Facebook is social media. They are dominating this category so much, that the CEOs of Twitter, Pinterest and Snapchat are calling themselves something different. I have pointed this out in the linked articles. Facebook is one of a few platform businesses that have proven the theory of platform business models right. The theory always stated – or should we say assumed – that explosive growth would be possible due to the indirect network effects. A review of Twitter’s, Snap Inc’s, Pinterest’s financials would let us wonder if this is true.
A look at Facebook’s financials will convince you that it indeed is possible. How Facebook got there has not been without criticism. It has had great positive but also some grave effects on individuals and communities and the question is whether the platform (and societies were unprepared for some of the ill-effects). I will cover this in great depth because it is so crucial to the trajectory of the business. As always we will be using the business model canvas tool to structure our thoughts.
Leveraging a combination of direct & indirect network effects digital social & communication firms use many different approaches, including social networks of all kinds centred around themes, hobbies, professions, activities, experiences, lifestyles, messaging, multimedia sharing, messaging, chat, micro-blogging, discussion forums among others.
This articles is structured in line with the elements of the business model canvas:
The vision and what they stand for
Facebook’s mission is to give people the power to build community and bring the world closer together. People use Facebook to stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them. Facebook And Give people the power to build community and bring the world closer together.
“Our principles are what we stand for. They are beliefs we hold deeply and make tradeoffs to pursue.
- Give People a Voice: People deserve to be heard and to have a voice — even when that means defending the right of people we disagree with.
- Build Connection and Community: Our services help people connect, and when they’re at their best, they bring people closer together.
- Serve Everyone: We work to make technology accessible to everyone, and our business model is ads so our services can be free.
- Keep People Safe and Protect Privacy: We have a responsibility to promote the best of what people can do together by keeping people safe and preventing harm.
- Promote Economic Opportunity: Our tools level the playing field so businesses grow, create jobs and strengthen the economy.”
Facebook’s key properties (ecosystem) are its various platforms which all have separate apps/websites. However, the accounts are linked (unless the user decides to create separate accounts – but Facebook algorithms will still try to identify the same user with different accounts across platforms and for it as one “person” – metrics “daily active person” and “monthly active person”). We will be focussing on the key social platforms:
Facebook: Facebook enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. There are a number of different ways to engage with people on Facebook, including News Feed which displays an algorithmically-ranked series of stories and advertisements individualized for each person.
Instagram: Instagram brings people closer to the people and things they love. It is a community for sharing photos, videos, and messages, and enables people to discover interests that they care about.
Messenger: Messenger is a simple yet powerful messaging application for people to connect with friends, family, groups and businesses across platforms and devices.
WhatsApp: WhatsApp is a simple, reliable and secure messaging application that is used by people and businesses around the world to communicate in a private way.
I will occasionally mention their other platforms (e.g. Oculus, Workplace, Libra, Calibra, Hobbi, Threads, etc) where it fits into the discussion. But focusing on the above will explain their vast success best. Btw, as always: anything in blue italics is their own words (either from their annual reports or webpages).
We generate substantially all of our revenue from advertising. Our advertising revenue is generated by displaying ad products on Facebook,
- Messenger, and
- third-party affiliated websites or mobile applications.
Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users. (1) Advertising Facebook’s payment models fall into the known CPM, CPC, CPA models typically via auctioning mechanisms (which also is standard).
- Cost per link click CPC: Facebook defines a link click (that can point to various types of destinations) as any click on the image or the name of the advertiser, etc (anything that takes the user to the advertiser). But essentially, this is CPC
- Cost per result (CPA): Essentially, this is cost per action (CPA). It is an aggregate result for the campaign that calculates the total amount spent divided by the number of results (defined by the campaign objective and other settings).
- Cost per Impression (CPM): It is the known cost per 1,000 impressions charging model or CPM
- Programmatic: Facebook Audience Network allows advertisers to place ads on Facebook’s participating partners. Websites and apps can run Facebook mediated ads on their properties (app, mobile web and video) via the audience network. Facebook states ads to be converting better when users see (the same) ads across Facebook, Instagram and other sites/apps. Facebook pays participants CPM-type revenues (cost per impression) while they charge advertisers CPM, CPC/CPA.
(2) Payments and other fees:
- These are transaction fee charges for the purchase of virtual/digital goods from 3rd party developers through Facebook. Payments and other fees. Payments revenue is comprised of the net fee we receive from developers using our Payments infrastructure.
