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A Paid Version of Facebook Doesn't Seem So Impossible Anymore

By Evan Niu, CFA – Updated Apr 11, 2018 at 3:33PM

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Key word: "version."

Over the years, countless hoaxes have circulated on social media claiming that Facebook (META -0.74%) was preparing to implement a monthly subscription fee, or some other type of fee (Facebook's main page says "It's free and always will be" in response to these hoaxes). As a result, Facebook must then monetize its free service through advertising in order to pay the bills, a trade-off that modern consumers are all too familiar with.

As the company finds itself embroiled in yet another privacy scandal, it sounds as if it may be reconsidering another approach.

Mark Zuckerberg speaking on stage

Facebook CEO Mark Zuckerberg. Image source: Facebook.

Zuck goes to Washington

CEO Mark Zuckerberg is on Capitol Hill right now testifying in front of Congress. Senator Orin Hatch asked him earlier today if Facebook remains committed to offering the service for free in light of the recent privacy revelations. His Zuckness replied, "Yes, there will always be a version of Facebook that is free."

A version.

The implication is that Facebook is at least considering both a paid version and a free version of the core platform. A paid version would presumably remove all ads, which should theoretically help mitigate any privacy concerns that users have. Keep in mind that it was a personality quiz app -- not an ad -- at the heart of the Cambridge Analytica scandal, so this notion wouldn't necessarily address all privacy concerns.

There's very likely some portion of Facebook's user base that would be able and willing to pay a small subscription fee, especially now that the privacy costs are far greater than anyone had ever thought. Facebook is now the least-trusted major tech company by a massive margin, according to a recent poll by SurveyMonkey/Recode.

How much would a paid version cost?

In many emerging markets, consumers simply wouldn't be able to afford a monthly subscription fee to access Facebook. Consider Zuckerberg's recent comments in an interview with Vox (emphasis added): "The reality here is that if you want to build a service that helps connect everyone in the world, then there are a lot of people who can't afford to pay. And therefore, as with a lot of media, having an advertising-supported model is the only rational model that can support building this service to reach people."

Of course, Facebook's ability to monetize its services varies widely by geographical market, which would present some pricing challenges. In order to compensate for lost advertising revenue, the company would on average need to charge a user in North America over 14 times as much as a user in Africa, for example.

Geography

Average Advertising Revenue Per User (MRQ)

U.S. and Canada

$26.26

Europe

$8.71

Asia-Pacific

$2.52

Rest of world

$1.85

Data source: Facebook. MRQ = most recent quarter.

These figures are for the entire quarter, so dividing by 3 would give you an approximation of what monthly fee the company would need to charge. That's not to say that the monetization differences would dictate pricing of a paid version; Zuckerberg has always prioritized Facebook's social mission over its finances.

It's also worth pointing out that in a recent interview, COO Sheryl Sandberg was asked if Facebook would ever allow users to opt out of targeted advertising. Sandberg responded:

We have different forms of opt-out. We don't have an opt-out at the highest level. That would be a paid product.

Clearly, management is at least discussing the possibility. Now, more than ever, it seems that a paid version (in addition to a free version) of Facebook could be on the table.

Evan Niu, CFA, owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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