facebook-business-model

How Does Facebook [Meta] Make Money? Facebook [Meta] Business Model In A Nutshell

Facebook is an attention-based business model. As such, its algorithms condense the attention of over 2.4 billion users as of June 2019. Facebook advertising revenues accounted for $31.9 billion or 98.66% of its total revenues. Facebook Inc. has a product portfolio made of Instagram, Messenger, WhatsApp, and Oculus. The company rebranded as Meta. 

Facebook, metaverse and rebranding as Meta

At the end of October 2021, Mark Zuckerberg announced the Facebook Inc. rebrand as Meta. A company focused and dedicated to building the Metaverse. Beyond buzzwords and corporate communication. What does that imply? Let me show you, but let’s start by looking at Facebook before Meta.  

Snapshot of Facebook key stats and facts

  • As reported officially by Facebook, the company’s main headquarter is situated on 1 Hacker Way, Menlo Park, California 94025.
  • As we highlighted the Hacker Way” is Mark Zuckerbergs’ key driving business strategy mindset.
  • Facebook, now Meta had 58,604 employees as of December 31, 2020.
  • The company also reported 2.41 billion monthly active users (remember that Facebook Inc, also comprises other products like Instagram, while they affect the Facebook bottom line, Facebook doesn’t report how much of it is coming from each product and doesn’t tell us the users count of those platforms). 
  • In the first six months of 2019 Facebook made $31.9 billion compared to the $25.1 billion of the first six months of 2018. 
  • Yet the income from operations in the first six months of 2019 was $7.9 billion compared to $11.3 billions of 2018. The decrease was primarily due to legal accruals, due to the FTC settlement which accounted for $5.76 billion of additional costs for the company.
  • In the first months of 2019 Facebook business model was driven by 98.66% by advertising ($31.53 billion in revenues) compared to 98.55% in 2018 (over $28.4 billion).
  • As of June 2019, Facebook spent 20% of its revenues in R&D ($3.31 billion). While it spent 14% of its revenues in Sales and Marketing activities ($2.41 billion).

facebook-community-metrics-dau-2021 facebook-community-metrics-mau-2021 facebook-community-metrics-2021Facebook key community metrics, as of 2021 (Source: Facebook Financials).

How does Facebook make money?

facebook-statistics

Facebook makes money with an advertising business model. Almost all the revenue comes from targeted advertising. Indeed, of the almost $86 billion in revenues, as of 2020, over $84 billion were advertising revenues. 

Facebook revenue breakdown in 2020 was:

  • Advertising (over 98% of revenues): it primarily consists of displaying ad products on Facebook, Instagram, Messenger, and third-party. As Facebook highlighted, in 2020, the number of ads delivered increased by 34%, as compared with approximately 33% in 2019. 
  • Payments and other fees (less than 2% of total revenues):  it consists of the net fee received from developers using Payments infrastructure or revenue from the delivery of virtual reality platform devices and most importantly revenue from the delivery of consumer hardware devices.

As of the time of this writing, the social network created by Mark Zuckerberg in 2004 in his Harvard dorm room is worth almost a trillion-dollar. If Facebook were a country that would be the most populous on earth!

Facebook’s business model is quite simple and based on advertising. Yet the company has been able to unlock so much business value from its operations that have become one of the most profitable tech giants, competing with Google, Netflix, Amazon, and Apple.

fang-companies
FAANG is an acronym that comprises the hottest tech companies’ stocks. Those are Facebook, Amazon, Apple, Netflix and Alphabet’s Google. The term was coined by Jim Cramer, former hedge fund manager and host of CNBC’s Mad Money and founder of the publication TheStreet.

*Here the term “Facebook” is used as interchangeable with “Facebook products” which is the set of apps Facebook Inc. owns (Facebook, Messenger, WhatsApp, and Instagram).

Facebook’s mission 

The company’s mission is to “to give people the power to build community and bring the world closer together.”

How is this mission accomplished today? By building products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and in-home devices. 

The five pillars of Facebook’s business model

The overall company is based on five pillars; as reported in its annual report for 2017:

Facebook enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. There are a number of different ways to engage with people on Facebook, the most important of which is News Feed which displays an algorithmically ranked series of stories and advertisements individualized for each person.

As highlighted here the News Feed is the crucial component of Facebook. That is where the company can engage its users. That is also the place where the company manages to monetize its users.

