Facebook build products that enable people to connect and share with friends and family through mobile devices, personal computers, reality headsets, and in-home devices. Facebook generate almost all revenue from selling advertising placements to marketers across Facebook, Instagram, Messenger and third-party applications and websites. Facebook Ads enable marketers to reach people based on a variety of factors including age, gender, location, interests, and behaviours. Facebook sell ad space mainly through pay-per-click but can also charge on impressions, video views and other metrics.
Facebook have over 2.7bn monthly active users (MAU’s) worldwide who generate an average of $31 per user annually.
The global market for advertising spending is estimated at estimated to be valued at $578bn, and is projected to grow at 7% CAGR to 2024. Social media only represents 17% of this ad spend and is forecast to outstrip global advertising spend, growing at a 10% CAGR to 2024.
Social media advertising is gaining market share over traditional forms of advertising as it generates a higher ROI for businesses because:
- Success is easier to measure – Digital advertising can track click through rates, bounce rates, engagement and conversion easier than traditional forms of advertising.
- It has more precise targeting – Advertisements can be targeted to specific users based on customer data, whereas TV advertising is a far broader category.
- It’s lower cost and has lower barriers to entry. Small businesses are able to run ad campaigns for the fraction of a cost of using traditional advertising methods.
Facebook are the market leader in social media controlling 6 of the top 12 networks, placing them in a prime position to gain from the switch to social media advertising.
The business benefits from a network effect. Although there were previous social media networks in the early 2000’s FB was the first to gain significant scale. Now that Facebook has over 2bn users and has built up years of data, connections, photos and videos, the cost/effort of a user to join another platform is high. This has created significant barriers to entry into the market, that even one of the more well-resourced businesses in the world, Google, failed to make a success out of their social network, Google+.
Facebook’s financials are phenomenal. They have achieved 37% revenue CAGR, 39% Operating profit CAGR and 51% Net Profit CAGR over the past 5 years. Facebook have consistently high gross and operating margins at 80%+ and 40%+ respectively.
Performance is underpinned by 2 KPI’s; Monthly Active Users and Revenue per user.
Facebook are growing users and revenue per user across all geographies in a consistent manner. The US is the most lucrative area with the $163 per MAU, compared to the RoW which generates only $8 per user signalling the potential for further monetization in other regions.
Middleton Enterprises believe Facebook is an extremely high-quality business with a significant runway for growth. Facebook have demonstrated the ability to continually attract more MAU’s to the platform, whilst increasing their engagement and time spent on the platform, in turn generating a higher revenue per user. Social Media marketing represents only ~12% of global marketing spend, despite its clear superiorities in generating ROI for businesses. There are likely to be several winners in this category, but as the owner of most of the top brands and the strong network effects, Facebook is likely to maintain its position as the leader in the category.