Why Facebook and Twitter Should Start Charging Users
What if Facebook and Twitter started charging users for their services? It’s something I’ve been thinking about for a while and have wondered why at least one of them, especially Facebook, have not experimented with in any way.
Let’s look at Facebook in particular. Over the past few years, the service has evolved into a daily utility for tens of millions of users in the U.S. alone. I’m talking about people who essentially cannot - or at least prefer not to - live without it, whether it’s for the fun, games, social interactions, photo sharing, or like me, as just a virtual and dynamic database of your personal and/or professional contacts. For many of these users, Facebook is probably as important (and for some more so) as having cable TV, a smart phone, satellite radio, or a host of other paid monthly, subscription-based services.
If Facebook was able to get a hearty set of these users to pay a nominal monthly fee for unmitigated access to its services, the company could quickly become a legitimate multi-billion dollar business (instead of an on-paper one). Let’s look at some [admittedly arbitrary] math. Facebook says publicly they have 300 million active users, 50% of which access the site in any given day. Let’s divide that number by half again and say there are 75 million fairly loyal and passionate users that would be significantly affected by not being able to use the site. How much would those people be willing to pay to continue to use the service at the level they currently are? How about $2 per month (or the price of one over-priced coffee)? Voila: that’s a whopping $1.8 billion dollars in pure profit-based revenue. And it’s more than FIVE times the estimated total revenues the company generated in 2008.
How about Twitter? There were 23 million users during the month of September (this excludes those who are consuming content from or through Twitter, which is soon to be just about everybody, knowingly or not). We know there are a lot of people who experiment unsuccessfully with Twitter, or do not use it very often. But there’s also a growing group of daily die-hards, including a good chunk of the 40 or so folks at LaunchSquad. Let’s conservatively peg this number today at one million people who are habitual Twitter users. Would those folks pay the cost of a coffee every month to keep using it in an unlimited fashion as they are today? If they did, Twitter’s suddenly generating $24 million in annual, subscription-based revenue for itself. For the record, that’s about $24 million more than they are currently taking in, give or take a few thousand bucks.
Obviously there are some good reasons why Twitter and Facebook have chosen to not go down this path. They are in high-growth mode and, unlike most startups, they have enough leverage with their investors to keep the “path to profitability” mantra at bay. Anything that might curtail registrations and usage is a big no-no.
Of course, any movement to try and develop this business model would have to be done with great care and deliberation to mitigate the backlash.But I think it may be a mistake though for them to not add this to the short-term plan, and begin experimenting with the most loyal users and seeing what the appetite may be and where the price points are that begin to truly hurt free usage growth. Even if Facebook charged those 75 million users only $5 per year, that potentially doubles their revenues right off the bat.
Update: Given the past comments below, I want to more clearly note here that under these hypothetical scenarios, Facebook is still free for the vast majority of users.
Bigger picture, there is a potentially huge domino effect that could happen here. If a company like Facebook or Twitter, or some other big name trendsetter, could ultimately prove that the Internet does not necessarily have to be free, it could have a profound effect on the entire universe of innovation, startups, venture capital, M&A and even the IPO market. It could even hasten and ignite the economic recovery.
Think of all of the companies out there currently pursuing free service models and relying on the combustible and unpredictable advertising market as their path to success. Not to mention the set of “freemium”-model companies, such as Evernote, TimeBridge, SugarSync, Anchorfree (disclosure: all are LaunchSquad clients) and countless others who have to deal with financial markets that question their long term potential despite having innovative, valuable technology and loads of very happy users.
This could also significantly impact media companies who are trying to come up with ways to charge for the content lest they crumble and die. If Twitter and Facebook are no longer free for loyal users, Rupert Murdoch & Co. have a much clearer path to creating pay walls and generating revenue for access to content. Admittedly a lofty thought, but this could be the savior the newspaper industry has been waiting for too.
I may be overstating things here, but a world in which people more readily accept that services like Facebook are not eternally free is a very interesting one to ponder.
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Comments (13 Responses)
I have to agree with this other comment. A small fee for Facebook will only drive it’s users to the next bigger, better version of social networking, that will most likely be free. There is nothing in our culture that is so amazing that is has guaranteed loyalty. Especially since the core age group for Facebook is tweens, teens and young adults. These are 3 groups that generally live for the next best thing. One wrong move and the core groups will not hesitate to turn their backs.
Even if one were an optimist and assumed half of the users would pay for a once free service, then FB loses the appeal for those that purchase ad space and sponsor apps on the site. Why would a company want to pour marketing dollars into a networking site that drove half the audience away? The money made by charging a fee would in no way be worth the amount lost in ad dollars.
The answer to your question is simple. They don’t charge the users because they would then no longer use.
I am surprised by two things with this post:
1. A company that specializes in public relations could be so off base with what the public wants.
2. This article was not proof read before it was posted.
Tony – Thanks for the comment. First, the argument here is just a hypothetical. Clearly nobody doubts that most users would react negatively if FB started charging, but it’s also an intriguing thought if they pulled it off. As for ad revenue, under the scenario laid out here, revenue by subscription would outpace ad revenue by 5:1; and even assuming they lost 75 percent of users to the (very minimal) pay wall, they’d still be pulling in 2.5 times what they made in 2008.