Instagram is a community for sharing visual stories through photos, videos, and direct messages. Instagram is also a place for people to stay connected with the interests and communities that they care about.

Messenger is a messaging application that makes it easy for people to connect with other people, groups and businesses across a variety of platforms and devices.

WhatsApp is a fast, simple, and reliable messaging application that is used by people around the world to connect securely and privately.

Oculus virtual reality technology and content platform power products that allow people to enter a completely immersive and interactive environment to train, learn, play games, consume content, and connect with others.

As we’re going to see the News Feed is the real cash cow.

Facebook’s products line

Facebook [Meta] producs line comprises: 

Facebook

The main product, which enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. Some of the Facebook’s key features comprise: Facebook News Feed, Stories, Groups, Shops, Marketplace, News, and Watch.

Instagram

instagram-business-model
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall business model. Acquired by Facebook for a billion dollar in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger, left the company, as Facebook pushed toward tighter integration of the two platforms.

The fastest growing, mobile-based social media. Which Facebook acquired in 2012, for $1 billion and which today is worth many times over that. Instagram is primarily a mobile native app, to share photos, videos, and private messaging, and connect with and shop from their favorite businesses and creators. Some key features of Instagram comprise: the Instagram Feed, Stories (become a standard in social media, this format was copied from Snapchat), Reels (a feature that is becoming a standard format in social media, primarily copied from TikTok), IGTV, Live, Shops, and messaging.

Messenger

The messaging application for people to connect with friends, family, groups, and businesses across platforms and devices through chat, video, and Rooms.

WhatsApp

WhatsApp, the messaging application, which was acquired by Facebook for $19 billion back in 2014. Which Facebook integrated within its family of apps. While WhatsApp doesn’t monetize with ads directly, it is integrated in the other products.

how-does-whatsapp-make-money
Founded in 2009 by Brian Acton, Jan Koum WhatsApp is a messaging app acquired by Facebook in 2014 for $19B. In 2018 WhatsApp rolled out customers’ interaction services. WhatsApp might be transitioning toward a set of features from video chats to social commerce that might transform WhatsApp into a Super App.

Facebook Reality Labs

Facebook Reality Labs is the augmented and virtual reality laboratory wchich produces hardware and consumer devices. This is comprised of Oculus, a leader in VR headset,  which Facebook acquired in 2014 for $2.3 billion. Oculus Quest, the main product line of what has been rebranded as Facebook Reality Labs is the VR device, which will also play a key role in the development of the Metaverse

We’ll see why the Metaverse plays such a key role for Facebook’s future. And it’s all about distribution

It’s all about ARPU: How much are you worth to Facebook?

facebook-arpu-2014-2018

ARPU stands for average revenue per user. In short, how much money a company can get on average from each user. In the Facebook case, we can take into account the monthly active users.

For a company like Facebook, for which over 98% of its revenues come from advertising the amount of time people spend on the so-called news feed is crucial to increase the profitability metrics of the company.

That isn’t only because Facebook is an advertising company, but also the way its business model was built. If you think about Google, what makes the company able to monetize its users is not necessarily how much time they spend on the search results pages. Instead, that is based on how fast users can find what they need. Once they click through that is how Google makes money.

Of course, things are changing fast both on Google and on Facebook. Yet as of now the more time you spend on Facebook and the more you’re active on it, the more you allow it to make money. What else? Not all users are born equal. In fact, according to the geography and the ad market of each country, the monetization strategy changes. 

facebook-arpu

For instance, that is how much each user based on geography was worth to Facebook in the third quarter of 2018:

  • US and Canada: $27.61
  • Europe: $8.82
  • Worldwide: $6.09

Therefore, a user from the US or Canada as of 2018 is worth more than a user from Europe or the Asia-Pacific region. The long-term objective for Facebook is to keep increasing its monetization for each user, especially in the developing parts of the world where there is still space to grow the user base, which instead has stalled in the US and Canada: 

facebook-mau

Facebook move into the Metaverse!

The Facebook business model is quite simple: advertising. Even though there are two sources of income, most of the revenue comes from ads.

I wouldn’t be surprised to see the other sources of income, other than advertising, grow in the next years. That is good to diversify the revenue stream.

However, as of now, the company growth is tied to its ability to engage its daily active users. 

Some users (for instance, North America and Europe) are worth more on Facebook because those areas are monetized differently. Also, there is one key metric that tells us if the value of Facebook will keep growing in the long-run: ARPU

Facebook, together with Google, is the most profitable attention merchant. The company has emulated successfully the Google advertising machine.

