Facebook is the dominant social media platform on the face the earth. At this very moment the platform boasts of more than 2.25 billion active users globally. Facebook is, simply put, a content-sharing site, which interestingly doesn’t necessarily create its own content. That being said, using the site is primarily free which poses a pertinent question on how exactly they make money. The crux of any business is to make money and so how exactly Facebook does this is something most people don’t quite get. The focus of this article will cast light on that subject & it’s quite interesting.
Advertising Is The Key Revenue Stream
Facebook’s revenue is broadly two-tier, namely, advertising & payment plus other fees. There are over 5 million businesses advertising on the platform monthly; its biggest markets are North America & Europe. Advertising contributes a colossal lion’s share of the company’s total revenue. In 2017, the platform, made in excess of US$40 billion in total revenue (89% of that was through ads on the platform). Overally, Facebook made a net profit of US$15 billion that year. In 2018, their total revenue was US$56 billion of which about US$55 billion of that was through advertising (that’s 98% of the total revenue).
Payments & Other Fees Is The Other Revenue Stream
Looking at last year, you can see that only 2% of revenue came from payments and other fees. This revenue comes through gaming & in-app services that Facebook offers. For instance, in 2017, they raked in US$711 million from selling in-app desktop games. Due to the ever-increasing usage of mobile for internet access, sales in that respect have declined since then. They have several other services such as selling VR (Virtual Reality) paraphernalia made by Oculus Rift (a company Facebook bought a while back). They also offer software services such as Facebook Workplace (which is a social network a company can purchase to get installed for intra-company use).
Another Revenue Stream Is User Data
Now this is a controversial one, but I do believe it to be true despite Facebook’s denying it. There is a story about a company called Cambridge Analytica, which is said to have used personal data of 87 million Facebook users without the users’ knowledge or consent. It is alleged that Cambridge Analytica then used this data to influence the US Presidential elections in 2016. Mark Zuckerberg did however deny their having let that happen deliberately and instead apologized for betraying the users’ trust. This data was collected by an in-app quiz owned by Cambridge Analytica. Whether Facebook was complicit or not, the point I’m putting across is that it is highly likely Facebook sells data to big corporations. It has been claimed that it sells data to large companies such as Microsoft, Netflix, Amazon etc.
In Mark Zuckerberg’s own words last year at a US Congressional hearing he had this to say, “What we allow is for advertisers to tell us who they want to reach & then we do a placement…” As much as this is true in most cases I doubt it nullifies the occurrence of data being sold directly to large corporations.
How Do They Get Money From The Ads
There are basically three types of ads, namely, self-service ads, targeted ads and video ads. Self-service ads mainly deal with when you pay to boost your posts, whilst video ads are those ones that you see popping up midday through any video you might be watching on Facebook. Targeted ads entail Facebook selling ad space on the platform to advertisers, for instance, those side bar ads or sponsored stories that you get to see on Facebook. Targeted ads are the key to their ads revenue. On the video ads front there is also Facebook Watch which is steadily gaining traction; it involves paying for ads involving live-streams or live broadcasts.
Advertising Is At The Core Of Facebook’s Strategic Intents
Sometime in 2007, they hired a COO (Chief Operating Officer) called Sheryl Sandberg who was a former VP at Google. Her background was in advertising and that really spoke to how advertising is at the core of the company’s revenue stream.
Facebook strives to continue to increase its number of users and also to increase the average time a user spends online. The over-arching strategy is to ultimately get as much data as possible & attract more advertisers. No wonder why Facebook has up to date made over 66 acquisitions. Some of them are WhatsApp which it bought for US$21.8 billion in 2014 and Instagram which it bought for U$1 billion in 2012.
I’m sure you have possibly wondered how come a free site makes billions of dollars annually, after all a business has got to sell something. Well, the answer is simple – they are selling you to advertisers. There is a common adage in the world of commerce which says, “if you are not paying for it, you are the product”. That is how they make money and interestingly many tech businesses nowadays operate with varying degrees of Facebook’s advertising revenue model.