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The Secret To How Facebook Makes Money

Posted by Nick O'Neill on January 19th, 2010 10:37 AM
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While most industry insiders have a firm grasp on

Facebook’s monetization models, most people still
don’t understand how Facebook makes money. For
those that still don’t know how Facebook makes
money, we thought we’d take the opportunity to
break down Facebook’s various revenue streams
including past and future streams of revenue. After
reading this guide, you should have a complete
understanding of how Facebook makes money.

Advertising Business
Facebook’s single most important revenue channel is advertising. The company has always been
ad supported and most likely will always be ad supported. While some have claimed that
Facebook will one day charge for access to the site, those rumors are completely false. Facebook
generates over half a billion in revenue each year, the vast majority of which comes from
advertising. So who is paying for advertising?

Self-Serve Facebook Advertising

The largest chunk of Facebook’s advertising revenue is the company’s
self-serve advertising platform. By visiting the following page you can
set up your own advertising campaign on Facebook. These
advertisements 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 Facebook’s self-serve
advertising platform is the granular targeting features.

Over the past few years Facebook has increased their targeting
capabilities, including the ability to limit advertising to metropolitan
areas as well as the following target variables: gender, age, network
(workplace, school, etc), profile keywords, relationship status, and more.

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The Secret To How Facebook Makes Money Page 2 of 15

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

We’ve written about a number of companies who have built services on top of Facebook’s Ads
API. To boil it down, the Facebook Ads API enables Facebook to reduce the amount of friction
large advertisers (those who spend more than $10,000 a day) have in posting new advertisements
and modify existing ones. According to numerous sources, Zynga, the developer behind the
largest games on Facebook (FarmVille, Café World, etc), is the largest purchaser of Facebook’s
self-serve ads.

Small businesses like doctors, lawyers, restaurants, and others are also responsible for a large
amount of Facebook’s revenue generated by the self-serve advertising platform. If you want to
learn more about Facebook’s 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 Business

• The 10 Laws Of Facebook Advertising No Marketer Can Afford To Ignore
• Facebook Launches Friends Of Connections Targeting For Ads
• 5 New Features In The Upgraded Facebook Ad Manager

Engagement Ads
In addition to Facebook’s self-serve advertising product,
Facebook also generates a substantial percentage of their
revenue through their “Engagement Ads” product.
Engagement Ads are Facebook’s solutions for large
brand advertisers. Facebook places all engagement ads
on the site’s homepage. Once a user logs in, they can
interact with advertisements (like to one pictured to the
right) which are placed on the right-hand side of the
homepage.

Facebook has been ramping up their efforts to recruit brand advertisers in a number of ways but
last September Facebook stepped up their efforts with the launch of Brand Lift. Brand Lift is
essentially a product which enables large brand to test the effectiveness of their advertising
campaigns almost immediately after their campaign is run. Facebook believes this increased level
of 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 Campaigns

• Facebook Tests New Direct Offer Engagement Ads
• Brand Lift: Facebook’s Answer To The Brand Advertising Conundrum
• Live Coverage Of The Brand Lift Announcement
• New Dirty Jobs Ad Highlights The Power Of Engagement Ads
• Facebook 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 ads
on the site. Recently, Facebook removed the advertisements internationally and it appears that
they could be completely phased out of the site by the end of the first quarter this year, according

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The Secret To How Facebook Makes Money Page 3 of 15

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

Another less discussed agreement is the one Facebook has with Microsoft over search. When
Microsoft invested $250 million in Facebook at a $15 billion valuation, part of the investment
included an agreement to integrate Microsoft’s search results into Facebook. The terms of the
agreement have never been public however we believe that Microsoft may be paying Facebook
beyond the terms of the initial agreement. Unfortunately for estimate purposes we have to assume
that 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 those
less familiar with the gift shop, it’s 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 lucrative
business, generating upwards of $100 million last year. Facebook has been slowly opening up the
gift shop to third-party developers in order to increase the variety of products sold through the
shop.