With a couple of slight differences.

First, Facebook’s ads are pushed to the users via targeting, where in Google’s case these ads are pushed based on contextual search. Second, where Google’s distribution passes through ownership of hardware (Google manufactures the Pixel), browser (Google owns Chrome), mobile operating system (Google runs Android), and search. Thus, Google (Alphabet) is way more vertically integrated: 

data-supply-chain-pixel-phone

Facebook’s distribution is primarily based on strong brand names. With the acquisitions of Instagram, WhatsApp and Oculus, Facebook has kept a strong distribution, yet primarily based on the strenght of these brands. 

Thus, from here we can really really explain the swift move that Facebook made into the Metaverse. 

We can argue that Mark Zuckerberg’s Meta is in a Blitzscaling mode. Where it’s both trying to defend its business model, and attack the market, by creating a whole new industry, potentially bigger than mobile. 

To understand this, we need to look at the Apple’s privacy update on mobile devices.

The Apple’s privacy change

The triggering move to Facebook’s rebrand has been the survival threat posed by Apple to the entire Facebook business model. On January 2021, Apple announed the “Data Privacy Day” where it explained: 

“A Day in the Life of Your Data” helps users better understand how third-party companies track their information across apps and websites, while describing the tools Apple provides to make tracking more transparent and give users more control. The explainer sheds light on how widespread some of these practices have become. On average, apps include six “trackers” from other companies, which have the sole purpose of collecting and tracking people and their personal information.Data collected by these trackers is pieced together, shared, aggregated, and monetized, fueling an industry valued at $227 billion per year.
The privacy nutrition label in the App Store displayed on iPhone 12.
App privacy nutrition lab, by Apple (Source: Apple).
 
This was just another of the steps Apple had taken to completely rehaul the digital advertising industry. In fact, Apple started to roll out a new default mode for privacy on its mobile devices. Where it showed users a clear statement where it said “Facebook would like permission to track you across apps and websites owned by other companies.”
 
This led and it’s leading many users to opt-out from mobile tracking and therefore advertising. Potentially creting a negative impact to the whole Facebook ecosystem. 

The Metaverse Supply Chain 

facebook-metaverse

In the 2021, Founder’s letter Mark Zuckeberg highlighted: 

We are at the beginning of the next chapter for the internet, and it’s the next chapter for our company too.

In recent decades, technology has given people the power to connect and express ourselves more naturally. When I started Facebook, we mostly typed text on websites. When we got phones with cameras, the internet became more visual and mobile. As connections got faster, video became a richer way to share experiences. We’ve gone from desktop to web to mobile; from text to photos to video. But this isn’t the end of the line.

The next platform will be even more immersive — an embodied internet where you’re in the experience, not just looking at it. We call this the metaverse, and it will touch every product we build.

And he continued: 

In the metaverse, you’ll be able to do almost anything you can imagine — get together with friends and family, work, learn, play, shop, create — as well as completely new experiences that don’t really fit how we think about computers or phones today. We made afilm that explores how you might use the metaverse one day.

Facebook, now Meta emphasized its role in this development as: 

Our role in this journey is to accelerate the development of the fundamental technologies, social platforms and creative tools to bring the metaverse to life, and to weave these technologies through our social media apps. We believe the metaverse can enable better social experiences than anything that exists today, and we will dedicate our energy to helping achieve its potential.

These statements which sound inspirational are actually explaining the long-term survival threat posed to Facebook, the rebrand as Meta, and its long-term success, achievable if Facebook managed to build the Metaverse!

What can you do in the Metaverse?

While Facebook’s vision for the Metaverse is limited for now, this might comprise various business worlds, domains and ecosystems. In fact, Metaverse is a term that comprises VR/AR, crypto and more. 

Yet, In Facebook’s Meta vision, the Metaverse will have a few key killer features like gaming, fitness and more: 

Horizon Home

Messengers calls in VR

Work and Productivity

Summary and Conclusions

  • Facebook was founded in 2004 by Mark Zuckerberg in his dorm room at Harvard. Since then the company has never stopped growing. If it were a country, Facebook would probably be the most crowded on earth. However, the ability of the company to increase its value over time is based on how much money on average can make for each user.
  • Over 98% of Facebook’s revenues come from advertising. Therefore, unless things will change; the news feed is still the primary driver for monetizing Facebook’s content. A simple change in its algorithm can influence the mood of billions of people. Also, it can affect the value of the company for billions of dollars.
  • Facebook swiftly moved into the Metaverse, as Apple’s privacy changes also threatened the company’s long-term survival. That is why Facebook, now Meta is committed in building the so-called Metaverse. 

