Inside Facebook's money machine

The social network's biggest asset is its user base, which generates billions of likes and comments per day.

By MSN Money Partner May 17, 2012 11:28AM

By Julia Boorstin

 

CNBCThere's been a lot of talk about Facebook's valuation, but the real question behind that valuation is how Facebook makes money and what its prospects are.

 

First: The value of Facebook's reach shouldn't be underestimated. Facebook had 901 million monthly active users at the end of the first quarter -- and it turns those users into dollars, primarily by showing them ads.

 

It had 526 million daily active users at the end of the first quarter, 41 percent more than in the prior year. Users generated an average of 3.2 billion likes and comments per day in the first quarter, and there are more than 125 billion friend connections.

 

Mobile is a huge driver of growth. The company now has about 500 million monthly average users. That's a potential source of revenue growth but also a challenge.

 

The company only recently started running ads on its mobile platform, but it doesn't put as many ads on the mobile experience as it does on its website. Since mobile usage is growing faster than its overall usage, that means Facebook's ad revenue can't really grow as fast as its usage.

 

Nuts and bolts: Facebook generated $3.7 billion in revenue in 2011, up 88% from the prior year. While that growth is still impressive, it's worth noting that revenue growth is slowing -- it grew 154% between 2009 and 2010. Growth continued to slow in the first quarter of this year, as revenue increased just 45% from the year-earlier quarter.

 

And the company's earnings are bearing the weight of the costs of growing -- marketing, administrative costs, research and development, etc. Net income grew 65% from 2010 to 2011, to $1 billion. But in the first quarter of this year those costs weighed on the company's balance sheet, pushing net income down 12% from the year ago quarter to $205 million.

 

How does Facebook make that money? The vast majority comes from advertising -- responsible for 82% of revenue in the first quarter of 2012. The company appeals to advertisers with its reach, but even more important, the fact that it can target ads with "relevance," based on all the personal information users decide to share. Perhaps more interesting, Facebook can target ads with "social context" -- which means highlighting users' friends connections with a brand or business. And people are much more likely to respond favorably to a message if they know a friend has endorsed the brand or just "checked in" at a store.

 

What's the future of Facebook's ad business? It all depends on how well those ads work for marketers. But Facebook says its potential share of the nearly $600 billion global advertising market is huge, because it doesn't just compete with other online display ads, but also can compete with traditional offline advertising. The big question here, is how well its mobile ads work, and whether they annoy users accustomed to an ad-free mobile experience.

 

The rest of Facebook's revenue comes from payments -- Facebook takes a cut when users buy virtual goods on games -- like a cow purchased for Zynga's Farmville. Users put in their credit card information to purchase those goods, and Facebook takes a 30% cut of Zynga's revenue, and a roughly similar cut from other companies.

 

How big a business is this? The worldwide revenue from sales of virtual goods is expected to hit $15 billion in 2014, and Facebook aims to get a growing percentage of that market. Right now Facebook only takes a cut of payments for games. But the company says it "may seek to extend payments to other types of apps in the future."

 

I'd expect retailers and entertainment companies to start offering more on the Facebook platform -- movies, live concerts, and clothing -- and for Facebook to start taking a cut. It won't be able to take the same 30 percent it gets from Zynga (ZNGA), but if say, J. Crew, starts offering shopping without leaving Facebook, if the social network takes even 5 percent, that could be meaningful to its bottom line.

 

More from CNBC.com

227Comments
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This is all a lie.  It leaves you the impression that you can start a website and do it too.  If it was all about spluttering a page with ads, Yahoo would outperform Facebook.  No.  That is not how Zuckerberg makes his money.  On the contrary, they data-mine all the information you put online about your family members and use it to profile your according to zip code and sell the information to corporations.  Its like Direct Mail on steroids.  The use it to do everything from sending you coupons in the Sunday paper, to delimiting your credit score because you live in the wrong zip code, to buying and selling real estate.  The use it to target 501c33 donors for money.  The wow you by knowing more about you individually than they are letting on, not from info you give them, but the by way of the exhaustive background investigation machine the Facebook actually is, and the more you use it the more you pimp your family members.   For example, when you remind your little sister how she loved the color purple when she was six, Facebook picks up on that sells the info to Home Depot which then floods your 28 year old pregnant sister's zip code with deals on purple paint.  Companies pay big bucks for that.  That is the backdoor money maker for Zuckerburg, and it is easily 82% of the money he makes.  Don't ever think these people are just sitting around randomly hoping you will click on a Facebook ad and pay the trinket cost per click fee.  NO.  They are running so many algorithms on your ****, they could tell you what your colon looks like without ever giving you a rim job - and you are paying dearly for it.  That is why I don't do Facebook.
May 17, 2012 12:38PM
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If "901 million active users" is the total number of accounts, I hope they know that that's not the number of actual people. There are a ton of businesses that have accounts and I'm sure they don't care about ads. Some people have multiple accounts so the number is smaller again. I predict within two years facebook will see its demise similar to myspace.
May 17, 2012 3:26PM
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OK, help me understand this: People actually use their credit card (and, hence, their money) to buy virtual items (like a cow). No wonder we are in a financial crisis! How can people be so stupid! Looks like mama did raise some fools.
May 17, 2012 2:48PM
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It's insane to buy imaginary animals with real money, what in the world are you people thinking.  There must be too much money in your hands to buy virtual products.  Total insanity.  Projected revenue for 2014 is 15 billion on this virtual buying.  Can the human mind get any more stupid.
May 17, 2012 2:21PM
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One thing I know for sure, all of the "ads" on the new Timeline drive me crazy.  I hate them.  I avoid my own personal Timeline.  I NEVER even use it.  Also, I find that I use Facebook less and less, all of the changes that they have made to it have made it less appealing to me.  I understand that they think if they change things up and make me search for the things I want I'll spend more time on their site... The only problem is, I actually spend less time.  I become irritated and annoyed that I'm searching through junk that I simply give up and shut down.  They are very close to losing my "business".

