As expected, the Congressional grilling of Facebook, Inc. (NASDAQ:FB) CEO Mark Zuckerberg was quite the spectacle. And, given the 4.5% rebound FB stock dished out following Tuesday’s meeting, investors clearly felt Zuck won whatever game was being played in Washington, D.C.
A funny thing happened during the back and forth though. That is, the young CEO suggested the possibility of offering an ad-free version of Facebook for users willing to pay for the privilege.
It’s an idea that’s surfaced before … several times, actually. They’ve never been anything but rumors though. The company never actually pulled the trigger.
Current and prospective owners of Facebook stock shouldn’t rule the idea out this time around though. After all, there’s no denying everything changed when the Cambridge Analytica scandal fully came into the light.
FB Stock Gains on Soothing Words
On the off chance you have yet to hear, Mark Zuckerberg is in a bit of hot water with the Federal government, and isn’t exactly on great terms with FB stock holders (though Tuesday’s gain implies at least some reconciliation). Indeed, Washington D.C. is so up in arms that a Senate committee “asked” Zuck for a face-to-face to better explain how political consulting outfit Cambridge Analytica was able to access a little too much data about some of Facebook’s users.
Even if you don’t know, the answer isn’t tough to imagine. Once again a company got a little too careless with the way it protects customer data.
The matter really isn’t about Facebook’s gaffe though; owners of FB stock can take a small amount of solace in that regard. This is more about internet privacy in general. Facebook was just a convenient poster child/whipping post.
That being said, to the extent the hearing was about Facebook, Mark Zuckerberg said all the right things. Down 13% from mid-March when the Cambridge Analytica debacle first took shape, FB stock recovered about a third of that loss on Tuesday when Zuckerberg held his own on the first day of the hearing.
Will Facebook Ever Charge?
So will Facebook ever charge for use of its social networking platform? Realistically speaking, it probably will … not so much because it wants to, but because it will have to in order to appease the privacy hawks now scrutinizing the company. By offering the option, Facebook can say users chose for themselves whether or not they gave up their basic privacy.
Don’t look for a bunch of people to sign up for that version of Facebook though. Its most affluent users would have to pony up a fair amount of money to offset what Facebook would lose in ad revenue.
How much? It depends where you live.
If you live in North America, you were worth $26.76 in revenue alone just in the fourth quarter of last year. In the Asia Pacific region, you only generated about $2.54 worth of advertising revenue during the final quarter of 2017. The overall average revenue per user was $6.18 in Q4.
The company needs to extract more sales or revenue from non-North American users? Zuckerberg would if he could, but he can’t — most simply can’t afford it. That puts the onus mostly on U.S. and Canadian users, but it’s unlikely many will be willing to pay the $100 or so per year they’re worth as advertising fodder … especially when rival platforms managed by Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP) are (for the time being anyway) still free.
The counterargument is that people think nothing of paying a similar amount for annual access to the streaming video service from Netflix, Inc. (NASDAQ:NFLX). A full-year membership to Prime, from Amazon.com, Inc. (NASDAQ:AMZN), costs about the same.
The difference is, Prime and Netflix don’t make people feel bad, sad or mad.
That may well be why Facebook users are increasingly checking in less. During the last quarter of 2017, the average number of minutes spent on Facebook fell 5% per user. It’s a modest lull on the surface, but it’s a 5% step in the wrong direction as far as owners of FB stock are concerned. Problem is, Zuckerberg and Sandberg are relatively powerless to do much about it. It’s clear that the social networking site has become a difficult-to-contain beast with a life and mind of its own.
Not many consumers are going to line up to pay to feel miserable.
While the impending advent of a subscription-based, ad-free version of Facebook will appease the proverbial powers that be, FB stock holders have a bigger concern on their plate — Facebook may be getting a little more aggressive with the way it shares data and sells ads, tacitly signaling its pricing power is waning the bigger its user base gets, and the more distracted those users become.
It’s an idea that’s sure inflame Facebook loyalists, who will be quick to (rightfully) point out that per-user revenue has been soaring for several quarters now.
The reason Facebook’s ARPU is so freakishly better than its rivals, however, may also be an indication of just how hard it’s pushing the envelope. It’s great for the production of near-term growth, but ultimately burns those users out.
An ad-free subscription model may solve that problem, but if such an option becomes available, it’s not apt to produce anywhere near the “per user” levels we’re seeing now. Facebook is going to have to get really, really good — and do so soon — at getting more sustainable ad revenue from its existing users.
That’s a tall order to be sure.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.