Internet Weekly: How does Facebook make money: advertising, commissions and virtual currency

If Facebook could be considered a country, it would be the third most populous country in the world.

It goes without saying that this sentence is widely circulated on the Internet. The point is that what makes Facebook bear this title is the more than 800 million users, and this huge user base is not something that any Internet company can have. According to the Wall Street Journal's forecast, Facebook's "IPO pricing range of $28 to $35 per share will enable it to raise $77 billion to $96 billion, making it the largest company ever to go public in the United States." There are also reports that some analysts suggest that its stock price will rise to as high as $46. Many Internet people have also predicted that a valuation of $10 million is not high for Facebook. How Facebook has obtained such a high valuation and how it uses 800 million users to make money are the most concerned issues for all Internet companies.

Precision advertising marketing

The ways to make money on the Internet are nothing more than advertising, games, and e-commerce. This has become a consensus among all practitioners. Facebook's advertising revenue is also the largest source of income at present. According to data from market research organization eMarketer, Facebook's advertising revenue in 2011 was 3.1 billion US dollars, and it is expected to reach 5 billion US dollars this year.

Such a number is not something that any company can achieve. If we talk about Facebook's greatest success, then precision advertising must be the first. If an advertiser makes the following request to Facebook: I want to target people who are: male, 35 years old, living in California, have a bachelor's degree or above, married and working, it will be very fast for Facebook to screen out such a user group. In this way, advertisers avoid targeting invalid users and improve advertising efficiency.

According to a report by Marin, a US research institute, the CPC (the price paid by advertisers for each click on an ad) of search ads in the fourth quarter of last year was an average of $0.85, while Facebook only needed $0.23. This means that targeted advertising has a higher return on investment than keyword advertising. After all, compared with the personal resume or interest information provided by users, their behavior can more accurately show the potential of users to convert into customers, and Facebook can also transform the general casting of a net in the traditional advertising model into a precise customer search.

This targeting system can not only improve Facebook's advertising return on investment, thereby attracting new advertisers, but also encourage existing advertisers to increase their investment in order to compete for market share. In addition, another interesting phenomenon is that the higher the return on investment, the more likely it is to be liked by small and medium-sized business owners, because they do not have to consider brand reputation, influence, etc. like large enterprises. The ideas of small and medium-sized enterprises are more direct and simple. They only need to obtain click-through rates and the resulting benefits through Facebook, without worrying about whether their ads are placed in the wrong place and causing poor user experience or ridicule. Facebook's huge user base just meets all the requirements of small and medium-sized enterprises. Therefore, there is evidence of the widespread use of Facebook by small and medium-sized enterprises. Its COO Sheryl Sandberg claimed in December 2011 that Facebook already has 2.3 million advertisers (9 million businesses are doing marketing on it, of course not every business is paid for advertising). But we only need to divide it simply to calculate that Facebook's advertisers contribute an average of more than $1,600 in advertising. This shows that Facebook's business foundation is extremely solid.

It can be seen that targeted advertising has higher click-through rate and conversion rate, which not only allows Facebook to charge advertisers higher CPC. Hong Bo, a well-known Internet figure, once said in public: Facebook's high degree of abstraction of people and social relations makes it the first company in history to take people as its object and digital social relations as its core. Any existing business may have a chemical reaction with social relations. This chemical reaction is not as simple as targeted advertising. Social advertising has huge potential, and it is just a small test at present.

Moreover, Facebook's social advantage is not limited to advertising. Applications, games, corporate marketing, customer relationship management, etc. all rely on Facebook's already very solid Social Graph. The potential explosion requires order and time. As time goes by, Facebook's revenue will also rise accordingly.

Virtual currency services

Facebook's virtual currency service was launched in April 2010. Since its launch, it has been determined that this business will account for one-third of Facebook's revenue. At the end of last year, Facebook once again upgraded this business, including solving a known payment flow problem, additional payment options for international markets, and restrictions on transferring virtual currency to other accounts without pre-authorization.

