Revenue Model of Most Popular Social Networking Site - Facebook

Jan 4, 2011 Ashish Chowdhary

Free registration, yet, revenues worth millions of dollars; turned cash flow positive after more than 4 years of its launch in 2004, however, today the company is valued at around $60 billion* with its CEO as the world’s youngest billionaire. The company in discussion is the most famous social network â€" Facebook. Had it been a country, it would have had the third highest population in the world. So how does this country, Facebook, actually make money? What is the revenue model of Facebook?

Facebook’s Revenues in 2008, 2009 and 2010*

Privately held Facebook does not disclose its financial results so it’s difficult to know revenue figures of Facebook, but according to sources, Facebook made around $300 million in 2008, $800 million in 2009 and revenues of Facebook in 2010 were estimated to reach $1.1 billion. Presented below are the primary and secondary sources of revenue of Facebook.

Facebook’s Revenue through Advertisement

Advertisement on Facebook form the main component of Facebook’s revenue model considering the huge amount of traffic Facebook generates.

Facebook provides two main types of advertisement:

Self-service ads: They are very simple. They consist of a title, a picture, a bit of text, and the user can click the link or “like” the advertisement. They are also known as Facebook Flyers. One doesn’t need to be a really big company to promote their products,anyone can make these ads.

Engagement ads: They are more complex in the sense that they let users interact with the advertisement. They allow for things like surveys that let users poll in their responses. As per your Profile, if you fall within a certain demographics concerning the poll, then the poll will automatically show up in your News Feed and you can either participate in it or overlook it.

Sponsored Groups and Text Announcements in Facebook

Companies form their own sponsored groups and promote their products. E.g. Apple has its own sponsored group known as ‘Apple Students’ where it lists the hottest items, prices, and even gives away free stuff.

Text announcements, which are more geared toward students who want to announce a party or event, are sold regularly for $9-$15 and guarantee a certain number of hits.

Facebook’s Deal with Microsoft for Banner Ads

In August 2006, Facebook signed a three year deal with Microsoft worth $240 million to provide and sell contextual ads on their site in return for a revenue split. As of January 2010, the software giant has stopped selling display ads to Facebook. However, Microsoft has expanded the deal with Facebook that involves search and advertising. This entails integrating Microsoft Live Search on Facebook, which will include Microsoft’s search advertising, i.e. Bing will now be the default search engine on Facebook worldwide and not just in the US (since July 2008).

Facebook Credits â€" Virtual Money from Facebook

Want to level up faster in your favourite Facebook game or buy a premium item yet not available to other players? Facebook Credits is a virtual currency that enables users to purchase gifts and virtual gifts in games and applications on Facebook. One U.S. dollar is equal to 10 Facebook credits. Facebook retains 30% of all revenue earned through Credits.

Facebook Gifts - Very Successful But Not Available Anymore

Ever wondered how you can send virtual gifts to your friends, relatives or your spouse, for a meagre price of $1 per gift? From February 2007 to August 2010, Facebook Gifts allowed users to select a small icon from novelty items and send it with a personalised message.

Facebook Beacon - A Failed Attempt

Facebook ran into resistance, when in November 2007 it rolled out Facebook Beacon, a now discontinued program that allowed third-party websites to publish stories about users, who purchased on their websites, to their Facebook friends’ news feeds.

Facebook Broadcasting Users’ Habits and Likes to Companies

When Facebook, in April 2010, announced a new feature that sends users’ profile information in bulk to companies such as Microsoft, Yelp and Pandora â€" in essence, broadcasting their habits and likes across the Internet, many users were outraged by this move.

Facebook Sharing Users’ Data with Advertisers

Facebook was accused of breaching the confidentiality of customers’ personal information and sharing it with advertisers and raking in money. Facebook pointed out that members intentionally share data, while advertisers aggregate data through searches and other online behaviours.

In May 2010, Facebook held a mea culpa press conference where Mark Zuckerberg apologised and the company revamped its privacy controls amid negative user feedback.

Facebook-Apple Deal

In July 2010 Facebook made an agreement with Apple Inc. to give away 10 million free iTunes samplers to Facebook users.

Credit Cards by Facebook

Facebook signed a one-year deal with J.P. Morgan Chase to promote Chase credit cards on the social network. Facebook members will see banner ads inviting them to join a special Chase network and members of that group will then earn reward points for their actions, like paying their bills on time and other activities. The points can be converted to charity donation or redeemed for prizes.

Even British supermarket giant, Tesco, has decided to sell Facebook prepaid credit cards.

Shop Now â€" Shop Online via Facebook

Facebook has now included a ‘shop now’ tab on brands fan pages. E.g. Pampers fan page allows users to make use of this tab to purchase diapers online through Facebook.

It's difficult to break each component of Facebook's revenues and determine how much each of them made. Facebook has still a long way to go to earn revenues that can match Google but considering the pace that Facebook is going with, it might not be far when we hear that Facebook has surpassed Google in revenues.

Sources:

* Cohen, Jackie (17 December, 2010). Facebook Soars To $59.4 Billion Valuation. Retrieved Jan 03, 2011.

** 18 June 2010. Reuters. “Facebook '09 revenue neared $800 mn: Sources”. EconomicTimes. Retrieved Jan 03 2011.

Kincaid, Jason (22 June, 2010). "Zuckerberg: Facebook Revenue Estimates Of $1.1 Billion “Not So Far Off..”". TechCrunch.