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How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained

DuckDuckGo makes money in two simple ways: Advertising and Affiliate Marketing. Advertising is shown based on the keywords typed into the search box. Affiliate revenues come from Amazon and eBay affiliate programs. When users buy after getting on those sites through DuckDuckGo the company collects a small commission.

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DuckDuckGo‘s business model starts from Google value proposition.

Handpicked content to learn more about Google‘s business model: 

What Is a Hidden Revenue Business Model? Google’s Business Model Explained

Differentiate the value proposition

When you surf the web through Google, the search engine is tracking you so that you can get targeted ads by the businesses part of the AdWords network. While this is interesting for businesses, which can quickly make money from advertising.

That is a flaw in this model: users’ privacy. In fact, as concerns from how data online gets used by private companies or governments that opens up new concerns from users. A concern is a threat to an established organization, but an opportunity for a rising one. In fact, if addressed fears can become a value proposition.

That is precisely what DuckDuckGo has done. Privacy has been the beginning one of the reasons why the search engine got built.

Advertising without tracking

According to DuckDuckGo‘s founder, Gabriel Weinberg, that is a myth that you have to track users to advertise. In fact, one a person enters a keyword into the search box, if that keyword could be related to a product, then the search engine may return an ad within the results.

For instance, if I’m searching for “car insurance” then the search engine will return an advertisement related to that. As simple as that. The search engine will not track either use your data as it will through it right after the search gets completed.

In short, where Google value proposition fails, DuckDuckGo builds up a business.

DuckDuckGo‘s business model has one key stakeholder: users. And it has one fundamental value proposition: privacy!

A new revenue generation pattern for search: Affiliate Marketing

Ther is nothing innovative about affiliate marketing. What is innovative is the use of that for a search engine. In fact, as we saw DuckDuckGo uses affiliations as a way to generate revenue streams together with untargeted advertising.

Is this business model based on untracked advertising and affiliate marketing sustainable?

Is this business model sustainable?

As of 2015, DuckDuckGo was profitable, and its revenues exceeded $1 million. Compared to Google‘s 74.9 billion. In short, DuckDuckGo revenues make up about 0.001% of Google‘s revenue.

Of course, the fact that the company is profitable and able to grow its users’ base consistently is a good sign. However, will it be able to grow enough to be sustainable in the long run? That will depend on whether or not users’ concerns related to privacy will grow and DuckDuckGo ability to create new revenue generation patterns, besides advertising and affiliate marketing.

For instance, if privacy is a substantial concern, a subscription-based web search might be one option. Experimentation here is the key to find its business model-market fit!

Summary and Conclusions

DuckDuckGo has managed to build a business model based on differentiating its value proposition compared to Google. In fact, Google’s value mainly comes from its ability to track its users to offer targeted ads.

While this is a strength that makes it attractive for businesses to pay for Google ads, and publishers to know what content users want, that might also be a weakness. In fact, as privacy concerns grow, more users are willing to give up Google to find an alternative to that.

Based on that. DuckDuckGo has built a value proposition based on privacy. Where Google tracks its users, DuckDuckGo doesn’t. So how does it make money? Mainly through untracked advertising and affiliate marketing. Is this business model sustainable? As of 2015, DuckDuckGo was already profitable. It revenues though are a tiny fraction of Google revenues.

Thus, the question that comes to mind is “will ever DuckDuckGo become a dominant player?” That is hard to answer, and it will depend on DuckDuckGo ability to experiment with other sources of revenue generations. For instance, if privacy is something so critical for DuckDuckGo users, why not experimenting with a subscription-based search? Who says that search has to be free at all?

DuckDuckGo Business Model Summarised below:

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What Is a Hidden Revenue Business Model? Google’s Business Model Explained

A hidden revenue business model is a pattern for revenues generation that keeps users out of the equation so they don’t pay for the service or product offered. For instance, Google‘s users don’t pay for the search engine. Instead, the revenue streams come from advertising money spent by businesses bidding on keywords.

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Let’s see more in detail how Google managed to create a business model worth almost a hundred billion dollars in revenues. In fact, to unlock so much financial value, a proper business model has to have an appealing value proposition for several key stakeholders.

Google’s Win-Win-Win Value Proposition

As of 2017, over ninety billion dollars, which consisted of 86% of Google’s revenues came from advertising networks. How did Google manage to be so financially successful and sustainable over time? The answer lies on a compelling value proposition for three key players.

Users: I can find an answer to anything

Google is the most powerful search engine in the world. However, it was not the first. In fact, when it appeared on the scene, in the late 90s, it was one of the latest search engines. However, thanks to a powerful algorithm, called PageRank it soon took off. Initially, it was not clear how the search engine was supposed to make money. One thing was clear for its founders though: it was supposed to be free for its users.

In fact, the billion of people that each day use Google are what makes the search engine better and better. In fact, Google uses that data to tweak its search algorithm, to make it able to read, interpret, understand and process users’ queries.

But if users aren’t paying, who’s paying for it?

Businesses: I get more sales through targeted Ads

Google uses an advertising business model, where companies take part of an ad network called AdWords. In short, they can bid on keywords (such as “car insurance”) to sell their products and services. This model works quite well as it allows those businesses to track their ads results, to offer their ads to interested users (in fact, through tracking Google can understand what users might want) and pay based on what users click through.

This compelling value proposition made Google profits grow quite fast. However, there is another critical piece of the puzzle: publishers.

Publishers: Easily monetize my content

Each day millions of new articles are written on the web. But why so many publishers hit the publish button? Of course, it has never been so easy to provide information. In fact, today thanks to the internet anyone can become a publisher. However, as Google powerful algorithm can index the whole visible web, it also becomes harder for publishers to be featured through it.

