Facebook Business Outlines: How the Company Makes Money

UTC by Osaemezu Ogwu · 7 min read
Facebook Business Outlines: How the Company Makes Money
Facebook HQ, Menlo Park, California. Photo: Facebook, Inc.

Here’s an outline of Facebook business model – how the company makes its money, its financials, business segments, and recent developments.

Social media giant Facebook (FB) is an American company that was launched in 2004. Mark Zuckerberg founded the business along with his colleagues at Harvard College. Today, Facebook is listed as a Big five tech company with the likes of Microsoft (MSFT), Amazon.com (AMZN), Apple Inc (AAPL), and Alphabet Inc. (GOOGL).

IPO

In 2012, Facebook went public and stated in its prospectus that its aim is to get a funding of $5 billion. The prospectus also revealed that Facebook has an active monthly user base of 845 million with 2.7 billion comments and daily likes. After the IPO, Zuckerberg gained a 22% share in the company and 57% of the voting shares.

According to Facebook, it strives to constantly improve, solve problems, and collaborates to connect people worldwide through its apps and technologies. And some of these products include Facebook Messenger, Facebook Portal, Facebook Watch. There’s also WhatsApp, Instagram, Oculus, and a 9.9% holding in Jio platforms.

Facebook Business: the Key Sources of Income

Facebook’s revenue is divided into advertising revenue, as well as, payment and other fees. Here’s an outline of each.

Advertising

Facebook’s main revenue source is from advert sales. It offers marketers the opportunity to publicize their products on its social networks and third-party platforms it is affiliated with. Charges on these ads are levied depending on the impressions or actions on the ads. These actions could include link clicks, comments, and so much more.

Coupled with that, the company’s advertising revenue as of 2018 was around $55 billion. And the amount raised accounted for 98.5% of its revenue for that year. There was also a 38% surge in ad revenue in the same year. However, the increment is less than the 49% surge in 2019’s ad revenue. And for Q1 to Q3 of 2019, its ad revenue spiked by 27% YOY.

Payments and Other Fees

There are developers who employ Facebook’s payment infrastructure, hence revenue is also generated from the fees they are charged. These fees are classified as payment revenue. Alternatively, Other fees include revenue generated from hardware devices or another source.

What’s more, this category helped the company to raise $825 million in 2018. As such, it accounted for 1.5% of 2018’s total revenue. Like the advertising category, the revenue for this segment surged by 16% in 2018. Nonetheless, it was a decrement from the 2017’s given that the latter was a 24% increment. And for through Q1 to Q3 of 2019, there was a 26% increment in the revenue from this category.

Generally, it can be said that Facebook makes its money from five major businesses it owns. These are its social media platforms as well as Oculus VR, Onavo, and Beluga. Oculus VR is a Virtual reality technology company that was acquired in 2014 for $2 billion. Onavo is Mobile web analytics and it costs Facebook between $100 to 200 million to acquire it in 2013. There Beluga, on the other hand, a messaging service whose acquisition took place in 2011.

Facebook’s Financial Details

Facebook has released its Q1 2020 financial report, which shows its revenue for the first three months of the year. Based on its report, the company’s total revenue for Q1 is about $17.7 billion. Specifically, $17.4 billion accounted for its advertising revenue while $297 million was raised in other revenue.

In comparison to Q1 of 2019, these earnings are significantly higher. For instance, the advertising revenue and other revenue for the quarter were $14.9 billion and $165 million respectively. Also, the total revenue was $15 billion, hence, there was an 18% YOY increment in revenue for Q1 of 2020. Much more, a 102% YOY increment was evident in the net income for Q1 of 2020 given that it stood at $4.9 billion. The net income for Q1 2019 was $2.4 billion.

What’s more, Facebook’s stock, alongside those from Amazon, Apple, and Microsoft reached a milestone on June 9, 2020. These assets closed at new all-time highs. Specifically, Facebook’s stock surged by 3% and it was noted that the stock of tech companies was less affected during the coronavirus outbreak compared to stocks from other industries. The latter was tied to the heavy reliance of people on tech products at the height of the pandemic.

