How Does Facebook Make Money?
Facebook is the world's largest social network, with a reported 800 million users. But the service is free to users, in that it doesn't charge a sign-up or monthly fee.
So, many wonder: How does Facebook make money?
Recently a hoax swept across Facebook and other social networks that Facebook was about to start charging members. The viral hoax spread like wildfire that users would soon be forced to pay $9.99 per month to use Facebook.
"IT IS OFFICIAL," the hoax said. "IT WAS EVEN ON THE NEWS. FACEBOOK WILL START CHARGING. DUE TO THE PROFILE CHANGES. IF YOU COPY THIS ON YOUR WALL YOUR ICON WILL TURN BLUE AND FACEBOOK WILL BE FREE FOR YOU. PLEASE PASS THIS MESSAGE ON, IF NOT YOUR ACCOUNT WILL BE DELETED IF YOU DO NOT PAY."
Of course, Facebook quickly reminded users, "It's free and always will be." It was just that -- a hoax.
Facebook seems to have little trouble making money. In fact, the only way that might change is if Facebook actually charged users. Currently, the more users Facebook has, the more revenue Facebook rakes in -- so it's likely that the company's pledge that it's "free and always will be" is on the proverbial money.
How Facebook makes money while allowing users on its site for free is through three sources:
1) Advertising
2) Applications
3) Virtual Goods
Facebook has become proficient at making money, to say the least. According to a report, Facebook will generate $4.27 billion in revenue this year -- double what the company made in 2010. Of that $4.27 billion, some $3.8 billion will come from advertising, according to New York-based EMarketer.
Through ads that appear on Facebook pages, for example, companies can target audiences specific to their products or services. That's why Facebook's users are more valuable to the company at no charge than they might be paying membership fees. Companies that charge membership fees, for instance, can't so easily sell user information to advertisers.
But with Facebook, for instance, if a user comments they like Wal-Mart, ads for Wal-Mart are likely to start showing up on their page and their friend's pages -- especially those who have "liked" the comment.
Facebook is also seeing rapid growth in revenue for applications, including games like "Farmville" from Zynga. Facebook takes a "rental fee" from revenue generated by games and other external applications its members use. In 2011, for instance, Facebook should make $470 million from Facebook Credits, the virtual-currency program that lets users buy items in games, according to EMarketer. That's more than triple the $140 million Facebook made from applications last year.
Facebook Credits is a revenue source that's expected to grow more rapidly grow than advertising revenue for the social network in the next several years.
Finally, the third way Facebook makes money is by selling virtual goods. This is the smallest piece of the revenue pie for Facebook, but it's still substantial. Whenever a Facebook user sends a "virtual gift," Facebook gets a portion of the gift revenue. The average cost of a virtual gift sent to friends is only $1, but Facebook's portion of the revenue can add up quickly with some 800 million users.
So while Facebook doesn't charge users, and claims it never will, the company has become proficient at making money. EMarketer estimates that Facebook will generate nearly $6 billion in ad revenue alone in 2012.
