living wills" detailing how they would wind themselves down without disrupting markets. This exercise has forced them to look more deeply at their operations -- a defense against the accusation that banks have grown "too big to manage."

However, U.S. regulators can't do it alone. A big problem after the failure of Lehman Brothers investment bank in 2008 was what to do with its overseas operations. It wasn't clear which regulators were in charge, or whose bankruptcy court would control the disposal of Lehman's assets.

Regulators are negotiating with their European counterparts, but it could take years before they agree on rules that would allow a global company to dismantle itself without spreading confusion through the financial markets.

-- JPMorgan effect: Like other banks, JPMorgan supports giving the government the power to dismantle a failing bank. CEO Jamie Dimon said so clearly in an appearance on "Meet the Press" on Sunday.

JPMorgan's loss probably doesn't affect the likelihood that regulators will break up a bank in the future. The loss wasn't nearly big enough to threaten JPMorgan with failure.

REGULATING DERIVATIVES

JPMorgan's bets involved complex investments known as derivatives whose value is based on the value of another investment. Before 2008, many derivatives were traded as individual contracts between banks and hedge funds, without any transparency for regulators. The financial overhaul sought to bring more derivatives onto regulated exchanges and force derivatives traders to put up more cash in case their bets turned against them.

-- Battle lines: Overhauling the rules governing this market, estimated at $650 trillion, has proved as complex as the investments themselves. Banks support many parts of the overhaul but generally argue that forcing too much transparency would make it harder and more expensive for companies to use derivatives as a hedge against risk. They say it is an unnecessary cost that would be spread across all types of companies.

The agency most responsible for implementing these rules, the Commodity Futures Trading Commission, faces the threat of a much smaller budget than it says it needs to write the rules and increase its oversight of the derivatives market.

Advocates for stronger regulation argue that the new rules apply to the sorts of derivatives believed to have magnified the financial crisis -- and JPMorgan's losses -- but do not threaten investments like energy futures, for example, which airlines use to control fuel costs. They say banks are just trying to protect a lucrative business that other companies can't compete in today.

-- State of play: About half the rules are done, but many crucial questions have yet to be decided. The rules will be phased in this fall through next spring. Banks are lobbying hard to protect their hold on this profitable business. Banks support pending legislation that would limit U.S. regulators' control over derivatives trades by their overseas affiliates.

-- JPMorgan effect: Fairly or not, JPMorgan's big loss on derivatives trades is likely to revive scrutiny of that market. That could give advocates of tighter rules some juice in ongoing negotiations with regulators. It also could empower those who believe the budgets of the CFTC and Securities and Exchange Commission should be increased to reflect the need for broader oversight.

BANK OVERSIGHT

The overhaul calls on the Federal Reserve to oversee the biggest and most important financial companies and apply a stricter set of standards for financial fitness. For example, the companies must hold more capital as a buffer against future losses. Before, the biggest banks were overseen by a patchwork of regulations.

-- Battle lines: Industry officials say they're working with regulators to fine-tune how big companies will be overseen. They are concerned, for example, about the extra costs imposed on the big companies to offset the extra risk they create in the financial system.

-- State of play: Industry officials say many of these changes were happening behind the scenes even before the financial overhaul was passed in 2010. They say banks already are better capitalized and meet other standards laid out by regulators.

It's still not known exactly which financial companies will fall into this category. The biggest banks are included automatically. Regulators have more discretion when it comes what are known as non-bank financial companies, such as huge insurance companies. Companies on the margin reportedly are lobbying hard to avoid this designation.

-- JPMorgan effect: As the nation's biggest bank, JPMorgan automatically will face stricter oversight. The trading loss there is unlikely to affect detailed negotiations about how exactly such companies will be overseen.

By Daniel Wagner AP Business Writer