It's Not Like Anyone's Gonna Quit...
February 16, 2012 10:20 AM   Subscribe

How much would facebook need to charge per user per month to eliminate ads?

... or for a one-time fee, I suppose, if that fits into your answer at all.

I think we're all aware that social networking will never go away, and, as you can tell by its uber-ubiquity, most people don't want it to. I've been considering this for a while now-- for youtube, google, yahoo, etc. It's sort of the satellite radio model, Netflix vs. cable TV, and, of course, our beloved MeFi.

I want the damn thing, so let me pay for it and cease the fucking ads giving, and taking, information from me like creepy robot spiders prying my eyes apart.

Same goes for FM radio, and the list never ends. But my question is specifically focused on facebook, and (lest the chat-filter police put barriers up in the street):

I'm interested in looking at it as realistically as possible-- in real, factual, contemporary numbers (taking into account how many users there are on fb; perhaps how that's growing or whatever; how much does fb pull in for ads; &amp) how would that realistically, if not foreseeably, translate as a monthly charge). thx
posted by herbplarfegan to Technology (27 answers total) 2 users marked this as a favorite
I don't have a link handy, but I heard on the radio the other day that Facebook makes an average of $4 per user per year. I'm guessing they'd want at least 20 years of revenue in exchange for a lifetime ad-free commitment, so say $80 would be the minimum cost.

Not that FB would ever do it, I expect, so the calculations probably don't matter.
posted by echo target at 10:29 AM on February 16, 2012 [1 favorite]

Their SEC filing indicated total advertising revenue in 2011 of around $3.2 billion. Dividing this by monthly average users, we get $4.39 per year - so that would be a lower bound of the what you'd have to pay, per year, as of right now to make up the difference to the company.

But, the filing indicates pretty clearly that Facebook isn't making enough money per-user as they should be. Keep in mind that the ad inventory per user is damn near infinite; 3-5 slots on sidebar ads per pageview alone, not to mention the quasi-ads users get in their feeds from brands they like. With somewhere near a half billion daily users, $4.39 per user is honestly pretty pathetic; my guess is that they can get that up to $10 or $20 pretty easily by doing a better job exploiting existing ad inventory, creating more, and selling proprietary data streams to consumer brands.
posted by downing street memo at 10:31 AM on February 16, 2012 [3 favorites]

I want the damn thing, so let me pay for it and cease the fucking ads giving, and taking, information from me like creepy robot spiders prying my eyes apart.

But I don't think that's the end of their business model at all. They not only make money by selling you ads, they make money by aggreggating crazy data and may one day start selling that at a much faster rate than they can today. There are a lot of ways to leverage users for money and ads are only one part of that, and a part I think will get smaller over time, too.
posted by Miko at 10:31 AM on February 16, 2012 [4 favorites]

Hm an interesting question. I'll look through the filing and see what I can find.

That said, previous posters are right: fixing their net profit per user is not in their best interest.
posted by teabag at 10:31 AM on February 16, 2012 [1 favorite]

Facebook's current revenue per user is between 4 and 5 dollars. The link argues that for the IPO to succeed, that number is going to have to go up considerably.
posted by willbaude at 10:32 AM on February 16, 2012 [1 favorite]

Best answer: There might be a case for Facebook to do it.

For free users there is no upper limit but the lower limit is actually a negative amount. A user who does not view ads actually costs money. I may never log in, but they still have to pay to store my information and CPU cycles to update my wall or whatever behind the scenes.

It is also better to have money today than the promise of money tomorrow.

They have very smart people, if they can figure out the correct business mix between ad supported and paid in order to maximize profit they will do it.
posted by Ad hominem at 10:33 AM on February 16, 2012 [1 favorite]

From what I understand, selling ads is not actually their main business. The real money is in selling all of the demographic data they have on their users to other companies.
posted by balistic at 10:37 AM on February 16, 2012 [1 favorite]

WSJ: How Facebook Makes Money Could Change
posted by Miko at 10:43 AM on February 16, 2012

OK in 2011, Facebook paid 1.955 billion in expenses, the majority (800mm or so) was their cost to of capital (see below).

Assuming 845mm active users, total cost per user is $2.31 per year per user.

As to composition of revenue, here we go:

We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers.

Advertising. Our advertising revenue is generated by displaying ad products on our website. Advertisers pay for ad products displayed on Facebook, either directly or through their relationships with advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. We recognize revenue from the display of impression-based ads on our website in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad appears in pages displayed to users. We recognize revenue from the delivery of click-based ads on our website in the period in which a user clicks on an ad.

Payments and other fees. We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using credit cards, PayPal or other payment methods available on our website. We receive a negotiated fee from our Platform developers when users make purchases from our Platform developers using our Payments infrastructure. We recognize revenue net of amounts remitted to our Platform developers. We have mandated the use of our Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games. To date, games from Zynga have generated the majority of our payments and other fees revenue. In addition, we generate other fees revenue in connection with arrangements related to business development transactions and fees from various mobile providers; in recent periods, other fees revenue has been immaterial.

