Facebook’s dependency on ad revenue is worrying.
Recently, it has been tough to be Mark Zuckerberg. After going to Washington DC and Europe on apology tours, Facebook has come under strong criticism, much of the time from politicians who don’t have a good understanding of how Facebook operates as a business, but are very concerned about how the company handles data privacy. Even the two founders of WhatsApp, which had been acquired by Facebook, expressed discomfort at Facebook’s dependency on ad revenue, and resigned from the company.
Adding to the complexity of the situation is the fact that the US and EU have very different ideas about data privacy, with the EU Parliament taking a much more aggressive stand than the US, mainly because US data privacy legislation has been drafted by large company lobbyists.
The simple fact is that Facebook, like Google and many other US companies, depends on ad revenue. In Facebook’s case, this is 99% of its revenue. The only outspoken critic of this revenue model in the US has been Apple, whose CEO Tim Cook, has taken advantage of each opportunity to remind the public of how seriously Apple treats data privacy unlike, ahem, some other companies.
From 2015 to 2016 Google’s annual revenue grew over 21%. During that time, revenue from Google websites has comprised a relatively consistent 67 to 68 percent of total company revenue. With the inclusion of the advertising network, Google earns about 90 percent of its entire income from advertising (Investopedia)
Contrast this with Tencent, which has a much more diversified revenue stream, and is much less dependent on ad revenue for growth. Tencent’s QQ was launched into a market where there was no mature online ad revenue ecosystem, and could not contribute to the company’s bottom line. Almost out of desperation, Tencent launched a membership system. With its strong presence in gaming, the company devoted resources to game development, and licensing games which it thought would perform well. The company only became serious about monetizing advertising when Martin Lau, a professional ad man from Malaysia came aboard around 2007, nearly a decade after the company was founded.
Looking back now, Tencent’s revenue diversification strategy looks better with the passage of time. Compared to the US government, the Chinese government is much more sensitive about how personal data is handled, and does not allow personal data on Chinese citizens to be stored on servers outside China. Tencent has had to live within these guidelines.
The side effect of these guidelines, and the ecosystem which Tencent grew in, was that it had to find revenue wherever it could find it: membership services, gaming, and then finally, advertising.
While Tencent’s management never planned it this way, the outcome of these business decisions have worked out better for the company than it has for Facebook. Looking forward, does this diversified revenue model work out better for Chinese companies than the American revenue model, which is highly reliant on ad revenue?
Everything I see suggests that it does.
We are going through a period where governments, or the nation-state, are re-asserting control over the Internet and mobile services. The Chinese government has been particularly assertive, but the EU has also been much more assertive in favor of data privacy where most of the talk about data privacy in the US is mostly just that, empty talk.
The American revenue model’s reliance worked well when the regulators did not understand the technology, but when they understand the technology, it is better to be less dependent on ad revenue, and have more revenue coming in from membership services and other services.
Time will tell where this goes.