How Facebook Makes Money

What you do when waiting for the bus or avoiding work goes a long way to explaining a tectonic shift in business and media.

In such moments you are most likely checking Facebook. More of you will be doing that than tweeting, searching on Google, checking stock prices on Yahoo or reading articles like this. And that constant lure, a fix you can easily satisfy both on a phone and a desktop computer, explains why Facebook is pulling ahead of every other large technology company right now.

Your addiction is making Facebook astonishingly profitable. Put a little more kindly, your emotional and intellectual interactions on the social network are creating a great place for companies to advertise.

What this means in dollars and cents for Facebook can be seen in numbers contained in its first-quarter financial results, released on Wednesday. For the United States and Canada, Facebook pulled in $11.86 in advertising revenue per user in the first quarter. That’s what advertisers are willing to pay to catch your attention as you argue with your friends and relatives over Donald Trump or coo over baby pictures or both.

Facebook’s revenue was up over 50 percent from a year earlier, while its net income soared nearly 200 percent. Its stock leapt on Thursday as the wider market fell. Facebook’s blowout financial performance stood out because Apple, Twitter and Alphabet, Google’s parent company, all reported disappointing first-quarter numbers.

Facebook is doing well because it occupies a huge sweet spot in the connected world, perhaps an even bigger one than Google owns.

Google bests Facebook on certain numbers. It gets more visitors, some 32.3 billion in March, against 29.5 billion for Facebook, according toSimilarWeb. Google also has far more revenue, some $78 billion in the 12 months through the end of March, which dwarfs Facebook’s $20 billion for that period. Both companies get most of their revenue from advertising.

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But people apparently hang around on Facebook far longer. According to SimilarWeb, users spent just over 17 minutes on the social network on average in March, well ahead of the nine minutes for Google (these figures don’t accurately reflect how active people are on the sites, but you can still see the difference.)

Google has long enjoyed a big advantage in the battle for online advertising revenue because users are more likely to click on an ad for something they are searching for. But even though Facebook users are not usually on the network to buy something, the sticky way in which they engage once there makes it an attractive place to advertise.

Another advantage for Facebook is that its costs are lower than Google’s, which helps it make more money out of every dollar of revenue. In the 12 months through March, Facebook’s operating profit was equivalent to 37 percent of its revenue; at Google it was 26 percent. Facebook is in the enviable position of spending less to bring in revenue that is growing more quickly than Google’s.

Pundits made a big deal this week about how Facebook excelled as Apple stumbled. But there was a warning for Facebook in Apple’s results. Apple has relied heavily on one product — the iPhone — for much of its revenue, so when sales of the device slowed, there was little Apple could do to keep growing. Facebook is even more reliant on a single element: advertising revenue. If people spend markedly less time on Facebook — because an enticing new network comes along, for example — the company’s revenue growth could slow.

There is no such threat on the horizon. Until one develops, we will be on our phones helping Mark Zuckerberg make even more money.


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