May 17, 2012 3:09PM
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Facebook a/k/a Stalker Central.  Total example of the stupidity of America. And today's youth is getting worse by the second.  Wait, let me put my thoughts on FB...
May 17, 2012 2:40PM
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I have never bought a product that facebook has advertized, nor will i ever.  Totally dislike the pop-ups that continually come up.  How many others are miffed at these pop-ups? 
May 17, 2012 2:44PM
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Mark my word. Facebook is Big Brother in disguise.
May 17, 2012 3:22PM
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I will never purchase anything from an advertisement on a website, I remember a time when you were not forced to watch some stupid advertisement before every single video on the internet, it has just gotten ridiculous. 
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the second they try to make me pay for anything is the last second I will ever use their site

 

May 17, 2012 3:24PM
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Zuckerberg sells your information to other business entities and probably to government agencies as well.
May 17, 2012 3:30PM
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Facebook is nothing but a fad.  A fad that will gradually decrease in popularity along with its stock price. Invest wisely.....
May 17, 2012 3:14PM
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Facebook not nearly as bad as cable TV--Pay $150.00 per month and watch 5 to 8 ads every 7 minutes.
May 17, 2012 10:22PM
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I really never notice the ads .So I guess the ads are useless
May 17, 2012 2:51PM
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  I hate media ads, and make a point of avoiding the purchase of anything that is annoying and offensive to me.
May 17, 2012 3:06PM
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Let's face it, the greedy media moguls are just going to keep on feeding a foolish public more and more helpings of stupid, unwanted, inane, annoying, in-your-face advertising until, finally, the folks they hope to reach will become totally immune to it and tune it out. Then what?

     A thief is someone who steals something. What's the only thing someone can steal from you that you can never recover? TIME. Every time some advertiser jams up YOUR phone or YOUR computer with THEIR unwanted ads, every time YOU have to WAIT until their TRASH downloads into YOUR equipment, they are stealing YOUR TIME.

     How to get rid of all the annoying ads? Simple. Stop buying whatever they offer. Better yet, how about a law requiring advertisers to obtain your explicit consent (on EACH and EVERY occasion, NOT by some blanket contractual clause) when they want to dump their ads on you. Just ask yourself why THEY should be the ones in control when it's YOU who are paying THEM for internet service. What ever happened to the customer is always right? Wake up folks, because as far as Facebook is concerned, you're nothing more than a part of their current financial portfolio. 

May 17, 2012 2:32PM
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Everything on the internet except the intranet business stuff is a fad and fads change with the weather.  No one is loyal to anyone or any site and as soon as some other techie in CA comes up with a newer, fancier and more user friendly site, all of facebooks' people will disappear.  Over the last 20 years, the track record of this happeining is unbroken.  To value a dot com company over that of Frod Motor Co. is really stupid thinking.  Ford had been here for over 100 years and will still be here 100 years for now.  Netscape, AOL, Compuserve, etc, give you a practical history of life on the internet.  If you buy facebook stock, make sure it's a short term investment and watch it closely.
May 17, 2012 8:42PM
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WITH WHAT I HAVE READ HERE, I WILL BE CANCELLING MY ACCOUNT. I HAVE RARELY USED FB BEFORE AND NEVER SAW THE USE IN IT...TOO MANY MORE USEFUL OPTIONS ARE OUT THERE! 

 

ALL I SEE IS A LOT OF PEOPLE POSTING, THINKING EVERYONE ELSE REALLY CARES ABOUT WHAT THEY HAD FOR BREAKFAST.

 

THE OTHER THING I HAVE NOTICED IS A LOT OF PEOPLE LOSING THEIR JOBS FOR WHAT WAS POSTED!

 

DUH!!!!!!!!!

May 17, 2012 8:22PM
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I have never even considered an ad on Facebook as anything other than an inconvenience.  I purchase items for my family based upon current need and personal research.  Putting GEICO in front of my every time I sign onto Facebook will NEVER get me to call them.  Every single person to whom I speak about this tells me they feel the same way.  Ten years ago, people were living without Facebook and the ads.  No one on Facebook that I know care about the ads other than that they are bothersome.
May 17, 2012 2:08PM
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Facebook's assets go home every afternoon.  Facebook, meet MySpace and her good friend, Friendster.  This whole pump & dump exercise is just like the ethanol frenzy of 10 years ago:  all the money that's going to be made ends up in the offshore accounts owned by the underwriters.
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