How Does Facebook Make Money?

One discussion I often get into with people not in the technology business is "How does Facebook make money?" Facebook is where Google was in 2004. Most lay people didn't understand how Google made money back then either.

A concept many people don't understand is that you don't have to make money by charging for your product or service. Just because you give away your product or services for free doesn't mean it has no value. There are other ways to monetize the value you create besides charging consumers. This is true both as a business and as an individual. Some examples of this are:

• Traditional media such as radio, TV, newspapers, etc. They have long broadcasted or published their content for free, but there is no doubt they make plenty of money through advertising.
• Along the same lines, there are now many independent bloggers, writers, etc. earning their living by publishing their content on the Internet for free. Once again, they give away their content for "free" to their readers, yet they still "make money".
• Youtube was founded in 2005. In 2006 Google paid $1.65 billion for it. Youtube never "made money".
• Skype was founded in 2003. In 2005, eBay $2.6 billion for it. Then in 2011, Microsoft paid $8.5 billion. Skype has never "made money" in 10 years of existence. It certainly doesn't bring in enough money to justify pay ing $8.5 billion.
• Instagram was bought for $1 Billion in cash and stock by Facebook in April 2012. It was initially released in Oct 2010. It never made a single penny.

These are just a few examples I can think of off the top of my head. But getting back to how Facebook makes money, consider the assets Facebook has and the value of those assets.

• There are over 900 million people on Facebook despite being banned in China. Nearly 1 in 7 people in the world have a Facebook account and half the people on the Internet. Nearly everyone under the age of 30 is on Facebook and it is the platform they communicate on. If you don't have a Facebook account, you are cutting yourself off from nearly everyone that will determine the future of our society, half the people with Internet access, and 15% of the world's population.
• Facebook not only knows everything that you write in Facebook. Facebook also knows who your friends are, and what your friends say about you. Facebook allows you to "tag" other people in photos and posts. While Facebook lets you remove tags from pubic view, Facebook itself still has this information. Removing yourself from other people's posts takes it off your account, but it doesn't take it off theirs. Since we have freedom of speech and press, there is nothing you can do to stop someone else from posting a photo of you that they took in a public space, or writing about you.
• Deleting your Facebook account or not having a Facebook account does not remove you from Facebook. As long as any of your friends write or post about you, Facebook knows about you and hundreds of millions of people. In fact, not having a Facebook account means you are letting other people define your identity instead of defining your identity yourself.
• Facebook has facial recognition technology. If you have been "tagged" in several photos, they now have software to recognize you in photos everywhere. Given that cameras are everywhere, automatically recognizing millions of photos and videos and who is in them has enormous potential.
• Facebook and Google are the largest information gathering service the world has ever seen. I can see in the very near future that they will know more about you than you know about yourself. This will happen whether or not you are on Facebook or Google unless you isolate yourself from the rest of humanity. The fact you are reading this means you haven't.

Of course, when I describe this, it scares most people. The implications of this is that there is no more privacy unless you wish to cut yourself off from society entirely. Look at a typical smartphone that is being sold by the hundreds of millions every year. It knows where you are at all times (GPS), which direction you are looking at (compass), what you are looking at (camera), what you are listening to (microphone), how you are moving; walking, running, cycling, driving, etc., (accelerometer). It is always connected to a high speed Internet connection, so that this information can be sent to anywhere in the world. The reaction, I get from some people is "Well, I won't have a smartphone!". But what good is that if everyone else around you has one? Facebook will know about you as long as other people write, take photos of you, or if you are in a public place with cameras.

I will write another post as to the philosophical and privacy issues. Everything you do, buy, see, hear, read, everyone you contact, everywhere you go is being recorded and analyzed by a computer somewhere. There is no stopping this trend. It is counter productive to fight it as it can not be stopped. A better approach is to understand the technology so that you can use it for your advantage while protecting yourself from its abuses.

Getting back to Facebook, the most obvious way they will monetize this information is through targeted advertising. For example, imagine mounting a camera on a electronic billboard. By using facial recognition technology, the billboard can change its advertisements based on who's looking at it. There is no question that the value of the information is enormous and unquantifiable. How Facebook makes money is only limited by their imagination.