How Does Facebook Make Money
Facebook earns money by auctioning off ad space in users' newsfeed and stories on Facebook and Instagram. Facebook's advertising income accounts for 98 percent of its total revenue. The remaining 2% comes from various sources, mainly from the sale of Oculus and Portal devices.
In 2020, Facebook will generate an average of $32 per user globally, with total advertising income of $84 billion and non-advertising revenue of $2 billion.
However, Facebook does not only display its users’ ordinary advertisements. Because of our activity on Facebook's family of applications, which includes Facebook, Instagram, WhatsApp, and Facebook Messenger, Facebook knows a lot about us. Because of the importance of this data, it makes sense for Facebook to provide its goods for free.
Facebook, for example, has information on who we interact with, what material we consume and how we react to it, and even what sites and apps we use outside of Facebook. These are just a few examples of the types of information Facebook gathers.
Facebook's algorithms may use these to estimate your personal profile and classify you based on very detailed traits that their algorithms can infer. Thanks to the predictive capacity of machine learning algorithms they employ, they can accomplish this even if you don't explicitly disclose it.
Facebook has information on our age, religion, ethnicity, hobbies, political beliefs, relationship status, and much more.
Of course, these forecasts aren't 100% correct, but they're close enough for marketers to use for precision ad targeting.
Facebook users are the company's main source of income, and the value of the company's economic model is heavily reliant on them. Users, on the other hand, are not Facebook's main customers; rather, advertising are.
Facebook's ad platform is used by approximately 10 million advertisers, the majority of which are small companies. Not only does the Facebook Ad platform enable them to display advertisements to targeted people, but it also provides comprehensive performance data on how various campaigns and graphics perform. Businesses may then test which kind of campaigns and which types of people perform best based on this information.
The price that companies pay for advertising on Facebook is decided by activity where advertisers compete with one another, similar to Google, Facebook's largest rival for ad revenue. It's not only about the amount marketers pay Facebook when a user clicks on their ad to win the auction.
It wouldn't make sense for Facebook to display ad campaigns with the greatest cost per click if consumers weren't likely to click on them. As a result, an auction takes into account how frequently people will click on advertising, and it is intended to prioritize ads that will generate the greatest revenue for Facebook.
App developers that utilize Facebook's ad platform to sell their applications, as well as video producers who submit films to Facebook Watch or, more recently, Instagram TV, share a tiny portion of Facebook's total advertising income (IGTV). However, when compared to the overall income generated by Facebook, this is a drop in the bucket.
Facebook advertises across its many platforms, including Facebook, Instagram, and Messenger. There are presently no advertisements on WhatsApp, despite the fact that Facebook worked on it for a long period before deciding not to do so.
Messenger contributes just a small portion of advertising income, with Facebook and Instagram accounting for the majority.
Facebook Feed continues to be the main source of income, accounting for almost 60% of all advertising revenue. Instagram income accounts for about 30% of all advertising revenue. Although Instagram Feed generates the majority of its income, Instagram Stories has grown to become a big component of it, accounting for one-third of the company's total revenue.
In terms of given statistics, the video above is a little out of date, but it provides a fair overview of how Facebook generates money and how it focuses its advertisements.
Who are Facebook's clients? Advertisers vs. Users
The fact that Facebook has over 3 billion members is what makes it such a valuable company. The “network effects,” which make it more difficult for users to quit Facebook for another platform, aided this market presence significantly.
Still, Facebook has a tremendous incentive to provide people a fantastic experience and listen to what they want and need in order to keep its business model afloat. Advertisers, on the other hand, are a group whose wants and desires are essential to Facebook.
Facebook clearly cares about its users as well as its advertisers. When we look back at situations where those groups' interests clashed, it's clear that advertisers are Facebook's primary customers, and their concerns weigh heavily in the company's decision-making.
After all, they're the ones who have to pay the bills.
The fact that more people use Facebook makes it more valuable is unsurprising. This is true for most businesses, especially those that rely on advertising for revenue. The granular user profiles that Facebook creates about us make Facebook users much more valuable to advertisers.
Advertisers may target their advertisements to specific audiences based on these profiles, and change the message depending on what works best for a certain set of users. Furthermore, they can rapidly determine if the marketing campaign was successful and profitable.
Advertisers are Facebook's key consumers, but the company's relationship with them, particularly the larger ones, is far from romantic. They've had a lot of disagreements in the past over Facebook's faulty ad performance monitoring, and the most recent problems were around advertisers pressuring Facebook to do more about nasty material on the platform.
Advertisers do not want to be connected with this material since it is not prohibited.
In these battles with advertisers, Facebook has an edge since it is not reliant on a few large corporations. It has a considerably more granular client base, with a lot of smaller companies.
When numerous well-known businesses declare that they will no longer advertise on Facebook, as we may see from time to time, it has little impact on Facebook's income.
However, Facebook ultimately does what every successful business must do in order to remain successful: it listens to its consumers and ensures that their requirements are fulfilled. Customers are advertisers in Facebook's instance.
Whatever Mark Zuckerberg and Facebook management say about trying to build a reputation for privacy in the future, we must remember that Facebook's business model is built on gathering as much data as possible without alienating its customers.
Aside from advertising and users, Facebook also has to deal with authorities and politicians when it comes to operating its business. The problem isn't only the impending antitrust case. It's also about determining what role Facebook and other social media platforms should play in online speech regulation and establishing where the boundary between acceptable and unacceptable material should be drawn.
Facebook has found itself in a difficult situation where there is widespread consensus that it is doing things incorrectly. However, various organizations have conflicting opinions on whether Facebook should allow more or less free expression.
Mark Zuckerberg delivered a lecture at Georgetown in 2019 in which he emphasized the importance of free expression and pledged to preserve it as much as possible on Facebook. When he was defending these beliefs, he also faced a lot of criticism, especially for his choice not to ban political advertisements.
When we look at what Facebook really did more than a year after that speech, we can see that the company's actions were much more pragmatic for its bottom line. Even if it went against the principles, it chose less controversy, which is much better for business and advertising, Mark revealed during his Georgetown address.
According to Mark Zuckerberg's article “Understanding Facebook's Business Model,” there is no conflict of interest between users and advertising on Facebook.
On this, I respectfully disagree. Simply comparing what Facebook does to what it claims it wants to accomplish in terms of privacy, it seems that Facebook is on the marketers' side. They demonstrated that on many times.
For example, recent full-page newspaper advertisements criticizing Apple's decision to require iOS applications to get users' permission before monitoring them outside of the app plainly demonstrate that when marketers and users have competing interests, consumers choose advertising. Facebook also ran a separate campaign to highlight the advantages of tailored advertising.
That does not automatically make Facebook a bad business. Many businesses provide free services in exchange for advertising or other payments on the back end. There are however many more instances when the interests of users and marketers are aligned, such as the removal of offensive material. However, privacy is clearly not one of them, and we should be aware that, if permitted by law, Facebook would almost certainly side with advertising.
When we consider that Apple and Google's decision to make it harder to track people on the internet outside of one app or service could actually solidify Facebook's position in targeted advertising in the long run, Facebook's dedication to its roughly 10 million advertisers is even more striking and intriguing.
One Last Thought
How many individuals use Facebook, how much time these users spend on Facebook, how many advertisements Facebook displays to its users per period of time, and lastly, how much Facebook charges for one ad placement are the main drivers of Facebook advertising income.