There have been whispers and rumors about a paid Facebook (NASDAQ:FB) option for years, but after this week, it seems more conceivable than ever -- CEO Mark Zuckerberg and COO Sheryl Sandberg have both made comments that seem to hint that, at the very least, Facebook is considering it.
In this week's episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Evan Niu indulge in a little wild speculation about what a paid Facebook tier could look like and how it would affect the company. Find out a how the pricing might be decided, a few things that would make implementation a lot trickier than you might initially think, what we know so far about U.S. consumer interest in a paid Facebook option, and more.
A full transcript follows the video.
This video was recorded on April 13, 2018.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, April 13th, and we're theorizing what a paid Facebook service might look like. I'm your host, Dylan Lewis, and I'm joined on Skype by senior tech specialist, Evan Niu. Evan, before we start talking about Facebook, it's Friday the 13th!
Evan Niu: I'm scared!
Lewis: [laughs] Do you have any superstitions?
Niu: I have one. This might surprise you. I used to be a pretty big gambler --
Lewis: [laughs] That doesn't surprise me!
Niu: -- before I had kids and real responsibilities. But, there is one gambling superstition that I fully believe, completely scientifically, which is that $50 bills are bad luck, and I will not physically touch them. I literally won't even touch them. I will have someone break them, I'll give them to my wife, I won't touch them. [laughs]
Lewis: Now, is there any logic to this? Or is it like the white lighter kind of superstition, where it's just born out of lore and no one can really explain why it exists.
Niu: Well, there's a lot of empirical evidence to suggest that if you touch them, you will lose your money. [laughs] No, I don't know where it comes from.
Lewis: I think there's a lot of empirical evidence saying that if you touch any money at a casino, you'll probably lose it. [laughs]
Niu: I mean, in my experience, I've lost money after touching 50s. But, it's also one of those things where, once you hear about it, you remember those times more.
Lewis: Yeah, there's a recall bias with that, I guess. Austin, what about you? Any superstitions?
Austin Morgan: Playing baseball is such a superstitious sport, so there's plenty. There was one season where I was running late, I was on my way home from the beach, I had a game that morning, running late, grabbed a double cheeseburger on my way to the game. First pitch I ever saw, I hit like 380 feet over the fence. I ate a double cheeseburger for every game the rest of the season.
Lewis: Isn't that's like the Wade Boggs diet? Didn't have fried chicken before every single game he played?
Morgan: Yeah. I didn't hit another home run that season, but I had a lot of double cheeseburgers.
Lewis: [laughs] That's pretty good. My superstition is also a sports superstition. I play goalkeeper in soccer, and I always have to put my gloves on the same way. I always have to strap them the same way. At a certain point, it just becomes ritual, I think, more than anything else. I'm surprised by Evan's $50 bill one, I didn't know that. I'm guessing there are going to be some listeners out there that are like, "Of course, this is gambling fodder, everyone knows this."
Niu: "Duh." [laughs]
Lewis: Well, we'll try to avoid having Evan touch any $50 bills on today's show. We're going to talk a little bit about Facebook. This news has really been covered quite a bit, Mark Zuckerberg's congressional testimony is deep in the new cycle at this point. I think Market Foolery hit this maybe twice already this week, so we're coming in late. We're going to take a slightly different angle when we're talking about Facebook today, and we're going to do a little thought exercise. The focus here is going to be, would Facebook ever consider a paid model, what would it look like, and how much would users have to pay for it to be worthwhile to Facebook? And Evan, this comes from a place where there's been internet speculation about a paid Facebook service for quite some time. It's one of those things that never dies.
Niu: Yeah, it's this urban myth, and you'll see it go around you every few years, rumors, "Oh, Facebook is going to start charging money. Somehow, if you copy and paste this status update, you'll be exempt from it," which obviously doesn't make any sense, but these kinds of hoaxes have always been around, and they sound really ridiculous every time they come around. But, now it seems like a real possibility.
Lewis: Yeah, we got some recent comments from management, Mark Zuckerberg, as well as COO Sheryl Sandberg, that make it seem like this could be something that management is at least kicking around as an idea.
Niu: Right. It's pretty clear that they're at least talking about it, because there's been a subtle shift in the language. So, responding to Senator Orrin Hatch this week, when asked questions about the business model, he basically said, yes, there will always be a version of Facebook that is free. Suggesting there are different versions of Facebook is in contrast to the company's long-standing approach to how they would talk about this, like, "No, it's always free," just kind of like, straight up, full-stop. But now, his comments kind of suggest that, at a minimum, they're talking about it.
