Mark Zukerberg, co-founder of Facebook, is the world’s youngest billionaire.
I don’t understand how facebook can be so profitable. Is it entirely from advertising, or is there something else going on? I’d call myself a casual user of facebook – although I may look at it every day, I’ve never played any of those games or participated in the wars, farms, etc. I’m kinda aware that a few ads appear on the right side of the window, but they aren’t very prominent and I have never clicked on a single one of them. Nothing in my facebook experience has ever asked me to pull out my credit card and pay for something.
So how is facebook getting huge revenues? Are there lots of other who do actually click on the ads and ultimately buy stuff, making it worthwhile for advertisers to pay big bucks?
Having a company that is worth a lot of money doesn’t necessarily mean that the company is making money right now. He has made money because he owns a huge amount of stock in a company that people have valued highly. They have put money into the company, and the company made two billion dollars in revenue in the last two years.
This is really interesting. After watching *The Social Network * with my son we were discussing this. According to the valuation of Facebook it is worth about $50 per participant to advertisers. Yet I , like you, am oblivious to internet advertising. I have never spent a penny at any site online that I didn’t go to intentionally.
My son went further. He was looking for some information recently and the result appeared on screen where an ad would normally be so he blocked it out initially. He realized only after checking the rest of the screen.
I started asking people at work about their experience and most people say the same thing - they don’t even see the ads, they never click through and they have never bought anything due to a popup or banner ad.
It is hard to figure how companies pay for all this advertising if it doesn’t work but try to find someone who spent any money due to an internet ad.
I’ve been wondering this for years. Same with MySpace, YouTube and all the other phantom billionaire websites. I seriously wonder if at some point the advertisers are going to realise nobody takes any notice of their ads – but then I read a few YouTube comments and realise that there are plenty of people dumb enough to click on anything with a picture of some breasts or a cute kitty on it.
I wonder also whether people will be prepared to pay for news in the future. At the moment, news is basically free. And yet someone has to write and edit the news, and they need to be paid for it. If advertisers won’t pay in the future, consumers will have to.
(Yes I do work in the newspaper industry, and I have no idea where it is heading…)
It’s really more accurate to say it’s worth $50 per participant to investors. Obviously they believe that advertisers will value it highly too but I think it’s a gross simplification to say that according to the valuation that’s how advertisers value it.
However in the case of Facebook, they are both cash flow positive and book profitable according to people I’ve talked to who work there.
Do the companies that run Farmville and Scrabble and the other Facebook applications pay fees to do so? They must, right? Also, if you notice - the advertising on the main page isn’t very heavy, usually small locally directed ads and maybe a banner ad at the top occasionally. But if you go play a game of Scrabble there are huge ads everywhere. I think the application pages are where FB really makes its dough.
After my initial reply I did look at the numbers more closely. $2 billion in two years is certainly a bit of cash; they are doing better than I had thought. I guess the question now is will Facebook be able to sustain that?
AOL bought bebo ( a social networking site that initially very popular in Ireland and elsewhere, before facebook made inroads) in 2008 for $850,000,000, they sold it in 2010 for less than $10,000,000 apparently. They paid nearly a billion dollars for what amounted to a four letter domain name. Obviously facebook isn’t bebo and is unlikely to go the way of bebo anytime soon but this example shows how much cash is out there to be invested in social networking sites.
The way the Internet ads on those sites make money is this: Only 2% or so of people click on them. But 2% of 500 million Facebook members is still a lot of people, enough for Facebook to earn billions of dollars.
The value of Facebook’s advertising is not just the sheer number of accounts, but the information tied to those accounts. People on Facebook fill out there age, location, gender, occupation, hobbies and all sorts of other valuable information advertisers want to know.
So if an advertiser is looking to target say, females in Florida between 18-24 who like to crochet or divorced single fathers in Germany, Facebook can say to them “We can make sure your ad will be viewed only by the demographic you want” and since almost all of the developed world is on Facebook, the site can guarantee more Floridian 18-24 year old women will see that ad than anywhere else.
