While most industry insiders have a firm grasp on Facebook’s monetization models, most people still don’t understand how Facebook makes money. For those that still don’t know how Facebook makes money, we thought we’d take the opportunity to break down Facebook’s various revenue streams including past and future streams of revenue. After reading this guide, you should have a complete understanding of how Facebook makes money.
Advertising Business
Facebook’s single most important revenue channel is advertising. The company has always been ad supported and most likely will always be ad supported. While some have claimed that Facebook will one day charge for access to the site, those rumors are completely false. Facebook generates over half a billion in revenue each year, the vast majority of which comes from advertising. So who is paying for advertising?
Self-Serve Facebook Advertising
The largest chunk of Facebook’s advertising revenue is the company’s self-serve advertising platform. By visiting the following page you can set up your own advertising campaign on Facebook. These advertisements are displayed in the sidebar of most pages of the site. That includes user profiles, events, groups, Facebook Pages, and third-party applications. The primary advantage of Facebook’s self-serve advertising platform is the granular targeting features.
Over the past few years Facebook has increased their targeting capabilities, including the ability to limit advertising to metropolitan areas as well as the following target variables: gender, age, network (workplace, school, etc), profile keywords, relationship status, and more. Facebook recently released the Facebook Ads API which provides large ad buyers with the ability to build robust ad managers on top of the Facebook advertising platform.
We’ve written about a number of companies who have built services on top of Facebook’s Ads API. To boil it down, the Facebook Ads API enables Facebook to reduce the amount of friction large advertisers (those who spend more than $10,000 a day) have in posting new advertisements and modify existing ones. According to numerous sources, Zynga, the developer behind the largest games on Facebook (FarmVille, Café World, etc), is the largest purchaser of Facebook’s self-serve ads.
Small businesses like doctors, lawyers, restaurants, and others are also responsible for a large amount of Facebook’s revenue generated by the self-serve advertising platform. If you want to learn more about Facebook’s self-serve advertising platform, check out some of the articles below. We expect Facebook to generate somewhere in the range of $450 million this year (2010) on self-serve ads.
- Local Advertising On Facebook Is Big Business
- The 10 Laws Of Facebook Advertising No Marketer Can Afford To Ignore
- Facebook Launches Friends Of Connections Targeting For Ads
- 5 New Features In The Upgraded Facebook Ad Manager
Engagement Ads
In addition to Facebook’s self-serve advertising product, Facebook also generates a substantial percentage of their revenue through their “Engagement Ads” product. Engagement Ads are Facebook’s solutions for large brand advertisers. Facebook places all engagement ads on the site’s homepage. Once a user logs in, they can interact with advertisements (like to one pictured to the right) which are placed on the right-hand side of the homepage.
Facebook has been ramping up their efforts to recruit brand advertisers in a number of ways but last September Facebook stepped up their efforts with the launch of Brand Lift. Brand Lift is essentially a product which enables large brand to test the effectiveness of their advertising campaigns almost immediately after their campaign is run. Facebook believes this increased level of measurement will encourage brand advertisers to spend more on Facebook Engagement Ads.
If you want to learn more about the Engagement Ads product, you can check out the articles below. We expect Facebook to generate around $250 million in brand advertising this year.
- The 4 Types Of Branded Facebook Campaigns
- Facebook Tests New Direct Offer Engagement Ads
- Brand Lift: Facebook’s Answer To The Brand Advertising Conundrum
- Live Coverage Of The Brand Lift Announcement
- New Dirty Jobs Ad Highlights The Power Of Engagement Ads
- Facebook Adds Fan Feature To Poll And Event Engagement Ads
Microsoft Banner Advertising Agreement & Search
Previously, Facebook had an advertising agreement with Microsoft for displaying large banner ads on the site. Recently, Facebook removed the advertisements internationally and it appears that they could be completely phased out of the site by the end of the first quarter this year, according to a Facebook presentation that was presented in Poland earlier this month. Facebook is phasing out the banner advertisements from Microsoft as they want to be completely self-sufficient. Total revenue generated from Microsoft advertising will be less than $50 million this year as they phase out banner ads completely.
Another less discussed agreement is the one Facebook has with Microsoft over search. When Microsoft invested $250 million in Facebook at a $15 billion valuation, part of the investment included an agreement to integrate Microsoft’s search results into Facebook. The terms of the agreement have never been public however we believe that Microsoft may be paying Facebook beyond the terms of the initial agreement. Unfortunately for estimate purposes we have to assume that this revenue is negligible although we believe it to be worth at least $150 million a year.
