How Does Facebook Make Money?

By now, most everyone is aware of the success of Facebook Inc FB as a social media platform. As of early 2015, Facebook had about 1.4 billion monthly active users. Few investors would argue over Facebook's success when it comes to popularity. However, popularity doesn't pay the bills. Where does the revenue come from? Many users set up a Facebook account, post pictures and videos, play games and socialize on the platform without ever paying a dime. So how is it that Facebook recently disclosed about $12.5 billion in revenue in 2014? For such a massive, high-tech, cutting edge technology company like Facebook, the answer to profits is extremely simple: advertising. You can't get any clearer than Facebook's recent 10-K annual report: "We generate substantially all our revenue from advertising and from fees associated with our Payments infrastructure." (http://investor.fb.com/secfiling.cfm?filingID=1326801-15-6) Advertising numbers To say that advertising revenue is critical for Facebook is an understatement. About $11.5 billion (92 percent) of the company's $12.6 billion in 2014 revenue came from ads. Facebook increased its total revenue in 2014 by $4.59 billion, and more than 98.2 percent of that growth came from increases in advertising revenue. Facebook points to increases in News Feed advertisements as the "most important factor" driving ad revenue growth. Average price per ad for Facebook ads also climbed by 173 percent in 2014. Rise of mobile One key area of advertisement growth for Facebook is mobile ads. In December 2014, Facebook had over 745 million average mobile daily active users. In 2014, 65 percent of Facebook's total advertising revenue came from mobile ads, up from only 45 percent in 2013. Do active users even matter? While the number of Facebook users doesn't directly produce profits for the company, active users do play an indirect role in Facebook's profits. The large number of ad impressions and clicks that Facebook's platform can generate from its massive user base is the reason why advertisers pay big bucks for Facebook ads.