How Facebook Makes Money and the Economics of Social Networks
It’s pretty hard to exaggerate the influence Facebook has built since it launched in 2004. Whether used for creating envy between “friends” or swaying political discourse, Facebook’s influence plays a huge roll.
All of this essentially boils down to the currency of the “new media landscape”: attention.
One study by marketing agency Mediakix found that, on average, Facebook users spend 35 minutes each day on the platform — adding up to almost five and a half years of your life. That’s more time than you will spend socializing (1 year 3 months) or eating and drinking (3 years 5 months).
With Facebook expected to hit 2 billion users in 2017, this ability to hold our attention converts to truly impressive earnings. In the fourth quarter of 2016, the company’s revenue was a whopping $8.81 billion, with $3.56 billion of that being profits.
And with a reported 1.86 billion monthly users, Facebook generates $1.57 of revenue per user per month. Not bad. Especially with a userbase that’s growing by tens of millions each month.
But where exactly does all this money come from?
It’s (Almost) All About the Ads
It’ll come as no surprise that over 90 percent of Facebook’s revenue comes from ads. And around 80 percent of that ad revenue comes specifically from mobile ads.
That’s because, as users, we spend a disproportionate amount of time browsing our News Feed on mobile. When we’re in line, taking a break from work, during ads in a TV show. This form of sporadic, addictive use of the mobile app contributes a massive amount to Facebook’s earnings.
The most prolific kind of ads are displayed as “sponsored posts” and “page suggestions”. They’re the ads you quickly scroll past as you’re checking your News Feed. On desktop, ads are also displayed in the right-hand column. Whether you click them or not, all these ads contribute to Facebook’s deepening pockets.
These adverts come from around 4 million of the 90 million businesses who have their own Facebook page. The largest spenders are unsurprisingly companies like McDonalds, Starbucks, HSBC, and Samsung.
These companies have fallen deeply in love with how specifically they can target their ads to each of us . This is far more granular than any other option, taking into account age, sex, location, interests, likes, demographics, which pages of their site you’ve visited, and more. This is all driven by the huge amount of data that Facebook stores about each and every one of us.
And More Kinds of Ads
For Facebook to continue pleasing its shareholders, it needs to routinely increase its profits. But there are only so many News Feed ads that users are willing to scroll past (and occasionally click) before they find something better to do with their time. And there’s only so much money advertisers are willing to pay before they spend their cash elsewhere.
Facebook knows what this sweet spot is. So instead of simply upping its prices and pushing out more News Feed ads, it comes up with different kind of ads that it can get away with. This is how the company continues to increase its profits (along with increasing its userbase).
Most of these ads run through the Facebook Audience Network. This is basically just another way for businesses to run different kinds of ads.
Many ads that you see in Facebook Instant Articles — those full-length articles that load within Facebook — are run via Audience Network. As are the rapidly growing number of ads that you have to watch when streaming video on Facebook.
As more and more people watch videos and read articles embedded with these kind of ads, the more money Facebook will make.
Another of Facebook’s revenue streams is Facebook Payments. This is where Facebook takes a cut of purchases made within games that you play on Facebook (not games within Messenger ).
At around $180 million per quarter, this revenue source is tiny compared to ad revenue, and it’s steadily declining.
Although Facebook says it wants to continue helping game developers to monetize games, this is unlikely to be a priority for the company.
In 2012, Facebook acquired Instagram for $1 billion. Facebook was essentially purchasing the 15 minutes per day that the average Instagram user spends on the app.
In return, businesses who run ads on Facebook can also have those ads displayed on Instagram, too. Unfortunately, Facebook does not break down its revenue by company, though it’s safe to assume revenue from Instagram ads is only a fraction of Facebook’s overall earnings.
That being said, the app is still growing incredibly fast with over 700 million users as of April 2017. Its profitability will likely increase in the coming years, especially now it’s moved into Snapchat’s turf .
The advertising industry is still the major driving force in the success of companies like Google and Facebook. But there’s a real worry that ad revenue could soon take a hit, especially with the increased use of ad blockers .
Unsurprisingly, Facebook co-founder and CEO Mark Zuckerberg is steering Facebook with this in mind. Recently, we’ve seen the company make a number of moves that suggest it’s preparing to diversify. This will ensure it’ll be less impacted by any downturn in the advertising industry.
First off is WhatsApp. This is a messaging app that Facebook bought for an eye-watering $19 billion just a couple years ago. Although the app isn’t making any real cash yet, there are plenty of options for monetization.
If WhatsApp started to become a place for companies to communicate directly with users (customer support , for instance), Forbes predicts the more-than-1-billion-users app could hit $4 in average revenue per user by 2020. That equates to $5 billion per year.
Impressive, but that would still likely be less than 10 percent of Facebook’s total revenues.
Another of Facebook’s companies is Oculus, the virtual reality (VR) endeavor that Facebook purchased in 2014. Since the acquisition, a huge amount of money has been funneled into R&D and the development of the Oculus Rift (read our review).
Although the company already sells VR headsets and apps, it’s not making much of a difference to Facebook’s overall profits. But that’s not the point. This is a much longer-term vision.
Zuckerberg hasn’t been shy about expressing his enthusiasm for the future of VR , though doubts it will see smartphone-level adoption for another decade. If he’s right, though, Oculus could prove to be a massive contributor to Facebook’s finances in the future.
In 2015, Facebook launched a feature allowing Messenger users in the U.S. to send payments to each other free of charge. But now with Facebook recently acquiring a European Payment license, it looks as though the company is finally getting serious about this feature.
First, the feature was recently expanded to allow for group payments (U.S. only) in Messenger. This helps to collect money when you’re planning a trip, or when splitting a bill. Second, before long we could see similar features available in WhatsApp, too. We could be buying things direct via Facebook Marketplace. We could even be purchasing goods and services direct from Facebook Pages themselves.
This could be a very smart move from Facebook if it plans to eventually charge a small fee for each transaction. This could be a huge potential revenue source which directly competes with companies such as PayPal and Google Wallet.
The Economics of Facebook
Within just a few short years, Facebook has shimmied its way into so many parts of our lives. Almost all of this influence has been paid for by the ads we scroll past and click on throughout each day.
The more ads we see and interact with, the more Facebook earns. We’re each doing our part to line those ever-deepening pockets.
But from what we can see, this is only the beginning. Facebook has plenty of other routes to explore for further profits. And it has the cash, users, and data about each of us , to potentially succeed at all of them.
Whether this is just “good business” or something we should be worried about is open to debate. Even so, there’s no arguing that Facebook is on the money train.
What do you think? Will adverts continue to be the lifeblood of Facebook? Will the company need to shift to other ways of making money? And do you think Facebook should ever start giving its users some of the profit they help the company earn?
Image Credits: 3d imagination/Shutterstock
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