Thus, it makes sense for small and large publishers to compete and create “content factories.” In fact, the more content they create, the more chances they get to be featured on Google. But what for?

A significant payoff for publishers to be featured by Google is of course visibility. In fact, many publishers monetize mainly through traffic. Second, and most importantly: money!

Indeed, those same publishers can “rent” part of their web pages space to Google to place banners from businesses part of the AdWords network. When users browse the pages with banners or click through them, those publishers can finally monetize their content. (this is called AdSense)

To have a better understanding of the whole Google‘s networks check this:

The Power of Google Business Model in a Nutshell

The overall network ability to generate value is summarised below:

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That is how Google through its hidden revenue business model was able to become a tech giant. The business model worked so well that made Google so big and powerful, which over time some concerns have grown.

Google’s business model? Not without a flaw

An advertising model based on hidden revenue generation might carry some flaws. In Google‘s specific case below some of the flaws.

Asymmetry toward users: You give me data, I make money

That is true that users don’t pay, but in the process, they do offer to Google valuable data. Some argue whether that data should be given back to the same users in some ways.

Biased content: Is content that targets keywords really relevant?

Publishers are incentivized to produce content, which might not always be the best form of information. In fact, although Google‘s original mission was to organize the world’s information, its business model became so effective to influence it eventually. In fact, today many publishers follow SEO guidelines to make sure to comply with the way Google‘s algorithm works.

We can then argue, whether Google‘s algorithm gives back the best content or the content that best fits its guidelines. That is not an easy answer to that and of course, in most cases, I believe Google does an incredible work.

The web as a giant billboard: Is this indeed the web we want?

When Google finally opted to adopt an advertising business model the web suddenly became a giant billboard. Many argue whether or not that is the way the internet was supposed to be. It’s interesting to see the point some internet visionaries expressed on Wired when they said: “the internet is broken.”

Privacy concerns: Do you really have to track me?

As users become more and more aware of the data that Google collects from them it raises questions about whether or not it makes sense for them to keep using it. In fact, other search engines more focused on privacy are growing their users base. That raises an important question.

Is Google’s business model the only possible for search?

Any company sooner or later will be disrupted. At times the paradox is that innovation comes from going back to the past. In fact, alternatives like DuckDuckGo (a search engine that doesn’t track its users) argue whether a search engine has to track its users. In fact, search engines like DuckDuckGo get a growing piece of the search pie by focusing on those concerns. Indeed, its founder, Gabriel Weinberg argues that a search engine can make money without tracking its users.

That means as users become more sophisticated privacy becomes a new value proposition as powerful as monetization. That, of course, would undermine the basis of a hidden revenue model built on users’ data.

Summary and Conclusions

A hidden revenue generation business model keeps users out of the equation, while it lets other parties finance – in part or entirely – the product or service offered. This kind of model works if the value proposition is appealing to several stakeholders. For instance, Google has created a sustainable business model based on hidden revenue generation, by creating a compelling value proposition for businesses and publishers. The former can bid on keywords and generate sales through targeted ads. The latter can effectively monetize their content.

Google‘s hidden revenue business model has become so powerful that of course has shown some flaws. The paradox is that from what a few years back was an innovative model that is now creating opportunities for competitors to come up with alternative value propositions. Thus, if monetization was a strong motivator over privacy, just a few years ago. Now, privacy is becoming more and more important. That leaves space for new players!

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How Facebook, Linkedin, and Twitter News Feed Monopolizes Our Attention

The news feed is a homepage used by social networks where users get updates and stories from their network. It was launched for the first time in 2006 by Facebook. Before that, Facebook was primarily a directory of profiles. Today the news feed is the main feature of social networks like Facebook, LinkedIn, and Twitter. 

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Although people say to hate the feed, they spend hours each day through it.

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The news feed is as revolutionary as Google search algorithm. In fact, when Google introduced its algorithm, PageRank – although there were already other search engines but not as good – the web was a plethora of pages. Thus, to get from a site to another, you had to know the exact address to find it. Google‘s search box changed all that. The algorithm was able to judge the relevance of a web page and offer it in its search results page.

The same kind of revolution happened with the news feed. When Facebook introduced the news feed, the social network was more like a directory of profiles. To be updated with someone in your network you had to visit her/his profile actively. The news feed changed that. In fact, you could get news and updates automatically from the people in your community based on what the Facebook‘s algorithm thought was important. But how does the news feed work?

How does the news feed actually work?

According to Tech Crunch, the news feed has a primary goal:

Facebook’s objective is to select the most relevant and engaging stories to show in the News Feed. It wants to choose the best content out of several thousand potential stories that could appear in your News Feed each day, and put those in the first few dozen slots that you’ll actually browse through.

Easy said than done. In fact, apparently, the news feed algorithm looks at as many as 100,000 high-personalized factors. However, sill from Tech Crunch this is a rough model of how the news feed algorithm works:

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Source: techcrunch.com
If you think you can resist the news feed; think twice!

Like the average investor that thinks he can beat the stock market because he’s smart enough. So the average social media user will say “I’m smart, I won’t get addicted to the news feed!”

However, that can’t be the case because as reported by Adam Mosseri, product designer at Facebook, there is a team of smart individuals (engineers, designers, managers and Mark Zuckerberg himself) that work on the feed. In fact, in Mosseri’s answer you can appreciate how the news feed team is organized:

Tom Alison manages the engineering team, Geoff Teehan manages the design team, Lauren Scissors manages the Research team, Dan Zigmond manages the the data science team, and I the PM team. We all report up through Chris Cox, the CPO of Facebook.