- In future, this may incorporate revenue that is linked to Facebook’s upcoming payments system / digital wallet Calibra which is intended to hold their cryptocurrency Libra. The launch is planned for 2020 (but as you know there has been a lot of conflicting messages around this).
(3) Hardware and other
- Consumer hardware devices (e.g. Oculus)
- And then some other revenues Our other fees revenue consists primarily of revenue from the delivery of consumer hardware devices, as well as revenue from various other sources.
As always with platform business models, we need to think about the value proposition to all sides of our multi-sided platform (well, there are more sides than shown below but these are the most important ones).
Value proposition for users
- Contact with friends and family: This includes posting (incl Facebook Stories and Instagram), reading updates from others. Presenting themselves via photos, envying others. Interacting via the timeline and interacting via direct messages. Within this, viewing photos is frequently surveyed as one of the most frequent activities
- Presenting oneself: While this may not be mentioned very often in surveys, one of the key reasons people are on the platform is to present oneself, their moments and (of course) their best moments. To this end, Facebook (and more so Instagram) allows creation of photo albums that friends (and depending on security settings friends-of-friends and other) can browse, comment on, etc
- Everybody else is there: More true for Facebook than for any other platform is the fact that people join because everybody else is there. This is their true moat
- Personally relevant content and opp: Because everybody else (in one’s circle) is there, they create content that relates to the users. One can chime into conversations and chit-chat. The most benign content / update from friends is for many people more interesting than world news because they can relate to it
- Pass time: Let’s be honest passing time is one of the key value propositions. Instead of or while watching TV, on the go as a short distraction at work, etc. In terms of search cost reduction, scrolling down the news feed to get an interesting tid-bit is easier than zapping on TV
- Get entertainment: One of the most common reasons to use FB is to get entertainment content
- Get news: Unlike Twitter, only 23% state they go to FB for news, but about double that number state that they actually do get news through FB (which is not a contradiction)
- Exploration/discovery: On the left hand side of one’s timeline, there are tons of things to explore. This includes things like friends’ birthdays
- Following friends and VIPs: though more of this happens on Instagram, this is still an important value proposition of FB
- Professional networking: is not a significant reason (11% say they do it for this reason) – there are now other platforms (notably LinkedIn) for this purpose
- Facebook has become a frequent way to log into other sites (too many people don’t know how much data they are revealing of themselves to 3rd parties by doing so) – book this one under transaction cost savings
- Organisation: There are millions of groups that self-organise around topics. This can be very valuable to help each other with tips on topics (e.g. health, parenting, DIY, etc) but can also be misused to spread disinformation
Value proposition for influencers
Influencers are important to Facebook and even more to Instagram (though likely not quite as vital as they are to Twitter). And Facebook is trying to present more content from friends. Though not yet exactly clear what that means, it is likely not good news for influencers (if you look at our Snapchat article, same has happened there where non-friends were moved to a less prominent area in the app)
- Build personal brand / remain top of mind / stay in touch with followers: We are always talking about brands in the context of large companies. But individuals (and groups, organisations, etc) can also build a brand, stay top of mind and show to advertisers their value. They can also see from the reactions (likes, emojis) and responses how their posts and messages fare
- Immediacy: Facebook influencers like the fact that they can have immediate contact with their followers
- Word-of-mouth & organic virality: In the early days, Facebook was a great place to get organic traffic to one’s page or business. But it has started changing from 2014 when Facebook limited displaying updates of businesses / influencers to followers. But it is still a place where word-of-mouth or even virality can occur
Value proposition for businesses / advertisers
Businesses were able to reach a lot of users organically but these times have changed. Now, they have to pay to reach sizeable parts of their audience.
