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How Facebook makes money

1:06 PM, Jul 27, 2012   |    comments
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CNN - Facebook released its first earnings report as a public company on Thursday. The social media site generated more than a billion dollars last quarter, up 32 percent, but reported a net loss of $157 million. So how does the social media giant make money and get out of the red?

If you're one of Facebook's 900 million users, and chances are, you might be, you're worth $1.21 to the company. That's how much they made per user last quarter. Let's take a look at how the company's actually making money.

See that digital cow on the Farmville game? Facebook makes a $1.20 every time you buy one. And that bullet-proof vest on Mafia Wars? And your survival knife? Facebook gets a slice of those sales, too; $1.20 for your virtual protection.

All of them are sold by Zynga, but Facebook gets a 30 percent cut of each sale. They're part of Facebook's payments business, which accounts for 18 percent of the company's revenue. The nickels and dimes add up -- Facebook collected $186 million last quarter. But the main way Facebook makes money is from the ads you see on the site.

"We spend several million dollars every month, frankly on Facebook ads," said Jason Goldberg, Fab.com CEO.

Design website Fab.com says it had nearly 200,000 users before they even launched, and two-thirds came from Facebook.

"On any given day, 25 percent of the visits to Fab are coming from Facebook," Goldberg said.

Some are not as sold on the success of paid Facebook ads.

"The marketers we talk to tell us they're just not happy with the performance they're getting from Facebook," said Nate Elliott, analyst for Forrester Research.

Businesses like the company pages where they can advertise their brand for free, but the social network made its $872 million in ad revenue last quarter from paid ads.

"When you click on those ads, that's how Facebook makes money. Facebook, quite frankly, doesn't care from a revenue perspective what happens after you get to that branded page," Elliott said.

General Motors has a branded Facebook page with 396,000 likes.

"Unfortunately, it's just about the only thing many marketers look at: how many likes do we have?" Elliott said. We think it's an overly simplistic metric and one that doesn't really tell you whether you're having success."

But those likes may not translate to profits. Two months ago, GM pulled all its paid advertising on Facebook. And that's not the only concern.

What really scares Facebook? Your smartphone. The company launched mobile ads four months ago and they're still not making a lot of money off of them.

"We're starting to see a lot of real money flow into mobile advertising but there's still a lot of potential to be unlocked there," Elliott said.

Analysts are expecting Facebook's sales to top a billion dollars this quarter. For that number to keep growing, Facebook has to figure out how to make money off mobile and not just the website itself.

CNN

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