A:

Facebook made $40 billion in revenue in 2017 the bulk of which came from digital advertisements, which brought in $39.9 billion. On July 25, 2018 the company declared its second-quarter results reporting $13.2 billion in revenue, up 42% compared to the same period last year.  Along with Alphabet Inc. (GOOG) subsidiary Google, Facebook has emerged as one-half of a dominant duo in digital advertising. Unlike its rival, which enables advertisers to serve up ads based on keyword searches, Facebook's value proposition is targeted advertising.

Targeted Advertising

Advertisers can use the wealth of personal data about users from Facebook's product ecosystem for ads. For its part, the Menlo Park, Calif.-based company claims that it makes the data anonymous and serves the information to advertisers in custom demographic buckets. Advertisers can further slice and dice the buckets based on their branding goals. They can serve up custom ads to Facebook users from specific income groups or regions. They can also target users based on other categories, such as sexual orientation, religion or political affiliation. Facebook has developed a broad variety of ad products for different stages of the branding lifecycle.

For example, Facebook's Dynamic Ads product enables advertisers to upload their entire product catalog and target customers at specific income levels. Similarly, its Lead Ads offering help advertisers in lead generation. These products have cemented Facebook's position in digital ads. While newer companies such as Snap Inc. (SNAP) are expected to garner substantial market share in the future digital ad market, Facebook's earnings suggest that it will remain a dominant player for years to come.

Video, Messaging

The company is preparing for the future by broadening its revenue canvas. It has emphasized videos and live broadcasts from its Facebook Live platform in its earnings calls in recent quarters. According to the company, the daily watch time for Facebook Live broadcasts has grown by more than four times in the past year. The social media giant has also inked deals with content creators to further promote video. (See also: Facebook Signs Content Deals With Vox, Buzzfeed.).

Another emerging area of growth for Facebook is its messenger service, which has recently begun displaying ads. According to Facebook chief-executive-officer CEO Mark Zuckerberg, the service's direct chat feature, which enables customers to chat directly with advertising businesses, already saw more than 2 billion messages being exchanged between users in the fourth quarter of 2017. Extending its influence in the sphere of messaging and chat, in 2014, Facebook purchased the popular messaging app WhatsApp for $21.8 billion

Facebook has also invested in emerging technology trends for future growth. "Over the next 10 years, we are developing consumer use cases around technology that are a big part of our future but won't be a big part of our business for a long time," Zuckerberg said during the social network's first-quarter earnings call of 2017. Included among these use cases is virtual reality and bringing internet to parts of the world without connectivity. Again, these initiatives translate into future sources of revenue for Facebook, as more internet connections translate to greater usage and revenue. (See also: Facebook Is All Grown Up.)

Selling Data: Fallout From Cambridge Analytica Scandal

How much does Facebook make from selling user data? Hard to be sure, since the ad revenue itself is targeted, which in turn means that it's based on user data.

But some suspect that Facebook is selling data in a more direct way than was previously assumed.

The Cambridge Analytica scandal, which exposed data of approximately 87 million users to hackers, became widely reported in March 2018. It is expected to have far-reaching consequences on Facebook’s revenues and the cost of doing business. 

Regulation and user concerns will likely drive up Facebook's costs of capital. In his testimony leading up to his Apr. 11, 2018 Senate hearing, Facebook CEO Mark Zuckerberg said that the company was building new technology and “significantly” increasing its investment in security. “I’ve directed our teams to invest so much in security — on top of the other investments we’re making — that it will significantly impact our profitability going forward,” he said. 

Revenues from Facebook’s two largest markets – North America and Europe - are expected to be affected as a result of the fallout from the Cambridge Analytica scandal. Both are extremely lucrative markets for Facebook. In 2017, Facebook earned an average of $84.41 from each North American user and $27.26 from each user in Europe. In contrast, each user in Asia was worth $7.61. 

But the scandal is expected to have an adverse impact on Facebook’s revenue in its two biggest markets in two ways. First, advertiser concerns might lead them to pull out ads from Facebook’s plan and result in an overall decline in revenue per user. Second, the social media network’s revenues could take a hit in Europe due to new regulation. The General Data Production Regulation (GDPR), which requires that Facebook obtain user consent for their data, in Europe will result in a 7% decline in its revenue, according to Goldman Sachs. 

The good news for Facebook investors is that the company is making significant inroads into new markets, such as Africa and Asia. While it does not contribute much to overall revenue, WhatsApp has become a runaway hit with users in Asia and South America. Other services such as Instagram, are also making inroads into new markets. 

RELATED FAQS
  1. When did Facebook go public? (FB)

    Learn how Facebook's initial public offering (IPO) did not go according to plan but how those who stuck with the company ... Read Answer >>
  2. How important is advertising revenue in the Internet sector?

    Learn about the importance of advertising revenue in the Internet industry. Find out how much Internet firms rely on advertising ... Read Answer >>
  3. How do Internet companies profit if they give away their services for free?

    Learn how companies in the Internet sector make a profit when service, content and user applications are offered at no cost ... Read Answer >>
  4. How does Twitter make money?

    Learn how Twitter earns revenue, including how the social media company uses three targeted advertising streams, data farming ... Read Answer >>
Related Articles
  1. Insights

    Facebook Says It Didn't Help Advertisers Target Emotional Teens

    Facebook confirmed it does conduct research and create reports on users' activities for advertisers, but denied that it lets advertisers have specific information about users' emotional states. ...
  2. Investing

    Wall Street Thinks Facebook Has Room to Grow (FB)

    Facebook shares could gain another 20% during the next year, buoyed by strong ad revenue.
  3. Investing

    Facebook Q4 Earnings Preview

    Under fire over fake news, Facebook has to prove that it can still grow profits as it invests for the future.
  4. Investing

    Facebook's 3 Most Profitable Lines of Business (FB)

    Looks at which of Facebook's business segments account for the largest portion of its revenue and which are likely to do so in the future.
  5. Investing

    Facebook's Milestone: 5M Monthly Advertisers

    Five million advertisers are running ads on the social network, up from 4 million in September.
  6. Small Business

    Is Facebook User Engagement Declining? (FB)

    The company has reportedly taken steps to address declining user engagement by forming a team in London to
  7. Investing

    Should You 'Like' Facebook in Your Portfolio?

    When it comes to your portfolio should you like Facebook?
  8. Small Business

    What Is Facebook’s Advantage Over Other Social Media? (FB)

    Discover the elements that define Facebook, which boasts 1.6 billion users who cement the company as the world's top social media outlet.
  9. Investing

    Why Facebook Will Never Charge User Fees (FB)

    Understand why Facebook is unlikely to ever charge users; the site's business model of leveraging free users to charge advertisers is highly profitable.
  10. Small Business

    Facebook Puts Google on Notice in Search Advertising (FB, GOOG)

    Facebook is taking on Google in search advertising.
RELATED TERMS
  1. Facebook Credits

    Facebook credits were a virtual currency which could be used ...
  2. Cambridge Analytica

    Cambridge Analytica is the firm that allegedly misused users' ...
  3. Social Data

    Social data is information shared publicly by social media users, ...
  4. Monthly Active User (MAU)

    Monthly Active User (MAU) is a key performance indicator (KPI) ...
  5. Network Effect

    The network effect is a phenomenon whereby a good or service ...
  6. Advertising Budget

    An advertising budget is estimate of a company's promotional ...
Trading Center