In August of last year, Facebook began opening the gift shop to non-profits and by September it
was opened to a number of other developers. During the ongoing Haiti crisis, Causes has been
offering users the opportunity to purchase gifts which directly benefit victims of the tragedy.
While there are few public estimates of Facebook’s gift shop revenue, we’d expect Facebook to
generate upwards of $150 million from their gift shop this year.

Facebook Credits
That last way Facebook generates revenue is through their Facebook Credits program. Initially
used 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 and
other large social games, to integrate Facebook’s Credits product
directly into their applications.

Facebook will in turn take a large percentage of all virtual goods

sold through applications. As we wrote in our 2009 Facebook
Recap, Facebook has been testing a number of ways to integrate
Credits. In addition to testing out alternative payments for Credits
for those users without access to credit cards, Facebook has been
testing 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 year’s
f8 developer conference being held in San Francisco this April. While it will only begin rolling
out later this year, we expect Facebook to generate $150 million in revenue from their Credits
platform this year. This could expand up to a few hundred million in a short period of time as the
volume of virtual goods sold on Facebook grows beyond $1 billion a year.

Conclusion
Facebook makes money a number of ways however advertising is the company’s revenue channel.
With self-serve ads becoming a booming business for Facebook and with the growth of
Engagement 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 through
further education about the company’s advertising products, we’d expect Facebook to stay on
track to almost double previously quoted estimates of last year’s revenue: $550 million.

While many users still wrongly think that Facebook will charge users because they aren’t 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 up Vote down

mark lehman · 52 weeks ago

That's why I love AdBlock-I never see any ads.

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Reply
-1 Vote up Vote 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 become
sustainable.

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

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

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0 Vote up Vote down

Bob · 52 weeks ago

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

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The Secret To How Facebook Makes Money Page 7 of 15

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0 Vote up Vote down

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.

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Reply
+1 Vote up Vote down

Brian Hanson · 51 weeks ago

Yeah no doubt! No Script on Firefox does the same thing. No ads, and I block ALL the nonsense
FB applications.
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0 Vote up Vote down

Rajiv · 33 weeks ago

I have heard that, just by logging into the facebook generates income to the Facebook, without
clicking on the Ads. Is it true?
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Reply
+1 Vote up Vote down

Dave · 25 weeks ago

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

Aston · 21 weeks ago

http://www.allfacebook.com/facebook-makes-money-2010-01 1/21/2011
The Secret To How Facebook Makes Money Page 8 of 15

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 the
doors. Things are going well when a salesman sees the open door and walks right in. He seems to
already know a great deal about you and each of your guests. This delights some - as they find a
good measure of things they didn't know they needed, while this inside knowledge greatly disturbs
others. People begin to leave.
Report
Reply
-1 Vote up Vote down

kelvin kimaro · 20 weeks ago

well i would like to work with facebook on creativity and also on my local area designing a
webpage for swahili version so that it can enhance the user of east africa and central who speaks
and write swahili(mind you swahili is the 7th ever speakean and currently used language in the
world 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 .

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Reply
1 reply · active less than 1 minute ago
0 Vote up Vote down

vinay · 17 weeks ago

hi......kelvin kimaro
i want to ask & share something with u
u can catch me on my fb account
my id is vinay8088@gmail.com
add me as friend there
m waiting.............
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0 Vote up Vote down

Jack · 4 weeks ago

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

sharyar haji · 2 weeks ago

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

http://www.allfacebook.com/facebook-makes-money-2010-01 1/21/2011
The Secret To How Facebook Makes Money Page 9 of 15

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0 Vote up Vote down

multipass · 1 week ago

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

mojtaba · 1 week ago

ok
we underestand that how facebook make money with members
but we want to know what facebook doing?
facebook just take money and member work for him
and when he sell facebook he sell members that trust to facebook
if he like members just alot of her money give to members with random
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0 Vote up Vote down

myopinion · 4 days ago

More and more companies many of them producing bullshit products compete for customers and
spend more and more money for advertising which the overwhelming majority of users especially
in the internet just ignoer or even never see...its like a pyramid scheme. A lot of people throwing a
lot 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 or
the credit cards debt bubble.
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