While content companies are pushing to diversify their businesses with subscriptions and licensing, and big tech companies draw on income from hardware sales and software sales and subscriptions, Facebook is sticking with advertising at scale for the foreseeable future.
Why it matters: Facebook created its massive business by handing out a free social network and monetizing it through ads. As it expands into other businesses like commerce, payments, and hardware, it's mostly sticking with that formula — convinced that "free and ad-supported" remains the best route to achieve massive scale and to deliver on its mission of connecting the world.
The big picture: Advertising as an industry has historically grown at roughly the same rate as the GDP, albeit a bit slower since the 2008 recession. In order for Facebook to maintain its revenue growth rate, especially through a possible recession, it needs to quickly expand its addressable market through free products.
- It also needs to move into different types of advertising formats that help businesses reach consumers at different points during the sales process.
- For now, the company is not interested in products that create friction between businesses and consumers, like paywalls or memberships, because it thinks that will limit the growth of businesses that Facebook is depending on to buy ads on Facebook.
- Facebook's foray into payments, for example, isn't about the company ultimately becoming a payment processor, but about facilitating higher engagement between businesses and consumers.
"If we can serve more businesses and serve all of them well with free tools, then in time, they can grow, hire and support more communities. Some of them will advertise in time."— Facebook Chief Revenue Officer David Fischer in an interview with Axios.
Details: Facebook's business plan is to grow its consumer experience first, and then to slowly integrate advertising into emerging products like messaging, stories, marketplace, and video, if they make sense for ads down the line.
- It plans to keep its new payments feature free for users until adoption grows big enough that one day, it could make sense for the company to take a cut of transactions, similar to the way traditional payment vendors make money.
- The company is willing to wait a long time before throwing up any types of barriers around consumer engagement.
- For example, Facebook still has yet to meaningfully monetize many of its biggest acquisitions (Instagram is the notable exception). It's been five years since Facebook acquired WhatsApp and Oculus, but it's only just beginning to monetize messaging, and doesn't yet really monetize virtual reality.
Facebook is continuously creating new ads and tools to subsidize (and increase) the free interactions between businesses and consumers.
- For example, its "Click to message ads" appear in places like the Facebook News Feed, which lead to an advertiser's Facebook Messenger or WhatsApp profile instead of its website. Facebook wants own that direct relationship as much as possible.
- The company's new "tabs," like MarketPlace and Watch, have also become advertising destinations. Facebook rolled out ads in Marketplace to help performance advertisers reach consumers looking to buy a specific item, similarly to search ads on Google, while video ads in Watch help brand advertisers expand their reputation.
Between the lines: As the news feeds in Facebook's flagship app and Instagram are quickly filling up with ads, Facebook is facing growing pressure to turn up the revenue dial for new services and features.
- To do this, Facebook has created aggressive education campaigns to help businesses transition their advertising spend over to new formats, such as a "Stories school" to teach advertisers and ad-buying agencies about how to create ads for Stories specifically.
- It also needs to focus on selling more ads to businesses outside of North America. Facebook makes the majority of its revenue off of selling ads to users in the U.S. and Canada, but its user growth in those countries has slowed dramatically.
By the numbers: Facebook sees plenty of room to expand its ads businesses.
- Currently, the tech giant makes around $55 billion annual in ad revenue, compared to Google's $116 annual ad revenue.
- Google, like Facebook, makes most of its money off of advertising on free-ad supported products, like search, news, video, directions, maps, etc.
- Facebook currently estimates it has 140 million businesses operating on its platform globally, with 7 million advertisers across all of its family of apps.
Be smart: The company acknowledges that it will face challenges in growing its ads business, particularly because of regulation.
- For example, Facebook's chief financial officer David Wehner warned on the company's first quarter earnings call this year that Facebook could face "headwinds" on its ad-targeting business due to privacy concerns in 2019.
The bottom line: Facebook's plan to grow its business is to make it easier to get more companies to grow their businesses on Facebook's back. If it gets them hooked on Facebook's platform for sales, the advertising market grows exponentially.