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Facebook business model: A critical look

  • With over 1.6 billion daily active users (DAUs) and 2.28 billion family daily active people (DAP) and a whopping $ 70.6 billion in revenue (2019 Annual Report), Facebook is by far the most used and most profitable social media platform in the world way above Twitter that has 153 million people on a daily basis and  $3.45 billion in revenue for the year ending 2019,  and Snapchat which boasted  218 million daily users and $1.7 million in revenue for the year ending 2019. Family metrics here represent the estimates of the underlying number of unique people using one or more of the Facebook family of products, namely, Facebook, Instagram, Messenger and WhatsApp. Facebook is one of these success stories that any entrepreneur is dreaming about, but only a few lucky ones can achieve even a fraction of it in such a short span of time. Is it any wonder that Facebook is the most scrutinize social media today about how they handle our data to make such an impact that is unmatched? In this article, therefore, we are going to look at the Facebook business model and how it’s paying excellently well that makes many to believe that the company will never change it to anything in the world. Perhaps, in the end, we will learn a thing or two that will benefit our business and help us better understand what we are dealing with.

    A little about Facebook and its founder

    Facebook is an American company and the world’s largest social network platform. The name Facebook is used to mean either Facebook as a product or Facebook, Inc – a group of Facebook products that consist of Facebook; the social networking site, Instagram; the media sharing platform, messenger; the mobile messaging app which previously was part of Facebook but now is a separate app, WhatsApp; the largest instant messaging client. The company does not differentiate the products in the reporting of its finances and other business activities in its annual reporting.

    It was founded in 2004 by a Harvard computer science student, Mack Zuckerberg, with his Harvard fellow students, Dustin Moskovitz, Andrew McCollum, Eduardo Saverin and Chris Hughes. It was originally aimed to enable Harvard and some selected colleges campuses students to connect with each other.

    The primary objective of Facebook is to connect people to share, discover and communicate with each other. Facebook is a free service since its inception until now. And we have not seen any evidence to assume that Facebook will charge its over 2 billion users ever.

    Users provide all the contents in the form of text and other media like images and videos, while Facebook provides the platform and bear the infrastructure, operation, maintenance, and administration cost.

    In the beginning, Facebook used to rent a server to host its website at the cost of a little over $ 80, but now, it owns some of the best data centres that you can find anywhere in the world. As of 2018, the social networking site has 12 data centres, with 9 in the US and the rest reside in different locations across the globe.

    Facebook business model overview

    Business model, as we all might have known it, is a master plan and a guide that state how a company or a business will and continue to make a profit. It also defines the product or the service that will be offered to some clear targeted customers. A business model also gives anticipated expenses that will be accumulated to make and sell a product. In addition, it states the strategic partners a business need in order to achieve its objectives. In short, a business model is simply a road map to a successful business when gotten right.

    Now that we have given a little background of what a business model is, it brings us to the question, what is the Facebook business model? While to answer this question, let’s say it as Mark Zuckerberg would say, Facebook helps users connect with friends and families around the world. By providing the platform which is entirely free of charge. You and I, enjoy Facebook without paying a dime, in fact, more than 2 billion people worldwide get this service for free. As Facebook is a free service that attracts such a massive unimaginable crowd of people from all demography – young, old, men, women, elite and what have we, naturally, so many people will be curious as to how Facebook is able to maintain and continue to expand at the rate that it is today?

    All thanks to this amazing business model that allows Facebook to get such mind-boggling ads revenue! Through the ads’ revenue, Facebook manages to become the top social media company in the world in terms of the number of users and revenue. They achieve this feat through continual improvement and innovation which their massive spending on research and development brings about.

    Facebook provides the platform, maintains the data centres, bear all operational cost, spends huge in research and development just to help us connect with our family and friends? The truth is, I see our relationship with Facebook as that of collaboration. We collaborate with Facebook to help Facebook make money, and we get to satisfy our insatiable human appetite for information, well, most especially, if this information is mostly gossip and show off.  I am not sure if we sign up for this collaboration. Well, even if we did, I am sure most of us do not understand how Facebook is using our data.

    How does this collaboration work? You see, Facebook, as mentioned earlier, provides the platform and all cost that comes with having a 24/7 technology infrastructure service. We, the Facebook users provide all the contents that make people to be addicted and stay clue on the platform because Facebook is an attention-based platform, and human by nature likes to attract attention to themselves and show all the blessings that we have and those that we don’t have. To say Facebook is addictive is to say the least because I personally know so many people that quit Facebook and vow never to return to it, but only to come back again after a while. How addictive!

