What type of network effects are present on facebook?

Network effect is a characteristic that causes a good or service to have a value to a potential customer
which depends on the number of other customers who own the good or are users of the service. In
other words, the number of prior adopters is a term in the value available to the next adopter. For social
networking sites, it is important to have a critical mass of users. The value of such networking sites to
the users is in the form of being connected to more users. Hence the participation of large number of
users will encourage more users to join the site. Prior to the public launch of Facebook, it had already
established a critical mass of users in schools and organizations. Hence, by opening the social network to
the greater online community, Facebook continued to ride on the network effect to attract more users.
The youthful demographic that Facebook attracts is highly prized amongst advertisers, the source of
revenue for Facebook.

What is the source of revenues for facebook?

There were several funding from venture capitalists since the launch of Facebook. NotablyUS$500,000
from Peter Thiel (co-founder of PayPal) in 2004, US$13 million from Accel Partners in 2005, and US$25
million from Grey lock Partners, Accel Partners, Meri tech Capital Partners and Peter Thiel.

The revenue model of Facebook is based on the following:

 Display advertisements – Example of revenue from this is through outsourcing advertising deal.
Besides the common banner advertisements, Facebook allows users to make their own
advertisements known as Facebook Flyers at low prices based on number of clicks. These
advertisements are filtered according to targets’ gender, age, education status, and regional
networks. Direct advertisements accounts for majority of Facebook’s revenue.
 Sponsorship – This is in the form of homepage sponsored stories and sponsored groups. In the
former sponsorships, advertisements are displayed in the News Feed section of Facebook users’
pages which most users pay attention to. The click-through rates of such advertisements are
higher than normal banner advertisements by ten to twenty times. Levels of filtering (such as by
gender or location) for targeted users are applied with a premium. Sponsored groups are groups
in Facebook created for particular brand of goods. These groups (such as Apple Students, PINK
Victoria Secret, NBA Finals Trivia Challenge) are personal environments for users to gather and
interact, transforming the brand into a participant of Facebook. The cost of each sponsored
group is US$300,000 for three months. There were 186 sponsored groups in September 2007.
 Gifts – Users can purchase limited edition virtual gifts for other Facebook users at US$1 per
item.