Every day, more than two billion people use Facebook, Instagram, WhatsApp or Messenger. That’s more than a quarter of the world’s population. And despite a rising number of privacy scandals and public backlash, Facebook is still growing. Total revenue for 2018 was $55.8 billion, up 37% from 2017.
But with all of those users paying nothing to use these apps, how does Facebook make money? Is the company selling your personal information to companies, politicians and even foreign governments? It’s actually much simpler than that.
How do you sustain a business model in which users don’t pay for your service? Senator, we run ads. Throughout its entire history, Facebook has relied on advertising for revenue here and there. The company has experimented with other types of revenue, such as hardware with its Oculus VR headsets and its new Portal speakers.
But really all of that is chump change compared to the revenue that it generates from advertising. About 99% of Facebook revenue came from advertising in 2018. There are about 7 million advertisers on Facebook and the ads that you see aren’t like a traditional TV commercial or newspaper ad that looks the same to everyone. Facebook and its entire family of apps use a type of ad that’s much more sophisticated and much more valuable.
When they first started out these were simple display ads on the company’s website. But since then, they have evolved into very targeted ads where an advertiser can pick the kind of audience that they want to reach. I believe that started happening after Sheryl Sandberg joined the company and from her experience with advertisers on Google were looking for.
And she could provide that to them. And probably more than that using the Facebook data that everyone volunteers. Facebook ads are targeted, which means each ad that you see was specifically for you. Companies only want to pay to show ads to people that are likely to buy its products.
Facebook provides advertisers with a near guarantee that they won’t waste their time or money, an assurance that a prom dress ad will be seen by a high school student and not a retiree, or that an ad from a new burger joint will be seen by a meat eater and not a vegan.
As a result of this targeting, corporations can save money in the long run and drive more sales for advertisers who simply want to reach as many people as possible. There’s no better way to spend money than Facebook. The other reason that advertisers use Facebook is because of the targeting that the company offers.
The company has a ton of data on its users and that’s very valuable to advertisers, especially those who maybe on a budget and want to make sure that they’re reaching users who could realistically turn into customers. This has led television and print advertising to decline.
This year, it is estimated that digital advertising will surpass traditional advertising for the first time, capturing more than half of all ad dollars spent. But how does Facebook know exactly who you are and what you’re interested in? Many paranoid users have alleged the tech giant is listening in on your conversations through the mic on your phone.
This isn’t true, although Facebook has filed patents that suggest it could eventually pick up audio signals from your TV to give you better ads. It’s also filed a patent that can interpret the expression on a user’s face as they read their news feed. The company claims it will not use these patents, but clearly it continues to focus on ways to gather even more data on its users.
At the moment, it can gather almost as much information just by what you do on its family of apps. Of course, you input basic info like age, location and education on your profile, but you’re also liking pages, joining groups, RSVP to events and sharing your location.
Facebook is able to package all this information and actually harvest it to try to figure out what kind of person you are and perhaps what you are most interested in. Or better yet, what you are looking to find and then sell that information to advertisers who are trying to find you. Facebook can also get data on you from other websites that you visit through what’s known as the Facebook Pixel.
Based on this kaleidoscope of details, Facebook forms an advertising profile for each user, putting them into certain groups that advertisers can pick and choose from when buying ads on Facebook. Corporations can target ads based on your interests, what type of phone you have, your political leaning ethnicity and even income level.
And with enough information, these ads can blend into your feed so well that you might not even recognize it as an ad. But all of these details are still just Facebook’s best guess. Not an exact science. The company has found itself in hot water on more than one occasion for heavy handedness in its ad targeting tools.
Pregnant women who have had miscarriages have criticized the company for continuing the show them baby product ads. A ProPublica investigation found that Facebook had several anti-Semitic advertising categories, including Jew-hater.
The Trump administration recently charged Facebook with discrimination in its advertising practices for housing, which until recently allowed employers and landlords to limit audiences based on race, ethnicity or gender. The company has pledged to reform its system to prevent this type of discrimination. Just as ads can influence consumers to buy products, they can also influence voting behavior.
In the Cambridge Analytics scandal, 87 million Facebook users had their data stolen to help influence the 2016 U.S. presidential election. We didn’t take a broad enough view of our responsibility, and that was a big mistake. So what can you do if you don’t want Facebook to show you personalized, targeted ads? If you’re trying to avoid ads on Facebook, that’s pretty much impossible.
But there are a few things that you can do to make it harder for Facebook to target you. Users can adjust the categories that Facebook has determined you’re interested in by going into your settings. But it’s nearly impossible to opt out altogether.
Even if you delete Facebook, which has become increasingly popular, the company still has your data if you use Instagram, WhatsApp or Messenger. Instagram just past 500 million daily active users on stories, a feature that is found on every app in the Facebook family that allows user generated photos and videos to take over your entire phone screen.
Recently, Facebook has started to change its advertising strategy by placing an emphasis on its stories product. Facebook is starting to sell ads to advertisers and brands in this same format. It is hoping to ramp that up in a way that will eventually generate more revenue than the advertising that they get from news feeds.
In its latest earnings call, the company announced that two million advertisers are using stories to reach customers. So despite data breaches and lawsuits, Facebook continues to lure advertisers. And while user growth has slowed, it is still growing.
But there are things that could affect the outlook for Facebook’s advertising business. Many people have become concerned about too much use of social media. Salesforce CEO Marc Benioff recently compared using Facebook to having a nicotine addiction.
Apple introduced Screen Time to help users crack down on how much time they’re spending on social media and their phones. We are very concerned about regulation. The EU has put into place some pretty onerous regulations for companies that are doing business on the internet, and I don’t think it’s beyond imagining that that could occur in other places, especially the United States.
Another factor that Facebook has talked about hurting its advertising revenue is of its own making. This is a new feature called Clear History that the company said is going to roll out to users in 2019. Clear history essentially gives users the ability to scrub the data that Facebook has on them.
The less data that Facebook has hurts the ability of the company to target ads to you with precision. Mark Zuckerberg recently announced a new vision for the company where he outlined building a privacy-focused messaging and social networking platform, raising questions for investors on how targeted advertising products will work if users aren’t posting publicly.
Three weeks after that announcement, a mass shooter used Facebook Live to broadcast his attack on two mosques in New Zealand. Facebook had to remove 1.5 million copies of the video off its platform. In spite of all of these events that seem like it would affect Facebook business, it keeps growing.
I don’t think it looks like anybody who actually uses his platform cares in the least about what they’re disclosing to Facebook because they keep doing it. That’s the crazy thing. They just keep doing it.