Facebook is one of the largest and most widely used social media platforms in the world, with billions of users across its various apps like Facebook, Instagram, and WhatsApp. However, despite its massive userbase, Facebook has struggled to effectively monetize many aspects of its platform. There are several key reasons why Facebook is not monetizing as effectively as it could be:
Over-reliance on advertising revenue
Facebook relies heavily on advertising for its revenue, with over 98% of its total revenue coming from ads. This over-dependence on ads means that Facebook is vulnerable to any declines in the online advertising market. We saw this in 2022, when changes to Apple’s privacy policies on iOS caused Facebook’s ad targeting and measurement capabilities to be impaired, resulting in significant revenue losses. Relying too much on one revenue stream is risky for any business.
Saturation of ad load
Facebook has saturated its platform with ads, and there is likely little room left to further increase its ad load without negatively impacting user experience. With ads already taking up significant space in Facebook’s app feeds and stories, it has become increasingly difficult for Facebook to add more ads without turning off users. This ad saturation limits how much more revenue Facebook can generate from its core social platforms.
Lack of shopping/e-commerce functionality
Facebook’s platforms like Instagram and WhatsApp have massive audiences, but limited native functionality to support shopping or e-commerce transactions. Unlike social media rivals such as TikTok and Snapchat which integrate mini-programs for shopping, Facebook has not emphasized shopping tools and functionality. This is a missed opportunity, as social commerce represents a fast-growing revenue stream that Facebook has yet to effectively capitalize on.
Challenges with scaling virtual reality
Facebook has invested heavily in virtual and augmented reality through its Oculus division, with the goal of driving future revenue growth. However, VR still has significant challenges to mainstream adoption, and it will likely take many more years before VR hardware and software are ready for mass consumer audiences. As a result, Facebook’s significant investments in VR and metaverse technologies have yet to pay off in a meaningful way.
Regulatory scrutiny and privacy concerns
Facebook faces substantial regulatory headwinds that limit its ability to collect user data and deploy targeted advertising. Regulators in Europe, the U.S., and other markets are implementing more stringent data protection rules and are cracking down on online privacy violations. Facebook is also dealing with backlash and distrust from users related to its handling of private user data. These regulatory and reputational challenges make it harder for Facebook to gather data and leverage it effectively for monetization.
Market saturation in core markets
Facebook has hundreds of millions of users, but growth in lucrative markets like the U.S. and Canada has stagnated. There are only so many digital ad dollars to go around, and competitors like TikTok are taking up a growing portion. Without the ability to significantly expand its revenue pie in established markets, Facebook will face continued challenges boosting monetization through its current ad models.
Slowing user growth and engagement
While still huge in absolute terms, user growth on Facebook’s core platform has slowed to a crawl, and key metrics like time spent per user are also declining. With the platform maturing and new competitors emerging, Facebook may have trouble further monetizing its user base if engagement continues to fall. Declining user interest and satisfaction will translate to fewer ad opportunities.
Conclusion
In summary, Facebook faces a range of hurdles in translating its vast user reach into more monetary success: over-reliance on a saturated ad market, limited e-commerce capabilities, regulatory scrutiny, slowing user growth and engagement, and stiff competition. To kick its monetization into higher gear, Facebook will likely need to diversify its revenue streams, enable more social commerce, continue investing in future platforms like VR, and find ways to reinvigorate user growth – especially in valuable markets. But with regulators and increasingly privacy-focused consumers casting more scrutiny on data gathering practices, Facebook’s path forward on monetization looks filled with challenges.
Key Reasons Summary Table
| Key Reason | Summary |
| Over-reliance on advertising revenue | 98% of revenue from ads leaves Facebook vulnerable to market fluctuations |
| Saturation of ad load | Little room left to add more ads without impacting user experience |
| Lack of shopping/e-commerce functionality | Minimal ability to support social commerce and shopping |
| Challenges with scaling virtual reality | Large investments yet to pay off meaningful revenue |
| Regulatory scrutiny and privacy concerns | Tougher data regulations inhibit advertising capabilities |
| Market saturation in core markets | Limited ability to expand ad revenue in mature markets like US/Canada |
| Slowing user growth and engagement | Declining usage metrics inhibit ad targeting and ability to monetize users |
Facebook’s Major Sources of Revenue
Facebook generates the vast majority of its revenue from selling advertising placements across its family of apps. Here is a breakdown of Facebook’s major sources of revenue:
Online ads on Facebook app
The Facebook app features display ads in the feed, stories, marketplace, and groups products. These ads accounted for approximately 87% of Facebook’s ad revenue in 2021.
Online ads on Instagram
Instagram distributes ads in feeds, stories, reels, and other surfaces. Instagram ad revenue made up about 11% of Facebook’s total ad sales in 2021.
Online ads on Messenger
Messenger places ads within its inbox/messaging environment on mobile and desktop. These ads contributed about 1% of Facebook’s ad revenue in 2021.
Online ads on WhatsApp
WhatsApp shows ads within its Status feature. It generated less than 1% of Facebook’s ad revenue in 2021, but growth is accelerating.
Ads in Oculus VR headsets
Oculus displays ads in select VR games and apps. Revenue is still negligible compared to Facebook’s other platforms.
