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The Secret To How Facebook Makes Money

Posted by Nick O'Neill on January 19th, 2010 10:37 AMShare 15 8 Comments (15)

While most industry insiders have a firm grasp onFacebooks monetization models, most people stilldont understand how Facebook makes money. Forthose that still dont know how Facebook makesmoney, we thought wed take the opportunity tobreak down Facebooks various revenue streamsincluding past and future streams of revenue. Afterreading this guide, you should have a completeunderstanding of how Facebook makes money.

Advertising Business

Facebooks single most important revenue channel is advertising. The company has always beenad supported and most likely will always be ad supported. While some have claimed thatFacebook will one day charge for access to the site, those rumors are completely false. Facebookgenerates over half a billion in revenue each year, the vast majority of which comes fromadvertising. So who is paying for advertising?

Self-Serve Facebook Advertising

The largest chunk of Facebooks advertising revenue is the companysself-serve advertising platform. By visiting the following page you canset up your own advertising campaign on Facebook. Theseadvertisements 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 Facebooks self-serveadvertising platform is the granular targeting features.

Over the past few years Facebook has increased their targeting

capabilities, including the ability to limit advertising to metropolitanareas as well as the following target variables: gender, age, network(workplace, school, etc), profile keywords, relationship status, and more.

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Facebook recently released the Facebook Ads API which provides large ad buyers with the abilityto build robust ad managers on top of the Facebook advertising platform.

Weve written about a number ofcompanies who have built services on top of Facebooks AdsAPI. To boil it down, the Facebook Ads API enables Facebook to reduce the amount of frictionlarge advertisers (those who spend more than $10,000 a day) have in posting new advertisementsand modify existing ones. According to numerous sources, Zynga, the developer behind the

largest games on Facebook (FarmVille, Caf World, etc), is the largest purchaser of Facebooksself-serve ads.

Small businesses like doctors, lawyers, restaurants, and others are also responsible for a largeamount of Facebooks revenue generated by the self-serve advertising platform. If you want tolearn more about Facebooks 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 BusinessThe 10 Laws Of Facebook Advertising No Marketer Can Afford To Ignore

Facebook Launches Friends Of Connections Targeting For Ads5 New Features In The Upgraded Facebook Ad Manager

Engagement Ads

In addition to Facebooks self-serve advertising product,Facebook also generates a substantial percentage of theirrevenue through their Engagement Ads product.Engagement Ads are Facebooks solutions for largebrand advertisers. Facebook places all engagement adson the sites homepage. Once a user logs in, they caninteract with advertisements (like to one pictured to theright) which are placed on the right-hand side of thehomepage.

Facebook has been ramping up their efforts to recruit brand advertisers in a number of ways butlast September Facebook stepped up their efforts with the launch of Brand Lift. Brand Lift isessentially a product which enables large brand to test the effectiveness of their advertisingcampaigns almost immediately after their campaign is run. Facebook believes this increased levelof 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 CampaignsFacebook Tests New Direct Offer Engagement AdsBrand Lift: Facebooks Answer To The Brand Advertising ConundrumLive Coverage Of The Brand Lift AnnouncementNew Dirty Jobs Ad Highlights The Power Of Engagement AdsFacebook 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 adson the site. Recently, Facebookremoved the advertisements internationally and it appears thatthey could be completely phased out of the site by the end of the first quarter this year, according




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to a Facebook presentation that was presented in Poland earlier this month. Facebook is phasingout the banner advertisements from Microsoft as they want to be completely self-sufficient. Totalrevenue generated from Microsoft advertising will be less than $50 million this year as they phaseout banner ads completely.

Another less discussed agreement is the one Facebook has with Microsoft over search. WhenMicrosoft invested $250 million in Facebook at a $15 billion valuation, part of the investment

included an agreement to integrate Microsofts search results into Facebook. The terms of theagreement have never been public however we believe that Microsoft may be paying Facebookbeyond the terms of the initial agreement. Unfortunately for estimate purposes we have to assumethat 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 thoseless familiar with the gift shop, its 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 lucrativebusiness, generating upwards of $100 million last year. Facebook has been slowly opening up thegift shop to third-party developers in order to increase the variety of products sold through theshop.

In August of last year, Facebookbegan opening the gift shop to non-profits and by September itwas opened to a number of other developers. During the ongoing Haiti crisis, Causes has beenoffering users the opportunity to purchase gifts which directly benefit victims of the tragedy.While there are few public estimates of Facebooks gift shop revenue, wed expect Facebook togenerate upwards of $150 million from their gift shop this year.

Facebook Credits

That last way Facebook generates revenue is through their Facebook Credits program. Initiallyused as a way for Facebook users to purchase virtual goods through the Facebook gift shop,




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Facebook is slowly opening up Credits to third-party developers.The purpose is for developers of applications, like FarmVille andother large social games, to integrate Facebooks Credits productdirectly into their applications.