Cost of Revenue and Operating Expenses

Cost of revenue. 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, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions.

Marketing and sales. Our marketing and sales expenses consist primarily of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include user-, developer-, and advertiser-facing marketing and promotional expenditures.

Research and development. Research and development expenses consist primarily of salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense substantially all of our research and development costs as they are incurred.

General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal settlements.

posted by teabag at 10:43 AM on February 16, 2012

Best answer: I'm not sure I agree with those who say there is no upper limit to the value of targeting ads to one user. We may not know what that value is, but presumably for any given user, the value isn't infinite. If, say, facebook could get their half-billion users to each pay them $1,000 a year, that would be a half a trillion dollars a year in revenue, which would presumably be enough for facebook. I imagine that would work for individuals as well as aggregates: That is: Facebook would be better off if *I* gave then $1000 and never saw another ad: the extra $1000 would be far more than the revenue loss of having one less user.

Of course, it's ludicrous to imagine that people woudl pay anything like $1000 for facebook. But if it's true for $1000, it's true for some smaller figure, too. To suggest that the upper limit of ad revenue is limitless seems wrong...

There may be very good business reasons for which facebook would not want to offer a paid ad-free version. But it's not because the value of showing me ads is immeasurably high...
posted by ManInSuit at 10:44 AM on February 16, 2012

AH, I meant "cost of revenue", my mistake
posted by teabag at 10:45 AM on February 16, 2012

Another issue (which might be obvious) is that keeping facebook free means there is very little friction in signing up for it. Facebook attracts people because "everyone" has it, and as long as it's free it can keep being where "everyone" is (and where everyone spends time online) and attract big marketing money from large companies. If it starts charging a fee, I imagine people will start leaving, or new signups will drop and eventually, whatever fee they charge won't be enough because so many fewer people would be paying it. A new (free) social networking site could fairly easily become the New Facebook. Social networking is a business of scale imo, and keeping it free and ad-supported is the best way to get that scale.
posted by MadamM at 10:47 AM on February 16, 2012 [2 favorites]

I am of the opinion that Facebook and Zynga are pretty much symbiotic at this point. They are also making bucks off selling virtual cows.
posted by Ad hominem at 10:49 AM on February 16, 2012

Oops, I see people are assuming Facebook would switch to a tiered model with free, ad supported accounts vs. paid ad-free accounts. Honestly, I think people who care a lot about ads forget that the majority of consumers don't really give a shit about ads as long as they're unobtrusive. Facebook presumably doesn't care if it loses the relatively small segment of society that cares about ads when it wins every other category.
posted by MadamM at 10:51 AM on February 16, 2012 [1 favorite]

We may not know what that value is, but presumably for any given user, the value isn't infinite.

Right, sorry, I didn't literally mean infinite in the mathematical sense. But once you stop thinking of Facebook as a tech product and instead think of it as a utility or an infrastructural network, more akin to the US Interstate system, you start to realize how high that limit might be.

Right now, the company has basically focused on monetizing its product in the same way most web companies do: ads. But when they start to take advantage of the fact that their platform is the connective social glue for large swaths of the western world, and get into things like payment processing (for instance) - watch out.
posted by downing street memo at 10:59 AM on February 16, 2012 [3 favorites]

Response by poster: downing_street_memo: and get into things like payment processing (for instance) - watch out.
can you elaborate on that at all?
posted by herbplarfegan at 11:12 AM on February 16, 2012

Well, imagine that you could send money to friends and family via Facebook instead of using a check, or that you could pay merchants by logging into their site with your Facebook credentials. This isn't theoretical, FB already has a "Payments" business (used mostly for cows in FarmVille or whatever, now) and they talk in the regulatory filing about how they're applying for the necessary licenses and permissions to handle payments on a bigger scale.
posted by downing street memo at 11:18 AM on February 16, 2012 [1 favorite]

You are proposing a complete 180 degree change to their entire business model. If you were to pay Facebook for their social networking services you would become a Facebook customer. As it stands now, users are NOT customers. You are product. The ad revenue is one thing. But it is all of the data they mine from you and sell that is probably much more valuable in the long run. I deleted my account a few years ago because I didn't want to be corporate product.
posted by Seymour Zamboni at 11:22 AM on February 16, 2012

Just wanted to pipe in and mention that FB doesn't actually "sell" any of your info to advertisers. They use your info to target ads at you, but as an advertiser I don't get any data about who sees my ads except for the aggregate number of people that meet my targeting criteria.
posted by dripdripdrop at 11:23 AM on February 16, 2012 [2 favorites]

One thing to consider is that not all users are worth the same amount--advertisers will pay different amounts to reach different groups of people. For example, Facebook will almost certainly make more money from showing an ad to a user in a rich country than from showing an ad to a user in a developing country. Someone who has detailed info about their interests, favorite shows, etc. on their profile is probably easier to sell ads to and thus worth more than someone with a spare profile. And so on.
posted by phoenixy at 11:33 AM on February 16, 2012 [1 favorite]

Best answer: There are many reasons they will never do this, the most important being it simply isn't their business model. Also, once you pay for something, it would require a bunch of accounting, support people, etc. Easier to take money from 1 million advertisers than 1 billion users.
posted by dripdripdrop at 12:11 PM on February 16, 2012 [1 favorite]

Best answer: MadamM makes an excellent point: Facebook relies on the low barrier to entry to get their users into the system. If they charged an entry fee, they would never have grown this large. So you can't do this historically because "imaginary Facebook + entry fee" is a much smaller, very different entity from Facebook today. Their costs would be entirely different.

