There are several – if not many – companies that have over a billion clients. Drink the world’s most popular soda or smoke its most popular cigarettes, and boom, you’re part of the customer base. But imagine a company with 1.2 billion registered users (give or take an Egypt or Germany’s worth of fake ones), many of them using its product for hours on end and cavalierly conveying their personal information while they’re at it. Founded in 2004, Menlo Park, Calif.-based Facebook (FB) is new enough that you’re probably familiar with its history. If not, here’s the one-sentence version: College kid notices how ugly MySpace is, makes something sleeker and markets it to post-adolescents. The phenomenon of Facebook, and the speed at which users joined and continue to join, is unprecedented. But just because a novelty is adopted by a large chunk of humanity, does that mean it’s inherently an economic powerhouse?
From Frothy to Flat, and to Frothy Again
If you believe that an overvalued juggernaut shouldn’t take more than two years to reenter the atmosphere, then the answer is most likely yes. Facebook stock lost half its value within three months of going public in May 2012, only to quadruple in value from that nadir. The stock still sits at close to an all-time high, resulting in a company with a market capitalization of $160 billion. That large number is the result of anticipation that Facebook will one day realize growth beyond its current apparent capacity. The company’s book value sits at a considerably less remarkable $15 billion, which is still substantial for an entity that didn’t even exist a decade ago and which doesn’t exactly provide an indispensable good or service.
Facebook's Real Users
Last year Facebook turned a profit of $1.5 billion on revenues of just under $8 billion, an enviable profit margin regardless of market sector. But unlike the company’s cohorts on the list of the world’s largest, Facebook doesn’t sell directly to customers. Tempting though it might be to collect even a nominal fee from each of those 1.2 billion users, the company charges them nothing to use the site. Instead, as you presumably know if you’re one of those 1.2 billion, Facebook’s true customers are advertisers. Some of the world’s largest purchasers of advertising, such as AT&T (T) and General Motors Co. (GM), have Facebook pages whose “likes” number in the millions.
But large corporations are only part of Facebook’s true clientele. The company’s advertisers range from multinational oil refiners to neighborhood craft stores, each convinced that reaching potential customers by spending money on the world’s largest social media site is mandatory, not optional.
Rise of Mobile
As use of mobile devices has increased relative to desktop computers in recent years, Facebook and its advertising have followed suit. 2013 represented a watershed year in that for the first time, most of the company’s money came from smartphone/tablet advertising. That’s not the result of a small sample size, either. 2013 was also the year in which Facebook welcomed its millionth advertiser, confirming the truth that online advertising has left its legacy media brethren of print, radio and television behind, probably forever. (For more on this topic, see Why Facebook Will Keep Making Money)
Facebook might be a glorified coupon book, a constantly updated one on which you can post your vacation photos and wait for your friends and friend equivalents to leave banal comments, but there’s more to the company’s revenue streams than just advertising. Somewhat surprisingly, Facebook derives a lower percentage of its revenue from advertising than does its competitor in documenting every detail of its users’ lives, Google Inc. (GOOG). In fact, in its short existence Facebook has gone from exclusively dependent on advertising to operating a model in which 10% of revenue comes from payments. That most likely means via games. Play Candy Crush Saga or some other video game, buy 99 cents worth of additional gameplay, hundreds of times over, and not only have you thrown away enough money to buy a few shares of Facebook, but you’ve contributed to the company’s prospering secondary revenue source. Multiply by tens or hundreds of millions of users, and you get the idea. (For more on this topic, see Why Facebook Should Buy Twitter)
The Bottom Line
A generation ago, the idea of a virtual meeting place for people of common interests to congregate was conceivable, if not necessarily practicable. The idea of monetizing such a place was even further removed from common understanding. As for monetizing it to the tune of tens of billions, buttressed by a population eager to spend money on non-physical trinkets and be advertised to continuously…well, that’s what makes Facebook’s rise so remarkable, and the company itself so distinctive a player among the world’s largest and most successful.