Lewis: And I think Sheryl Sandberg's comments talking about how there isn't an opt-out at the highest level, which would be a paid product -- again, this is acknowledging the idea that this is something that could exist in the world. It's not to say this is happening anytime soon, but it's fun for us to speculate on it a little bit. Ultimately, it comes down to, what would something like this cost? If you're on the user side, how interested would you be? And that really lands on, well, it depends on where you live.
Niu: Right. I think there's certainly many angles to look at. Certainly lots of online services in general include paid versions as well as free ad-supported version. So, the idea is quite common out there. Nothing groundbreaking in itself. I do think it's very interesting to look at, Facebook's ability to monetize its service varies very widely by geographical region. Which might not directly dictate pricing decisions but would certainly be a part of that conversation. So, for example, last quarter alone, ad revenue per user on average was about $26 in the U.S. and Canada, $9 in Europe, $2.50 in Asia, $2 in the rest of the world. So, for example, in a country like Canada, you would have to charge people 14X as much compared to Africa just to break even to compensate for lost ad revenue. Now, again, that's not to say that they're going to do it that way, because they could maybe do it based on the global average, they could price it by region, which some companies do. For example, Amazon Prime costs $100 in the U.S., Amazon Prime is only $15 in India. So, certainly, lots of companies have lots of different pricing strategies. But, a lot of interesting implications there.
Lewis: Yeah, if you look at the full year for the average revenue per user in the U.S. and Canada, I think it works out to just over $80. So, if you divide that by 12, you get roughly $6.50 or so, just under $7 per month as a monthly subscription service if it was siloed to what they're able to generate off of users via ads in that market. Because, I think there's a substitution that needs to happen there for this to be a realistic possibility.
That isn't really all that expensive, when you think about it. You look at what it costs for a Netflix subscription per month, it's dramatically less. So, it's something that people, I think, would be able to wrap their head around. We actually have some data on this, on people's willingness to possibly spend money on Facebook. We're going to hit that on the second half of the show.
So, Evan, the critical element of this is, is this something people would actually want? And frankly, I think the answer is no. I think there are a lot of consumers out there that, even in the wake of all the data issues that Facebook is dealing with, would still rather have the ad-supported model.
Niu: Right. I think that's definitely where Facebook is thinking of it from. And I think that the answer to that question is changing. I agree that most people, probably the vast majority of people, would not be willing to pay for Facebook. But, at the same time, it's like, as people become much more cognizant and aware of the privacy costs associated with these types of services, I feel like the propensity to pay for them increases over time. On one hand, you have to worry about this all the time, this privacy stuff and data leaks, vs. paying some small fee that's like a couple cups of coffee a month, equivalent of that, to not have to worry about it at all. I think there are some people that would pay for it.
And there's no question that Facebook is a useful service from a social perspective. I think the issue is, how do you properly balance the privacy considerations for the business model, and whether or not offering a paid and a free version as different products can at least offer consumers a more effective way to pick that balance for themselves, instead of relying and trusting that Facebook to pick that balance for you. So, I think there's some merit to the idea. I agree that the vast majority of people will probably still not pay for it. But, it's definitely worth offering, in my opinion.
Lewis: And to put some numbers to how many people might actually be interested, Recode and research firm Toluna recently surveyed 750 U.S. adults about Facebook -- this was in the wake of Cambridge Analytica, so that's what's in their minds. And 77% said that they would stick with the ad-supported model, so 23% would be interested in a premium subscription model where they pay to use it and have an ad-free experience or have less of their data being used and tracked.
Within that, even more helpfully, Recode and Toluna asked people about pricing points. So, you look at where they broke things out, it was $1-5 per month, $6-10 per month, and $11+. 42% of people said they would pay between $1-5 per month, 25% said they'd be in that $6-10, everyone else was more than $11, so 33%. What that says to me, and what's really important about that is, a lot of people that are willing to pay are willing to pay less than what their value is to Facebook, which puts them in an interesting dynamic, if they're making this decision about making it available to users.
