How Meta makes billions using simple psychology tricks
How meta uses psychological strategies and mind games to make money from you.
If there is only one key point you should take away from this article, it’s this:
Meta's communication networks, such as WhatsApp and Messenger, enhance user connectivity and are not directly monetized. Instead, they support the overall ecosystem by driving user engagement. Psychological mechanisms are used to keep users engaged and locked-in. That’s when monetization comes into play.
Want to know more? Keep reading, then.
I have been studying Facebook/Meta since 2018, but this is the first time I have broken down their business model in great detail. My initial opinion has not changed much; Facebook is still a simple but powerful online business that makes a lot of money.
In my notes from 2018, I labeled three types of users:
users (consumers)
merchants (advertisers)
developers (less important).
The services offered to users are:
Connecting
Creating and sharing content
Discovery and consumption
Communication
Most of these core services have not changed.
How Facebook makes money: the basics
Facebook's business plan is not too difficult to understand. This article tells you the basics. In Part 2, I will talk about five important things to keep an eye on.
Key Products and Demand-Side Power
Starting with the demand side of a business, I look at the products or services offered, how they are used, and how predictable the demand will be in the long term. Facebook is like Coca-Cola or Marlboro in that it is a once-every-ten-years company.
Facebook's two main consumer products are Instagram and the original Facebook newsfeed. Both have spread quickly around the world and get a lot of daily engagement. As of Q1 2024:
3.24 billion family daily active people (DAP)
2.11 billion daily active users (DAU)
3.07 billion monthly active users (MAU)
6% and 3% year-over-year growth in DAU and MAU, respectively
Over 69% of MAUs are daily users
All of Meta's apps are included in these numbers, including Facebook, Messenger, Instagram, and WhatsApp. When you break these numbers down by product, location, and age group, you can see that user engagement and growth are really taking off. Instagram and Facebook bring in the most money.
The power of Facebook's products
Four communication networks—WhatsApp, FB Messenger, IG Messenger, and Messenger—and two audience-building platforms—Instagram and Facebook Newsfeed—make Facebook powerful. These networks, while intangible assets, aren't platforms. People can share and find new things on the audience builders.
Two main factors enhance the power of these products:
The way people use common utility services, especially communication services, is a lot like how people used the first phone networks. Capturing high-frequency activities places Facebook at the forefront of user engagement.
Giving away free useful services is often a good way to market your products, just like Google does with Gmail, search, and maps.
How Facebook affects people's thinking
Through a number of psychological tricks, Facebook's power goes beyond providing useful services:
Status seeking: Public posting makes people more likely to brag and be jealous, which increases engagement.
Endless consumption: The newsfeed is like a bowl with no bottom, which makes it easy to use for a long time.
Multiple reward systems: Comments and likes create a system of multiple rewards, like slot machines.
Forging habits: Regular use creates habits that make people check in often.
Chemical addiction: A type of digital addiction is caused by the dopamine hits that come from notifications.
Emotional manipulation: Because algorithms change content to make people feel certain emotions, mass manipulation is possible.
In Google, we see #1. Number 2 is seen in casinos and other places where people gamble. Numbers 3 through 4 are seen in cigarettes. #5 is almost everything on TV, but this is stronger. But there's a lot more going on than this.
Business model: Meta’s networks and platforms
Meta’s business model consists of four networks and two platforms.
Warren Buffett once considered the possibility of acquiring a cigarette company. According to him, it was the most impressive business model he had ever come across. There are many similarities between cigarettes and Facebook as products.
But cigarettes are physical products that cost money to make and sell. Could you imagine giving them away for free? How about if they were digital goods and you could make money by putting ads on them? Offering free cigarettes would have been a lot stronger.
That is how I see Facebook, too.
I like how the networks let people communicate. But I think Instagram and Facebook's newsfeed are bad for you, even though they are very useful.
Together with this, a strong digital business model has been created.
Warren Buffett passed on the cigarette company because he said he would not be comfortable owning one.
Meta Platforms, Inc., formerly known as Facebook, operates a multifaceted business model primarily organized into two segments: Family of Apps and Reality Labs.
Communications networks. That is: WhatsApp, IG Messenger, and Facebook Messenger. They all have direct network effects on a global scale. These were separate but have merged over time. They are typically not monetized directly but serve as essential tools for user engagement and retention.
2 audience-builder platforms. That is Facebook's newsfeed and Instagram. Both have indirect network effects. They allow for interactions between users/consumers and content creators (both amateur and professional). And they make money by advertising, which is where most of their money comes from. It is like YouTube and TikTok, but the content (text, photos, and now short videos) is different. These are complementary platforms, which is my favorite type of business model because they complement each other.
Economies of Scale
Meta leverages economies of scale in several areas:
Information Technology (IT): As Meta grows, it can invest in advanced technology and infrastructure, reducing costs per user by spreading these investments across a larger user base.
Research and Development (R&D): Continuous innovation in product development helps Meta maintain its competitive edge and expand its technological capabilities.
Political Lobbying: As the company expands, it invests more in lobbying to influence regulations that affect its operations, reflecting its significant stake in the regulatory environment
Overall, Meta's business model is heavily reliant on advertising revenue, which accounts for the majority of its income. The company also explores new revenue streams through its Reality Labs segment, focusing on augmented and virtual reality products.
Meta: a money making machine
Meta generated nearly $135 billion in revenue in FY2023. And with 15% growth, nobody doubts that this is a strong and large company.
Additionally, a lot of money has been pouring into questionable projects such as the metaverse and augmented reality. Based on more realistic spending on R&D, marketing, and general and administrative costs, the operating margin is likely over 50%. It is a global money machine.
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Would be nice to see more on Meta! Very interesting business.