With the release of iOS 9, iPhone owners can now block ads and other undesirable content on the mobile web. But when logging into an app like Facebook (NASDAQ:FB), users will still be inundated with advertisements.
A couple of years ago, Greenlight Digital conducted a poll that found that 15% of Facebook users would be willing to pay Facebook for an ad-free experience. Eight percent of respondents said they'd be willing to pay $5 to $10 per month just to avoid ads.
But the truth is, Facebook is better off showing ads to those users than offering a subscription.
Average ad revenue per user is still skyrocketing
Facebook is expected to generate about $48 this year for each of its 200 million or so American users, according to research firm eMarketer. That's up from an estimated $35 in 2014. Going forward, eMarketer expects that number to climb to $61 next year, and $73 in 2017.
Those 2016 and 2017 average-revenue-per-user estimates fall squarely within the lower end of the $60-to-$120-per-year range that respondents to the Greenlight poll said they would pay. However, there are a few more factors to consider.
Someone who's willing to pay to block ads likely sees more ads than the average Facebook user. Either they spend more time on Facebook, or they fall into a particularly valuable demographic that lots of advertisers target. These users are inherently more valuable to Facebook than the average user who's expected to generate a bit more than $5 per month next year.
Second, it's worth noting that expectations are that Facebook will continue to grow its average revenue per user at a consistent level on an absolute basis. Even with a moderate slowdown, it's not unreasonable to expect Facebook to generate $100 per U.S. user by 2020, and more than $120 per user -- $10 per month -- within another three years. It's much harder to increase subscription prices at a rate that can keep pace with that growth.
There's reason to believe Facebook will be able to keep up the pace of ad revenue growth, too. It's continually improving its ad tech through in-house development, as well as acquisitions like Liverail and Atlas. It's continuously pulling levers to grow average ad prices like 100% viewable ads, or increasing the requirements for video ads to 10 seconds to count as a view. And it's constantly introducing new ad formats that command a premium over its existing ads, like app-install ads, or video ads.
Facebook has 45 million small businesses with a presence on its platform, but only 2.5 million are actively advertising. That represents a huge opportunity for Facebook to increase the number of bidders on its ad units.
Another reason Facebook won't offer a subscription option
While Facebook's 2.5 million advertisers are mostly small and medium-sized businesses, the social networking giant has been pushing toward more branded advertising. The company recently unveiled plans to allow brands to purchase video ads in a similar manner to how they buy TV ads, using gross ratings points. It's also making efforts to appeal to big-brand advertisers' demands, like 100% viewable ads, or extended video viewing before the advertiser is charged.
But the biggest draw to Facebook for brand advertisers is the company's broad audience. If Facebook offers an ad-free option, that audience gets just a bit smaller, and branded ad campaigns become just a bit less valuable. What's more, a subscription option removes the most valuable people from the advertisements' reach -- people who are willing to pay for things.
Don't hold out hope
Although there's a loud and clear demand from consumers to remove ads from everything they consume on the Internet, Facebook is much better off showing ads to all of its users -- especially those willing to pay for an ad blocker. Investors should rest easy with the knowledge that Facebook is capable of increasing its average revenue per user for the foreseeable future.
What's more, Facebook's huge network offers a reliable moat to prevent ad-free competition from making an impact on its business. (Remember Ello?)
So, how much would you pay for ad-free Facebook? It probably doesn't matter.