- Targeting/penetration: Of course all platforms that we have looked at provide refined targeting capabilities within their tools. But advertisers look much more favourably at platforms that have achieved high penetration in those segments that they like to target. For Facebook, this holds true pretty much about most segments. Ads on Facebook will always be able to reach sizeable audiences even when quite specific targeting parameters are chosen
- Native integration / ad formats: Facebook’s ad formats are (quite) natively integrated. They have rules around what the ad creative (image, text, video) can and cannot do (very famous is the 20% text rule that aims to avoid low quality ads). Facebook has recently cut down the number of ad formats from over 25 to reduce confusion on the side of advertisers
- Non-interrupt: On a spectrum from high to low-interruption marketing, Facebook sits somewhere in the middle of the spectrum
- Word-of-mouth: while virality for ads or content marketing content is not as it was in the early years, word-of-mouth can still play a role
- Self-serving business tools: Basically all advertising features can be self-served. Businesses who find the tools too complex can still get their marketing managed through Facebook advertising partners
Value proposition for developers and other groups
- Gaming: Somewhat gone are the days of Farmville. But Zynga and many other game developers are still around. Facebook has a high-spec gaming platform and a “social” gaming platform for more simple games (similar to the early days). Gaming was probably very valuable to get people onto the platform in the early days but they are not quite as omnipresent as they were at the time (this is a subjective impression). A study from 2011 came to the (staggering) conclusion that “a conservative estimate of the employment impact of developers building apps on the Facebook Platform in the United States in 2011 is 182,744 full time jobs. In other words, at least 182,744 jobs were added to the U.S. economy as a result of the Facebook App Economy. Similarly, these economic models suggest that a conservative estimate of the total employment value of Facebook’s app economy is $12.19 billion. Using more aggressive estimates, the Facebook App Economy created 235,644 jobs, adding a value of $15.71 billion dollars to the U.S. economy.”
- There are various sub-platforms on Facebook for various types of platform participants (Facebook is an extensive multi-sided platform), such as:
- a marketplace / classifieds,
- jobs, apps,
- offers and
- lots more (see the left hand bar in your account)
- Partnering service providers: Facebook has an extensive network of 3rd party service providers mainly for advertising services
Facebook is a multi-sided platform with a large ecosystem of partners. Most of them are “just” a partner rather than one “side” of the platform.
- Users: The majority of users are not influencers, VIPs, businesses. The create content that appears in other user’s feeds (which is a key part of the network effects). Messages do not appear on the feeds but are even more targeted and engaging for the recipient (and the sender who is waiting for a response)
- Influencers, VIPs: influencers want to build their own brand through followers and shares. Others want to make direct money through endorsements (or both). Compared to Twitter, Instagram is more the platform for celebs, VIPs from the non-political spheres (sports, music, entertainment, etc). They make a lot of money from their Instagram activities (here the top 10 in 2019, here the top 10 NBA players). Even if the numbers were not 100% correct, it gives us a good idea why they are there.
- Brands/businesses/advertisers: Brands like RedBull, Starbucks, Walmart, Nike have among the largest account with 30-45m followers. Now, this is still much smaller than the VIPs but nevertheless considerable followerships. But they reach only a fraction of their followers organically and have to pay advertising dollars for more exposure (to followers and non-followers). They can leverage “lookalike” targeting to reach new users
- Micro-influencers, solopreneurs: Facebook/Instagram is also a place for micro-influencers with big followership in their niche
- Websites/blogs: Many websites and blogs share content via Facebook and Instagram – the latter being especially valuable for certain visual businesses. Here we also see considerable competition to Pinterest (though the overall presentation layer is very different
- Sellers: There are many stories of micro-businesses that have made a breakthrough on Facebook & Instagram and changed the way many people shop
- Media partners: includes some of the big media outlets who can monetise through (e.g. in-stream ads)
- Creators / publishers: Facebook for creators allows creation videos where in-stream ads can be placed (directly through Facebook or the Audience Network) earning a revenue share. This also includes gamers
- Customer service partners: Facebook’s size attract a very large amount of businesses that are providing services with the various aspects of Facebook marketing, some examples are:
- Agencies to help businesses on Facebook
- Marketing partners can help with
- advertising (campaign management, measurement, online/offline conversion),
- selling (including order fulfilment and customer support),
- engagement (e.g. community engagement)
- Developers: Facebook focuses on a wide array of research areas and has the means to bring these forward. R&D has also been the largest cost in their cost structure for several years (as we will see later). We shouldn’t forget the many smaller and larger partners who have helped the Facebook ecosystem to grow faster than others in the early days (remember Farmville that helped Zynga to become a multi-billion dollar company in their own right). Current focus areas are more ambitious (though gaming – more advanced – still plays a big role):
- Artificial Intelligence
- Augmented Reality
- Business Tools
- Open Source
- Social Integrations
- Virtual Reality
- Fact-checking partners: Facebook works with various partners (mostly journalistic background) on fact-checking content on their platform to avoid negative externalities through platform manipulation. Reuters has recently become the 8th such partner
- and more in the advanced stuff
The most important activities for platform business models are to enhance positive network effects and reduce negative ones. Facebook has significant positive network effects for its users but needs to constantly manage and improve these. It is often mentioned that Facebook’s very success is rooted in the fact that they have managed negative network effects more stringently than MySpace who were one of the biggest internet companies (by traffic) before Facebook even existed. Reasons often mentioned are: managing bad behaviours, a more controlled growth with opening the platform gradually to wider users, less aggressive monetisation in the early days.
