The Inside Scoop on Facebook's $1.6 Billion Ad Machine
Facebook has become a ubiquitous part of our culture and day-to-day lives. Still, many in the ad industry reacted with surprise when the company revealed it had doubled revenue in the first half of the year to the tune of $1.6 billion, with $500 million in profit. They'd like more insight into how Facebook is growing.
The social network is still privately held, of course, so it doesn't have to disclose its financials. But if you piece together everything we know about Facebook right now, it's easy to see how the social network became an advertising juggernaut. In fact, it's not just one thing triggering growth, but a combination of user adoption, improved advertising products, launch of its social currency, and a rapidly maturing ecosystem.
Facebook's revenue growth is closely tied to user growth. The network has a greater number of users and wider usage of the platform than ever before. Over the past year Facebook membership has exploded, not only in the U.S. but also throughout the world to over 800 millions users. Where the social network once relied solely on college students, usage now extends to diverse demographics and locales, enabling advertisers to precisely reach and engage consumers globally.
Heavy usage has naturally attracted more advertisers. Local businesses, big brands and pure-plays such as gaming enterprise Zynga, group-buying company Groupon and other VC funded start-ups are flocking to Facebook and competing for inventory. Facebook's advertising marketplace relies on an auction sales model, and greater competition as well as improved ad products has increased the social network's overall advertising yield. CPMs are up 60 percent, while CPC revenue is up 30 percent for the first half of 2011 and we expect these to continue to increase as competition increases in Q4 and into 2012.
Improvements and innovation to its advertising products have played an important role in stoking adverting results. In the past six months, the platform has launched new products like the Sponsored Stories ad unit, zip code targeting, topical targeting, broad targeting and improved ad metrics.
Businesses have been investing in fan pages and applications versus microsites. As businesses look to increase the effectiveness of fan pages and applications, they are rapidly migrating budgets to Facebook, replacing budgets once dedicated to Yahoo, AOL, and MSN. Facebook is attractive to advertisers as it not only delivers against key reach and frequency metrics, but with the added bonus: its ad units drive engagement and are socially enabled, giving Facebook a word-of -mouth advertising solution that delivers at scale.
Let's jump back quickly to the expanding user base. As time goes on, users add more friends and expand their social circle. At the same time, they post and Like more content, whether it's from a friend or from an outside site. All of these Likes and shares have contributed to an exploding social graph across all demographics, which fuels improved ad targeting, performance and revenue as well. At the same time, Facebook has a growing global sales team focused on brand and agency relationships, and will soon launch an aggressive campaign to recruit more local advertisers.
Facebook's advertising innovation is happening rapidly with the potential for future revenue streams to include mobile, display, search and video, putting it in direct competition with Google and other ad-delivery networks, but differentiated by premium first party audience data and its social graph. As the Facebook ecosystem matures, the importance of ad API partners increases, because more businesses need solutions to place and optimize large-scale ad campaigns more efficiently and with improved performance.
When you account for all of these factors, it's easy to see why Facebook revenue is soaring and is on track to exceed $4 billion in 2011. Don't expect the growth in users, revenue, or advertising innovation to stop anytime soon.