Understanding Facebook Business Model

In the post titled, ‘Understanding Business Model Fundamentals’, we learnt why do we need to understand business models and how to visually represent a business model using the ‘Business Model Canvas’. In this post, we will try to understand Facebook business model using the Canvas.

Facebook is the leading Social Networking Site (SNS) of the World. Facebook mission is to make the world more open and connected. Facebook has built a Multi-sided Platform (MSP) that serves different customer segments with different value propositions.

Facebook helps Internet users stay connected with their friends, families, and colleagues. It helps them discover and learn more about what is going on in the world around them. It helps them express themselves by sharing their opinions, ideas, photos, and activities. Facebook provides a number of products, free of charge, to its users. These include: Timeline, News Feed, Photos and Videos, Messages (Email, Chat, Text Messaging), Groups, Lists, Events, Places, Subscribe, Ticker, Notifications, and Facebook Pages.

Facebook had 845 Million Monthly Active Users (MAU) by the end of 2011. The following statistics are further illustrative of Facebook size and scale: 100 Billion friendships; 250 Million photos uploaded every day; 2.7 Billion Likes and Comments per day.  More than 425 Million MAUs, nearly half of Total MAUs, used Facebook products on Mobile. With so many users using Facebook on a regular basis, it has become an attractive destination for advertisers and developers alike.

Facebook offers a unique combination of reach, relevance, social context, and engagement to the advertisers. Advertisers can engage with users based upon the information shared by users such as Age, Gender, Location, Education, Work history or specific Interests. Facebook offers advertisers an ability to include social context in their Ads. Social context highlights a user’s connections with a brand or business. Businesses can also create Facebook Pages to engage with interested customers and simulate an ongoing dialog with them.

Facebook offers development tools and APIs that enables developers to easily integrate with Facebook. Developers can use Facebook platform to build apps and websites that are more personalized, social, and engaging. Facebook offers developers Open Graph API and Social Plugins that developers can use build different user experiences, including Apps on Facebook, Desktop Apps, Mobile Apps, and Platform-integrated websites. At the end of 2011, more than 7 million apps and websites had been integrated with Facebook. Facebook offers developers an online payment infrastructure that enables developers to receive payments from the users in an easy-to-use and secure environment.

While advertisements remain a key source of revenue for Facebook, the contribution from payments is increasing consistently. Payment revenues increased from nearly 2% in 2009 to 15% in 2011. Ad revenues contributed 85% to the total revenues in 2011.

Facebook is investing heavily into Facebook-owned data centers. This is to support user growth, increased user engagement, and delivery of new products. Facebook data centers currently store more than 100 petabytes (100 quadrillion bytes) of photos and videos. This is going to increase further in the future as users engage more on Facebook. To support these massive storage and computing needs, Facebook custom designed and built their software, servers, and data centers from the ground up.

To increase the user engagement even further, Facebook has partnered with companies such as Netflix, Hulu, Spotify, Washington Post providing online movies, TV shows, music, and news. Their apps help users share what they are watching, listening, or reading with their friends and family.

Facebook business model can be represented over the Canvas as follows. Click the image to see it on Full Screen.

 

Yesterday, on 9th April 2012, Facebook announced a decision to buy Instagram for $1 Billion. Instagram is a photo sharing application that allows its users to apply digital filters to the photos and then share them on different social networking services. The acquisition news is generating lot of buzz because Instagram had no revenues and only 13 employees. However, following statistics of Instagram are impressive: 30 million+ Registered Users; 1 billion+ Photos Uploaded; 5 million+ Photos Per Day; 575 Likes Per Second (~50 Million Likes per Day); 81 Comments Per Second (~7 Million Comments per Day).

In your opinion, how Instagram complements Facebook Business Model? Facebook spent about a quarter of cash they had at the end of 2011 on the acquisition. Was it worth it? Does the Canvas representation of Facebook business model helps you in assessing the acquisition fit?

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3 Comments

  1. Hi there. I like your blog. I like to way you explained the business model of Facebook. I would love to hear your feedback on my blog on how Facebook makes money. Please check it out at: http://revenuesandprofits.com/how-facebook-makes-money/

    Reply
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