Facebook is one of the largest and most popular social media platforms in the world, with over 2.9 billion monthly active users as of the fourth quarter of 2021. However, in recent years, the company has faced growing criticism and scrutiny around topics like data privacy, election interference, and the spread of misinformation. This has led some to question whether Facebook’s immense success is sustainable in the long run.
How does Facebook make money?
Facebook generates revenue primarily through advertising. In 2021, Facebook reported total revenue of $117.9 billion, with advertising accounting for $114.9 billion or 97.5% of that total. When users interact with Facebook’s products like its core app, Instagram, Messenger or WhatsApp, they provide data that allows Facebook to gain insights into user demographics, interests, behaviors and more. Facebook leverages these insights to serve users targeted ads from businesses seeking to reach specific consumer groups.
In addition to advertising, Facebook earns revenue through payments and other fees, such as purchases made inside gaming apps or badge purchases on Facebook. But ad revenue remains core to Facebook’s business model.
Is Facebook’s ad-based business model sustainable?
Facebook’s reliance on advertising revenue has raised concerns about the long-term sustainability of its business. Here are some potential risks and challenges to Facebook’s ad model:
User engagement may decrease
If users spend less time on Facebook’s platforms, view fewer ads or share less data, Facebook has fewer opportunities to show relevant ads. There are signs engagement on Facebook’s original app is declining among younger demographics, who are flocking to competitors like TikTok.
Ad targeting and measurement changes
Facebook gathers huge amounts of user data to allow precision ad targeting, but privacy changes like Apple’s App Tracking Transparency requirements are making it harder for Facebook to track users across apps and websites. New privacy legislation could further limit data collection and require Facebook to change its ad targeting approaches.
Reputational damage and trust issues
Controversies around fake news, data leaks, election interference and more have hurt Facebook’s public image. If more users lose trust in Facebook, they may share less data, view fewer ads, or leave the platform altogether.
Competitive threats
Other social media apps like TikTok are gaining popularity, especially with younger users. And if an entirely new type of social media emerges, Facebook’s platforms could rapidly decline in relevance. Facebook needs to continue evolving with changing consumer preferences and technology.
Despite these risks, Facebook remains highly profitable thanks to the enormous scale of its user base and ad targeting capabilities. But the company does face real long-term threats to the sustainability of its advertising machine.
How is Facebook trying to diversify revenue?
Recognizing the potential vulnerabilities of its ad-centric model, Facebook has been exploring ways to diversity its revenue streams beyond advertising. Some key initiatives include:
Facebook Marketplace
Launched in 2016, Facebook Marketplace lets users buy and sell goods locally. While the feature is free, Facebook eventually aims to facilitate transactions and take a cut of sales.
Facebook Pay
Facebook’s payment system aims to facilitate payments across its apps and provide financial services to users. Transaction fees and partnerships with banks and financial institutions could create revenue.
Oculus VR headsets
Facebook aims to be a leader in virtual and augmented reality technology. It could potentially earn hardware revenue from sales of devices like Oculus VR headsets.
Facebook Dating
Facebook’s dating app lets users find romantic matches among friends of friends. Premium subscription plans could become a future revenue stream.
Consumer hardware
Facebook is investing heavily in consumer devices powered by artificial intelligence, like its Portal video chat displays. Direct hardware sales provide an alternative revenue flow.
While still in early stages, these initiatives demonstrate Facebook is thinking about what’s next beyond digital advertising. But it remains to be seen whether any of them will truly rival ad revenue at Facebook’s scale.
Does Facebook face sustainability risks beyond business model?
In addition to concerns about over-reliance on ads, experts argue Facebook faces other sustainability risks that could threaten its long-term health as a company:
Employee retention challenges
Negative publicity has hurt Facebook’s workplace culture and made it more difficult to recruit and retain top talent, especially more ethical technical employees.
Regulatory threats
Governments worldwide are considering stronger regulations on social media companies around data privacy, illegal content, antitrust issues, and more.
Declining innovation
Some argue Facebook’s best innovation days are behind it, and that it won’t be able to match competitors in creating engaging new technologies and platforms in the future.
Founder succession uncertainty
When founder and CEO Mark Zuckerberg eventually steps down, there are questions around whether new leadership can maintain the company’s success.
Addressing these broader sustainability risks likely requires deeper changes to Facebook’s underlying culture and values beyond just diversifying revenue models.
What steps is Facebook taking to address sustainability concerns?
Facebook claims it is taking actions to evolve into a more responsible and sustainable company by:
Investing in AI content moderation
Facebook is using artificial intelligence to better detect and remove problematic content like hate speech, misinformation, and other violations.
Emphasizing privacy protections
New products and features put greater emphasis on encrypted messaging and private interactions between smaller groups.
Partnering with independent researchers
Facebook provides data access to select independent researchers to conduct objective studies on its platforms and address criticisms of its internal research.
Increasing transparency
Facebook publishes periodic transparency reports detailing statistics on content takedowns, government data requests, and more.
Supporting sustainability and social good initiatives
Facebook has committed to reaching net zero carbon emissions and is giving users ways to support nonprofits.
However, many argue these steps are insufficient given the scale of Facebook’s problems. Transforming the company’s whole approach to issues like data and research may require foundational shifts.
What reforms could improve the sustainability of Facebook’s business model?
Assuming Facebook remains dependent on digital advertising for the near future, experts propose various reforms that could make that business model more sustainable:
Stronger user consent requirements
Demanding Facebook get explicit user permission before collecting data for ads could facilitate more responsible data practices.
Limits to ad targeting capabilities
Regulations could restrict the extent to which Facebook can use personal data to micro-target ads to specific user groups.
Ad transparency and oversight
Requiring Facebook to archive and disclose details on the trends, demographics and purposes behind its ads could reduce harmful advertising.
Interoperability mandates
Making Facebook open up its technical infrastructure so users can easily communicate across its platforms and competitors could reduce its market power.
Independent governance oversight
Structures like independent privacy committees with enforcement powers could provide much stricter accountability over Facebook’s practices.
However, Facebook also has legitimate interests in maintaining user engagement, its ad platform strengths, and business confidentiality. Finding reforms that balance sustainability, privacy, and commerce will involve trade-offs.
Conclusion
Facebook has proven its advertising model can deliver immense revenue at unprecedented scale. But dependence on ads, reduced innovation, public distrust, competitive threats, and regulatory scrutiny raise increasing questions around the sustainability of Facebook’s dominance. Diversifying into new revenue streams provides some hedge, but likely cannot replace Facebook’s ad cash cow anytime soon. More fundamental reforms to how Facebook operates – like much greater transparency and user consent requirements – may be essential to making sure the company’s success can withstand the test of time.