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How Does Facebook Make Money?

Practically everyone you know is on Facebook (NASDAQ: FB), but how does the tech company take all those profiles, likes, and comments and turn them into a business that brought in over $50 billion in revenue in 2018?

We’re here to answer that question with a video from our YouTube channel! (A full transcript follows the video.)

Narrator: Facebook has a massive global audience. Every month, 2.3 billion people log in to its namesake platform to connect with friends and family.

That reach is practically unprecedented, and advertisers have taken notice – over 7 million use the platform to reach customers. Advertising is the moneymaker for Facebook, comprising 99% of the company’s overall revenue.

In this video, we’re going to explain how Facebook turned status updates and pictures of your dog into a multibillion-dollar advertising empire.

The global digital advertising market is effectively a duopoly controlled by Facebook and Alphabet‘s (NASDAQ: GOOGL)(NASDAQ: GOOG) Google. In 2019, the two platforms are projected to control over 50% of the $327 billion market.

In 2018, Facebook logged over $55 billion in revenue, up 37% year-over-year.

Facebook and Google tackle advertising slightly differently, but their success comes down to the same thing — Targeting!

Targeted advertising uses sophisticated methods to let marketers drill down to specific audiences — the groups that have certain traits that are related to the product or message the advertiser is selling. The traits might be demographic and involve gender, age, the level of education, income level and/or employment. Or they could be psychographic traits that focus on the consumer’s values, personality, attitudes, opinions, lifestyles and interests.

Add some behavioral variables to the equation like browser history, purchase history, and other recent online activity and you have a VERY firm idea of who a consumer is.

With all of these tools at their disposal, advertisers can focus on the most qualified people for their message, leading to better performing campaigns and higher return-on-investment for every ad dollar spent.

Facebook is a gold-mine for this kind of targeting, because it knows who you are, where you work, your friends, and interests from the page you follow. And it has that data on A LOT of people.
As already mentioned, Facebook has about 2.3 billion global Monthly Active Users, its photo-sharing property Instagram also boasts over 1 billion Monthly Active Users.

But some of that audience is more valuable to advertisers than others.

Of those 2.3 billion monthly Facebook users, about 10%, or 242 million, are in the United States and Canada. Instagram has approximately 132 million U.S. and Canadian users, or 13% of its total.

All told, North America made up 48% of the company’s revenue in 2018.

That’s because on a per-user basis, users in the U.S. and Canada are more valuable to advertisers. Ad rates are generally a reflection of consumer purchasing power.

Worldwide Facebook earned an average of roughly $25 per user on ads in 2018. But in the U.S. and Canada, that average was almost $110.

But big picture, growth in Facebook’s home market is going to be harder to come by, because it’s pretty saturated. Think about it, thanks to the network effect, most people you know are on Facebook. That’s why you’re on Facebook.

The platform had 231 million monthly active users at the end of 2016, in the past two years its only added 11 million to that total.
During that time, the platform saw international MAUs go from 1.6 billion to 2.1 billion.

So, what is Facebook doing to adjust?

The company has really turned on the ad-engine for its other properties like Instagram to help maintain its growth figures. Specific numbers are hard to come by, but one source estimated that Instagram’s U.S. ad revenue jumped 70% in 2018. Other sources say Instagram’s overall revenue will grow to $10.9 billion in 2019, a 22.5% jump, year over year.

The company also has two messaging apps — WhatsApp and Messenger – that each have over a billion monthly users. But, so far, Mark Zuckerberg and company haven’t quite figured out how to monetize them.

Targeted ads are the reason investors “Like” Facebook. Long-term the company will have to figure out how to port that model to its messaging properties OR find another way to monetize its untapped platforms.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.