Facebook is free to use because the company makes a lot more money charging advertisers than it would by charging users. Other forms of media, such as radio and television, operate under the same premise. They offer a free form of entertainment to the masses and then leverage the masses to sell advertising. Facebook can approach potential advertisers with its huge captive audience and offer to put their products or services in front of some or all of those Facebook users in return for ad revenue.

Leveraging Large Audiences for Advertising Dollars

Audience size determines how much money media companies can charge for advertising. For example, advertisers spent an average of $4.5 million for a 30-second spot during the 2015 Super Bowl. The amount an advertiser spends to promote its product during a 3 a.m. rerun of a lame 1990s sitcom is a tiny fraction of this number. The Super Bowl is the most-watched television event in the world every year. The viewer base for reruns that air in the middle of the night, by contrast, consists of a smattering of insomniacs, shift workers and people who failed to turn off the television before falling asleep on the couch.

While the dynamics of online advertising differ from television and radio, the fundamentals are the same. Companies pay more to advertise on websites with huge monthly users versus websites with smaller audiences. As of 2015, only Google – another website that is free for users but makes huge money from advertisers – draws more monthly visitors than Facebook.

If Facebook did not have so many engaged users, advertisers would have little incentive to spend money to market on the site. Most studies indicate Facebook would lose over 90% of its users if it began charging a fee. Thanks to its huge user base, Facebook made over $4 billion from advertising during the three-month period ending in June 2015. The amount the company would earn charging a fee, say, $10 per month, to the 10% or less of its user base that would agree to pay pales in comparison to Facebook's current ad revenue. With the site's audience slashed by over 90%, its ad revenue would disappear.

Facebook's Appeal to Advertisers

As of October 2015, Facebook has over 968 million daily active users. This is about eight times the number of people who watched the 2015 Super Bowl. The site's monthly active users approaches 1.5 billion. Unlike TV viewers, who can fast forward their DVR or take a bathroom break during commercials, or radio listeners, who can change the station, Facebook users cannot escape the ads. Anywhere you scroll or click on Facebook, the ads are right there in front of you, targeted to your interests and begging to be clicked. The company's sales pitch to potential advertisers is simple and convincing: When you advertise on Facebook, you are putting your product or service in front of literally hundreds of millions of people who can then click a link to arrive at your business's website or fan page.

Even better, advertisers on Facebook can target their ads to specific users based on age, gender, geographic location, interests and a host of other factors. Other advertising media, such as radio and television, cannot offer such laser-focused exposure. For example, commercials for men's products are ubiquitous during football games because, historically, more men than women watch football. However, plenty of females are watching, and since total audience size determines ad costs, the makers of Rogaine, Viagra and other such products effectively pay to promote to these women. It is, largely, a waste of money. On Facebook, advertisers can select to market to one gender exclusively, and further break down their audiences by age, location and interests. This ensures that the largest possible percentage of ad recipients are actual target customers.