Facebook will in turn take a large percentage of all virtual goodssold through applications. As we wrote in our 2009 Facebook

Recap, Facebook has been testing a number of ways to integrateCredits. In addition to testing out alternative payments for Creditsfor those users without access to credit cards, Facebook has beentesting 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 yearsf8 developer conference being held in San Francisco this April. While it will only begin rollingout later this year, we expect Facebook to generate $150 million in revenue from their Creditsplatform this year. This could expand up to a few hundred million in a short period of time as thevolume of virtual goods sold on Facebook grows beyond $1 billion a year.

Conclusion

Facebook makes money a number of ways however advertising is the companys revenue channel.With self-serve ads becoming a booming business for Facebook and with the growth ofEngagement 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 throughfurther education about the companys advertising products, wed expect Facebook to stay ontrack to almost double previously quoted estimates of last years revenue: $550 million.

While many users still wrongly think that Facebook will charge users because they arent able to

pay for the site, the reality is that advertising is proving to be a very big business for Facebook.

Tags:Advertising, Guides, Money, Revenue

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+3 Vote upVote down

mark lehman 52 weeks ago

That's why I love AdBlock-I never see any ads.ReportReply-1 Vote upVote down

Bruce Christensen 52 weeks ago

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 becomesustainable.

It would be interesting to see how well Facebook could do in expanding their gift sales bypartnering with major e-commerce platforms. The key would be to make the gift giving processbecome a part of the conversational format that is at the root of Facebook's success. I think that itcan be done.

I highlighted a discussion on this topic in my blog the other day.

ReportReply0 Vote upVote down

Bob 52 weeks ago

With such a large audience, Facebook has potential for advertising if executed properly. But Icontinue to be appalled at the arrogance demonstrated by Mark Zuckerberg and his obviousdisdain for protecting the privacy of Facebook users. His recent comments show that he haslearned 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 havethought the disastrous Beacon fiasco would have taught Zuckerberg something, but based on hisrecent comments, it's obvious that he has learned nothing.




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Rod 52 weeks ago

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.ReportReply+1 Vote upVote down

Brian Hanson 51 weeks ago

Yeah no doubt! No Script on Firefox does the same thing. No ads, and I block ALL the nonsenseFB applications.ReportReply0 Vote upVote down

Rajiv 33 weeks ago

I have heard that, just by logging into the facebook generates income to the Facebook, withoutclicking on the Ads. Is it true?ReportReply+1 Vote upVote down

Dave 25 weeks ago

Facebook is pretty odd to me. Millions of people sitting in front of plastic boxes typing on aplastic keyboard for hours on end. People are like cows at feeding troughs, and the food is amisguided belief that facebook is an essential part of socializing and that everyone must beconnected and "stay in touch." It's amazing how willing some people are to spend hours and hoursonline, just clicking away, making companies rich. Pretty ingenious.ReportReply-1 Vote upVote down

Aston 21 weeks ago




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You decide to throw a little party with some of your closest friends. After dinner and a few drinks,you're all sitting around chatting. The outside air feels great, so you open the windows and thedoors. Things are going well when a salesman sees the open door and walks right in. He seems toalready know a great deal about you and each of your guests. This delights some - as they find agood measure of things they didn't know they needed, while this inside knowledge greatly disturbsothers. People begin to leave.ReportReply-1 Vote upVote down

kelvin kimaro 20 weeks ago

well i would like to work with facebook on creativity and also on my local area designing awebpage for swahili version so that it can enhance the user of east africa and central who speaksand write swahili(mind you swahili is the 7th ever speakean and currently used language in theworld and also be an official language in africa union summit,east african annd central,and in the

commorow island)

by being part,it can maximize your industry.

please dont hesitate to contact me .ReportReply1 reply active less than 1 minute ago0 Vote upVote down

vinay 17 weeks ago

hi......kelvin kimaroi want to ask & share something with uu can catch me on my fb accountmy id is [email protected] me as friend therem waiting.............ReportReply0 Vote upVote down

Jack 4 weeks ago

what about facebook selling user data to 3rd parties, like google do do?ReportReply0 Vote upVote down

sharyar haji 2 weeks ago

what about facebook selling user data to 3rd parties, like google do do?




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multipass 1 week ago

It would be great if AdBlock and other ad-blocking plug-ins were installed by default in FF andSafari. Many people aren't aware of it exist.ReportReply0 Vote upVote down

mojtaba 1 week ago

okwe underestand that how facebook make money with membersbut we want to know what facebook doing?facebook just take money and member work for himand when he sell facebook he sell members that trust to facebookif he like members just alot of her money give to members with randomReportReply0 Vote upVote down

myopinion 4 days ago

More and more companies many of them producing bullshit products compete for customers andspend more and more money for advertising which the overwhelming majority of users especiallyin the internet just ignoer or even never see...its like a pyramid scheme. A lot of people throwing alot of money into it while only very few can actually earn a profit.It's a giant bubble just like the housing market in many countries which led to the banking crisis orthe credit cards debt bubble.ReportReply

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