The business that controls Facebook, Meta Platforms Inc. (META), makes money primarily by selling advertising space on its multiple social media platforms. Websites and mobile applications, for example, enable users to interact and communicate with family and friends. Social networking site Facebook, photo- and video-sharing app Instagram, and messaging apps Messenger and WhatsApp are among the company’s sites and apps. Discover how Facebook make money and what its new name means for its business model.
Facebook – META
Consider Facebook’s new digital lineup, each of which contributes to or is projected to add to the company’s revenues in the near future:
- Facebook Payments. This Facebook business makes money through payments, much to peer-to-peer payment systems such as Venmo.
- Jibbigo. Facebook purchased this language translation tool in 2013, allowing Facebook posts and chats to be translated into multiple languages. The capacity for businesses to advertise their products in multiple languages would be extremely appealing in both a digital and global economy.
- Atlas Services. Facebook purchased Microsoft (MSFT) in 2013 – Get Free Report Atlas helps advertisers to track the effectiveness of their social media outreach efforts.
- Onavo. This mobile utility application improves data performance on mobile devices and allows businesses to compare the performance of their app to other apps in the same business category.
- Instagram. This photo-sharing app, purchased for $1 billion in 2012, has 400 million users and is projected to be a big fulcrum for Facebook in the developing photo app digital industry. While Instagram hasn’t generated much income for Facebook prior to this year, analysts expect that to change, with estimates ranging from $10 billion to $16 billion by the end of 2018.
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- The Oculus VR headset. Virtual reality is another technology that is commonly regarded as an excellent customer outreach tool in marketing circles. With Facebook’s $2 billion purchase of Oculus VR in 2014, Facebook now has a foot in the door to VR technology and market, where corporations can engage customers (the video game market is a wonderful example) in ways that marketers could never have envisioned even 20 years ago.
- WhatsApp. In 2014, Facebook paid $19 billion for WhatsApp, making it the company’s largest acquisition in recent years. WhatsApp is a hugely successful instant messaging app that advertisers would love to break into, considering its worldwide popularity. Facebook is preparing to launch a new business model in which advertisers would be charged a set fee for communicating with WhatsApp users.
Finally, Facebook’s survival is dependent on its principal source of money – advertising. That’s the financial engine that keeps Facebook running, and it’s interesting to observe how advertising revenues flow through Facebook’s financial pipeline.
How Does Facebook Make Money?
Facebook presently earns 98.5% of its money from digital advertising, mostly through Facebook and Instagram ads. They also own WhatsApp and Facebook Messenger, but these apps do not yet generate much ad money.
In addition, Facebook profits from hardware sales. They own Oculus, the maker of virtual reality headsets, and they sell the Facebook Portal.
In addition, the company is growing into other services such as online payments, eCommerce, and corporate messaging. These services are not currently profitable, but they will be in the future.
Here is a breakdown of Facebook’s seven key money streams.
#1. Facebook and Instagram digital ads
Ads on Facebook and Instagram account for approximately 98.5% of Facebook’s revenue.
The majority of the advertising is “pay-per-click,” which means advertisers pay Facebook each time someone clicks on an ad.
Even if each click is not expensive, it quickly adds up to billions of clicks and billions of dollars.
Advertisers who want to reach individuals utilize Facebook’s advertising capabilities to determine who they want to reach.
Here’s what advertising from a premium automobile manufacturer, such as Mercedes-Benz, may select to target:
- United States of America
- Gender: Male
- Age: 30–60
- Interests: Luxury automobiles
Advertisers can increase their return on investment significantly by targeting their adverts to those who are likely to be interested. It is a common misconception that focused advertising is “bad.”
Most internet advertisements are targeted in some fashion. Facebook is simply superior to everyone else.
Most consumers would rather view relevant adverts than irrelevant ads if given the option. The relevance gives a better user experience than, say, TV advertisements.
Furthermore, having access to such sophisticated advertising tools is extremely important for small to medium-sized enterprises, which can now compete with major corporations without significant advertising departments.
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According to Facebook, there are currently 8 million businesses using its advertising platform worldwide.
Ads on Instagram generate money for the corporation in the same way that they do for the Facebook platform. They don’t have much advertising on WhatsApp currently, so the platform isn’t contributing much revenue right now.
Ads in Facebook and Instagram’s old news feed make the most money, but ads in the vanishing Stories are also becoming more popular and making more money each year.
Surprisingly, adverts on Facebook’s mobile apps now account for the majority of the company’s revenue. This is a significant shift from the company’s early days when the website generated the majority of its revenue.
Facebook, on the other hand, has lately begun to roll out privacy options that allow users to restrict part of their data from being used for targeted adverts.
These privacy tools may become a future barrier to revenue growth. It has the potential to make targeted ads less successful and less appealing to marketers.
