How Does Facebook Make Money?

Facebook is the cigarette manufacturer of the digital era.

What about cigarettes made for such successful stocks?

They sell for dollars, cost cents to make, and are addictive too!

facebook_smoking_mkhmarketing

Image source: mkhmarketing

Let’s rewind and try bed ourselves back in earlier times. Back before the multiple growth hacks. Back before there were ads on Facebook.

It was MySpace’s cooler, more handsome, older brother. But underneath the social, all your college friends are on it, hook, the business was still a website, and the stock had limited prospects.

When they introduced adverts, they did what everyone did and put display ads around the page. At this point in time, Facebook was simply AOL: A walled garden where they served you banner ads. As Yahoo has shown, banner ads do not make for a good stock investment.

If there is one reason Facebook might, and this is still unproven, might be a better investment than Google, it is mobile.

The iPhone happens, Android happens, and more and more people start using Facebook and Google on their smartphone.

Google is obliged to show you less adverts on a smaller screen. Otherwise it puts people off.

Facebook was obliged to leave out display ads and put adverts directly into your newsfeed. This turned out to be the best thing that could have ever happened to them.

At first Zuckerberg et al were incredibly scared about putting off users, but after much testing they discovered people just sucked up the ads. They are yet to find the level that stops users scrolling down their newsfeed. They are yet to find a level where they stop making more money from their users.

Facebook ran a test, where they disabled people’s smartphone app, to see how long before people stopped opening the thing.

Never. People didn’t stop. They might log in through the browser as well. But they kept trying the app.

Facebook vs Twitter

Remember prehistory…like when Facebook introduced the timeline and everyone started complaining? Yep Facebook copied Twitter.

Yet Facebook reaches 70% of US internet users and is growing whilst Twitter is on 20% and flat.

The problem are trolls. Twitter has too many trolls. They are less of a problem on Facebook as its much easier to exclude the people you hate. This is my post on how Twitter is Fox News.

How Facebook makes money: the Equations

Monthly average users (MAU) * average revenue per user per month (ARPU)

Where average revenue per user is:

Number of newsfeed items viewed in a month (think time user spends on Facebook) * ad load * dollars per ad

Across July to September of 2015, Facebook had 1.5bn monthly average users, and average revenue per user of $2.89. This worked out at $4.3bn in revenues. Quadruple this to get a year run rate.

Facebook’s business model is your time. They are churning you and your friend’s content back at you, and letting you suck in as much as you can.

At the same time, it has crept quietly into the center of the media industry. According to Pew 71% of adult American Internet users are on Facebook, and they love to share and read content.

Facebook is a content distribution platform with massive reach.

Outside of America, users in India, China and Brazil are still growing rapidly. In India alone it has 125m users indicating a long runway of growth in these markets, unrelated to out of fashion commodity and oil investments.

Some will dislike my comparison with cigarette stocks.

Firstly, remember the fact that cigarettes can kill you is a side effect, if the cigarette companies could have separated that out they would have. It was most definitely not part of their business model and if anything, the biggest let down of this industry was it did not figure out a way to stop cigarettes killing you.

Killing the customer is a terrible investment characteristic.

Secondly, Facebook have hired many of the cleverest artificial intelligence specialists on the planet. They are investing in state of the art machine learning. Most of their time is spent writing AI that figures out how to make your newsfeed more addictive.

Think endless scroll. Think leaving out friends you consider dull. Think identifying friends you have a crush on.

Facebook’s revenue recipe

  1. Create a place where friends can proudly share content with each other
  2. Present this content in an ever more addictive way
  3. Lace this content with paid for advertising

The good news is they do not wish to compromise your privacy. They just want to use your private thoughts to get you to invest more time in scrolling!

When Facebook invests in Instagram, Whatsapp or Occulus Rift, they are trying to identify how you are going to spend your time going forward. They are pretty good at this too, even if the money they pay is eye watering.

Google is at its heart finding out what you’re going to buy. Amazon is a platform for you to buy things. Facebook is selling your addiction.

Curious how Kickstarter made paying in advance cool? Then you need to check out How Does Kickstarter Make Money.

Yuen Lo

3 Comments

  1. Loved it.. Analysed it myself and have this to say unicornomy.com/2016/02/22/how-does-facebook-make-money/

  2. Thank you! Nice site, good luck with that. So you know, all wordpress comments are nofollow. Where you based?

  3. Hey Man
    Thanks for good word 🙂
    I am based at Mumbai, India.

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