Now we know how Facebook plans to make money off of Libra

Call me crazy, but the world arguably learned more about Libra in the past day than it has in the nearly one year since it debuted.

On Wednesday, Facebook – which bootstrapped Libra’s early development and has, arguably, shaped its overall perception – held an annual shareholder event, during which time senior executives fielded a range of questions. Questioner Brett Young got straight to the point by asking how Libra benefits Facebook financially: “How is Libra going to make money for Facebook?"

Facebook CEO Mark Zuckerberg’s answer was a bit roundabout, but once you peel back the proverbial onion’s layers, it’s not that complicated: a possible boost to ad revenue.

As my colleague Yogita Khatri’s write-up of his remarks explains, businesses that want to advertise on Facebook do so via auction. The idea is that they’ll get somewhere in the neighborhood of equivalent returns on their investments and pay as little as possible when doing so. The thinking with Libra (and Facebook Pay, which also got namedropped) is a more seamless payment structure that will help drive sales conversions because users might be enticed to click on through. With more effective advertising, businesses might come to view them as more valuable — and pay more for them.

Zuckerberg also offered a wider perspective on this, and — without specifically naming it — invoked the kind of “payments for the unbanked” talk that Libra was positioned around at launch. 

"I think there are a lot of opportunities with Libra to make the process of commerce and payments helpful — a lot easier," said Zuckerberg. "And I think that, that's going to be great for people around the world. I think it will be helpful for the economy overall. And we will be able to participate in some amount to that value creation ourselves through higher prices in ads if businesses are succeeding using these tools."

Whether that thesis actually bears fruit remains to be seen. And for what it’s worth, the person who asked the original question is himself skeptical.

Still, advertising is Facebook's biggest money-maker. The social media company brought in $17.44 billion in the first quarter of 2020 – a 17 percent year-over-year increase. In that quartely earnings report from April 29, Facebook also made note of "a significant reduction in the demand for advertising, as well as a related decline in the pricing of our ads, over the last three weeks of the first quarter of 2020," going on to say:

"After the initial steep decrease in advertising revenue in March, we have seen signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020. The April trends reflect weakness across all of our user geographies as most of our major countries have had some sort of shelter-in-place guidelines in effect."

A sign of the end-times? Not exactly, but the platform's sensitivity to adverse economic conditions makes a method for possibly boosting ad revenue more enticing in the long run.

Facebook has been down the “make platform payments simpler” road before. Facebook Credits, which launched in January 2011, was more of a walled-garden approach, with the intention of driving payments in the apps hosted on Facebook. As The Block’s Steven Zheng reported last year, Credits provided a significant boost to Facebook’s payments revenue. But that growth was short-lived, and in June 2012 Facebook announced that it would discontinue Credits — a move it completed in September 2013.

But this week’s comments from Zuckerberg are quite revealing because they provide a window into why — beyond the lofty statements of financial inclusion — Facebook put time, effort and, as we later saw, significant political capital on the line to push Libra to fruition. Libra’s revised white paper also demonstrated the degree to which the stablecoin project has evolved since its debut, and, after a year of meeting with regulators, central bankers and other stakeholders, it’s beginning to look more like the traditional financial system it once seemed to challenge. And the Libra Association’s recent hires demonstrate that the network’s progenitors want to play nice with some of the institutions who one day might become a part of the network via new digital currencies that may come online in the years ahead.

I should note that Facebook’s position isn’t really all that controversial — economically questionable, maybe but not controversial. The social media giant, along with other powerful tech companies, is in the proverbial hot seat over questions of election-year censorship, and there’s no clear timeline as of yet on when Libra might actually go live.

But as the initiative evolves, we’ll likely hear more about how Libra will fit into Facebook’s bigger picture — and it’s bottom line as well.