Of course, that is an answer from April 2016. Therefore, people in charge might have changed. However, this gives you an idea of the importance and complexity of the news feed. The most talented people at Facebook work on that.

Therefore, if you thought you could avoid getting addicted to the news feed; think twice!

That is not to say those people woring at Facebook have evil intentions. However, for a feature that has become so heavily used, a single wrong decision can affect the lives of billions of people. That is also why Mark Zuckerberg in a Facebook post, dated January 2018 announced:

The central part of the post says:

Based on this, we’re making a major change to how we build Facebook. I’m changing the goal I give our product teams from focusing on helping you find relevant content to helping you have more meaningful social interactions.

What does it mean meaningful social interactions? According to Mark Zuckerberg, that means:

As we roll this out, you’ll see less public content like posts from businesses, brands, and media. And the public content you see more will be held to the same standard — it should encourage meaningful interactions between people.

How and why did we get there?

The news feed is like a slot machine
Facebook is a for-profit organization. There is nothing wrong with that. What is tricky is the asymmetric business model they’ve adopted. In fact, even though Facebook offers its platform for free, it also collects data from its users. The user doesn’t own the data, neither he/she know what data gets collected. Also, that same data gets sold to businesses and publishers.


Therefore, the time spent by users on the news feed means more or fewer profits for the company. That is also why it makes sense to hook users for as long as possible. Thus, in this scenario, it is essential that users get educated about how platforms, like Facebook, work.

As reported by qz.com:

Facebook’s News Feed acts like “slot machine for the brain,” say Turel and Bachara. Every time we refresh the site, it generates different rewards that encourages us to keep on using it. In an email to Quartz, Turel and Bachara write:

This is like the idea that most of us like cakes. When we open a refrigerator door multiple times and see the same cake, we will not be as motivated to eat like if we opened the refrigerator door multiple times, and each time see a different cake (i.e., be exposed to a variable reward)….The objective of introducing better “reward management” abilities was to ensure users spend more time on Facebook as the rewards they are exposed to after the new abilities were implemented are presumed to be larger than before.

In fact, that is achieved with UX design. And many argue whether that is design or manipulation.

That is not to blame Facebook. In fact, to understand how valuable the news feed is let’s look at some financial data!

The news feed is the most valued asset for those social network companies

Just to give you a rough idea of how powerful the news feed is just taking a look at Facebook financials for 2017:

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The company made over forty billion dollars in 2017, over 98% of it came from advertising. Can you guess where that advertising gets served? Of course, in the news feed!

So how do ads get inserted into the news feed?

As reported by techcrunch.com:

Facebook uses a similar but separate ranking algorithm to determine whether you’re likely to be interested in a Page or business’ ads. Facebook limits the number of ads you see, and therefore wants to maximize the likelihood that the ones it shows you will resonate with you or get you to click, since that’s how it earns more money.

The more Facebook knows about you, the more relevant the ads will be. If you fill out your profile and Like the Pages of things you care about, Facebook’s ads will become more personalized and relevant, informing you about products, apps, events, and more that you’re truly interested in.

In other words, you do use Facebook for free, but the information you five to its algorithm through your news feed than gets used to giving you back what Facebook believes are tailored ads that make the company almost forty billion per year (of course the numbers also comprise Instagram). Thus, if there is a problem that is not in the news feed but the asymmetric business model.

Summary and Conclusions

In this article, we saw how the news feed revolutionized (or actually created) the social network industry. The news feed, in fact, is based on a sophisticated algorithm engineered by teams of smart and talented people. Therefore, if you thought you could avoid getting addicted to the feed you might have deceived yourself.

In fact, the news feed follows the same logic of the slot-machine in casinos. Not surprisingly the news feed is the most valued asset for companies like Facebook. In fact, at a quick glance from its financials, you can see that the company generated over forty billion dollars in revenue in 2017.

Mark Zuckerberg in January 2018 announced a change to the algorithm that privileged meaningful relationships. What consequences will this have on the billions of people hat each day spend hours in the news feed? Also, what will be the consequence for the revenues of the tech giants? We will see!

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What Is the Razor and Blade Business Model? Apple’s Reversed Razor and Blade Strategy [Case Study]

The razor and blade business model is a strategy that relies on selling what is supposed to be the primary product at a low price or given away for free; while complementary goods get sold at high margins. For instance, Gillette’s razor would cost a few bucks. Instead, a set of blades will be 3-4 times more expensive.

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At times company that seems to follow the razor and blade business model in reality use a variation of the same. In fact, take Apple, which has been a disruptor of a few industries. The company today uses a version of the razor and blade business model: the reversed razor and blade business model. 

What is the reversed razor and blade business model?

Apple and the reversed razor and blade business model

If you ever bought an iPhone, you’re aware of the fact that it can cost as much as a computer. In fact, Apple rather than decrease its prices overtime is actually uses the opposite strategy. In fact, the latest confirmation of this strategy comes from the iPhone X, which has even higher margin compared to the iPhone 8. As reported by reuters.com:

The iPhone X smartphone costs $357.50 to make and sells for $999, giving it a gross margin of 64 percent, according to TechInsights, a firm that tears down technology devices and analyzes the parts inside. The iPhone 8 sells for $699 and has a gross margin of 59 percent.

In short, In this case, the iPhone is the blade. What is the razor then? That is the iTunes or the set of digital products Apple made available through its store. In fact, when Apple launched iTunes, a CD would cost anywhere between $16 or $18. Today you can get an album for $9.99 or 99 cents per song.

