The Telecom Regulatory Authority of India just dealt a major blow to Mark Zuckerberg's goal of reaching 5 billion Facebook (NASDAQ:FB) users by 2030. The agency said Facebook's Free Basics, which provides free access to some Internet services including Facebook, is in violation of net neutrality. Net neutrality is a set of principles that call for equal treatment of all traffic across the Internet. Offering free access to some sites but not others "is not in the interest of consumers, or of the growth of the Internet," according to R.S. Sharma, chairman of the Telecom Regulatory Authority.
India is one of the largest and fastest-growing Internet markets, so the shutdown of Free Basics is a major setback for Facebook. Additionally, the decision could set a precedent for other regulatory authorities to shut down Free Basics in their own countries; Facebook has partnerships with carriers in nearly 40 countries. Zuckerberg will have to reevaluate his plans to offer free Internet access in developing markets.
The importance of India
India represents a huge growth market for every major Internet-based company. Twitter (NYSE:TWTR) has been investing heavily in the region with its acquisition of ZipDial and recent partnerships with wireless carrier Reliance Mobile and e-commerce app LookUp. Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, meanwhile just announced plans to provide free Wi-Fi in train stations across the country.
India is already Facebook's second-largest market by users after the United States, and Free Basic users were only a small percentage of the 130 million Indians using Facebook every month. Late last year, Reliance Communications -- Facebook's wireless partner for Free Basics in India -- said nearly 1 million subscribers had tried the app.
But the next 100 million users won't be as easy to sign up. The vast majority of the population still has limited-to-no access to the Internet. That's where efforts like Free Basics, or Google's Wi-Fi plans, or Twitter's ZipDial and SMS Fast Followers come into play. They cater to working with the technology and limitations experienced by most Indians, while at the same time expanding access to Internet services.
Free Basics was Facebook's edge over the competition. Indians typically rely on wireless carriers for Internet access, and are more likely to use services that don't count against their data caps, all else being equal. Twitter is following the same playbook with ZipDial, which allows users to subscribe to text-message notifications by placing a missed call (which doesn't cost anything since the call never connects and most carriers only charge for outgoing texts).
So, where does that leave Facebook in India?
Facebook is still a very compelling product. The ability to connect with friends and see what people in your social circles are up to is something humans naturally crave. As more Indians gain access to the Internet, Facebook will surely benefit.
Free Basics intentionally limited access for two reasons: It funneled users toward Facebook, and it's easier to convince wireless carriers to sign on to give away data for a limited set of low-data apps.
Google's Wi-Fi plans, for their part, are aimed at funneling users toward Google Search and other services (even if it offers free access to the entire Internet). Facebook could work on a similar principle, requiring users to log in with Facebook to access its free Internet service. That would provide it with lots of data and onboard a lot of new users.
India remains a poor country, so even massive user growth wouldn't result in a big gain in revenue. It's a long-term investment. Last quarter, Facebook's average revenue per user in the U.S. and Canada was 8.5 times as much as that in Asia-Pacific. With foreign-exchange pressure and the mature market in the U.S. and Canada, that gap is actually widening. At some point, that trend is bound to reverse. And that's when a large established user base in India will become a tremendous growth driver for Facebook. How it goes about attracting those users, however, is now up in the air.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.