- Enhancing positive network effects and reducing negative network effects: One of the reasons why Facebook has several other apps (Instagram, Messenger, WhatApps) is that this gives them a way to enhance positive (direct and indirect) network effects in a more targeted way than it would be possible to do this all in one app. The network effects are very closely linked to the key value propositions. E.g. Instagram allows leveraging positive indirect effects between celebs (who are often paid by companies for endorsements) and normal users. In Messenger this would be perceived as a negative network effect where most people want privacy. There are hundreds of larger and smaller details that are driven by network effect considerations. The biggest most recent ones is Facebook’s announcement to separate Social from Media
- Platform health / fake accounts and content: One of the negative externalities are fake news/content posted by fake or ill-intentioned accounts. Like other platforms, the paradigm of growing the user base at all costs has changed to make place for healthy growth and getting rid of many fake and ill-intentioned/behaving accounts. Facebook estimates there to be 5% fake and 11% duplicate accounts (with higher proportions in certain countries) – this is still a very big number (5%=125m, 11%=275m). Information shared around the Coronavirus has become the latest “infodemic” example
- Engaging the users is mission-critical for any platform business. But this can mean a lot of things. Some people are more engaged by updates from friends and family and in other situations by updates from VIPs, etc. Having one account across the various apps allows to satisfy a lot of needs under the Facebook umbrella
- Content creation: Facebook has the largest employee base of all companies in the world with over 2 billion employees and they are called users. They duly create content where other companies need to hire staff to do so. Not only that, most of the content that is being created is highly relevant for the recipient (i.e. friend family of the users that post). Even local newspapers can’t compete with creating such targeted and relevant news for their readers
- Professional content creation: and then there is the professional and semi-professional content that is being created (see key partners), some of which is being used for revenue generation
- more in the advanced stuff
Key Resources / Assets
The master resource (or asset) of any platform are its network effects. It is the resource/asset that needs to be built and nurtured. Here is how this translates into more detail.
- Active users Facebook: DAUs >1.6b; MAUs >2.4b
- Active users: Instagram MAU >1b; Messenger >1.3b; WhatsApp >2b
- DAP (Daily Active People across all apps): 2.3b; MAP (Monthly Active People): 2.9b
- Business, VIP accounts and content creators: attract large follower bases and create engagement through their content (140 million small businesses mostly non-advertising, 10-K Q4’19)
- High engagement, thus usage: 41mins per day per user on FB alone’
- Content assets:
- Content shared by users, including likes, emos, replies/comments, shares, etc
- Content shared by users and professional creators, such as photos, videos, images, infographics, links, and other resources, live-streaming events, etc
- The Facebook brand is synonymous with social media. In the renowned Interbrand brand ranking, they fell from the 9th rank to the 14th in 2019 which still is a strong position. No other social media brand is represented, except LinkedIn ranking 98th. Their biggest competitor on digital advertising, Google, however, ranks 2nd
- And many more … you know where …
With over 2.5b users on the different platforms, the question is not really who they can address (the answer to that is: basically a third of the world population) But the question is which micro-segments they can address. And that boils down to the data users share through the various ways with Facebook. Liking things (on or off Facebook) tells them a lot about you, your profile information (there is a lot users can share), tagging on photos, location check-ins (it will track location even if users don’t “check-in” so long location is not disabled), who people are affiliated with, who they follow, their profile which has education, it gets data from apps that user log-into with their Facebook account, it gets data from pages that install the Facebook Pixel and that use Facebook APIs and so on. But it says that it doesn’t mine your text data (posts, messages, calls, etc).
- Classic geo-demographic segments in the US:
- Facebook overall penetration (US): 69%; notable biases (female, educated, millennial):
- Female: 75%, male: 63%
- Age 25-29: 84%
- No college: 61%; Some college: 74%; College+: 75%
- Instagram overall penetration (US): 37%; notable biases (female, urban, gen z / millennial):
- Female: 43%, male: 31%
- Age 18-29: 67%
- Urban: 46%; rural: 21%
- WhatsApp overall penetration (US): 20%; notable biases (Hispanic, millennial / gen x, urban):
- Hispanic: 42%
- Age 30-49: 31%
- Urban: 46%; rural: 21%
- Facebook overall penetration (US): 69%; notable biases (female, educated, millennial):
- and more
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From a technical perspective, their various websites and apps are the most important channels. Most transactions are automated and self-serving. Facebook’s functionality is significantly larger than most other social media apps/sites.