In fact, as reported by billboard.com:

Steve Jobs “said to us, ‘There’re two things you have to accept: 99 cents for every single song, and every song has to be sold as a single.’ And we went home and swallowed hard because that was tough for us to accept for us as a music industry…. If certain songs were really popular we should be able to set the price at whatever we thought was the right price as opposed to the $1 price. Steve said, ‘You know, you’ve got to keep it simple, you’ve got to keep it clean.’”

Said to Thomas Hesse, President, Corporate Development and New Businesses, Chief Digital Officer at Bertelsmann. He was Chief Strategy Officer for BMG Music Entertainment when the iTunes Music Store launched.

[image error]

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Are Tech Companies Profitable? Visualizing Tech Giants Key Profitability Ratios

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When performing a profitability ratio analysis, it is essential to take into account companies that operate in the same industry. In fact, based on the industry the profitability ratios might vary quite a lot. Even though below we have five tech companies, those operate in different contexts and competitive landscapes. In part, their business models overlap. Take Microsoft, which also serves the advertising industry with Bing. Also, a proper comparative analysis should take into account previous years. For this infographic however it is a useful exercise to appreciate how profitability metrics can change according to the industry you’re taking into account.

The key metrics we take into account for the infographic are:

Operating Margin

That is a measure of the operational efficiency of a company given by operating income over net sales. This measure is critical because it tells us the ability of a company to improve its operational efficiency over time. In fact, other metrics, like the Net Margin might be biased by factors like taxes and interest expenses, that are more tied to the company’s ability to find the right tax mix and financial mix. Instead, with the operating margin, we have a quick glans at the company’s operational efficiency.

Net Margin

It measures how good a company is in converting revenues in profits. This is a reasonable assessment of the overall business. However, when we refer to profits, it is crucial to understand the difference between cash. In fact, the income statement primary purpose is to understand the operations of an organization and not necessarily understand how much cash it has in the bank. For that, there is the cash flow statement. This metric is given by net income over net sales.

Return on Equity

This metric measures how much profit a company generates with shareholders investments


Its formula is given by the Net Income over Shareholder’s Equity. Once again, net profit is not the same as cash. Therefore, if you want to understand how much money shareholders are getting back from the company’s operations, the cash flow statements is the place to look.

Return on Capital Invested

The return on capital invested tells you how much return a company makes on its invested money. Its formula is Net Operating Profit After Tax/ Invested Capital (Total Assets – Excess Cash). This is an important metric to assess the ability over time of a company to generate value more holistically.

Return on Assets

The return on assets tells you how much earnings a company generates from invested capital. Its formula is Net Income over Total Assets. It tells you how much profits are made for each additional dollar of capital invested in acquiring assets.

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The post Are Tech Companies Profitable? Visualizing Tech Giants Key Profitability Ratios appeared first on FourWeekMBA.

How Do Tech Companies Make Money? Visualizing Tech Giants Business Models

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In the last years, I had the chance to devote most of my waking hours to think about a big issue for any business: distribution.

The way a company structures its operations become vital to its long-term ability to create value. In fact, the business model is an essential part of any business. Often, especially in the start-up world, there is the belief that a great product or service is all you need. However, that is not the case. In fact, the tech giants listed in this article all mastered distribution. There is no doubt that each of them has excellent products and offer incredible services. However, without a proper distribution strategy, their success wouldn’t have been possible.

Apple: It’s all about the iPhone

Apple’s business model is based on the sales of products. It undeniable that the value of those products is based on Apple’s ability to create a friendly environment for its products. Had the Apple store not existed, would have Apple managed to sell over 77,316 iPhone and 13,170 iPad in 2017 alone? I doubt it!

Revenues in Bln ($)




iPhone
141,319
61.6%


iPad
19,222
8.4%


Mac
25,850
11.3%


Services
29,980
13.1%


Other (Apple TV, Apple Watch, Beats, iPod touch)
12,863
5.6%


Total
229,234

However, as of 2017, the iPhone represents over 61% of the total sales.

Microsoft: The octopus of tech!

Founded in 1975 Microsoft has survived a few tech bubble and thrived. In fact, as of the time of this writing, Microsoft is still one of the most valued companies, with a market capitalization of over seven hundred billion dollars. That is also because the company has been able to use the excess cash it generated in the last decades to acquire new ventures.

In fact, when Microsoft sniffs a trend, it goes all in. For instance, in 2016 Microsoft bought LinkedIn to enter in the professional network space. Microsoft is also in the search and advertising industry with Bing. In short, Microsoft has been able to use its cash cow, the Microsoft Office System to diversity its business model.

Revenues in Bln($)


Microsoft Office system
25,389
28.2%


Server products & tools
21,758
24.2%


Xbox
9,256
10.3%


Windows PC operating system
8,625
9.6%


Advertising
6,971
7.7%


Consulting & product support services
5,588
6.2%


Devices
4,557
5.1%


LinkedIn
2,268
2.5%


Other
5,538
6.2%


Total
89,950



Amazon: The everything store

Amazon is one of the most disruptive tech companies. It started as an online book store to become the everything store; even though most of its revenues come from its store. There is a growing part of the business that relies on seller services, subscription services (Prime), cloud-based services (AWS). Therefore, Amazon too has a hybrid business model.

It is highly probable that the part of the business related to seller services, subscriptions, and cloud-based services will be the most critical part of the company also from the revenue generation standpoint.

Revenues in Bln($)


Online stores
108,354
60.9%


Physical stores
5,798
3.3%


Third-party seller services
31,881
17.9%


Subscription services
9,721
5.5%


AWS
17,459
9.8%


Other
4,653
2.6%


Total
177,866



Google:  The tech giant that became the web

Google’s business model is based mainly on advertising. Even though the company has placed some bets on products that are not related to its main business model. Even though Google was a latecomer in the search engine industry, it took it over with the algorithm that changed the web: PageRank.

