Written by Norman Isaac Mwambazi

Facebook crosses the $1 trillion mark

Social media giant Facebook has become the fifth company to cross the $1 trillion mark in market capitalisation after a …

Social media giant Facebook has become the fifth company to cross the $1 trillion mark in market capitalisation after a late afternoon stock rally on Monday fuelled the company to this milestone.

This came after a federal court judge dismissed an antitrust suit filed by the Federal Trade Commission (FTC) last year against Facebook. In the lawsuit, the FTC alleges that Facebook’s policy of buying off would-be competitors in the social networking arena- like messaging app WhatsApp (2014) and photo/video sharing application Instagram (2012) makes the company a monopoly of sorts in the social network industry. It should be noted that Facebook bought WhatsApp for $19 billion and paid $1 billion for Instagram, which was a start-up at the time.

The judge based his judgement on the claim that the FTC lacked enough facts to back up its monopoly claims against Facebook. However, The Federal Trade Commission secured 30 days within which it should file amendments to the suit if it wants to go ahead with the case.    

It should be noted that Facebook is not the first company to be scrutinised by the FTC. Other big tech companies like; Apple Inc, Google’s parent company-Alphabet, and Microsoft Corporation have in the past been the subject of scrutiny by the FTC, questioning their business practices.

According to Dow Jones Market Data, Facebook (ticker: FB) rose 4.2% in Monday’s trading session that saw the company close the day with a market capitalisation of $1,008,404.77. 

With this valuation, the tech giant joins the trillion-dollar club that has companies like Apple (ticker: AAPL), Microsoft (ticker: MSFT), e-commerce giant Amazon (ticker: AMZN) and Google parent Alphabet (tickers: GOOG, GOOGL). As Facebook joins the trillion-dollar club, Microsoft soared a trillion-dollar higher last week when it surpassed the $2 trillion mark and now has a market capitalisation of $2.02 trillion.

If the statistics provided by Dow Jones Market data are anything to go by, then Facebook investors must be smiling from ear to ear and have probably recovered from the company’s slip to $416.2 billion in March 2020 because since then, it’s valuation has meteorically risen by $592 billion. This data also shows that Facebook’s market-cap gain from March last year to date is worth more than the entire market caps of JPMorgan Chase & Co ($467.18b), financial services company Visa Inc. ($499.27 billion), and Nvidia Corp. ($498.03b).

Over the past 12 months, Facebook’s stock has surged 65%, more than the benchmark S&P 500 gains of 43% in the same period.

How does Facebook make money?

As of the first quarter of FY2021, Facebook reported that it has over 2.85 billion active users, making it the biggest social network in the world, so it is only fitting that it makes billions of money from its users, but the question is: How does it do so?

Facebook’s finances have been rising year-on-year until yesterday, when it achieved a trillion-dollar valuation. Most users predominantly utilise their Facebook account to share their strong political views, trash their ex or share memes. A few others visit Instagram regularly to gawk at model’s photoshopped photos, comment on random stranger’s content and share popular memes. Whatsapp is utilised not only for basic messaging but also to create communities through the spread of chain messages containing everything from financial advice to admonitions about how God will punish your failure to pass the message along. The real question remains: How does a company with no clear revenue stream in sight and no concrete product or service sold make billions of dollars by the end of the quarter? How does such a company receive record-breaking valuation?

Facebook’s business segments

Advertising

Facebook primarily makes money by selling advertising space to its various social media platforms, businesses, individuals, political organisations and other entities that want to advertise their goods and services or amplify their voices and have them broadcast to a bigger audience. Some of Facebook Inc. platforms include the social media site Facebook, messaging apps WhatsApp and Messenger, photo/video sharing app Instagram, as well as an ecosystem that allows users to connect through its Oculus virtual reality products. Facebook bought Oculus VR in 2014 for $2.  

Through advertising, Facebook makes the biggest chunk of its revenue, 98% to be exact. When you pay for Facebook to advertise your business, your ad will primarily be displayed on the Facebook site and simultaneously on other platforms like Messenger, Instagram and other third-party affiliated mobile applications like browsers, websites, and games. Facebook’s metric system estimates your advert audience depending on your budget and will provide a report showing metrics like the number of people that saw the ad, the number of people who clicked on the ad, and those who messaged you, among others.

In FY2020, Facebook reported that it earned $84.2 billion in advertising revenue which was 98% of the company’s total revenue in FY2020, a growth of 20.8% in that period.

Other Revenue

Aside from advertising revenue, Facebook also earns a significant amount through its second business segment, the tech giant calls “Other Revenue.” Facebook makes this other revenue by delivering consumer hardware devices like the Portal Mini and Portal TV video call devices which feature a camera and a set of microphones. Facebook earns this other revenue from net fees it receives from software developers who use it’s payments infrastructure.

In FY2020, Facebook reported that it earned $1.8 billion from its “Other Revenue” business segment, which represents 2% of total revenue for the year. Facebook’s other revenue grew by 72.4% in FY 2020.

Facebook’s competition

Just because Facebook is the biggest social media company on the planet does not mean it doesn’t have competitors. It sure does have them. These include companies that also sell online advertising space to marketers like Alphabet’s Google and YouTube. Facebook’s other competitors include companies that provide platforms for communicating and sharing content online like; Apple, Amazon, Twitter, and Chinese streaming services developer Tencent Music Entertainment Group (TME), which takes advantage of the fact that Facebook faces a ban in mainland China.

Google’s AdSense has the edge over Facebook in the online advertising business because it has the world’s largest search engine, Google and leveraging on a plethora of Google products.