#2. Oculus headsets and apps for virtual reality
Facebook paid $2.3 billion for the acquisition of Oculus in 2014.
Oculus is the global leader in consumer virtual reality headsets. The Oculus Rift, Oculus Go, and the recently released Oculus Quest are their major products.
Because each Oculus headset costs several hundred dollars, Facebook profits from each unit sold.
However, Oculus also has an app marketplace where users may buy programs and games to play with their Oculus headsets.
Oculus’ revenue contribution is minor in comparison to the advertising business. They don’t say how much it is, but it is most likely a significant portion of Facebook’s 1.5% non-advertising revenue.
Oculus is now investing heavily in research and development, as well as developing augmented reality (AR) headsets that may become popular in the future.
The Oculus app marketplace, like Apple’s (AAPL) App Store and Google’s (GOOGL) Play Store, might someday become a major cash generator.
Facebook reported $5 million in revenue from the Oculus app store on Christmas alone during their most recent earnings call.
#3. Facebook Portal video communication gadgets that are clever
Facebook Portal is a smart video communication gadget made by Facebook.
These are smart-home devices that allow you to communicate with Facebook Messenger and WhatsApp via video chat.
The device contains a screen and a video camera that can follow you around a room while you video chats with a friend or family member.
The Portal also includes the Amazon (AMZN) Alexa smart home assistant, making it a smart-home gadget. You may use it to get the weather, and news, and control your home lighting, among other things.
Facebook does not disclose how much money they make from the Portal, although it is likely not much given the low cost of the gadgets.
The Facebook Portal devices have grown in popularity among certain demographics, particularly families who communicate frequently via video chat. They have very positive online evaluations, usually 4.5 stars or above on Amazon.
#4. Payments and electronic money
Facebook sees digital payments as a large market opportunity and has lately begun rolling out a new service called Facebook Pay.
They intend to include numerous payment tools in their apps that will allow users to send money to individuals and companies.
Facebook is also working on the Libra cryptocurrency, which has the potential to disrupt the global payment market in the future.
People using Libra may soon be able to transmit money all over the world immediately and with absolutely no expenses.
Payments may eventually become a substantial source of revenue for Facebook.
#5. Instagram and Facebook Marketplace Ecommerce
eCommerce is one of the fastest-growing segments of the internet.
Facebook sees this as a huge opportunity because people already use their services to find new things and shop.
Facebook Marketplace has already attracted hundreds of millions of users. Many firms and influencers use Instagram to sell their products as well.
Instagram Checkout is already available on Facebook in the United States. As a result, some businesses can offer things directly through the site.
Along with payments, this is an area in which Facebook is heavily investing. More features are anticipated to be added in the near future.
#6. WhatsApp and Facebook Messenger for Business Messaging
Business texting on WhatsApp and Facebook Messenger is another prospective monetization opportunity for Facebook.
Many companies already use these messaging services to engage with their clients.
Many websites, for example, now include Facebook Messenger chat widgets that allow customers to submit messages directly to sales or customer care.
In the future, the corporation is likely to find ways to monetize these functionalities. They may, for example, charge firms for premium services that allow them to improve their customer service.
#7. Facebook Workplace
Facebook Workplace is a solution that allows organizations to manage their internal communications.
This service directly competes with business communication platforms such as Slack and Microsoft Teams.
Workplace offers a free subscription, however, its advanced service charges $4 per month per user.
It is used by over 30,000 enterprises and organizations worldwide, including major corporations such as Starbucks and Walmart.
Workplace exceeded 2 million paying users in February of 2019.
Other Ways Facebook Make Money.
Facebook also earns money by collecting interest on its large cash reserves.
The company is so successful that it earns considerably more money than it can spend. As a result, it possesses around $56 billion in cash and cash equivalents.
Facebook, like other large corporations, invests the majority of its surplus income in financial instruments that pay interest, such as bonds and money market funds.
In 2019, Facebook earned $826 million in “interest and other income,” the majority of which came from interest payments on its massive cash reserves.
The interest income was nearly as large as their total non-advertising revenue in 2019, which was $1,042 million.
The Business Model of Facebook
The company offers its members a free array of social media apps. It then charges advertisers to display adverts that are tailored to specific user groups or traits.
Ad pricing is based on an auction system in which ads compete for impressions based on bids and performance. A company that runs an ad will only be charged for the number of clicks or impressions the ad received. Impressions are the number of times an ad is shown even if it is not clicked.
A company that wants to run an advertisement specifies a maximum budget and will be charged a monthly fee based on the ad’s performance.
Conclusion
Facebook’s primary revenue source is advertising sales, but by altering its name and future business focus, the company intends to develop additional sustainable revenue sources in the near future.
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