- Key interaction channels on the website/app are:
- The news feed is the main user channel to get the user (re)engaged
- Notifications (about 2 dozens of notifications – but can be customised)
- Chat / messages and activity status of friends to stimulate interaction
- And much more – see esp the left sidebar (website) and top bar
- Most transactions on the user side are automated through the app/website. It allows a ton of settings (e.g. security, privacy, tagging, location, and a lot more)
- Help pages, contact, reporting, etc
- Mail, SMS depending on settings
Other interaction channels:
- App stores organic and ads (e.g. responses to reviews)
- Social media pages:
- Facebook: Facebook, Instagram, Messenger, Whatsapp all have their Facebook pages each of them with tens of millions of likes and followers
- LinkedIn: ~5.4m followers, reaching out to users, businesses and talent
- YouTube: ~940k subscribers (product updates, behind the scenes, life at Facebook, etc)
- Twitter: 13.4m followers, Facebook, Instagram, WhatsApp have their own accounts with occasional updates. Additionally, there are more targeted accounts (e.g. for developers, for education, for business, newsroom) for updates to these targeted groups
- Pinterest: N/A
- Word-of-mouth: Facebook and Instagram are present organically in many conversations and news articles. You will often see posts from VIPs, influencers shared via Facebook and Instagram
- And more
(We are looking at this from the lens of the underlying needs, how they are served and the things that affect customer relationships. There is a natural overlap with the value proposition) If you are a regular follower of my blog, you know that this is one of the most important categories for platform business models (in the long run) and in particular for social media (or similar) platforms.
There is obviously a lot of value that users get out of Facebook. But first, we need to understand the risks and negative externalities. Saying this, it is clear that we can only get a glimpse into this complex topic. Negative network effects can bring a platform down before they ever reach potential. Some form of managing negative network effects will be required even in the smallest platform.
Some examples that you can find in the community standards are shown below and reading through these standards is a very sobering moment when you realise what platforms (and innovation in general) can be used for.
|Violence and criminal behaviour||Violence, incitement, organised crime, terrorism, smuggling, etc|
|Safety||Self-harm, suicide, bullying, harassment, privacy violations, human exploitation, etc|
|Objectionable content||Hate speech, violent content, cruelty, etc|
|Integrity & Authenticity||Misrepresentation, fake news, manipulated media, spam, cybersecurity, etc|
|Intellectual property||Content, images, videos, etc|
Facebook tries to control the majority with machine learning algorithms but this is not an easy endeavour even when posted in plain English. Add to this that it can occur in different languages, using insider terminology, obscured by special characters, expressed in images, videos, live streams, etc.
All hell broke loose after the US election of 2016 and Facebook’s role therein, followed by probes, investigations, congressional hearings and media coverage. Facebook occasionally publishes taking down “coordinated inauthentic behaviours” and accounts in their integrity section.
Twitter was in a similar boat and has released more details. In 2018, Twitter shut down 80 million fake accounts a staggering amount given their ~300m MAUs at the time. In 2019, they have shut down 80,000 linked to an authoritarian regime (who would have thought). In the case of Facebook, there are detailed 3rd party accounts that help us to understand the staggering details behind manipulation through Facebook’s apps. Here is a very lengthy account published about a year after the 2016 election and here is a more recent (even more lengthy) account with even more refined tactics leaving us to wonder what will happen towards the 2020 election.
Twitter has banned political advertising (but their revenues from this were relatively small). Facebook hasn’t banned it. And reading the above sources, we have to wonder if Facebook is going to face its biggest challenges yet. This topic is super important – but I am trying to keep my articles not much longer than 4,500 words (which is already a lot). Any of my committed readers can get more on this in the advanced stuff.
- “Cost of revenue: Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include
- expenses related to the operation of our data centers, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs.
- costs associated with partner arrangements, including traffic acquisition and content acquisition costs,
- credit card and other transaction fees related to processing customer transactions, and
- cost of consumer hardware device inventory sold.
- Research and development expenses consist primarily of
- share-based compensation, salaries, and benefits for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense all of our research and development costs as they are incurred.
- Marketing and sales consist of
- salaries, share-based compensation, and benefits for our employees engaged in sales, sales support, marketing, business development, and customer service functions.
- also include marketing and promotional expenditures, and professional services such as content reviewers.
- General and administrative: The majority of G&A expenses consist of
- salaries, benefits, and share-based compensation for certain of our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees include legal-related costs and professional services.”