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.
- Snapshot of Facebook key stats and facts
- How does Facebook make money?
- The five pillars of Facebook’s business model
- How much money does Facebook make?
- Understanding the advertising business model
- It’s all about ARPU: How much are you worth to Facebook?
- Summary and Conclusions
- Related Facts
- Related Case Studies
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.
- As of June 2019 the company had 39,651 full-time employees.
- 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).
How does Facebook make money?
- Advertising (over 98% of revenues): it primarily consists of displaying ad products on Facebook, Instagram, Messenger, and third-party
- 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 others
As of the time of this writing, the social network created by Mark Zuckerberg in 2004 in his Harvard dorm room is worth more than four hundred billion dollars. 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.
*The term “Facebook” is used as interchangeable with “Facebook products” which is the set of apps Facebook Inc. owns (Facebook, Messenger, WhatsApp, and Instagram).
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 andacross 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 platform power products that allow people to enter a completely immersive and interactive environment to train, learn, play games, consume , and connect with others.
As we’re going to see the News Feed is the real cash cow.
How much money does Facebook make?
In 2018 Facebook made over $55.8 billion, most of it from advertising. Facebook also made a net income of over $22 billion. This means as of 2018, Facebook is extremely profitable.
In 2018 revenues went up 37% year-over-year. Indeed, ad revenue was $55.01 billion, up 38% year-over-year.
What does it mean? Shortly, not only Facebook has been able to accelerate its growth. However, it has also managed to reduce the growth pace of its expenses. That had a positive impact on the net income.
When it comes to cost of revenue (the money spent by Facebook to incur an income) the company specifies:
Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including acquisition costs, credit card and other transaction fees related to processing customer transactions, cost of virtual reality platform device inventory sold, and amortization of intangible assets.
Also, for tech companies, it’s also important to keep a pile of cash to acquire competitors or to face hard times. That is why on the Facebook balance sheet are sitting more than forty billion dollars in easily convertible assets (called cash, cash equivalents, and marketable securities):
In addition, Facebook has been pretty good in 2018, at increasing the monetization of users in the US & Canada, which made up a good chunk of its revenues.
ARPU or average revenue per user is a critical metric to measure Facebook success as it makes money via advertising.
In 2018 the primary factors driving Facebook growth were:
- Mobile advertising
- A higher cost of advertising
- Higher demand from marketers to advertise on Facebook and related products (Instagram for instance)
- Better engagement of the advertising campaigns
However, as of now, the company growth is tied to its ability to engage its daily active users. According to Facebook as of December 2017, there were 1.4 billion daily active users. Also, not all users are born equal.
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.
It’s all about ARPU: How much are you worth to Facebook?
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.
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:
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 value of the company for billions of dollars.. A simple change in its algorithm can influence the mood of billions of people. Also, it can affect the