Revenues in Bln($)


Advertising
95,375
86.0%


Other (Apps, Google Cloud, Hardware)
14,277
12.9%


Bets (Access, Calico, CapitalG, GV, Nest, Verily,

Waymo and X)
1,203
1.1%


Total
110,855

As of 2017 86% of the revenues come from the advertising networks of Google. In fact, advertising generates over ninety-five billion dollars in revenues; no doubt that is the cash cow for Google. It is also true that the company is growing other revenue streams (such as Apps, Google cloud, Hardware). Those sources will grow more and more in the future as Google will rely less on advertising.

Facebook: The social network 

Facebook has been able to tap into the value of its billion users. Facebook‘s business model is based on advertising. In fact, as of 2017 over 98% of its revenues came from advertising.

Revenues in Bln($)


Advertising (Facebook and Instagram)
39,942
98.3%


Payments and other fees
711
1.7%


Total
40,653

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The News Feed vs. the SERP: A Fight for Attention and Profits

Facebook and Google are the two tech giants that in the space of a decade have disrupted the old media industry and created an empire. Google in the late nineties up to these days has built a business model based on advertising, which leverages on two networks (AdSense and AdWords).

At the time of this writing, Google’s value is almost eight hundred billion dollars. Facebook, on the other hand, was created by Mark Zuckerberg in his Harvard dorm room back in 2004. At the time of this writing, Facebook has more than a billion users and a market capitalization of over five hundred billion dollars.

Both companies have a secret weapon. For Google that is the SERP, while for Facebook that is the News Feed. Both target one thing: users’ attention. The more attention they get, the more they monetize.

But who’s the winner?

I’m using for this article the data coming from Similar Web to assess the engagement of the SERP vs. the News Feed. Instead, I’m going to dig into Facebook and Google‘s financials to understand what’s more powerful from the financial standpoint.

At the end, we’ll determine who’s the winner based on two things: attention and profits!

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Facebook’s secret weapon: The News Feed

Back in 2006 a significant transformation silently revolutionized Facebook: the news feed. Before that, Facebook was primarily a directory of profiles. If you wanted to see what any other person in your network was doing, you had to look for that actively. When Facebook introduced the news feed, a new homepage allowed any user to be continuously updated on what her/his network was up to.

The news feed is a critical part of Facebook‘s success. In fact, without the news feed, there is no way Facebook could have managed to make its users stick. Also, the news feed is where Facebook monetizes its users’ base.

To know more about Facebook‘s business model read this:

How Mark Zuckerberg Makes Money? Facebook Business Model Dissected

Google’s most valuable asset: The Search Engine Results Page

Today we give for granted that Google is an advertising company (as of 2016, 88% of its revenues came from advertising). However, on the 2000s that wasn’t a trivial choice. In fact, one of the reasons why Google had been so successful was its ability to create a search engine that offered relevant results through a powerful algorithm called PageRank.

That is also why Page and Brin (Google‘s co-founders) didn’t want their search to be associated with a company that mixed paid advertising with organic results. In fact, Google‘s UX got simpler and simpler over the years: 

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Google UX in 1996. Source: uxpin.com

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Google UX in 2018

Google’s search page is the most important asset the company owns. That is the place where billions of people each day ask anything from “how to tie a tie” to “why am I alone.”

It is so popular that back in 2006 the verb “to google” was added to the Oxford Dictionary.

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Google in the Oxford Dictionary 

The ability of the company to keep users going back to its results pages is also the secret for its past, present, and future success.

To know more about Google‘s business model read this:

The Power of Google Business Model in a Nutshell

News Feed vs. SERP: The fight for attention

Before we get into financials, it is crucial to stress why the primary sources of business value for Google and Facebook are the SERP and news feed respectively.

When we think about traditional companies, it’s easy to understand what’s their most important asset. Take a real estate company that owns a resort. You know that resort is a vital asset for the company.  Instead, when it comes to tech companies, it gets a bit trickier.

For instance, if you think about Google or Facebook, what’s their most valued asset? In short, what’s the property that generates most of its long-term business value? 

Probably the 2,000,000 square feet Googleplex in Mountain View or the 307,000 square feet Facebook data center in Prineville? Undoublty they have enormous value. However, I believe the two most important assets respectively for Google and Facebook are the search results page (SERP) and the news feed.

That is the place where each day the battle for the attention of billions of people is fought. Those are also – I argue – the leading company’s assets. Google without its SERP and Facebook without its news feed would be worthless. 

So how the two things compare? I used the data from Similar Web:

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The engagement of users is crucial for both Google and Facebook. It is true that the SERP‘s logic is slightly different from Facebook‘s news feed. In fact, Google needs to be able to provide relevant results quickly and allow its users to leave the results page. Indeed, by clicking on a sponsored advertising – part of Google‘s AdWords network – or by surfing a website –  part of the Google‘s AdSense program – that is how the tech giant from Mountain View monetizes.

Instead, Facebook‘s news feed logic is to keep the users for as long as possible trapped into the feed. What a behavioral psychologist would call a “slot-machine mechanism.” In fact, the news feed has an infinite scroll. There’s no limit. You could spend days scrolling that, and you’d be always finding content available for you to consume.

In a sense, I’m not surprised that Facebook wins against Google. It is true though that Google in the last years has developed a set of features that also serve the purpose of keeping users for as long as possible on the SERP. Think about the featured snippet (a little box that gives users answers to specific questions) or the more recent people’s also ask feature. Those allow you to find most of the content you need in the SERP.

In conclusion, if we compare who’s the winner based on the battle for attention, Facebook‘s news feed shows an average visit duration of 13:44 minutes compared to Google’s SERP of 7:20 minutes. That is quite a long time considering those are averages. In short, there might be people that spend a little time on the news feed; while others might be spending an entire day!

