Facebook Could Triple Its Revenue With 1 Move

When Facebook (NASDAQ: FB  ) shares soared 30% the day after the social network reported its blowout earnings I couldn't help wishing I had emulated my Facebook CAPScall in my real-money portfolio. Too late. Or is it? Is there still upside left to Facebook's stock?

"Facebook Premium"
Pandora One subscribers grew 114%, year over year, in the company's most recent quarter. In fact, the ad-free version of its streaming music was the company's fastest growing revenue stream during the quarter.

What does this have to do with Facebook? According to Twitter co-founder Biz Stone, giving members an option to pay for an ad-free Facebook experience along with a few other exclusive benefits could generate an additional $12 billion in revenue, annually.

Pandora has Pandora One for $36 per year. Flickr has an Ad Free account for $50 per year and a Doublr account (ad free plus 2 terabytes of photo and video space) for $500 per year. Facebook has ... well, on Facebook you must endure advertisements whether you like it or not. For now.

Was Biz Stone right?
Maybe.

Greenlight decided to put Stone's assumptions to the test, polling 500 Facebook users. The study revealed several interesting tidbits.

As it turns out, not every Facebook user appreciates ads. Surprise, right? Greenlight's survey showed that about 70% of respondents never or rarely click on ads or sponsored listings. Greenlight CEO suggests this means that this is "indicative that consumer apathy [for advertisements on Facebook] is very real."

Just how many members would pay for an ad-free experience?


Source: Facebook Newsroom.

Fifteen percent. In fact, 8% indicated that they would spend $5 or more per month.

If 15% of Facebook's 1.15 billion members paid $7.50 per month for an ad-free experience, Facebook could earn an additional $1.25 billion every month. That would have essentially tripled Facebook's second-quarter revenue.

Why not?
If some members would love to pay for an ad-free service, Facebook should let them. With revenue like this, Facebook could spend more time on improving the user experience and less time spicing up its ad business.

This is just one way Facebook could increase its revenue. I recently detailed a way Instagram could contribute to the top line, too. Certainly there are even more ways Facebook could monetize its lockdown on more than 1 billion of the earth's population.

During Facebook's first year as a public company, I missed the mark. Facebook doesn't need to grow into its valuation with existing streams of revenue. It just needs to introduce new streams. Easier said than done, but still a realistic development.

I may have missed the party, but I still might buy Facebook shares.

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Read/Post Comments (22) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2013, at 8:21 AM, jschw3000 wrote:

    if no one looks at ads , wouldn't they loose the revenue from the people who are placing the ads?

  • Report this Comment On July 28, 2013, at 10:02 AM, TMFDanielSparks wrote:

    @Jschw3000 Only 15% of users, according to the study and this projected scenario would pay more than $5. The outsized gain in subscription revenue would more than make up for the slightly less demand for demand

  • Report this Comment On July 29, 2013, at 10:54 AM, MichaelGentry wrote:

    I have no problem saying Facebook will be the world's first trillion dollar company that is if there power partner doesn't beat them to it. Glad I don't have to make that call lol :) #facebook #microsoft

  • Report this Comment On July 29, 2013, at 5:23 PM, TMFDanielSparks wrote:

    @Jschw3000 "slightly less demand for ads" I meant... :)

  • Report this Comment On July 30, 2013, at 11:17 AM, pondee619 wrote:

    ". In fact, 8% indicated that they would spend $5 or more per month"... "If 15% of Facebook's 1.15 billion members paid $7.50 per month for an ad-free experience"

    OK. I'm confused. 15% said they would pay for ad free service. BUT only 8% said they would pay $5 or more per month. What would the other 7% pay? Less than 5 per month?

    What are the demographics of that 8 (or 15%) and how would their loss effect ad spending? Is it fair to say that that 1.15 billiion would all be added to revenue with NO off set?

  • Report this Comment On July 30, 2013, at 11:30 AM, TMFDanielSparks wrote:

    @pondee619,

    Thanks for your thoughts. If you view Greenlight's findings, they mentioned that some of those 8% would pay far more than $10. So I averaged it out to $7.50 for the 15% that would pay, especially since 8% of that 15% indicated they would pay at least over five and some even more than $10.

    Also, there would definitely be an offset -- yes. But this scenario would actually even more than triple their revenue without an offset. So with an offset of 15% it still would just about triple their revenue.

    But, keep in mind the point of the article is to go through just one exercise in which Facebook could utilize its powerful asset of 1.15 billion users. I highly doubt Facebook would do exactly what I would describe.... but the exercise allows us to see the power Facebook has in these numbers and how it could easily boost revenue with just one additional service...

    Thanks for the thoughtful comment!

  • Report this Comment On July 30, 2013, at 12:07 PM, gskinner75006 wrote:

    Just run an Ad blocker. I haven't seen an Ad in longer then I can remember.

  • Report this Comment On July 30, 2013, at 12:10 PM, TMFDanielSparks wrote:

    @gskinner75006,

    Just curious... does that block the promoted posts and ads that show up in the news feed? Or just the ones on the side.

    That's definitely a good point... but that's one reason why I think there needs to be a few exclusive benefits... kind of like Pandora One and Flickr.