The amount of demographic information that other media companies spend lots and lots of money to research, Facebook is given by its users for free.
It’s based on how much of Facebook he owns and what it’s estimated the company would sell at. For instance, when Microsoft invested 240 million dollars to get 1.6% of Facebook that relatively small investment boosted Facebook’s worth from 1.5 billion to 15 billion.
Since Zuckerberg owns 30% of it, that puts him worth 5 billion dollars.
A quick research shows of the 150 million dollars spent in ad revenue on Facebook almost 2/3 of it was by Microsoft.
So think about this, if you have 150 million dollars in ad revenue and 100 million of it is form one company…Well…you can see why some analysts say the company is way overvalued.
I have seen estimated values of Facebook approaching 50 BILLION dollars. Which would put Zuckerberg at 16 billion.
Of course having an net worth doesn’t translate into cash.
Think of it in terms of more traditional advertising. You can’t buy a product through a television or magazine ad, and you don’t often consciously think “hey, I saw that brand on TV, I’m going to buy it,” but clearly these ads “work.” It just so happens that the internet makes it easy to add “buy it now” functionality to ads, but that’s really just icing on the cake - what they’re paying for is your eyeballs on their product. Many “serious” (non-scammy) internet ads simply link to more info on their product, or a coupon etc.
Right now the ad on my facebook page is for Lexus - obviously I’m not going to click on it to buy a new car, but I still glossed over the Lexus insignia, which may have imperceptively increased my esteem for their brand. No one thinks they could be so easily manipulated in this manner (“I’m no sheep!”), but of course we’re all wrong.
I agree that Facebook ads are kind of worthless. I’ve never clicked on one. But I’ll go refresh my Facebook 5 times right now and see what pops up!
No external ads. Ad spaces taken up by an ad for the Friend Finder app (which collects e-mail passwords, so maybe this is an illegal scam posing as Facebook?), and a sponsored ad encouraging me to buy ad space on Facebook.
No external ads again. Friend Finder again, and some other mobile app called Facebook SMS. Obviously Facebook doesn’t know I don’t own a mobile phone.
Advertize on Facebook again.
Activate Facebook SMS again.
Another Facebook app ad that tells me to instantly upload photos from my non-existant phone.
So there you have it, the one time I actually wanted to see ads on Facebook, they’re giving me nothing! (I refreshed it a few more times and finally got an actual ad for Captain Morgan rum, which claims someone on my friends list has “liked” it. Do people actually click “like” on these, or are the friend names randomly generated from my account?)
How much actual money does Zuckerberg have in the bank, not tied up in the hypothetical value of his Facebook shares? If he wanted to go out and spend a billion dollars on something tangible, could he?
Usually not, this depends entirely how the company is set up.
For Zuckerberg selling out would be less of a big deal than at other companies.
For instance, if Bill Gates decided to sell all his Microsoft stock people would be “Oh my goodness, he knows something, we should sell too,” and the price would fall.
Would anyone care if Zuckerberg sold? Who knows they might or they might not.
Normally there are time limits to how much you can take out each year, with the amounts going up each year. But that’s not necessarily true in every case.
You can’t overvalue Facebook at this point. They have the deepest set of user data which lets them sell targeted ads to 500 million different people, they account for a significant chunk of all internet traffic, and they are the sole internet destination for many users – particularly younger people. To top it off, they have built something that has been sorely lacking on the internet – a trust network. Each application they roll out can take advantage of the fact that they know who your friends and family are and thus who you trust. Their email service is a perfect example of this; it can prioritize your emails based on your level of trust.
The fact that school kids today often see email as ‘old fashioned’ compared to FB really drives home how much things have changed and how important FB is to them.
The features of the service may not be all that impressive, but the fact that it scales well to half a billion people is amazing.
Or look at Zynga making millions of dollars selling virtual crap as a FB plug-in.
Zuckerberg is a billionaire because he is the CEO and major shareholder of the company that is doing all this. If run well, FB has incredible future potential.
To me, it boggles the mind and it signals the end of an era. The internet is not the same place it was and it can never go back.