Does the battle for attention make Facebook also more profitable? Let’s see!

News Feed vs. SERP: The fight for profits

To determine who wins the battle over profits. I’m going to look at one central metric: the operating margin. This metric, in fact, assesses the effectiveness of a company’s operations. In fact, if we had to look at the net income, other factors (like taxation) would be influencing the results. Instead, I want to see how the two companies compare at the operational level.

Google (data in $ mln)
2016
2017


Revenues
90,272
110,855


Operating Income
23,716
26,146


Operating Margin
26.27%
23.59%

 

Facebook  (data in $ mln)
2016
2017


Revenues
27,638
40,653


Operating Income
12,427
20,203


Operating Margin
44.96%
49.70%

From the operational standpoint, Facebook wins! In fact, even though as of 2017 Google still has almost three times as much revenues as Facebook. If we look at Operating income that becomes only 1.3 times higher. Also, Facebook as of 2017 has an operating margin of 49.7% compared to Google‘s 23.6% (more than twice).

Therefore, by looking at the financial operations, Facebook seems to be the winner as well.

A little caveat: To be 100% accurate I should have adjusted the Google revenues and operating expenses to reflect only those related to advertising. However, Google provides a breakdown of the sales based on the different segments. While it’s not possible to make the same adjustments for the operating expenses as they get lumped all together. However, the exercise above is still critical to understand the profitability of the two companies based on the overall business.  

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Facebook sales break-down 2015-2017

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Google sales break-down 2015-201

Summary and Conclusion

Throughout the article, I argued that Google and Facebook most important assets are the SERP and News Feed respectively. By looking at the data from Similar Web, it is clear that Facebook news feed can keep the user engaged more than Google‘s SERP. The financial data confirmed the operational ability of Facebook to be financially more effective.

In fact, even though as of 2017 Google‘s revenues are almost three times higher than Facebook. If we look at the difference between operating income, the gap gets narrower.

In conclusion, it seems that Facebook news feed could unlock profits for Facebook that – if things stay equal in the next future – will allow Facebook to take over Google. Of course, in tech things change swiftly and a simple algorithm tweak can also change the future profitability of a company.

The post The News Feed vs. the SERP: A Fight for Attention and Profits appeared first on FourWeekMBA.

How Mark Zuckerberg Makes Money? Facebook Business Model Dissected

As of the time of this writing, the social network created by Mark Zuckerberg in 2004 in his Harvard dorm room is worth more than five hundred billion dollars. If Facebook were a country that would be the most populous on earth!

Facebook’s business model is quite simple and based on advertising. Yet the company has been able to unlock so much business value from its operations that has become one of the most profitable tech giants, competing with Google and Microsoft:

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In this article, I’m going to show you all you need to know about Facebook’s business model.

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The five pillars of Facebook’s business model

The overall company is based on five pillars; as reported in its annual report for 2017:

Facebook enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. There are a number of different ways to engage with people on Facebook, the most important of which is News Feed which displays an algorithmically ranked series of stories and advertisements individualized for each person.

As highlighted here the News Feed is the crucial component of Facebook. In fact, that is where the company can engage its users. That is also the place where the company manages to monetize its users.

Instagram is a community for sharing visual stories through photos, videos, and direct messages. Instagram is also a place for people to stay connected with the interests and communities that they care about.

Messenger is a messaging application that makes it easy for people to connect with other people, groups and businesses across a variety of platforms and devices.

WhatsApp is a fast, simple, and reliable messaging application that is used by people around the world to connect securely and privately.

Oculus virtual reality technology and content platform power products that allow people to enter a completely immersive and interactive environment to train, learn, play games, consume content, and connect with others.

As we’re going to see the News Feed is the real cash cow.

How much money does Facebook make? 

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From the annual report for 2017:  Facebook reported over $40 bln of revenues in 2017.

A 47% growth compared to 2016.  The income from operations has grown to over $20 bln. An over 62% growth compared to 2016. 

What does it mean? Shortly, not only Facebook has been able to accelerate its growth. However, it has also managed to reduce the growth pace of its expenses. That had a positive impact on the operating income.

When it comes to cost of revenue (the money spent by Facebook to incur an income) the company specifies:

Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including content acquisition costs, credit card and other transaction fees related to processing customer transactions, cost of virtual reality platform device inventory sold, and amortization of intangible assets.

When a company manages to become efficient in its spending while increasing its revenues that is a good sign for the financial health of the organization. 

Also, for tech companies, it’s also important to keep a pile of cash to acquire competitors or to face hard times. That is why on the Facebook balance sheet are sitting more than forty billion dollars in easily convertible assets (called cash, cash equivalents, and marketable securities):

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The advertising business model

The business model is quite simple: advertising. In fact, even though there are two sources of income, most of the revenue comes from ads:

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1. Advertising (over 98% of revenues): it consists of displaying ad products on Facebook, Instagram, Messenger, and third-party 

2. Payments and other fees (almost 2% of total revenues):  it consists of net fee received from developers using Payments infrastructure or revenue from the delivery of virtual reality platform devices and others

I wouldn’t be surprised to see the other sources of income, other than advertising, grow in the next years. That is good to diversify the revenue stream.

However, as of now, the company growth is tied to its ability to engage its daily active users. According to Facebook as of December 2017, there were 1.4 billion daily active users. Also, not all users are born equal.

In fact, some users (for instance, North America and Europe) are worth more on Facebook because those areas are monetized differently. In addition, there is one key metric that tells us if the value of Facebook will keep growing in the long-run: ARPU. 