Virtual Goods And The Gift Shop
Facebook currently generates a large amount of revenue from the Facebook Gift shop. For those less familiar with the gift shop, it’s a product which enables users to send virtual gifts to one another. At an average cost of $1 per gift, Facebook gifts have become an extremely lucrative business, generating upwards of $100 million last year. Facebook has been slowly opening up the gift shop to third-party developers in order to increase the variety of products sold through the shop.
In August of last year, Facebook began opening the gift shop to non-profits and by September it was opened to a number of other developers. During the ongoing Haiti crisis, Causes has been offering users the opportunity to purchase gifts which directly benefit victims of the tragedy. While there are few public estimates of Facebook’s gift shop revenue, we’d expect Facebook to generate upwards of $150 million from their gift shop this year.
Facebook Credits
That last way Facebook generates revenue is through their Facebook Credits program. Initially used as a way for Facebook users to purchase virtual goods through the Facebook gift shop, Facebook is slowly opening up Credits to third-party developers. The purpose is for developers of applications, like FarmVille and other large social games, to integrate Facebook’s Credits product directly into their applications.
Facebook will in turn take a large percentage of all virtual goods sold through applications. As we wrote in our 2009 Facebook Recap, Facebook has been testing a number of ways to integrate Credits. In addition to testing out alternative payments for Credits for those users without access to credit cards, Facebook has been testing user-to-user credits as well as in-application credit integration.
Facebook is widely expected to release the Facebook Credits product for developers at this year’s f8 developer conference being held in San Francisco this April. While it will only begin rolling out later this year, we expect Facebook to generate $150 million in revenue from their Credits platform this year. This could expand up to a few hundred million in a short period of time as the volume of virtual goods sold on Facebook grows beyond $1 billion a year.
Conclusion
Facebook makes money a number of ways however advertising is the company’s revenue channel. With self-serve ads becoming a booming business for Facebook and with the growth of Engagement Ads, Facebook could be on track to generate up to $1 billion in revenue this year. While our estimate is aggressive, Facebook has been experiencing continued growth and through further education about the company’s advertising products, we’d expect Facebook to stay on track to almost double previously quoted estimates of last year’s revenue: $550 million.
While many users still wrongly think that Facebook will charge users because they aren’t able to pay for the site, the reality is that advertising is proving to be a very big business for Facebook.
That’s why I love AdBlock-I never see any ads.
Nick,
I am pleased that Facebook is making money in so many ways.
It demonstrates that a social media property must find a solid revenue model in order to become sustainable.
It would be interesting to see how well Facebook could do in expanding their gift sales by partnering with major e-commerce platforms. The key would be to make the gift giving process become a part of the conversational format that is at the root of Facebook’s success. I think that it can be done.
I highlighted a discussion on this topic in my blog the other day.
With such a large audience, Facebook has potential for advertising if executed properly. But I continue to be appalled at the arrogance demonstrated by Mark Zuckerberg and his obvious disdain for protecting the privacy of Facebook users. His recent comments show that he has learned nothing. Quite the opposite in fact. Zuckerberg feels a sense of entitlement to exploiting user-created content and preferences for personal gain, your privacy be damned. I would have thought the disastrous Beacon fiasco would have taught Zuckerberg something, but based on his recent comments, it’s obvious that he has learned nothing.
I have a safari GreaseKit script just to block facebook ads.
It works perfectly… haven’t seen an ad for months.
They need to come up with a more elegant design for the ads.
I hate to see my friends photos with ads next to it or anything else.
Yeah no doubt! No Script on Firefox does the same thing. No ads, and I block ALL the nonsense FB applications.
I have heard that, just by logging into the facebook generates income to the Facebook, without clicking on the Ads. Is it true?
I also heard that facebook is planning the facebook credits to a vitual currency which can used on facebook partner sites
Facebook is pretty odd to me. Millions of people sitting in front of plastic boxes typing on a plastic keyboard for hours on end. People are like cows at feeding troughs, and the food is a misguided belief that facebook is an essential part of socializing and that everyone must be connected and “stay in touch.” It’s amazing how willing some people are to spend hours and hours online, just clicking away, making companies rich. Pretty ingenious.