facebook-report-2018

The State Of Facebook Business Model In 2018 [Report]

The year 2018 hasn’t been an easy one for Facebook Inc. Going through several scandals, Mark Zuckerberg was called to Congress, and over and over again we heard the story of a growing number of users leaving the platform.

For that matter in this report, we dissect the critical numbers of Facebook for the whole year 2018 to understand the status of its business model.

In a previous report I’ve already noticed how nonetheless all, looking at Facebook numbers through the third quarter of 2018, the overall business was looking good.

Read: How Mobile Advertising Is Driving Facebook Growth

Is it still the case for 2018?

*In this report I use the term “Facebook” as interchangeable with “Facebook products” which is the set of apps Facebook Inc. owns (Facebook, Messenger, WhatsApp, and Instagram).

Facebook MAU and ARPU

As Facebook monetizes its users via advertising, it needs to be able to have people going back each day and use it regularly every month. For that matter, Facebook tracks a metric called MAU, or monthly active users.

MAU measures how many users have come back to Facebook at least once during 30 days. For the MAU calculation Facebook doesn’t take into account Instagram but only users of Facebook and Messenger.

facebook-mau

By looking at the MAU over the years we can notice how growth has stalled in the US & Canada, it kept growing a bit in Europe, and it increased substantially worldwide. The worldwide MAU grew to 2.32 billion users in 2018, which was a 9% growth compared to 2017.

However, that was driven primarily by growth in Asia-Pacific (from 828 million users in 2017, to 947 million users in 2018) and in the rest of the world (from 692 million users in 2017, to 750 million users in 2018).

Even if that is a good sign for the platform, those users are monetized less by Facebook, compared to the US and Canada.

What about the Facebook monetization strategy?

facebook-arpu-2014-2018

Even though growth stalled in the US & Canada ARPU or average revenue per user, another key metric, has grown substantially. We’ll see what might have driven growth in the paragraphs below.

Breaking down the numbers 

facebook-profitability-breakdown

In 2018, Facebook revenues got to $55.84 billion, up 37% year-over-year. Those revenues were mainly comprised of advertising. Indeed, ad revenue was $55.01 billion, up 38% year-over-year.

Facebook is a cash cow (for now) and what’s incredible is its profitability. With a net income of $22.11 billion in 2018, Facebook has a profit margin of 39.6%. To have a comparison Alphabet Inc. (Google) overall net margin in 2018 was 22.4%.

If we look at the ARPU for 2018,  Facebook worldwide ARPU was $24.96, an increase of 24% from 2017. ARPU increased by 34% in Europe, 33% in the United States & Canada, 21% in Rest of World, and 20% in Asia-Pacific.

The user base growth has been primarily driven in the Asia-Pacific and Rest of the World.

Facebook goes all in with advertising 

facebook-revenues-breakdown

As pointed out on Facebook Annual Report for 2018 “We generate substantially all of our revenue from advertising.

Thus, instead of diversifying its business model, Facebook is becoming even more reliant on advertising, which has driven over 98% of its overall revenues in 2018.

Facebook advertising revenue is generated with the display of ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.

More precisely marketers pay advertising based either in impressions or on a set of actions taken by users delivered via Facebook (clicks, share, likes and so on).

What did drive Facebook growth?

facebook-advertising-revenues

Facebook growth has been driven primarily by mobile advertising, which represents 92% of the overall advertising revenues. That growth has been driven by an increase in revenue from ads served on mobile devices.

Facebook has transitioned to mobile-first as it envisioned the change of consumers habits toward mobile devices. That had paid off quite well, and in 2017 Facebook mobile advertising revenues contributed to 88% of its total advertising revenues, and it kept growing at 92% of its overall advertising revenues in 2018.

The growth of advertising revenues in 2018 can be broken down as:

  • A 22%the increase in the number of ads delivered
  • And the average price per ad increased by 13% (a 29% increase was recorded in 2017)

The primary factors affecting that growth were:

  • The increase in the ads delivered was driven by an increase in users and their engagement
  • An increase in the number and frequency of ads displayed across Facebook products
  • As pointed out on the Facebook annual report its growth was driven by “an increase in spend from existing marketers and an increase in the number of marketers spending advertising on our platform as well as the quality, relevance, and performance of those ads”

One thing to notice, it’s hard to say right now whether the increased budget was due to marketers willing to spend more on Facebook advertising inventory, or it happened because Facebook ads got more expensive. Understanding that is important.

Indeed, I analyzed already how Facebook organic reach, in 2018, has fallen and I took as a paradigm for that, the referral traffic that a popular publication, called Slate:

facebook-referrals-to-slate

Yet as the organic reach from Facebook fell, in order for publishers and marketers to reach their desired audience they had to buy more advertising inventory.

Therefore, it’s hard to say yet whether an increased budget was due to that phenomenon. One signal might point out that marketers did increase willingly their budget, as Facebook got more expensive (13% more expensive). However, not as much as it did back in 2017 (29% more expensive than the previous year).

A question mark remains here: if marketers are spending more simply because Facebook advertising got more expensive, can we expect this to last?

A second element, which is hard to dissect from official numbers is about Instagram. Indeed, as Facebook doesn’t report the breakdown of Instagram numbers is hard to say how much it contributed to its overall bottom line. However, we can assume it did big time.

That’s because Facebook advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.

Read: The Advertising Economy: Inside Facebook Money-Making Machine

Key takeaways

  • Mobile is driving Facebook growth, and now it represents 92% of its total advertising revenues
  • In 2018 Facebook went all into advertising. Its business model isn’t becoming more diversified. Quite the opposite, advertising now represents 98.5% of its revenues
  • Facebook user base (comprising Facebook and Messenger) stalled in the US and Canada
  • Facebook user base kept growing a bit in Europe, and it kept increasing worldwide, thanks to substantial growth in Asia-Pacific (from 828 million users in 2017 to 947 million users in 2018) and in the rest of the world (from 692 million users in 2017, to 750 million users in 2018)
  • Nonetheless, a stalled growth in the US & Canada Facebook ARPU grew substantially. Why did that happen? A first clear reason is that Facebook is monetizing via mobile, and it seems a growing number of marketers joined the platform (we can’t know the number from its financials) and those same marketers are spending more. At the same time, Facebook ads are “performing” better
  • Instagram might be driving Facebook growth
  • Facebook got 13% more expensive in 2018, yet not as much as it did back in 2017 when it was 29% more expensive
  • A growing number of marketers are joining the platform and are spending more on ads
  • Marketers might be spending more on ads also due to Facebook cutting off their organic reach. In short, advertising remains the most effective mean to reach an audience on Facebook
  • Facebook profitability stands at 39.6% in 2018, which makes it (for now) a cash cow, even more than Google’s Alphabet (which profitability stand at 22.4% in 2018)

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach about a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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