Related Visual Facts

facebook-swot-analysis
Facebook, with its products, with its strong appeal, and consumer brand has a solid business model, threatened in the last years by privacy concerns, which open up the way to potential regulation to break up the company. If that will not happen, Facebook will have the chance to expand to define other markets like VR.
google-competitors
While Google (now Alphabet) has been born as a search engine, it is now a diversified company, even though its core business remains search, as most of its revenues still come from Google, the search engine, and YouTube, the “video engine.” However, as a tech giant, which business is primarily based on advertising, the company does compete with Facebook, Twitter, Microsoft (with Bing), and Amazon (with e-commerce search and its advertising machine).
who-owns-facebook
Mark Zuckerberg is the principal shareholder of the company. Not only he retains ownership and control of the company. Facebook, like Google, has issued two kinds of common stocks, Class A and Class B. Where the holders of Class B common stocks are entitled to ten votes per share, and holders of our Class A common stocks are entitled to one vote per share. Mark Zuckerberg has a total voting power of 57.9%.
who-owns-instagram
Instagram was acquired by Facebook, in 2012, for a billion dollars. As such, Instagram is now under the Facebook’s control. Therefore, Mark Zuckerberg is the principal shareholder of the company. When Facebook acquired Instagram in 2012, it promised to keep it as dependent as possible. As of 2018, Facebook asserted control over Instagram. In 2018, Insgrangrm founder left the company.

Related Case Studies

Instagram Business Model

instagram-business-model
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall business model. Acquired by Facebook for a billion dollar in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger, left the company, as Facebook pushed toward tighter integration of the two platforms.

Snapchat Business Model

snapchat-business-model

Discord Business Model

how-does-discord-make-money

 

Discord makes money in several ways. From its Discord Store, where users can buy premium games, to the seller shops, that primarily works with a 90/10 revenue share for developers and game sellers. And the ability for sellers to get more visibility on the platform by adding features to the game visibility.

WhatsApp Business Model

how-does-whatsapp-make-money

 

Founded in 2009 by Brian Acton, Jan Koum WhatsApp is a messaging app acquired by Facebook in 2014 for $19B. In 2018 WhatsApp rolled out customers’ interaction services, starting to make money on slow responses from companies. And Facebook also announced conversations on WhatsApp prompted by Facebook Ads.

Pinterest Business Model

how-does-pinterest-work-make-money

 

Pinterest makes money by selling advertising for marketers and companies that can gain visibility for their brands and more sales for their shops. In 2018, Pinterest made over $755 million in advertising revenue and it had 250 million monthly active users.

Twitter Business Model

how-does-twitter-make-money

 

Twitter is a platform business model, monetizing the attention of its users in two ways: advertising and data licensing. In 2018, advertising represented 86% of its revenue at over $2.6 billion. And data licensing represented over $424 million primarily related to enterprise clients using data for their analyses.

Telegram Business Model

telegram-business-model

 

Telegram is a messaging app emphasizing privacy and encryption, launched in 2013. It doesn’t make money yet, while it raised over $1.7 billion in Initial Coin Offerings throughout 2018, halted by the SEC in 2019. Telegram wants to keep the app 100% free while trying to sustain its growth.

Reddit Business Model

how-does-reddit-make-money

 

Reddit is a social news and discussion website that also rates web content. The platform was created in 2005 after founders Alexis Ohanian and Steve Huffman met venture capitalist Paul Graham and pitched the company as the “front page of the internet.” Reddit makes money primarily via advertising. It also offers premium membership plans.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"

One thought on “How Does Facebook [Meta] Make Money? Facebook [Meta] Business Model In A Nutshell

  1. Thanks for sharing Irina, you surely made a good point. So far Facebook has been successful with its advertising network as it was able to provide a higher ROI compared to other advertising networks. However, as influencers can attract large audiences, it starts to make sense to have a deal directly with them and correct that in some cases it might have a higher ROI. Thus, the paradox is that Facebook might be cannibalizing its advertising revenues by making those influencers grow. Therefore, we might assume that Facebook will experiment with new business models or it will limit the influence of those people that otherwise will erode Facebook revenues.

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