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 Julia Boorstin
There'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.
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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".
the second they try to make me pay for anything is the last second I will ever use their site
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.
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!
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