Facebook: The King of Advertising

Unsurprisingly, every student in our class has a Facebook account. Today, Facebook has become a necessity for any college student – or rather for any functioning member of society.

 

thefacebook

Founding Story

On February 4, 2004, Harvard students Mark Zuckerberg and Eduardo Saverin launched a social networking service called “The Facebook”. The website improved on its predecessor, “FaceMash”, which Zuckerberg developed the year before as a glorified “hot or not” game. Within 24 hours of launching The Facebook, over 1,200 Harvard students signed up and, within just one month, over half the undergraduate population had created a profile! Facebook continued to spread like wildfire across other Boston universities, Ivy League schools, and all US universities. Thankfully, the company dropped “The” and became “Facebook” in 2005, attracting over 6 million users by the end of the year. Facebook surpassed 100 million users on August 26, 2008, averaging over 175% monthly growth over that time. Facebook has continued to grow ever since, with over 2.2 billion monthly active users by the end of last year.

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VC Funding

In 2004, Peter Thiel made the first outside investment in Facebook, investing $500,000 for a 10.2% equity stake. In 2005, Facebook raised Series A funding of $12.7 million from Accel Partners, valuing the company at $98 million. Facebook then closed its Series B round of $27.5 million at a valuation of $500 million in 2006, which included Greylock Partners, Meritech Capital, and additional investments from Thiel and Accel. In 2007, Microsoft also purchased a 1.6% stake at a valuation of $15 billion.

 

Profitability Struggles and IPO

In 2008, Facebook hit a short-lived rough patch. BusinessWeek and other media outlets doubted Facebook’s ability to monetize social networks the same way Google monetized search, noting the private sales of company shares by employees. In response to this criticism, Facebook hired COO Sheryl Sandberg, a crucial move in the company’s journey to success. Sandberg reportedly met with employees to discuss the long-term monetization and concluded that advertising would be Facebook’s path to monetization. As a result, Facebook tweaked its advertising model and turned a positive cash flow for the first time in 2009. Facebook then filed for its IPO in 2012 with an astronomical valuation of $104 billion ($38 per share). After the first week of trading, however, FB shares traded at $31.91, 16% down from the IPO price. Today, Facebook is trading at a whopping $182, with a market cap of $530 billion!

CEO Mark Zuckerberg and COO Sheryl Sandberg at Facebook’s IPO

 

Revenue Streams

Targeted Advertising

Facebook’s single most important revenue channel is advertising. The bulk of Facebook’s revenue comes from digital advertisements, which brought in over $12 billion last quarter alone. In recent years, Facebook has emerged as a dominant force in digital advertising, only second to Google. Unlike its competitor, which advertises based on keyword searches, Facebook’s value proposition is targeted advertising. Given the extensive data available to the social networking site, advertisers can utilize personal data about users from Facebook’s ecosystem for ads. Advertisers can customize ads to Facebook users from targeted income groups, regions, sexual orientations, religions or political affiliations.

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Facebook’s advertising revenue almost reached $40 Billion last year!

 

Facebook Ads Guide

The Facebook Ads Guide comprehensively describes the 11 distinct types of ad formats available on Facebook. The primary ad types on Facebook are Link Ads and Video Ads. Facebook offers an incredibly easy-to-use, user-friendly advertising platform, designed for individuals, small businesses, and large corporations. Facebook manages to appease all advertising consumers, regardless of objective, call-to-action, or company size. Facebook has developed a range of advertising products for all stages of the branding lifecycle. For instance, Lead Ads offer help to advertisers via lead generation. Practical products like this have catalyzed Facebook’s rise in digital advertising, and Facebook’s revenues suggest that it will remain an advertising goliath for the foreseeable future.

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Facebook IQ

A major part of Facebook’s advertising value proposition comes from Facebook IQ. Facebook IQ serves as Facebook’s data analytics hub based on organic Facebook data. For instance, Facebook recently published a post about the Winter Olympics, offering these “People Insights” into user habits:

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Facebook IQ published data analytics from the 2018 Winter Olympics

 

Dependency on Advertising

“The social network is more dependent than ever on the cyclical ad market, even as its rival Google finds new revenue streams in hardware and software.”

Sheryl Sandberg recently stated that Facebook would diversify its revenue model by expanding its base of advertising across regions and industries. While this does mitigate the risk of depending on advertising, it does not address the underlying problem. Facebook has warned for some time about declining non-advertising revenue. Facebook’s non-advertising business consists almost entirely of video game players on desktop computers buying virtual currency, and it has fallen as gaming has moved to smartphones.

Facebook’s lack of diversification poses a long-term threat, especially in contrast to its biggest competitor, Google. Google’s non-advertising grew to more than $3 billion last quarter, or over 13 percent of total revenue. To address this dependency, some companies would diversify through acquisitions, but most of Facebook’s purchases such as Instagram and WhatsApp have been in adjacent markets. Facebook’s dependence on advertising is a long-term concern, but it has some time to develop other revenue streams while building its core ad business. Thanks to a whopping $40 billion in advertising revenue, Facebook surpassed $15 billion in net income last year!

 

VR/AR Integration

“Over the next 10 years, we are developing consumer use cases around technology that are a big part of our future but won’t be a big part of our business for a long time” —  Mark Zuckerberg, during Facebook’s 2017 Q1 earnings call.

