For years, the conventional wisdom in Silicon Valley was that social networks were expensive to run, and didn’t make much money. So as Facebook grew by hundreds of millions of users over the past few years, many people wondered if it was in financial trouble.
Revenue, however, appears to have doubled every year since 2007. And at this point it appears to be increasing even more sharply.
Based on what we and others have heard, we’ve tracked Facebook making $150 million in 2007, slightly less than $300 million in 2008, and somewhere up to $800 million in 2009. A number of reports have suggested that it will make $2 billion or more this year, and we have also heard the same estimates in recent months — up significantly from the $1.1 billion number that the company loosely confirmed earlier this year.
How? Through growth in brand and performance advertising — payoff from years of investment — with revenue from its Credits virtual currency only starting to kick in.
But, aside from bits of information provided by sources close to Facebook, there is very little information available about how the latest revenue numbers actually break down. So here’s a closer look at what we think is going on.
Some high-level points, before we get started. Facebook’s user base has boomed from around 375 million at the beginning of the year to somewhere around 575 million today, with growth happening across the world, in all types of advertising markets (see our Inside Facebook Gold report for more details on Facebook’s worldwide traffic). Engagement is also massive: Facebook says that more than 50% of users visit the site every day.
Facebook’s product development has focused on continuing to increase engagement and gathering more user data — factors that help it target advertising more accurately to more people more often. And although we’re focusing on revenue here, we should also note that Facebook has made significant hardware and software investments to reduce infrastructure costs, helping it to become profitable as of late 2009.
Zynga and other social gaming companies began utilizing Facebook’s self-serve advertising system in order to reach more users over the course of 2008 and 2009. Along with a smattering of online performance marketers, and a few early adopter small businesses and major brands, the developers provided significant boosts to Facebook revenue in past years.
That trend has continued, with local advertisers, social game developers and group buying sites like Groupon reportedly making massive investments. Advertisers have reported prices steadily rising as more of them figure out how to achieve their desired returns on investment. As of this past fall, the average cost-per click in Facebook’s largest market, the United States, is around one dollar. For developers interested in learning more, we’ll be examining how advertising is working for Facebook and developers at our Inside Social Apps conference in late January.
Facebook has been making a significant new effort to help performance advertisers spend more money. It introduced an advertising API last year that allows third-party service providers to place thousands of automated, highly targeted ads on behalf of clients. While that program has rolled out slowly, big search marketing businesses like Omniture have moved in to offer services to clients, and a dynamic ecosystem of startups are competing for clients as well.
Facebook also ended most parts of its original advertising deal with Microsoft, where that company ran banner ads on the site and split the revenue — the relationship is now more product-focused, on things like social features for the Bing search engine.
In addition to more users, more engagement, more advertisers, and the new options available through the API, that switch helped make even more inventory available to sell against.
Facebook has been trying to pitch Madison Avenue on the benefits of its advertising services for years, and all those efforts appear to be paying off now. Most major brands at least have a Facebook Page today, and dozens have created more sophisticated applications, Facebook integrations on other sites, and other campaigns designed to engage with users.
While Pages are free, Facebook upsells owners into its performance and brand advertising services. The home page ads are only available to companies that spend $50,000 or more, and include a variety of engagement-focused options, such as the ability to Like a Page or RSVP to an Event with a single click.
The company has also aggressively stepped up its sales efforts to large brands, building out its staff in New York City and many other offices around the world, and hiring a series of veteran salespeople away from other technology and media companies.
While there’s little information available about the amount of revenue now coming from large advertisers, anecdotal evidence suggests it is booming. For example, a number of Page management companies, like Buddy Media, are saying that they’re seeing significant new interest.
While still in its early stages, Credits will likely form another key revenue driver for Facebook in the future. This past year, the company made it clear to developers that Credits would be the only payment option for virtual goods in canvas applications. While many companies have not fully integrated Credits yet, expect them to in 2011. Also look for Facebook to expand Credits to the web and mobile devices — something that many have speculated about, but has not yet happened. If Credits proves to be a big success in 2011, we expect Facebook to quickly expand it beyond the home site.