In 2009, around 98% of total revenue came from ads. But the proportion fell to 95% in 2010 and got whittled even more in 2011, to 85%. Last year, users buying digital or virtual goods on Facebook, along with fees from other services, generated the remaining 15% of revenue, according to Facebook’s registration statement filed with the Securities and Exchange Commission.
Still, since advertising remains the main revenue driver for Facebook, the company is working to rev up its ad engine even more. For example, it is testing the Facebook Ad Exchange, which lets marketers bid in real time for their ad to appear on a web page while an internet user is visiting it. Based on third-party data about the user, certain marketers may spot a target customer and decide to bid more aggressively for their ad to appear. Facebook also recently started rolling out “Sponsored Stories,” where ads contain comments of users who like certain products or services. However, the company is being sued for allegedly violating a California statute that bans the use of a person’s name or photo in a paid ad without consent.
In addition, Facebook is working to make ads more relevant, with a measurable return on investment. It has partnered with Nielsen to demonstrate that people remember its ads better.
Advertisers remain cautious. General Motors famously yanked its advertising from Facebook earlier this year, saying its ads there did not boost car sales. The Wall Street Journal noted that GM spent a comparatively miniscule $10 million on Facebook out of a total $1.8 billion ad budget in 2011. (GM reportedly later began talking with Facebook about resuming the ads.) It did not help that around the same time, UK digital marketing agency Greenlight released a survey showing that 44% of respondents never click on a Facebook ad or sponsored listing, and 31% rarely do so. “Today, nearly every one of the Global Ad Age 100 advertisers spends with us every quarter,” Sandberg stated during the earnings call. “But to date, most only allocate a small slice of their budget to Facebook even though their customers spend
How LinkedIn did it
One major social network that has not suffered much in the stock market since its IPO is LinkedIn.
Its market cap stands at around $12.4 billion, down slightly from the all-time peak of $13 billion. Founding member Lee Hower, now a venture capitalist, says the business model for the company arose organically. Since LinkedIn was aimed at job seekers, networkers and recruiters, it was logical to charge them to get access to expanded tools on its site, with the basic membership staying free. Businesses would pay to post jobs, access a suite of recruitment tools and search user profiles for potential job candidates.
Employees would pay a subscription fee to get expanded job listings and contacts. In 2011, hiring services comprised half of LinkedIn’s revenue. Advertising, including display ads, took up 30% of revenue while the rest came from premium subscriptions, according to LinkedIn’s latest annual report filed with the SEC.
