Facebook is an online social media and social servicing company based in America. It was started by Mark Zuckerberg on 4 February, 2004 along with fellow Harvard students and roommates Eduardo Saverine, Andrew McCullum, Dustin Moskovitz and Chris Hughes. The membership of website was only limited to Harvard students in the initial stage. In the year 2006 anyone who has completed 13 years can be the registered user of Facebook. In February 2012, Facebook held its IPO (Initial Public Offering) and at that time the value of the company was US$104 billion, the largest valuation to date for the newly listed public company! Facebook makes most of the money from the Advertisement that appears on the screen.
Facebook Revenue Model
In the year 2018’s FORTUNE 500 list of largest United States Corporations, Facebook ranked 76th. Facebook’s most of the revenue comes from the advertising. Facebook has generally lower Click Through Rate (CTR) for advertisements than most major websites. According to businessweek.com, banner advertisement on Facebook has received a 1/5th number of clicks of the whole web. A big part of Facebook’s pitch is that it is having so huge data, about its users that it can more efficiently target ads to those who will be responsive to the content. A small portion of revenue also comes from “Firehose” access, bulk access to the social media data sold to the third parties. Now, let’s find the entailed answer to the question “How does Facebook make money”
How does Facebook Make Money?
There are many ways through which Facebook Makes Money, they are:
The most important revenue channel of Facebook is the advertising. The company is ad supported and most likely will remain ad supported. Facebook makes over ½ billion revenue each year and from which most of it comes from the advertising. So, advertising is one of the answers to the question “How does Facebook make money“? There are various types of advertisers who give money for the advertisement, they are:
Self-serve Facebook advertising
In this type of advertising you can visit the website and then create your own advertising, campaign on Facebook. Those are displayed on the sidebars of the pages of the website like user profile, events, groups and third-party applications. The primary advantage of this advertising platform is that it targets in the segments. Facebook has increased their targeting capabilities from past few years, including the ability to limit advertising to metropolitan area as well as the following target variables such as gender, age, network, profile keywords and more. The Facebook ad API is a feature in which it posts the new ads and modifies the existing ads of the large advertisers. According to the source, Zynga, the largest developer of the games on Facebook is the largest purchaser of Facebook’s self-serve ads.
How does Facebook make money? – This question is directly related to how Facebook generates a good amount of revenue from the “Engagement Ads” product. Engagement ads are for large brand advertisers. It places all engagement ads on the website’s homepage. When the users log in, they can see the advertisement on the right-hand side of the homepage. In the last September Facebook launched Brand Lift. It is a product which helps the large brand to test the effectiveness of their advertisement immediately after the campaign’s run. Facebook believes that this increased level of measurement will attract brand advertisers to spend more on Engagement ads.
Microsoft Banner Advertising Agreement and Search
Facebook has an agreement with the Microsoft for displaying the large banner on the website. From the recent presentation of Facebook in Poland, they presented that they are phasing out a banner advertisement from Microsoft as they want to become self-sufficient. This year they phased out of the banner ads completely and generated total revenue of less than $50 million from the Microsoft advertising. Another agreement of Facebook with Microsoft was over searched. When the valuation of Facebook was $15 billion, Microsoft invested $250 million and as part of investment includes the agreement in which it was written to integrate Microsoft’s search results in Facebook. This term of an agreement never went public, however, we believe that Facebook being paid by the Microsoft beyond the terms of an initial agreement.
These advertisements are an integral and important part of Facebook revenues. With an increasing use of mobile, those days Facebook has worked out to comply with the demands of today. From the total revenue of Facebook, its 1/3rd revenue comes from mobile advertisements. Facebook has partnered with many big names of ad agencies to deliver their mobile advertisements. But it is still in developing phase and there are still many changes to make. Facebook’s share price has a big drop from $38 to $19 per share simply because of its inability to monetize on the small screen as to understand the question “How does Facebook make money”?
2) Virtual Goods and the Gift Shop
Nowadays Facebook makes lots of money from the Virtual Gift Shop. It is used to send the virtual gifts through Facebook to one another. Averagely it cost $1 per gift and this business has become so lucrative that Facebook generated more than $100 million last year. Now Facebook is opening the gift shop to third-party developers in order to increase the variety of products. In August of last year it opened a gift shop to non-profits but by September, it was opened to the number of other developers. There are very less public estimates of Facebook’s gift shop revenue, but Facebook makes more than $150 million through the gift shop business.
3) Facebook Credits
The last way through which Facebook earns money is Facebook credit program. Initially, it was used by Facebook users to purchase the virtual products from the Facebook gift shop. Now Facebook is slowly opening credits to the third party developers. This is for application developers and the main purpose is to integrate Facebook’s credit product directly into their application. Facebook in return will take a large percentage of the virtual goods sold through the applications. Facebook is testing user – to – user credits as well as in – application credit incorporation. Facebook is widely expected to release Facebook’s Credit Products at this year’s conference being held in San Francisco. It will be rolling out later this year but still we expect that Facebook will generate $150 million from the credits platform this year.
Different Ways Facebook Makes Money
Facebook is not actually a free service, because users provide their data to Facebook each and every day in exchange for their ability to use social media platform. Facebook is able to translate your likes, locations, photos and other online activity into cash. With this huge amount of data Facebook made around $40 billion in 2017. The social media giants use your data and from it they know a lot about you and according to that data which shows you ads which you might like, and advertisers pay Facebook to point their products to the right clients. These are called targeted ads. Facebook doesn’t technically sell your data to outsiders but it sells access to you based on your likes.
Facebook earned $711 million in 2017 from various paid services like the purchase of games provided in the website. This revenue stream has actually slowed down over the past few years. That $711 million also includes the Oculus products, Facebook’s VR headset and additional gear. Facebook announced an experiment named App install ads in August 2012 to allow developers to pay to inject “install now” ads into the mobile news feed of the Facebook app. In this ad, they show the ad’s name, icon, description, Facebook App center rating and friends using it. When you click that ad, you will be redirected to the App store or Google Play store where you can download and install the application. This is used effectively to leverage the time used by users to discover the apps. Given the app’s information, Facebook also gives the data of apps which their friends use and advice them to use too.
Another way by which Facebook makes money is the Facebook Exchange (FBX). This is a cookie-based retargeted ads program. This program lets the advertisers target their ads on Facebook to users who have recently visited the website and have searched for some particular information. This is same as Google ads. Facebook announced its sponsored results ads in 2012. Sponsored results can be obtained through their ads API and they also began experimenting with ad display. They have also generated small revenue from it. Facebook is working seriously on different and completely new monetization channel. Since users are not ready to pay for the service, Facebook would have to experiment around advertising for it makes a major share of revenues. Facebook is enjoying a steady revenue growth and according to analyst Facebook was expected to cross $12 billion by the year 2017.
According to the report, more than 5 million businesses advertise on Facebook each month. Among these companies, there are big companies who spend billions on advertising. These are global brands like McDonalds, HCL, HSBC, Nestle and DELL.
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