Five questions about Facebook's IPO

Q: How does Facebook make money?

A: Facebook recorded $1 billion in net profit on $3.7 billion in revenue for 2011. The company, which does not charge its members for access, makes "substantially all" of its revenue from advertising and collecting fees from third-party developers that sell virtual and digital goods via Facebook. Advertising accounted for 85 percent of 2011 revenue. Zynga, the social gaming company behind"FarmVille" and "CityVille," accounted for 12 percent of Facebook's 2011 revenue. Players spend real money on virtual goods such as tractors and crops, and capturing proceeds from these small transactions adds up to big bucks for Facebook. In its regulatory filing, the company cited industry data projecting that the sale of virtual goods will generate worldwide revenue of $15 billion in 2014, compared with $7 billion in 2010.

Q: What is Facebook's global profile?

A: Of Facebook's 845 million monthly active users, 19 percent are in the U.S. The company estimates it has about 60 percent penetration among Internet users in its home country. Facebook penetration is much higher, at more than 80 percent, in Chile, Turkey and Venezuela. In contrast, the company has captured just 20 to 30 percent of Internet users in Brazil, Germany and India. And in China, where residents do not have access to Facebook, penetration is effectively 0 percent. Facebook has lofty worldwide goals. "There are more than two billion global Internet users ... and we aim to connect all of them," the company said in its filing.

Q: How addicted are Facebook users?


A: In December 2011, Facebook had an average of 483 million daily active users, up from 327 million in December 2010. That means that 57 percent of its monthly active users are logging in every day. Facebook said this figure is up from 54 percent in December 2010, indicating that the platform is getting "stickier." On average, users spent more than 9.7 billion minutes on Facebook on PCs every day during December 2011.

Q: Can small investors participate in the IPO?

A: In typical IPOs, the Wall Street investment banks underwriting the deals favor their own clients, as well as institutional investors such as mutual funds, when allocating shares. This practice tends to shut out retail investors, who have to wait until shares debut on the open market. However, buying in on the first day of trading comes with its own challenges, as price movements can be too volatile for a mom-and-pop investor to catch a big increase.

Q: What happens next?

A: The Securities and Exchange Commission will review Facebook's documents, a process that can take three to six months. Chicago-basedGroupon Inc., for example, filed its IPO paperwork in June 2011 and debuted on the Nasdaq in November. Facebook may revise its documents in response to SEC questions or concerns. The company must also price its offering. While Facebook's Wednesday filing said it is looking to raise $5 billion, that figure is used to calculate the registration fee. The actual proceeds and the company's valuation won't be known until Facebook prices the IPO.

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