  • Report this Comment On July 30, 2013, at 1:29 PM, navynukesupe wrote:

    An ad blocker does get rid of many of the ads but add-ons like Social Fixer do a much more thorough job of removing the unwanted aspects of Facebook. It is almost disorienting the occasional times I log on from a different computer.

  • Report this Comment On July 30, 2013, at 2:00 PM, MethodlessMan wrote:

    "Fifteen percent. In fact, 8% indicated that they would spend $5 or more per month.

    If 15% of Facebook's 1.15 billion members paid $7.50 per month for an ad-free experience, Facebook could earn an additional $1.25 billion every month. That would have essentially tripled Facebook's second-quarter revenue."

    I understand that $7.50 very well may be the average of these 15% of respondents. I wonder if 2 things were taking into consideration though:

    1) Facebook does not have the ability to price discriminate, you must take the minimum not the mean. You can't charge $5 to one user and $10 to another.

    2) How random was this survey? e.g. If only people from developed countries were polled, I'd imagine the reality would be significantly less revenue if this were to be implemented. It is possible that the percentage of people willing to pay is the same in each country, but I'd be surprised if the amount was the same.

    I'd imagine this to generate closer to 25-35% of the revenues, if not even less.

  • Report this Comment On July 30, 2013, at 2:04 PM, vidar712 wrote:

    There have been many 'Facebook will require users to pay' scares in the past. (All of them have apparently been hoaxes.)

    Just the hint of Facebook making users pay for the service could trigger a user backlash. (Similar to what happened to Netflix when they announced they were splitting their company.)

  • Report this Comment On July 30, 2013, at 3:34 PM, TMFDanielSparks wrote:

    @MethodlessMan

    You could be right. Maybe they wouldn't pay $7.50. Maybe it wouldn't be close to 15%. Even so, don't you think the exercise illustrates the asset Facebook has at its finger tips? Whether its an ad-free service or some future add-on option that we haven't thought of yet, people are on Facebook all day, every day. 699 million daily active users.... I think this what-if scenario shows us that we may only be looking at the tip of the iceberg. Whatever revenue streams Facebook chooses to pursue.. who knows, but there certainly will be some new streams in the next five years or so I would think.

    I think if Facebook decided to offer an ad-free option it would be some sort of bundle deal that had new additional services too...

  • Report this Comment On July 30, 2013, at 5:37 PM, TMFValueMagnet wrote:

    Interesting idea, but Facebook has about 320 million users in the US, Canada, and Europe, the people most likely to pay for ad-free access, so I'd moderate the numbers a little bit.

  • Report this Comment On July 30, 2013, at 6:04 PM, dudleyyvr wrote:

    8% of respondants? ie, How many were asked? Facebooks have millions of people in countries like India where $7.50 a mth is way out of consideration.And there's a larger percentage of users in poor nations who could not afford it.

    Look what an extra few bucks did for Netflix shares.

    8% of 100 people doesnt really account for much. it's not 8% of 1.15 bn.

  • Report this Comment On July 30, 2013, at 6:20 PM, wasmick wrote:

    There's plenty of time to decide what to do with this stock as it is a long, long way from figuring out what it wants to be when or if it grows up.

    Right now it's still priced below its bungled IPO and once the market adjusts, it will likely half. That would be the time to buy if you're inclined to buy this type of thing.

    FB has over a billion users precisely because it is free. Since it doesn't actually offer anything other killing time, very few subscribers will ever pay for it and rightly so.

  • Report this Comment On July 31, 2013, at 1:59 AM, awallejr wrote:

    I am still not sold on FB. People get more upset over NSA and phone numbers than they do over what FB does with all your information. You want to let Zuckerberg monetize you so be it.

  • Report this Comment On July 31, 2013, at 7:35 AM, BMFPitt wrote:

    FB Purity is free.

  • Report this Comment On July 31, 2013, at 8:01 AM, mikecart1 wrote:

    The price that I'm willing to pay to use Facebook is $0.00 and not a penny more. This is my final offer Mark Zuckerberg.

  • Report this Comment On July 31, 2013, at 9:38 AM, WildTing wrote:

    15% people opt out of ads... that means 15% less impressions for advertisers to pay for. So the question is are those people opting out worth more as paying customers or as eyeballs for advertisers? They say they're not clicking and aren't influenced by ads, but they really are.

  • Report this Comment On August 02, 2013, at 12:00 PM, TwinMount wrote:

    I am not a fan of Facebook, someone hacked my account and changed my personal info so I cancelled the account. I didn't use it anyway. My kids and my granddaughter are not fans either, saying it is a waste of time.

  • Report this Comment On August 03, 2013, at 1:30 AM, macollin wrote:

    @TMFDanielSparks

    Ad block plus in firefox is great. I don't listen to commercials on pandora, don't see ads on Facebook and don't watch commercials on streaming TV shows.

    I don't need to pay for an ad free experience there are always hacks to remove ads.

  • Report this Comment On August 03, 2013, at 3:32 PM, Tempeste49 wrote:

    I have used FaceBook ads to promote my business. I paid per click, not per view. I think having users pay to remove ads will have a negligible effect on advertizing revenue.

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