Facebook Audience Network
This is Facebook’s external ad network that places ads on third-party apps/websites. FAN accounted for about 2% of total ad revenue in 2021.
E-commerce transaction fees
When users buy products directly on Facebook/Instagram, the company charges a fee on these transactions. This represented less than 1% of revenue in 2021.
Facebook’s User Growth Statistics
Despite market saturation concerns in some regions, Facebook’s family of apps still rank among the most widely used social media platforms globally. However, user growth has slowed significantly for the core Facebook app.
Facebook app monthly active users (MAUs)
| Year | MAUs (Billions) | YOY Growth % |
| 2019 | 2.5 | 2% |
| 2020 | 2.8 | 12% |
| 2021 | 2.9 | 4% |
Note: 2021 growth was likely an anomaly due to COVID lockdowns. Otherwise growth has stagnated.
Other Facebook-owned apps MAUs
| App | Latest MAUs |
| 1.4 billion | |
| Messenger | 1.3 billion |
| 2 billion |
These other apps still show strong user growth, especially Instagram which grew over 20% year-over-year in 2021.
How Facebook Makes Money from Advertising
Facebook generated $115 billion in advertising revenue in 2021. This came predominantly from selling ad placements via auction across its various apps.
Ad Auctions
Most Facebook ads are placed via second-price auctions, where advertisers bid on showing ads to specific users based on targeting criteria. The winner pays just above the second-highest bid.
Ad Targeting
Facebook leverages the extensive data it has on users’ demographics, interests, behaviors, and connections to allow advertisers to target ads.
Ad Formats
Facebook offers numerous ad formats including photo, video, carousel, collection, messaging, and augmented reality ads.
Minimum Bids
Advertisers must meet minimum bid thresholds that vary based on factors like ad placement and targeting criteria.
Ad Quality
Relevance signals help ensure users see relevant ads that are more likely to generate results for advertisers.
Reporting
In-depth reporting provides advertisers data on impressions, clicks, conversions, and other metrics to optimize campaigns.
Facebook’s Alternate Revenue Streams
While advertising dominates revenue for now, Facebook is exploring other emerging business models to diversify revenue, including:
Facebook Payments
Facebook plans to integrate payments across its apps, opening up potential transaction fees.
Virtual reality
Virtual reality headsets and content remain a potential long-term revenue driver.
E-commerce
Facebook is expanding native shopping functionality on Instagram and facilitating social commerce.
Subscriptions
Facebook is testing subscription offerings to provide exclusive app capabilities and content.
Virtual tokens / Metaverse economy
Crypto / virtual tokens could support revenue generation for VR platforms and metaverse activities.
Content licensing
Licensing Reels content to third parties is an emerging opportunity to monetize creator content.
How Facebook Can Increase Monetization
Given the challenges Facebook faces maximizing revenue from its current business model, here are some ways it could potentially boost monetization going forward:
Enable more shoppable ads and social commerce
Leveraging the massive reach of Facebook and Instagram to facilitate more product discovery and direct shopping/transactions could open up a huge new revenue pool beyond just branding ads.
Develop innovative ad formats for new surfaces and devices
Finding ways to seamlessly blend ads into emerging surfaces like AR/VR could provide fresh ad inventory to tap into.
Offer more robust subscription capabilities
Giving users more options to pay for exclusive app access and content could establish predictable recurring revenue streams beyond ads.
Experiment with digital currencies and metaverse monetization
Creating own virtual economy linked to cryptocurrencies or NFTs has potential to unlock new revenue if the metaverse gains traction.
Cultivate lucrative creator content and commerce
Revenue sharing opportunities exist for empowering creators, influencers and businesses to generate income directly on Facebook’s platforms.
Focus on growing ad revenue from developing markets
Tailor ad models and products to expand ad revenue in emerging markets like India, Southeast Asia, and Latin America with untapped potential.
Risks and Challenges
However, Facebook also needs to be aware of the major risks and challenges that could hinder its ability to significantly expand monetization:
User disengagement and churn
Pushing too many ads, commerce features, subscriptions, etc. could aggravate users and damage engagement and retention.
Reduced ad targeting capabilities
Privacy changes imposed by regulators and Apple continue to limit Facebook’s ability to leverage user data for highly targeted ads.
Creator monetization could cannibalize ad revenue
If user-generated content starts displacing ads, it could shrink Facebook’s overall ad market share and revenue.
Emerging revenue streams could take years to mature
Bets on VR, metaverse, payments, etc. require massive upfront investment with monetization potential unlikely to be realized soon.
Increased costs across the business
Investing in new areas and revenue streams will inflate costs and hurt profitability in the near-term.
The Path Forward
Facebook clearly faces challenges maximizing monetization from its maturing social media assets. But with billions of users and a dominant market position, it still possesses tremendous strengths to unlock new revenue streams both on and off its core platforms. However, execution will be critical as Facebook needs to add new monetization capabilities while preserving the user experience and engagement that serves as the foundation for its advertising juggernaut. If it can nimbly evolve its business model without alienating users or regulators, Facebook is well-positioned to tap into multiple emerging trillion-dollar markets across e-commerce, payments, creator monetization, and the metaverse. But capturing any major new revenue pools will likely take years of concerted investment. In the meantime, Facebook stock may continue to underperform until questions around its future monetization potential gain more clarity.