    Facebook is like a giant data house, that has over 2 million people’s very personal information stored in their database up for grab for the advertisers and marketers to use in targeted ads. And that is where 98% of Facebook revenue comes from. Indeed, the Facebook business model is the simplest and most wise that is out there today.

    Not all Facebook users are valued the same in terms of revenue, though. The average revenue per user (ARPU) based on 2019 fourth-quarter report from the US and Canada is worth $ 41.41, for European users is worth $ 13.21 per user, Asian Pacific users are worth $ 3.57 per user, and the rest of the world is $ 2.48 per user! Check this for more about Facebook ARPU

    After much rumbling and beating around the bush, let’s put everything in the nine building blocks of business model canvas to get a better perspective of this fascinating business model!

    The customer segments

    Facebook services three types of customers, the users - its primary customers, the advertisers, which includes marketers and lastly, the developers.

    Users are individuals that use Facebook to connect with their friends and families all over the globe. In contrast, advertisers and marketers use Facebook to advertise their products and services to some targeted users. And on the other hand, Facebook developers are third-party developers that leverage a set of tools, services and products provided by Facebook to create unique applications that access data from Facebook. 

    Important to note, the most important of all Facebook features is the News Feed. This News Feed displays an algorithmically ranked series of stories and advertisements individualized for each person. All most all the ads revenue comes from the News Feed.

    Customer relationship

    Facebook has the most accessible customer service because it is a self-service platform where the users and the advertisers self-taught themselves how to navigate and use the site with almost zero help from the company. It also has a global sales force where every customer from anywhere in the world can be attended to if need be.

    Who are Facebook strategic partners?

    Strategic partners are those partners in a business that have something that can help a business deliver its products or services to the final consumers or help to reach more and achieve more than one could have otherwise done by themselves. These partners help a business achieve its objective more efficiently. Every business must identify those partners. In the case of Facebook, content creators - the users, are the number one Facebook strategic partners. Without sharing and posting our contents on the platform, Facebook is an empty space. Another key partner of Facebook are third-party developers that help to enrich the site and its experiences. Read more about Facebook partners here.

    Revenue stream

    All most all Facebook revenue comes from the advertisement as mentioned earlier, only a fraction of about less than 2 per cent comes from payment by third-party developers and Oculus – Facebook artificial intelligent device (AI). We can, therefore, conclude that Facebook is what it is today because of advertisement revenue!

    Channel

    Channels are the paths through which customers receive final product or services from a business or a manufacturer. It is very important for a business to identify its channel before even starting operation. As for Facebook, the channels to reach its customers are through what we all might have known – the Internet, the Facebook websites and its mobile apps, and finally, the third-party developer tools and APIs

    Key activities and resources

    Facebook key activities include the continuous platform development and maintenance, data centre operation management and data security, establishing partnership and developing new offerings and strategic acquisition, among other things.

    This segment is especially important as it is the backbone of the platform. This is where all the technical know-how is practised, the Facebook technician like engineers; that maintain and ensure the data centres are working, the business strategies and all are found here. As a matter of fact, Facebook technology talent, one of the most critical resources of Facebook, is in this category.

    Value proposition

    Value proposition in business is the value that a company creates or gives to its customers such that when a customer buys a product or receives a service that a company offers he/she gets in return some form of value equal to or more than the resources spent. Value could be anything from getting the satisfaction of some needs to exchange of physical things. Customers need to feel satisfied before a value is said to be created!

    Facebook value proposition, therefore, include global connectivity, sharing of ideas, global communication, brand publishing, business expansion and easy accessibility

    Cost structure

    The Facebook operational cost goes to mainly research and development, which takes about 20 per cent of the entire revenue. Marketing and advertisement is the next big operational cost for Facebook. The next and the obvious one is the platform maintenance, data maintenance and protection, content acquisition cost as well as customer service.

    Conclusion

    We have learnt that Facebook is the largest social networking site that existed yet and has recorded over $ 70 billion in revenue in the last quarter of 2019. And that more than 98% of this revenue comes from advertisement. Facebook has more than 2 billion active users – if Facebook were a country, it would be the most populous!

    Let me hear, in the comment section below, what you think about the Facebook business model. Until then, happy reading!

    Some References

    Facebook Reports Fourth Quarter and Full Year 2019 Results. Retrieved from

    FourWeekMBA (nd). How Does Facebook Make Money? Facebook Business Model In A Nutshell.

    Leber J. (16, May 2012). The Biggest Cost of Facebook’s Growth.

    Miller R. (19, March 2018). Facebook accelerates its data centre expansion. Retrieved from:

    Sherman L. (16 April, 2018). Why Facebook Will Never Change Its Business Model. Retrieved from

    Statista (nd) Number of daily active Snapchat users from 1st quarter 2014 to 2nd quarter 2020

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