Even now that they have a huge number of users, they have to keep bringing in more users to increase their revenues, so an entry fee would stifle their growth. Since they make around $4.39 per user or year today, you might think that charging $5 or even $10 poor user per year would more than cover it. But that would destroy their growth prospects. As we saw with Netflix, increasing fees can cause a remarkably quick exodus. And as we saw with AOL IM vs the multitude of messaging systems today or MySpace vs Facebook, it really doesn't take that long for a social media platform to replace another. So if Facebook went for that model, they would be sacrificing the possibility of doubling or quadrupling their revenue per user and significantly reducing their user base. Now we're talking about $20 to $50 per year to make up for the lost growth. That is a major barrier for a service people can get elsewhere - what happens when everyone migrates to Google+ because it's free? So adding a fee could easily mean killing the goose and tarnishing their reputation (like Netflix).

In summary: an "everyone pays" model will bork their business model and kill their growth. Investors are very interested in future growth. And it's potentially a tough misstep to recover from.

There is a case for an ads-free version for a price. But I don't think that will mean they'll stop collecting your data. In business circles right now the big idea is using Big Data to solve problems and make money. No one is really clear on where that market will go, but because the business is still developing Facebook doesn't want to kill their data by punching holes in it. What if 10 years from now, selling analytics to marketing firms is a huge business, but there are glaring holes in Facebook's data because Facebook started offering a "no tracking" model? A company without that option would then have a big leg up on them. And as phoenixy points out, some users' data is more valuable than others. It might be that mostly wealthy users use the "no track" option, and suddenly Facebook is missing data on the group with the most disposable income - marketers would really want that data. Finally, this data might become more valuable over time. We might find out that trending over decades of data is an extremely valuable practice, and the measly $10/year that Facebook collected in the 2011-2020 time frame is worth much less than having the data from 2020-2120. That's another deal - due to the sad state of privacy laws, I believe Facebook owns that data forever. That means they may find ways to make money on it indefinitely, and they'd rather lose out on the "no tracking" fees than find out that they missed out on making money on that data for 50 years.

In summary: they won't ever offer a no-tracking option because it's unclear whether the money today will be better than the money tomorrow (and the next day, and the next...). Sure, a bird in the hand is worth 2 in the bush, but if you think there might be 10 or 20 birds in that bush you might take that risk.
posted by Tehhund at 12:28 PM on February 16, 2012

This also depends on what you consider advertising. The average user of facebook sees almost no traditional ads at all - there are no banners, no takeovers, no inserted information in the middle of the feed. Only a couple of sponsored lines and a small image in the corner.

Instead, facebook is treating companies like users, letting them mod up their own pages, and it's your friends and contacts passing on the ad content. Facebook makes the money, but if all of your friends recognized those games and coupon "likes" and other apps as ads, maybe they wouldn't click them and you wouldn't see them at all.

I think a tiered payment system could work to let people pay to not see the little sponsor ads in the sidebar. But the money they make from advertisers creating "content" that gets shared is a whole other ball game. The less relevant traditional media becomes, the more money companies will be willing to spend on those bells and whistles on facebook, where every like can translate into a certain definable number of sales (and in a way that's far easier to track than running a magazine or TV ad).
posted by Mchelly at 2:53 PM on February 16, 2012

let me pay for it and cease the fucking ads giving, and taking, information from me like creepy robot spiders prying my eyes apart

Facebook would put value on data about you even if you paid them extra to never see an ad. You've conflated the two of these.

The number you'd be looking at to not have ads is not going to be the same what the data they have about you is worth. It's an asset to them.
posted by yohko at 3:16 PM on February 16, 2012

There is no reason for it to be either/or. They can have users pay and show them ads. They are both legitimate, non-overlapping sources of revenue. It works for newspapers (well, did), TV, live sporting events, etc.

(And they won't ever stop doing awkward stuff with your information. That's the grease that makes the system work.)
posted by Ookseer at 4:17 PM on February 16, 2012 [1 favorite]

This was on NPR yesterday - I think it was Marketplace? Facebook makes $4 off every new user.
posted by bendy at 8:15 PM on February 16, 2012

Here's the link.
posted by bendy at 8:18 PM on February 16, 2012

« Older The most passive income?   |   Roux en-Y vs. Lap Band Newer »
This thread is closed to new comments.