Niu: Right. And separately, there was another survey that came out with other data points for us to look through, also by Recode but with SurveyMonkey this time. It actually showed that Facebook is the least trusted major tech company by far currently. Also, this was done after the Cambridge Analytica stuff. So, the question was like, which company would you trust least with your personal information, and 56% of respondents said Facebook. [laughs] Which is a ridiculously huge gap between the second company, which is Google at 5%. So, 56%, 5%, and Apple is at, like, 2%.
But, yeah, there's very clearly a trust issue. Whether or not they can charge for this, we'll have to see, and what that'll look like. To bring it back to their ad revenue numbers, if they wanted to price it based on world averages, the worldwide average is $6 a quarter per user, so divide that by three, that's $2 a month. And those numbers you mentioned, of the people that are willing to pay, almost half of them would pay somewhere between $1-5. So, if Facebook were to price it at $2-3 a month, that's pretty cheap.
Lewis: The trouble, though, is -- and this is something Mark Zuckerberg has talked about in interviews, if you're trying to build something that can truly connect the world, you're dealing with people that have totally varying abilities to pay for something, and you need to make it free for certain folks. So, I think the paid users, even, whatever the price point would be, would primarily be in North America and Europe. And those are extremely valuable ad markets. So, I think that you can't really apply that average out over the entire world. You have to do that regional pricing model that we talked about before, which means, I think the price points would be closer to the tipping point for a lot of people that might not consider it worth it.
Niu: Oh, yeah, exactly. Absolutely agree with you right there. It would be kind of silly to offer it for $3 in the U.S. when they're making $8, because then it's a net negative for them. But, it's tricky, because Zuckerberg's philosophy has always been to focus on the social mission. The finances have always almost seemed secondary to him. Like, he knows it's a necessary part of the business that he has to pursue, but he's not as interested in it. His whole goal has been, arguably naively, this whole social mission of connecting the world, which has kind of contributed to the problem, because they didn't really think about all the bad ways this platform could be used. But, yeah, I think they definitely have a lot of factors to look at.
Lewis: And also, thinking about Wall Street and investors and their expectations, and how that weighs into all of this. One of the points, I think Jeremy Bowman made this point, one of our fool.com writers in an article he wrote was, any decisions that they make with offering a subscription model would have to fit into the broader course of what people are expecting for this business. Facebook's North American ad business has grown over 40% for each of the last four quarters. And this is a market where user growth is in the low single-digit percentage points, so almost all of that is coming from ad inventory and ad prices, which is to say that they would be rolling out a subscription service, but then having to increase the price over time if there was a critical mass of people that were interested in it in order to post meaningful growth. So, it might be that a subscription model can't grow as quickly as their advertising business can.
Niu: And, I just thought of this just now, another idea is this idea of diversifying the revenue even further. They've always had this payments business, but it's never been very big. And if they end up pricing it in a way that their financials will take a hit, they could consider trying to expand the platform in other ways. They've been really dipping their toes in a lot in e-commerce, which I see a lot of potential in, particularly for Instagram. But, there's payments and e-commerce, they have a lot of other areas they could potentially expand into to diversify the revenue base if the subscription model looks like it would be a net negative when trying to replace the ad model. But, yeah, I see a lot of ways out of this.
Lewis: Yeah, if you have 99% of your revenue coming from ads and you do anything that will meaningfully impact the number of ads you're serving up, you have to make sure that whatever you're going to be putting in shows the same revenue growth prospects. Otherwise, you're going to wind up taking a hit on your financials. The growth rates are just going to come down.
Niu: Right. I do wonder if, maybe in the next earnings call, if analysts will ask about this and if we'll get a little bit more color then. But for now, all we have to go off is three sentences. [laughs]
Lewis: And that's what we do. We speculate somewhat wildly based on three sentences, Evan.
Niu: That's part of the game.
Lewis: That's part of the game. Listeners, that does it for this episode of Industry Focus. If you have any questions or if you just want to reach out and say hey, you can shoot us an email over at email@example.com -- oh, my God, was that a sneeze, Austin Morgan?!
Morgan: ... That was a sneeze.
Lewis: That was vicious. I heard that through the studio wall. My gosh! I'm just going to keep rolling, because I think that's a great human moment. [laughs] If you're looking for more of our stuff, you can subscribe on iTunes or check out The Fool's family of shows over at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Shout-out to Austin Morgan for all his work behind the glass, editing and sneezing. For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Alphabet (A shares), Amazon, Apple, and Facebook. Evan Niu, CFA owns shares of Apple, Facebook, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.