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A Paid Version of Facebook Still Doesn't Make Sense

By Adam Levy – Apr 18, 2018 at 11:00AM

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Almost nobody is really willing to pay what they're worth.

Facebook (META -3.67%) found itself embroiled in the middle of the discussion about internet privacy following reports that Cambridge Analytica gained unauthorized access to tens of millions of users' data. CEO Mark Zuckerberg even spent 10 hours answering questions from Congress in order to help the legislature determine appropriate actions to help protect users' privacy.

In that testimony, Zuckerberg used language that implied Facebook may offer a paid version of its service at some point. But the economics of a paid version of Facebook without ads simply don't make any sense right now, and they probably never will.

Sign at the entrance to Facebook's campus.

Image source: Facebook.

People aren't willing to pay what they're worth

Even at the height of consumer data privacy concerns, the vast majority of people would still rather use an ad-supported version of Facebook than pay for it. Seventy-seven percent of respondents said they'd stick to the current free version of Facebook rather than pay even $1 per month, according to a recent survey by Recode.

Of the 23% of respondents that said they'd pay, about two-thirds said they wouldn't pay more than $10 per month for an ad-free version of Facebook. Forty-two percent wouldn't pay more than $5 per month.

For reference, Facebook made an average of $6.87 per month in advertising per user in the U.S. and Canada last year. So, right off the bat Facebook can eliminate about half of the 23% of consumers that said they'd pay at least something for ad-free Facebook because it can easily make more money from selling ads than the consumers would be willing to pay.

Also consider the fact that Facebook continues to increase its average revenue per user year after year. Revenue per user in the U.S. and Canada increased 36% year over year in the fourth quarter. Analysts expect about 36% overall revenue growth in 2018. If Facebook's average revenue per user increases just 25% in the U.S. and Canada during the year, it'll push the number above $8 per month.

If Facebook wants to avoid price increases for several years, it'll have to charge even more than that.

People willing to pay are worth more

What makes the economics worse is that those that are actually willing to pay for an ad-free version of Facebook are naturally worth more to advertisers.

Anyone opting to pay to remove ads is more likely willing to pay for other things as well -- things marketers might advertise on Facebook. Removing those users from the advertising pool means ads won't convert into sales at the same rate they used to, decreasing how much marketers are willing to pay per impression.

Furthermore, removing even a subset of users from Facebook's advertising diminishes one of the most appealing factors of advertising on Facebook. The social network has unparalleled reach among internet properties. Telling brand advertisers they can reach hundreds of millions of users with their messages, but they won't reach the most valuable users on the internet kind of defeats the purpose.

Offering a paid version of Facebook destroys the economics of Facebook's ad-supported version, necessitating an even higher price for a paid version to decrease the negative impact and offset the losses.

The freemium model isn't for everyone

It's practically impossible for Facebook to create any kind of gap between the value of free users and paid users. Spotify Technology, for example, makes more in a month from a premium subscriber than it makes from an ad-supported listener in a full year. As a reminder, Facebook generated $82.44 per user in the U.S. and Canada last year.

Even asking for a modest gap that leaves room for ad revenue growth and accounts for the negative impact on the advertising business would appeal to very few users. Just 11.6% of the 23% of users willing to pay for Facebook said they'd pay more than $15 per month. That's just about 6 million users in the U.S. and Canada.

In the grand scheme of things, offering a $15 per month option in the U.S. and Canada would generate maybe $1 billion in additional revenue over the next two years. (After all, it's one thing to say you'll pay, and another to actually put your money where your mouth is.) For reference, analysts expect Facebook to add $30 billion in revenue total during the same period. It hardly seems worth the trouble for Facebook to offer a paid version.

Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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