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Facebook is making the majority of its revenue off U.S. users, and it's not because of scale.

While the number of monthly active users in the U.S. is relatively low compared to other countries, the average revenue per user in the U.S. is 1314% higher. See the dark purple boxes below compared to the light purple.

Expand chart

Data: Facebook; Chart: Lazaro Gamio / Axios

Why is the U.S. such a cash cow?: The U.S. advertising market, by spend, and particularly by mobile spend, is by far the largest and most concentrated advertising market in the world. The U.S. ad market is worth around $191 billion dollars. By comparison, the next biggest ad market, China (which blocks Facebook), is worth around $80 billion USD. The third largest ad market, Japan, is worth around $37 billion USD.

What this means: The number of Facebook's monthly active users (MAU) has grown steadily over the past year, while the amount of average revenue per user has grown at a more irregular pace, with an expected surge during the holiday season in Q4. These growth patterns suggest that Facebook's revenue strategy relies on competitive ad pricing, mostly through their programmatic auction, not necessarily the expansion of their user base, which in major markets — like the U.S. — is largely saturated.

What to watch: Because Facebook already has a large penetration into the U.S. market (nearly 80% of all U.S. internet users and over 90% of U.S. millennials), they will need to focus on increasing the average revenue per user (ARPU) in the U.S. The obvious way to do this is through video advertising opportunities, but Facebook hasn't quite solidified its video revenue strategy. In the short-term, they will focus on two key metrics to expand their ARPU:

  1. Migration of monthly active users (MAUs) to daily active users (DAUs): Facebook has continually rolled out new personalization techniques to ensure their percentage of DAU's increases, which will in turn allow Facebook to raise its advertising rates. (Higher engagement with the platform warrants a higher premium on ads they can sell.)
  2. Maintaining a competitive ad auction: Currently, Facebook sells ad units in a variety of formats (cost per click, cost per 1000 impressions, etc.) through their automated bidding system -- an ad auction. While the company continues to test their video advertising strategy, a key focus for growth will be maintaining competitive pricing within their auction.

Why it matters: Mark Zuckerberg warned investors last week that Facebook's ad revenue would "come down meaningfully" in 2017 as the company continues to work through a decline in newsfeed inventory without a solidified video revenue strategy.

Ad buyers can expect: Facebook's ad auction will become increasingly competitive to offset revenue losses the company anticipates.

Users can expect: Facebook to continue to optimize personalization features and push notifications, like memories in news feeds, birthday reminders, and event suggestions, to push monthly active users to become daily active users.

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Dave Lawler, author of World
7 mins ago - World

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