How Facebook (Meta), X Corp (Twitter), Social Media Make Money From You

An astounding number of people use social media each day, so it's a fair question to ask, "How do social media companies make money while offering so many free services?"

As of Q4 2022, Meta (META), formerly Facebook, had 2.96 billion monthly active users. Twitter (now X) stopped reporting monthly active users, but the last count in Q1 2019 was 330 million, while LinkedIn had about 900 million monthly active users as of Q1 2023.

Such volume is the short answer to the question of how these companies are making money. But that doesn't tell the whole story. Here we explain exactly how the top powerhouse social media companies translate all that volume into cash.

Making Money Through Advertising

This isn’t a unique observation, but it’s a crucial one: If you’re not paying for the product, the product is you. The real transaction here isn’t you receiving enjoyment in the form of a free temporary distraction created by a media company at great expense. That media company renting your eyeballs to its advertisers.

For many people, this is most obvious in the television industry. CBS doesn’t come up with a new episode of NCIS every week strictly to please viewers with a limitless capacity for being passively entertained. It’s because you and 12 million other people will watch that episode, and thus pay at least subconscious attention to the 16 minutes of commercials that are interspersed throughout it.

For a car manufacturer or fast-food restaurant, there are few more efficient ways to grab customers’ attention, something CBS and its rival networks are well aware of. Media companies are interested in pleasing the brewer before the viewer.

For social media, the importance of the number of viewers glued to their computer or smartphone screens is every bit as important (if not more so) as it is to commercial television. There’s a reason why Meta’s 10-K filing with the U. S. Securities and Exchange Commission (SEC) uses the acronym ARPU, which means average revenue per user.

Meta's ARPU at the end of 2022 was $39.63. Multiply that by the aforementioned estimated user base for Q4 2022 to get a total revenue approximation, and now you can understand why Meta had a market capitalization of over $1 trillion at its height.

When Meta founder Mark Zuckerberg went looking for a chief operating officer in 2007, it’s no coincidence that he selected not an engineer nor a technologist but a vice president with a background in advertising sales. Sheryl Sandberg had spent 6.5 years selling advertising as a vice president at Google (GOOG).

Increasing Users to Increase Advertising

Growing Meta’s user base to the point where it reached critical mass was obviously important to the company’s operations, but only to the extent that it provided something to attract advertisers. To an uninterested observer, committing $19 billion to acquire the texting application WhatsApp might sound like the height of dot-com-era hubris and recklessness. But it wasn't.

WhatsApp boasts over 2 billion monthly active users, which to Meta management means an even greater stock of susceptible minds to sell as a unit to companies looking to, for instance, move a few more smartphones this quarter. Every acquisition Meta has made since, whether it was $1 billion for Instagram or $19 billion for WhatsApp, was conducted with the same goal in mind.

Other Ways Social Media Companies Make Money

Advertising isn’t just a way for Meta and other social media companies to perhaps earn a little bit of revenue in between hosting family photos and personal musings. It’s the very purpose of those sites.

However, in recognition of the potential perils of having too much of the company's fortunes tied solely to advertising, Mark Zuckerberg initiated a new corporate strategy at Meta to eventually dominate what has come to be known as the "Metaverse." Whether the strategy will bear fruit for the company remains to be seen.

Other social media companies are also exploring new ways to increase their revenue. For example, after Elon Musk bought Twitter in 2022, he changed the site's blue "verified" checkmark system. These checkmarks were once given to prominent or important accounts (such as journalists, politicians, celebrities, and newspapers, and other media accounts) to show that their identities had been verified and could be trusted.

Under the new system that Musk implemented in 2023, however, checkmarks became a symbol that users had subscribed to X Premium. X Premium subscribers receive benefits including editable posts, fewer ads, longer posts, and more robust security measures. This service costs $8 per month or $84 per year.

The Bottom Line

Social media companies primarily make money from advertising revenue. Some platforms, such as X, are experimenting with other ways to make money, such as subscription services. However, most social media users expect their accounts to be free.

Using an advertiser-supported model, rather than charging each user individually, is the easiest way for Meta and other social media companies to garner as many users as possible. The more users on the site, the greater the number of advertisers willing to engage them, and the more those advertisers are willing to spend.