In 2017, Facebook has generated $40 billion in revenue. That’s a 47% increase compared to 2016!
With that much of profit, it makes you wonder, “How does Facebook make money?”
There were rumors that Facebook will eventually charge it users a fee in order to access their network – this is not true.
Why? Because Facebook is selling you to the advertisers.
Here’s Zuckerberg explanation during the Senate hearing on April 2018,
“What we allow is for advertisers to tell us who they want to reach, and then we do the placement. So, if an advertiser comes to us and says, ‘All right, I am a ski shop and I want to sell skis to women,’ then we might have some sense, because people shared skiing-related content, or said they were interested in that, they shared whether they’re a woman, and then we can show the ads to the right people without that data ever changing hands and going to the advertiser.”
In other words, Facebook is making money from you – using your data.
Facebook is able to turn your activities on the platform, such as likes, shares, location sharing, photos, games, status updates and other online activity into its revenue stream.
Here’s a breakdown of Facebook’s revenue stream:
- Payments and other fees
Out of those two, advertising serves as the biggest revenue stream for Facebook. It contributed 98% of the total $40 billion revenue in 2017.
Facebook knows a lot about you, even more than yourself.
The social media giant analyzes you by collecting the activity you do on the platform and also on the Internet. Advertisers then pay Facebook to plug their products to you if you fall into the correct group.
Such advertising method is called targeted ads.
For example, if you just got engaged or are planning to get married and updated the status to Facebook, most likely you will see ads like wedding planning, wedding vacation, etc. When advertisers run an ad on Facebook, they will choose the suitable parameters for their products. This enables the advertiser to reach the right audience. The parameter could be “someone married or engage who lives in California, between the ages of 20 – 30.” – Hey, that could be you!
This briefly shows you how Facebook advertising works in a nutshell. It’s important to note that Facebook doesn’t technically sell your data to third-party, it just gives better access to advertisers to target their ads to you based on the data you provided.
Payment and Other Fees
While advertising remains the biggest revenue stream for Facebook, it doesn’t mean they don’t dabble in other ways to gain profit. The remaining 2% of the total revenue in 2017 was made up of payments from in-app purchases in the desktop games offered on Facebook.
However, this income stream shows a decline over the past few years.
Kristina Varshavskaya, a former Product Designer at Facebook wrote, “This decline is likely a reflection of the general shift away from desktop to mobile and mobile games.”
The Possible Future Revenue Stream
We’ve covered what Facebook has done in the past to generate a steady stream of revenue. But like all good businesses, if you want to remain profitable, you have to invest and diversify. Facebook knows this and have started investing on a number of possible future revenue streams.
Virtual Reality has been the hot topic since a few years back but it still hasn’t really taken off. However, Facebook has recently launched Oculus Go – the cheaper version of Oculus. With the launch of Oculus Go, Facebook hopes that it will take them one step closer to integrating VR into its user experience and its products.
Facebook started venturing into video content since last August. This could be their answer to YouTube. Facebook Watch is a smart move for keeping people on the platform for a longer period and it also given advertiser’s another opportunity to run commercials into the videos.
Till date, Facebook has acquired 66 companies with WhatsApp Messenger being the largest acquisition at $19 billion, which basically values them $40 per user on the platform. Others notable acquisitions include Instagram in 2012 and Vidpresso – a Live streaming software. It’s believed that the acquisitions is a strategic move that will benefit the company in the future, which includes growing their business revenue.
Facebook – the largest social media network with 1.47 billion active users daily (source) will continue to rely on user data to make money.
According to CNBC, the main factors that have helped Facebook to grow its ad revenue are:
- Increasing ad load — the number of ads on the website
- Steady user growth
- Increase in the time spent on Facebook’s platform
As long as the platform is able to keep its user hooked, ad revenue will continue to be the major source of income in the near future.