Included among these use cases is virtual reality and universal internet access. These initiatives translate into future sources of revenue for Facebook, as more internet connections translate to greater usage and revenue. According to the 2017 VR Consumer Survey, 88% of Oculus Rift owners are “highly interested” in social VR experiences and two-thirds say they would use a social platform every day. For more information on Facebook’s VR and AR integration, wait for my presentation!

 

Margaret Gould Stewart

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At Facebook, we are lucky enough to meet with the incredible BC alumna Margaret Gould Stewart. A class of ‘92 BC grad, Stewart worked as a User Experience (UX) manager at Google and Director of UX at YouTube before transitioning to Facebook in 2012. She now serves as the Vice President of Product Design for Facebook and exudes passion about how design can improve people’s lives. Stewart founded the a blog, Fountly, where she shares her musings on design, management, and motherhood. Over the course of her career, she has led the design teams for 5 of the top 10 most visited websites in the world. Stewart is also famous for her renowned TED talks, one of which – “How giant websites design for you” – we had the chance to watch!

“I am passionate about how design can improve people’s lives, and the responsibility designers have to use their talents in that pursuit. I’ve led design teams for some truly world changing platforms like Google Search, YouTube, and currently, Facebook. I feel pretty lucky to do this for a living.” — Margaret Gould Stewart

 

Questions

  1. How does Facebook reconcile the acquired companies across various industries under the umbrella of Facebook?
  2. How will the creation of a VR social network complement or substitute aspects of the existing platform?
  3. How does Facebook plan on integrating machine learning and AI into its product offerings given the recent M&A activity in the industry over the past few years?
  4. Will Facebook look to emulate Alphabet’s diversification model and umbrella structure or focus on maintaining its competitive edge in advertising and VR?
  5. Zuckerberg has previously entertained the idea of providing internet connectivity to areas currently without internet access. How has Facebook reacted to SpaceX’s Starlink project as a potential catalyst for future advertising revenue?

8 thoughts on “Facebook: The King of Advertising

  1. Loved this post, Rohan! Especially, I thought the Facebook IQ was something that stood out to me because I had never heard of it before. I explored the link that you provided and the data Facebook is able to offer through this system seems endless. It makes me reflect on how Facebook originally was able to approach this mountain of readily available data and manipulate it into something useful for users and clients. Facebook IQ is able to not only provide precious information about possible customers to advertisers, but also is an invaluable source of information for the world. The knowledge about various demographics’ interests that is discovered simply by analyzing and compiling clicks, searches, posts, and more is astounding. Can’t wait to visit!

    Liked by 1 person

  2. Great post, Rohan! I appreciated the detailed history for a foundation as we head into our visit next week, but I am particularly intrigued by their revenue dilemma. Google has quietly been working on it’s “moonshots” to find a winning product, and I’m curious if Facebook would venture into these waters as total dependency on advertising is very risky. Last winter I was in NYC and went to a Facebook Demo of their VR Glasses – can’t wait to hear more about VR integration in your presentation!

    Liked by 1 person

  3. Wow. Great blog post! I remember people asking me back at FB IPO whether the stock was overpriced or not. My response was that “it all depends on if they can figure out the advertising model or not.” Looks like they have. I’m a bit less concerned about FB reliance on ad revenue, because what they’re really about is analytics. I suspect there will be many other way to monetize that data if they so choose.

    Liked by 1 person

  4. Awesome post, Rohan! I’ve been interested in Facebook’s management since watching “The Social Network,” and I think it’s fascinating to see how the company has grown since its inception. In the midst of being one of the world’s largest platforms, I think it’s very easy to forget that it’s still a company and that Mark Zuckerberg is only 33. Looking forward to your presentation and learning more about the company’s future!

    Liked by 1 person

  5. Loved this! Like Abby, I am also intrigued by their problem with lack of diversification in revenue sources. It makes sense that advertising plays such a huge role in generating revenue for these large web-based companies, but that also increases risk for them in having to compete against other giants (i.e. Google). I wonder what new avenues Facebook will pivot toward to address this problem. I also took a look at Margaret’s blog, Fountly, and have to say that it’s definitely worth checking out!

    Liked by 1 person

  6. I’m so excited for your presentation, Rohan, and for our visit to Facebook! It is clear that Facebook’s success in monetizing through advertising and ability to capture so much useful data has led to their dominance as a platform. I can’t wait to visit the legendary campus and learn a little more about their culture while we are there. Also, we are so lucky to get to meet with Margaret Gould Stewart! I’m a big fan of her TedTalk and can’t wait to learn from her!

    Liked by 1 person

  7. Awesome post Rohan!! I really enjoyed your presentation yesterday and this blog post does an awesome job diving deeper into Facebook’s ad based revenue model. It will be interesting to see how Facebook continues to grow as their competitors grow, and through which avenues they do that. Does Instagram and WhatsApp hold a lot of weight when comparing Facebook to Google? How about Oculus? Facebook’s value doesn’t necessarily have to be limited to the Facebook platform itself. Lastly, I really enjoyed the Facebook IQ images and the information gathered about users. It highlights the different components that make Facebook so great at what it does — ads.

    Liked by 1 person

  8. Nice post! That’s interesting how they aggregate and display user date for companies through Facebook IQ. One other thing I think is also worth mentioning about Facebook when it comes to advertising is their pricing control. I read a great newsletter a couple weeks ago that showed how despite Facebook’s ad impression growth decreasing, their price per ad growth has actually been increasing. For me, this speaks to the strength of their user base and how as super aggregator, there are very few other options for advertisers.

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