It’s all about ARPU: How much are you worth to Facebook?

ARPU stands for average revenue per user. In short, how much money a company can get on average from each user. In Facebook case, we can take into account the monthly active users.

For a company like Facebook, for which over 98% of its revenues come from advertising the amount of time people spend on the so-called news feed is crucial to increase the profitability metrics of the company.

That isn’t only because Facebook is an advertising company, but also the way its business model was built. In fact, if you think about Google, what makes the company able to monetize its users is not necessarily how much time they spend on the search results pages. Instead, that is based on how fast users can find what they need. In fact, once they click through that is how Google makes money.

Of course, things are changing fast both on Google and within Facebook. Yet as of now the more time you spend on Facebook and the more you’re active on it, the more you allow it to make money. What else? Not all users are born equal. In fact, according to the geography and the ad market of each country, the monetization strategy changes:

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That is how much each user is bringing on Facebook’s pockets based on three main geographical areas:

US and Canada: $26.76
Europe: $8.86
Asia Pacific: $2.26

Therefore, a user from the US or Canada is making as much as 12 times more than a user from the Asia Pacific region!

Summary and Conclusions

Facebook was founded in 2004 by Mark Zuckerberg in his dorm room at Harvard. Since then the company has never stopped growing. In fact, if it were a country Facebook would probably be the most populous on earth. However, the ability of the company to increase its value over time is based on how much money on average can make for each user.

In fact, over 98% of Facebook’s revenues come from advertising. Therefore, unless things will change; the news feed is still the main driver for monetizing Facebook’s content. A simple change in its algorithm can influence the mood for billions of people. Also, it can affect the value of the company for billions of dollars.

So far though, Facebook had made sure to have a pile of cash sitting on its balance sheet (more than forty billion dollars) which give the company enough space to buy its potential competitors or to face hard times in the next future!

Handpicked related content: 

Everything You Need to Know About Snapchat Business Model [Financial Infographic Inside]
How Tesla Loses Money: Tesla Business Model in a Nutshell
How Amazon Makes Money: Amazon Business Model in a Nutshell
The Power of Google Business Model in a Nutshell

The post How Mark Zuckerberg Makes Money? Facebook Business Model Dissected appeared first on FourWeekMBA.

Everything You Need to Know About Snapchat Business Model [Financial Infographic Inside]

Back in 2008, Evan Spiegel met Reggie Brown, during the freshman year. The same year they joined together the Kappa Sigma fraternity house of Stanford. There they met Bobby Murphy.

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In the spring of 2011 Reggie had this idea – how cool would this be – if the photos he was sending to a girl would soon disappear. That is how in 2011 the idea behind Snapchat was born. The three young men put together an app which at the time it was called Pictaboo:

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Source: techcrunch.com

By the end of the summer, the app only had 127 users! The name was changed in Snapchat in the fall of 2011. However, the app soon started to get tracion.

In less than a year, by the spring of 2012, Snapchat had 100,000 users. The first investment arrived in April 2012, when a venture capital firm made its first seed investment by valuing the company at $4.25 million.

By the spring of 2013 more than 60 million snaps were sent each day. The pace of growth accelerated in June 2013 the valuation of the company (after other two investment rounds) grew to $800 million. Snapchat added new features (like Snapchat stories) which made the company grow even faster.

The incredible thing about this story is that Mark Zuckerberg is reported to have offered $3 billion to acquire Snapchat,  although at the time the company didn’t turn a dollar in revenue.

In December 2013 the company valuation reached $2 billion. By the same time, Snapchat had over 4.6 million users. Finally, on June 2015, Snapchat came up with the first monetization strategy. The uses of Geofilters to allow businesses to brand themselves through advertising.

As reported by blog.bufferapp.com:

Currently, On-Demand Snapchat Geofilters are only available in the USA, UK and Canada and the area you select must be less than 5 million square feet.

Just like Google allows businesses to bet on keywords. Businesses can create their Geofilters based on location and track the results of those Ggeofilters.

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Source: blog.bufferapp.com

In January 2017 the company starts to work on an IPO which valued the company $24bln at $17 per share. At the time of this writing, Snapchat is valued at the same rate of its IPO. Even though back in August 2017 the stock had fallen to its minimum at $11.83.

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How does Snapchat make money?

Snapchat’s business model follows the advertising framework. According to the Snapchat website, the company has 178 million average daily active users. There are four sources of income:

Snap Ads

Those are mobile video ads. As reported by wallaroomedia.com:

The cost for Snap Ads varies by campaign. The cost for Snap Ads campaigns start at $3,000/month in ad spend. This obviously does not include the agency fee, or the cost to create the creative that you would run as the ad.

Sponsored Lenses

As reported by wallaroomedia.com:

The cost for Sponsored Lenses varies depending on the day of the week, holiday, trends, etc. A general rule of thumb for Snapchat Sponsored Lenses costs is this: $450,000 per day Sunday through Thursday, $500,000 for Fridays and Saturdays, and $700,000 plus for holidays or special events (like the Super Bowl).

The cost might seem crazy unless you consider that those ads can add up to hundreds of millions of views!

Sponsored Geolifter

Those are visuals set up on a localization basis. According to blog.hootsuite.com, they can cost as low as $5.

Snapchat Discover

According to wallaroomedia.com:

Snapchat Discover ads are the most expensive offering. Right now, Snapchat discover ads start at $50,000. Snapchat Discover ads get premium placement (at the very top of the app), and are usually reserved for publishers or big brands. And that $50,000 number? That’s a daily rate. Snapchat recently said that Cosmo, one of its leading publishers, gets several million views per day on it’s Snapchat Discover feed. At the top of the image below is where Snapchat Discover ads are featured.