Data from Facebook itself also shows that in 2011, nearly 16 billion Facebook virtual currencies were issued and spent; industry insiders predict that by 2012, Facebook's spending on virtual goods, digital products and other products will rise to 40 billion. The 2009-2011 virtual currency revenue report from Facebook also shows that in 2012, the growth rate is 300%, slightly lower than in previous years, and Facebook's currency in circulation will quickly reach 47 billion. If there are 7 billion unused balances in consumer accounts at the end of the year, then 40 billion should be spent on social games, social entertainment and new invention applications. Based on a 10 cent profit per virtual currency, the total revenue generated by Facebook's virtual currency market in 2012 is nearly 4 billion US dollars.

Such an amount is not exaggerated at all. Analyzing the important conditions and objective commercial factors for its feasibility, we will find that there are many conditions supporting the development of Facebook's virtual currency business.

First, Facebook saw the opportunity and its inherent contribution to the network, and will use its strong market influence to introduce the currency to merchants and consumers at the same time. Virtual currency is new and its prospects are currently immeasurable. If many people do not understand it, where to get it, what to use it for, and why it is important, such market efficiency may enable mainstream market channels: TV, radio, media, etc., just to spread the news: the huge value of Facebook virtual currency is deeply rooted in everyone's life.

Secondly, the help from the retail industry. With the gradual development of Facebook's virtual currency business, iTunes gift cards will face more severe challenges because of the urgent needs of young consumers. They no longer need only iTunes cards, but more birthday cards and holiday cards. The diversity of applications and built-in social interactions have created a huge demand for entertainment for the next generation. Hundreds of big brands and thousands of small brands are also paying more and more attention to using virtual currency as a tool to stimulate consumption, and even conducting low-cost and high-yield marketing. Merchants will also encourage consumers to reward virtual currency after shopping. Therefore, online advertising content is becoming more and more colorful, and the content and value of virtual currency are constantly changing.

Thirdly, the growth of social entertainment in scale and influence will also bring better impact to virtual currency services. Every year, a large number of TV dramas and live broadcasts will be launched on the Internet, and Facebook is naturally one of the platforms that businesses attach the most importance to. If each program obtains 30-100 virtual currencies, it will also be immeasurable for the development of Facebook. It is reported that 89% of the best pages on Facebook today are classified as movies, music, sports or personal videos, and fans still have this continuous demand, hoping that more and newer pages of this kind will appear on Facebook. So. Virtual currency will also be used more and more frequently by Facebook users in 2012. And social games will continue to grow based on new games and new players. Take Zynga as an example. Every transaction of it will be generated from the Facebook social network platform, so the income it generates in the virtual currency market is naturally immeasurable.

As a global trend, users do not need to worry about exchange rates or floating currency values ​​when using Facebook's virtual currency. Facebook provides seamless currency conversion for 47 currencies, and the number of currencies is still increasing. It can be seen that both merchants and customers want this ecosystem to remain active. Therefore, it is not difficult for Facebook to achieve a revenue of 4 billion, and ignoring it means losing a lot of market opportunities.

Collect commission from developers

Long before Facebook announced its developer forum plan, industry insiders predicted that its next plan would be to open a platform like Apple and make money from developers. Regardless of Apple, let's take Taobao as an example: Taobao.com (Weibo) does not charge for opening a store, but if you want to become a trustworthy merchant, want to enter Taobao Mall, or want to be ranked higher in Taobao search and get advanced services, you need to pay a fee. The big merchants on Taobao are very willing to pay this money because the Taobao platform can make them more money. The same is true for Facebook.

With a huge user base, Facebook is now only a platform, not an application. It opens up all the data that can be opened, spares no effort to cultivate app developers, and creates the best way for app developers to make money. Facebook is a huge online store, and app developers are merchants who rent stores for free, selling their own toys and attracting users to play. App developers can do a series of activities such as online recruitment, air ticket booking, e-commerce, product promotion, etc., but what Facebook does is very simple. It just launches value-added services for app merchants. Do you want to be pinned to the top? Do you want to get a better promotion position? Do you want to know who will promote your product to the best effect? ​​Facebook can do all this for you, and all the merchants have to do is pay Facebook. At this time, the profits go into Facebook's pocket in large quantities. This is, and is the real brilliance of Facebook.

