The Business Of
Eyeballs | Meta | How Do They Make Money?
Morning All!
So yesterday, we started Part 2 of The Business Of Eyeballs and we set the scene for the week. We looked at how Meta’s social media products (Facebook, Instagram) fit into the wider advertising industry. We saw how WhatsApp’s rise has led to a decline in text messaging. And we briefly touched on Meta’s VR products - the Quest headset and the Ray-Ban smart glasses!
Today, we’re going to dive deeper into how the tech giant actually makes it money. Now, in The Business Of Alphabet, we saw that whilst Alphabet makes the majority of its money from advertising. ~20% of their revenue comes from non-advertising sources. However, as we can see from the chart below, that’s not the case with Meta! Pretty much all of their revenue comes from advertising!
That ~2% sliver of revenue comes from the sales of their VR headsets and smart glasses! But because it’s such a small part of revenues, we’re going to focus all our attention today on Meta’s advertising business.
And to guide us, we’re going to split Meta’s revenue into its 2 main drivers. One, the number of active users - basically the number of people using Facebook and Instagram. And two, the average revenue per user - how much Meta charges companies to advertise to their users. Alrighty, let’s dive in!
~80% Of People With Mobile Phones Use Meta’s Apps!
Okay so, the first driver we’ll look at is users. And the first question we’ll ask ourselves is - how many active users are there of Meta’s apps? Facebook, Instagram, WhatsApp?
Well, the answer is a staggering ~3.9 BILLION people. ~3.9 billion people open Facebook, Instagram, or WhatsApp at least once a month! Which is pretty extraordinary when you think that there are only ~5 billion people on Earth who have mobile phones!
Now unfortunately, until 2018, Meta didn’t report how many active users they had across all their apps. They just reported how many active users they had on Facebook… which makes it impossible to see how their total app users has grown!
HOWEVER, the chart below shows us how Facebook’s monthly active users has grown since 2011. And we can see that Facebook’s active user count has grown at a super impressive ~12% CAGR to go from ~766 million active users in 2011 to a whopping ~3 billion in 2023!
Now, question - Facebook’s active users has grown by ~2.2 billion people since 2011 (766 million to ~3 billion). But what’s been driving this growth? Because as we saw yesterday, Facebook launched in the US in 2004. Surely, by 2011 most people in the US were already using Facebook right?
Well, if you’re thinking that - you’re kind of right! By 2011, ~172 million people in the US and Canada were already active users on Facebook. And by 2023, this figure had grown ~4% CAGR to ~271 million. Okay so, 99m extra people have become users of Facebook in the US and Canada since 2011. But then where’s the other extra ~2.1 billion Facebook users come from? Well, as we can see from the chart below, pretty much all of Facebook’s active user growth has come from outside the US/Europe. In the Asia-Pacific region, the number of Facebook active users has jumped from ~185m people to a whopping ~1.3 billion!
Now, within the Asia-Pacific region, one country in particular has been a huge driver of user growth. And that’s India! This article here is a good read on how Instagram has grown in popularity in the country. Apparently ~100m new users join Instagram a year in India! And in fact, Meta recently actually said that India was the most significant country for the firm!
Okay, so there’s one final point to make on user growth. As I said earlier, Meta don’t split out how many active users are on Instagram. But according to most articles, when Facebook acquired Instagram in 2012, the app only had ~30m active users. Fast forward 11 years, and Instagram now has a whopping ~2 billion users! And we’ll see in a moment how important Instagram has been for Meta’s overall revenues!
Donald Trump Loves Facebook Ads! But One Person Loves Them More…!
Okay so, let’s move onto the pricing side of things. And see how much Meta makes from all the ads that we see on our Facebook and Instagram screens!
To kick us off, let’s first just be clear on the different types of ads. And I’ll focus on Instagram here. There are basically 3 main ways companies and individuals can advertise on Instagram. On a user’s;
1. Explore page,
2. Feed, and,
3. Stories.
In the image below, you can see 3 different ‘healthy eating’ companies - Lions Prep, AG1, and Green Chef - advertising to me across Explore, Feed, and Story!
Now, question - how does Meta get paid from these ads? Well, the answer is very similar to what we saw on The Business Of Alphabet. Meta will get paid based on clicks and impressions. To explain this, let’s look at one of the examples above. Take Green Chef (the ad on the right). The company’s ad has appeared whilst I’m flicking through Instagram stories. And in their ad, it says ‘Order Now’.
Now, Green Chef may have set this ad up, so that every time someone SEES this ad, they’ll pay Meta. OR they may have set this ad up so that every time someone CLICKS on ‘Order Now’, they’ll pay Meta. Now, how much will Green Chef pay Meta for every ‘CLICK’ or ‘SEE’. In other words, what’s their cost per click (CPC)? And cost per impression (CPM)? Well, according to this site, the average CPC on Instagram is ~$1.20. And the average CPM is ~$10. Which means that every time we CLICK on an Instagram ad, on average, Meta will make ~$1.20. And every time 1,000 users SEE an Instagram ad, Meta will make ~$10.