COVID-19 Impacts on Facebook’s Business

Despite the increment in earnings for Q1 of 2020, Facebook noted that its business had still been affected by the coronavirus outbreak and it is facing uncertainty. It also stated that its company’s performance will further be affected by issues out of its control. These issues are not limited to the impact of the economic stimuli worldwide, and the volatility of currencies.

Facebook further outlined that it has created a COVID-19 center on its main social network in a bid to offer users real-time information pertaining to health. Also, $20 million is being offered as a relief package and $25 million is donated to healthcare workers dedicating their time to fight the virus. Coupled with that, health organizations are provided with free ads and tools that will enable them to track the epidemic.

Facebook Number of Active Users Surges

Asides from that, the American company also revealed that there was an 11% YOY increase in Facebook daily active users (DAUs). Specifically, there were 1.73 billion DAUs on average in March. Likewise, there were 2.60 billion monthly users as of the end of March.

Reportedly, Zuckerberg said about 3 billion people are now employing Facebook, WhatsApp, Instagram, or Messenger on a monthly basis. And this number is an increment from the 2.99 billion that were using these platforms as of March 31, 2020. Also, the monthly usage of the Facebook app surged by 10% given that it is now 2.6 billion instead of the 2.38 billion recorded in Q1 of 2019.

Key Events around Facebook Business

There has been a lot of news surrounding Facebook ranging from its expansion to controversies. Some of these developments include:

Data-privacy Scandals Riddle Facebook

Facebook’s reputation has been on the line of recent due to data privacy issues. In 2018, there were allegations that Cambridge Analytica, a political consulting firm gained unauthorized access to the private data of millions of Facebook users. And the data was taken advantage of to influence voters’ support for U.S. President Donald Trump.

Prior to that, the social media company revealed that various groups had attempted to use its platform to manipulate the U.S 2016 presidential election. Nonetheless, the company has had a tough nut to crack especially when it is facing four antitrust investigations. These investigations are from the U.S. Department of Justice (DOJ), Federal Trade Commission (FTC), and the U.S. state attorney general.

In 2020, Facebook announced that it will not support all state-controlled media outlets in promoting their ads effective this summer ahead of the 2020 U.S. elections.

Facebook’s Libra Cryptocurrency

In April 2019, Facebook launched a whitepaper to reveal it wants to create a cryptocurrency called Libra. According to the Social media giant, Libra will offer billions of people worldwide easy and safe access to financial services. And the asset could possibly create a new global payment system that offers faster and low-cost transfers.

On the other hand, the news was embraced by crypto-enthusiasts since it could potentially give more credibility to the crypto ecosystem. However, regulators around the world have been hot on Facebook’s tail after its announcement. They opined that Facebook has disregarded user privacy in the past, and Libra needs to be well regulated to maintain global financial stability.

Accordingly, U.S. lawmakers asked Facebook to temporarily halt Libra’s development. But more recent news reveals that Facebook is changing its plans for the Libra project to also support fiat currencies like the US dollar and the euro. Specifically, the Libra Association confirmed that instead of just a single global stablecoin whose value is tied to several national currencies, it’ll develop other stablecoins. Each of these stablecoins will represent a national currency. Also, Calibra, a wallet that was initially meant to support only Libra will also support certain fiats.

Facebook Invests in Reliance Jio Platforms

In April 2020, Facebook invested a whopping $5.7 billion in Reliance’s Jio Mobile. The latter is the largest telecom network in India. And the investment is aimed at monetizing the 400 million users on Whatsapp in India. It is also speculated that WhatsApp may become like WeChat, which will enable Indians to purchase products and make payments directly from the platform.

Conclusion

Facebook makes its money through adverts placements and by offering other products to marketers and developers. It’s one of the top tech companies worldwide, and could potentially grow more in the near future. Accordingly, if you’re looking for a stock to invest, it’d be best to give one from a major company such as Facebook serious thought.

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