The most intuitive example is that in October last year, Facebook provided developers with a viral software promotion channel. If a developer wants to promote its local application, Facebook will notify potential users to buy the software in the app store. Facebook has stipulated that all games on the company's platform must use Facebook Credits virtual currency, and Facebook will charge a 30% commission. At the same time, industry insiders who pay attention to games will find that almost everyone is paying attention to social games, and most of them are based on Facebook.

As early as last August, developers from more than 190 countries had developed games and applications for Facebook. At that time, Google, which had only 10 developers, had formulated a promotional policy for transaction commissions on the game platform in order to attract users. During the promotion period, Google only charged 5% commission for transactions on the game platform. After the promotion period, the fee will be much lower than Facebook's 30%. It can be seen that Facebook's platform not only affects the choices of developers and users, but also causes huge disputes among peers.

Mobile Internet is gaining momentum

According to statistics at the end of 2011, the number of Facebook users worldwide has reached 845 million, half of whom are regular users, and 40% access the Internet through mobile devices. According to a research report released by market research company comScore, Facebook traffic from mobile devices is now higher than traffic from computers. According to the latest report released by telecommunications research company Strand Consult, people are using Facebook to quickly send text messages, thereby dividing the profits of telecommunications operators. It can be seen that Facebook can appear anywhere users want.

Although Facebook is still a little weak in the field of mobile Internet, its greatest wisdom lies in its ability to grasp the key - core technology, which is similar to Steve Jobs' Apple.

Comparing the early competition between Facebook and MySpace, we can find that MySpace defines itself as a place for online social interaction, while Facebook defines itself as a high-tech enterprise that provides technical services for online social interaction to netizens. In its short company history, it has continuously created leading technologies. These patents have brought great advantages to Facebook in later competition, and competitors have to pay patent royalties to use these technologies.

On June 13, 2009, Facebook developed an Internet access function that connects to smartphones, allowing users to log in to Facebook through their phones. On February 23, 2010, Facebook's News Feeds was granted a series of patents, which are functional linking technologies that allow multiple users to participate in the same activity at the same time.

On November 15, 2010, Facebook launched the new "Facebook Messages" service, which integrates multiple SMS and email functions and can be set up for privacy. It is called the "Gmail killer". In February 2011, Facebook developed a calendar function. Since April 2011, Facebook users can hear each other's live voices through Facebook Chat and SMS functions. On July 6, 2011, Facebook partnered with Skype to launch a one-to-one video phone service.

Then, during the IPO period, Facebook also launched its own app center. This new app center is likely to provide Facebook with a new form of advertising: this advertising will be directly linked to the user's app download and installation behavior. In addition, this app center is also conducive to the development of another business of Facebook: payment. The growth of all these businesses is accompanied by the promotion of Facebook's strong user base. Once its mobile client business layout is completed, its future value will still be immeasurable.

Apart from the above, Facebook, which already has its own payment system and accurate database, is not impossible to launch e-commerce in the future. After all, Facebook, which has been established for 8 years, cannot be satisfied with the current revenue model. Experts have long pointed out that Facebook will seek new ways to make money in the near future, and e-commerce will be Facebook's first choice. This can be seen from the relationship between Facebook and online game developer Zynga: Zynga displays its related game equipment on Facebook and conducts marketing; Facebook can extract 30% of the sales of these game equipment as a reward.

In the future, it is possible for Facebook to use its own accurate data to make shopping recommendations anytime and anywhere. Moreover, people prefer to invite friends to shop together and like to share shopping results and experiences; and it is entirely possible for Facebook to get a share of the e-commerce market in the future by relying on its unique social network services. Not to mention that Facebook can also complete the most basic fan marketing and email marketing on the current Internet by virtue of its wide influence and highly customizable goals of its advertising platform. Once it is believed that there are greater business opportunities in the e-commerce field, it is also possible for Facebook to become a competitor of Amazon.

In the long run, Facebook has 845 million monthly active users, and the cultivation of this gold mine has just begun. With the continued promotion of the open platform, the profit model will definitely become more diversified. Facebook's influence on the world and China's Internet will also become more far-reaching.