Okay, so we know how Meta makes their money from these Instagram ads (it’ll be very similar for Facebook ads by the way). But a question you may be wondering is - who are the biggest advertisers on Meta? Maybe a big consumer brand like Nike? Or a tech company like Apple?
Well, not quite! And this shocked me - but according to this article, from Nov 2018 - Sep 2022, the biggest spenders on Meta were all US presidential candidates! Joe Biden came in third, spending ~$55 million buying ads on Facebook/Instagram. Donald Trump spent ~$58 million. And Mike Bloomberg - the billionaire who lost out to Joe Biden in the Democratic nomination race - spent a whopping ~$63m on Meta ads!
Okay so in the US, we know it’s politics that dominates the advertising spend on Meta. Surely in the UK it’ll be the same then right? Well, no - in the UK, it’s slightly different. The main spenders aren’t political parties...
… they’re actually charities! The WWF (wildlife), The International Rescue Committee (refugees), Greenpeace (environment), Shelter (homelessness), and UNICEF (children’s rights), all appear to have spent more money on Meta ads than the Conservative or Labour parties from Nov 2018 to Sep 2022!
Okay, so we know who the biggest spenders are on Meta. And we know roughly how much they pay Meta for clicks and impressions. So the big question is - how many clicks and impressions are there on Meta every year? Well, unfortunately - Meta don’t disclose that data!
However, what they do report is the average revenue they make per user (ARPU). And this is basically - all the income they make from advertisers for clicks and impressions. Divided by the total number of users on their apps. And as we can see from the chart below, ARPU (for Facebook) has been flying! Back in 2011, Facebook’s made an average revenue of $5.02 per user. However, last year, this figure had jumped all the way to $44.60! That’s a growth of ~20% CAGR! And means Meta are making ~9x more revenue from each of their users now vs in 2011!
But here’s a question - HOW are Meta making so much more revenue per user? Are Meta showing more ads to each of their Facebook/Instagram users? Or are Meta charging advertisers more for their ad slots?
Well from the chart below, we can see that the answer is well and truly the second one - Meta are charging advertisers much more in 2023 vs 2011! In fact, the average price/ad has gone up ~11.4x over that period! Which shows just how powerful Meta’s position is in social media advertising. Companies and individuals (like Trump, Bloomberg, Biden) are so desperate to advertise to Meta’s huge ~3bn user base that they’re willing to pay >20% more every year for this access!
Okay, so Meta clearly have incredibly strong pricing power. >20% pricing growth per year is pretty unheard of for most companies! But then another question you may have is - why haven’t Meta increased the numbers of ads per user? The orange line above has skyrocketed. But that blue line has stayed pretty flat over the years. In fact, the number of ad impressions per user is actually lower in 2023 vs 2011! Surely, Meta can increase the number of ads they serve users and make more money, right?!
Well, yes you’re right. Meta could do exactly that. They could put ads in after every story you see. But there’s a big reason why they don’t! Imagine you’re using Instagram and every other swipe you do, ends up being an ad?! What’s going to happen? You’ll get annoyed and you may start opening up your Instagram app less. Which would have the opposite effect that Meta were after. Because if you’re opening up the Instagram app less, it means you’re seeing less ads! So, it’s a fine balancing act for Meta. Show enough ads to make revenue from advertisers. But not too many that people use their apps less!
Move Aside Alphabet, Nvidia, and Netflix! Not You Tesla!
Alrighty, let’s wrap up! We’ve looked at how Meta’s social networking platforms make money - companies and individuals pay Meta when their ads get clicked and seen. And we’ve looked at how strong Meta’s pricing power is - increasing your average price/ad by >20% per year is quite remarkable.
Now, the equation below basically sums up what we’ve seen today. ~3 billion users. Multiplied by ~$44.60 average revenue per user. Equals ~$135bn revenue!
That’s right. Meta made an extraordinary ~$135 billion in revenue last year. And as we can see from the chart below, this revenue figure has grown rapidly over the last decade. From ~$777 million in 2009, Meta’s revenues have grown ~45% CAGR over the last 14 years!
And this is an astonishing stat when you consider some of the other fast-growing companies we’ve seen on TBO. Alphabet’s revenue grew at ~27% CAGR from 2004-2023. Nvidia’s revenue grew at ~23% CAGR from 2014-2023. And Netflix’s revenue grew at ~22% CAGR from 2007-2023. Meta’s ~45% CAGR is quite ridiculous! Okay, not quite as ridiculous as Tesla’s ~79% CAGR… but still pretty ridiculous!
12th Mar 2024
And that’s a wrap! I hope you enjoyed breaking down how Meta makes its money. Tomorrow, we’ll crack on with looking at the company’s margins. And let’s see if they’re as strong as Meta’s topline!
Have a fabulous day!
The Business Of Team