How does Facebook actually earn money

Facebook Inc. (FB) primarily makes money by selling advertising space on its various social media platforms. Those platforms include websites and mobile applications that allow users the ability to connect and communicate with family and friends. The company's sites and apps include social networking site Facebook, photo- and video-sharing app Instagram, and messaging apps Messenger and WhatsApp. Facebook also provides an ecosystem that allows users to connect through its Oculus virtual reality products.

Facebook competes with other companies that sell advertising to marketers, as well as companies that provide platforms for communicating and sharing content among users’ various social networks. Major competitors include Apple Inc. (AAPL), Alphabet Inc.’s (GOOGL) Google and YouTube, Tencent Music Entertainment Group (TME), and Amazon.com (AMZN).

Facebook's Financials

Facebook posted a net income of $22.1 billion on $55.8 in total revenue in 2018 for a net profit margin of 39.6%. As much as 46.1% or $25.72 billion in revenue came from the U.S. and Canada. The other 53.9% came from other regions across the globe.

Growth in both net income and revenue slowed considerably in 2018 compared to the year earlier. Net income grew by 39% in 2018, down from the 56% growth in 2017. Revenue growth slowed to 37% in 2018 from 47% in 2017.

The slowdown in revenue growth appears to have continued throughout the first three quarters of 2019, while net income declined. For the nine-month period ending on September 30, Facebook posted a 27% year-over-year (YOY) increase in revenue. Meanwhile, the company posted a 27% decline in net income for that same period compared to a year ago.

Facebook breaks down its revenue into two separate segments: Advertising and Payments and other fees. The company does not do a separate breakdown for net income.

Facebook's Business Segments

Facebook breaks down its revenue, but not income, into two main segments, as outlined here.

Advertising

Facebook generates substantially all of its revenue from selling advertising to marketers. Ads are displayed on Facebook's main social-networking site, as well as Instagram, Messenger, and other third-party affiliated websites or mobile applications. Marketers pay for ads based on the number of impressions delivered or the number of actions, such as clicks, undertaken by users. 

Facebook posted $55 billion in advertising revenue in 2018, comprising 98.5% of the company's total revenue. Ad revenue grew by 38% throughout 2018 compared to 49% throughout 2017. Through the first three quarters of 2019, ad revenue grew 27% YOY.

Payments and Other Fees

Revenue from payments is derived from the net fee Facebook receives from developers using its payment infrastructure. The other fees are comprised of revenue from the delivery of consumer hardware devices and various other sources.

Facebook posted $825 million in revenue from payments and other fees in 2018, representing the remaining 1.5% of total revenue for the year. Revenue for the segment grew by 16% in 2018, a significant improvement from a 6% decline in 2017. Through the first three quarters of 2019, revenue from payments and other fees grew by 26%.

Facebook's Recent Developments

Facebook has been forced to defend its reputation in recent years as it's faced a growing backlash over fake news and data-privacy issues. In April 2017, the company issued a case study confirming that several groups had attempted to use its social-networking site to influence the 2016 presidential election. In March 2018, news broke that political consulting firm Cambridge Analytica had illegitimately accessed millions of users' data and used the data to influence voters to support presidential candidate Donald Trump during his campaign.

The company currently is facing four separate antitrust investigations, including one by the U.S. Department of Justice, one by the Federal Trade Commission (FTC), one by the state attorney generals of eight different U.S. states, and one by the U.S. Department of Justice (DOJ).

Facebook also faces resistance from global regulators over its proposal to launch its own cryptocurrency, Libra. The launch of Libra would make Facebook not just a social media and tech giant, but could quickly transform it into a global player in banking and financial services. Considering the other issues Facebook is currently facing with regulators, it wouldn't be surprising if next year's planned launch of Libra is delayed.

Key Takeaways

  • Facebook sells ads on social media websites and mobile applications.
  • Ad sales are the primary source of Facebook's revenue.
  • Facebook is investing heavily to develop new products, including the new Libra cryptocurrency, artificial intelligence (AI), and augmented reality.
  • Facebook is being investigated by four separate groups of U.S. regulators for antitrust violations.
  • The company's Libra cryptocurrency is facing stiff resistance from global central banks and other regulators.