As reported by blog.hootsuite.com the main metrics are:

Spend: The total amount spent on the campaign to date
Impressions: The total number of times your ad was viewed
eCPM: Average cost per thousand impressions
Swipe Ups: Number of swipe-ups on Top Snap ads
eCPSU: Average cost per swipe-up

Snapchat in numbers

The company has more than doubles its revenues from 2016. However, its operating income is still quite negative (part of it is due to the accounting recognition of administrative expenses). The profitability of the company so far seems tied to its ability to make its users hooked.

Summary and Conclusions

Founded back in 2011, Snapchat is a camera company that was started by three Stanford students. The company grew so fast that Facebook’s CEO, Mark Zuckerberg offered $3 billion to acquire the company back in 2013. Snapchat’s founders turned the offer down. The company after only four years, in 2017 launched an IPO that valued the company at $24bln. As of February 16th, the company is worth $24.59 billion. The company business model is based on four main types of advertising. The high tier advertising (called Sponsored Discovers) can cost as much as $50k per day! The low tier advertising (Sponsored Geolifter) can cost as low as $5. The company has more than doubled its revenues in 2017. However, it’s still burning cash.

The post Everything You Need to Know About Snapchat Business Model [Financial Infographic Inside] appeared first on FourWeekMBA.

How Tesla Loses Money: Tesla Business Model in a Nutshell

Tesla is the carmaker owned by entrepreneur/visionary Elon Musk. Today the company is worth over fifty billion dollars, although it didn’t turn a profit ever since its foundation. Tesla’s case study is quite interesting because it poses a few vital question about how the market values companies. In fact, the Tesla case study opens up a few interrogatives.

First, how a company that for the traditional financial standard would be bankrupt still manages to be alive and be valued at over fifty billion dollars. Second, how can we learn to evaluate tech, innovative companies with traditional accounting methods, are profitability and cash flows still the main metrics we need to focus on?

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Elon Musk’s financial outlook for Tesla

Elon Musk has a positive outlook for the next future. In fact, he sees Tesla starting to generate positive operating income anywhere in 2018 as specified in a Tesla’s letter:

Our goal is to become the best manufacturer in the automotive industry, and having cutting edge robotic expertise in-house is at the core of that goal. Our recent acquisitions of advanced automation companies have added to our talent base and are helping us increase Model 3 production rates more effectively. We don’t want to simply replicate what we have built previously while designing additional capacity. We want to continuously push the boundaries of mass manufacturing.

The objective is ambitious, but if Elon Musk manages to push electric cars to mass markets, then the company will finally become highly profitable. In fact, as clarified by the letter:

2018 will be a transformative year for Tesla, with a high level of operational scaling. As we ramp production of both Model 3 and our energy products while keeping tight control of operating expenses, our quarterly operating income should turn sustainably positive at some point in 2018.

Tesla in numbers

Tesla has four main sources of income:

Automotive
Automotive leasing
Services and other
Energy generation and storage

The automotive as of 2016 represented almost 80% of its annual revenues. Back in 2014, it was over 89%. In fact, the other three segments (leasing, services and energy generation and storage) have improved consistently since 2014. The income from operations grew from 2014 to 2016. Also, the cash flows from investing and operations are negative; while most of Tesla’s cash comes from financing activities due to the increase in long-term debt.

In fact, as of 2016 Tesla balance sheet shows a long-term debt of almost six billion dollars. Also, as of 2016 US is the country that drives most of Tesla’s revenues.

If we purely look at these numbers the scenario doesn’t look promising. Also, in the next years part of the debt will be due:

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Part of that debt will convert in equity. The last refinancing was in February 2018 when Tesla got a loan giving as collateral the leasing from its buyers. As reported by techcrunch.com:

Tesla is using its car leases as collateral for a big $546 million loan as it turns to debt markets to raise additional cash to combat the blistering burn rate of its auto and energy business, according to multiple reports.

The myth of Tesla zero $ advertising budget

Musk is famous for his unconventional stunts. For instance, the stunts of the flamethrowers or the Tesla roadsters sent on space managed to reach hundreds of millions of people worldwide without a dollar spent on ads.

What Elon Musk Can Teach You About Unconventional PR

However, this also fueled the myth that Tesla doesn’t spend a dollar on advertising campaigns.

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Is it true that Tesla didn’t spend a dime on advertising?

Like any other company, Tesla has a marketing budget for advertising. In fact, as Tesla specified in its annual report in the section related to “Marketing, Promotional and Advertising Costs:”

Marketing, promotional and advertising costs are expensed as incurred and are included as an element of selling, general and administrative expense in our Consolidated Statements of Operations. We incurred marketing, promotional and advertising costs of $48.0 million, $58.3 million and $48.9 million for the year ended December 31, 2016, 2015 and 2014, respectively.

Thus, even though Elon Musk I believe is the kind of unconventional PR, Tesla still needs advertising to push its sales. In fact, viral marketing might work for low-priced products. But I’m not sure about its effectiveness when it comes to complex transactions like purchasing an electric car.

Summary and Conclusions

If we look at the numbers, Tesla seems to be on the edge of bankruptcy. Yet its market capitalization has kept growing since its IPO back in On June 29, 2010; Tesla Motors Incorporated launched its IPO on the Nasdaq exchange. It offered 13.3 million shares at a price of $17 per share. At the time of this writing, Tesla is listed for 335.49 (almost twenty times higher). That means if you invested a single dollar on Tesla back in 2010 you would have now nearly $20 in your pocket. Does it mean Tesla market capitalization will keep growing? As Elon Musk admitted in Tesla’s letter It will all depend on the company’s ability to reach profitability in the next future! 

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