FB hemorrhaging 90-95 percent of their users is also very possible, but where would they go? There’s really nothing comparable out there now. But, you’re right – it’s very possible that it would destroy the user base. These companies have to figure out something beyond ads to pump up the revenue stream, so this is one of those “what ifs” …
As for the proofreading, I looked and found one error, which I fixed, if there’s more, apologies.
We will close our accounts, then tweet about the evil-greedy face book. Say I have 300 friends, and I close my account (after I tell them about the greedy fees), a domino effects starts….then there will be no facebook. Hullo?
I think I need to clarify a major point here. I’m not suggesting Facebook charges all users. It will still be fundamentally free. But once you reach a certain level of usage - let’s say 300 friends or 5 apps - you then need to start paying, or refrain from expanding your network. This is the freemium model I mentioned.
Helathy discussion.
I really think Facebook should find a way to monetize its information assets without taking any risk regarding privacy.
BI and entreprise level services could bring $$.
This post makes this company look like it isn’t aware of the fundamental principals of internet culture. The percentage of users who tend to pay for premium access (no matter how cheap) after the product has been promised implicitly for free, is closer to 1% not 25%. Why do you think the NYTimes, LinkedIn, and other prominent sites are unable to charge for their otherwise high end product. Your current assumption is extremely far off the mark, and undermines even a hypothetical conclusion.
This is adding on top of the fact that you don’t seem to understand the business services Facebook provides. It charges for clients to advertise to select
Also, this hypothetical ignores the fundamental principle and product that Facebook was created to accomplish, connect people. The business model is attempting to monetize that by allowing companies access to their user base for free. Its not like Facebook is selling something that is so amazing it can’t be duplicated anywhere else, there are thousands of other carbon copies which are free as well. Charging for this process of connecting people destroys the basic way that Facebook attracts its user base. The difference between Free and $1 is huge. Even if a friend invites me, it goes from feeling social to feeling scam, a pyramid scheme where my friends are accosting me to spend money on a product.
If you simply say, oh ok, we’re going to charge money now, you’re ignoring the product, business model, existing user base and about everything else Facebook does. In fact, you are essentially creating a new company. Oh wait, its already been done before — classmates.com — and its hasn’t been able to get over $50m in revenue.
Freemium is the only way to go, because its similar to creating a store and selling a product. How many customers would you expect to come in if you charged a fee to enter? None. How would that translate into sales? It wouldn’t. Facebook needs to think of itself as a store which gets people in, then charges them once they find something they want.
Ack errors above “Select group” and “access their user base for a fee”
But Chris, once they come in to the store, what can Facebook sell them? You can transfer this entire argument over to what happens when Facebook tries to monetize its user base in a freemium model. I think people don’t want advertising in Facebook as much as they don’t want to pay for it.
Everyone always says there are a bunch of replacements for Facebook, but it would take a whole lot of truly tectonic shifts for people, en masse, to migrate over to another platform. Not saying it couldn’t, but I don’t know that a $2 fee would cause that.
People went pretty quietly from getting music for free on Napster and P2P to paying $1 on iTunes, which is a bit of an apples to oranges, but certainly can be analogous. I think free Internet purists certainly reflect thinking inside the tech community, which, we often forget, is a lot different than the public in general. I doubt most people have a philosophical foundation for their decision on whether to pay for something, they just do or don’t – and most often don’t.
I am playing Devil’s Advocate a bit – I personally wouldn’t pay to use FB, but I’m not a big user – but I think there’s little merit in the “people will never pay for it” argument about online services. We inside the tech bubble have strong opinions about it, but I’m guessing the other 149.5 million people using FB don’t. They just might not pay for it if it isn’t worth it to them.
Facebook isn’t a product or service, its a place. For example, online dating services rarely do well if they charge for you simply to browse users. However, some do very well if they take the extra step to set you up with users. This is a premium and tangible service provided by the company. It is worth it for some users to plop down a couple bucks for it. Amazon.com or any other e-tailer gives you a physical product in exchange for your money, self-explanatory why that works.
Facebook on the other hand is a place, a club if you will. There aren’t any services it provides that make it ‘cool’ enough to pay for it. Sure, everyone has it, but people don’t like to pay to explore or find out what COULD happen. They pay for guarantees they know WILL happen. I WILL get a date or I WILL get this product… not oh I’m paying to screw around and upload some photos.
Facebook has a platform which could sell many services. Think of the dating possibilities at college, it sets you up for a fee with others at your college who are looking. Not to mention non-romantic things like clubs or other groups and services.
There are also social sales opportunities, selling local or recruiting locally, all possible with Facebook (probably better served on LinkedIn though).
There are plenty of other opportunities, but if Facebook wants to start charging, they need to stop sitting at their computers all day programming algorythms and start doing real work to provide services people want. We pay for physical products or relationships developed through service. We do not pay for automated digital services which we perceive as inherently valueless or replaceable.
Also your iTunes analogy isn’t properly researched. The iTunes store does not make a lot of money in comparison to the iPod, which is the main drive of profits. Why do you think record companies have been jostling with Apple so much over prices lately. Also, the iTunes story didn’t convert many people, more steal or listen by alternative means then ever before… look at playlist.com, torrenting, or pandora (someone who has an effective freemium model).
People don’t pay for ideas, connections, relationships, entertainment, emotional content, or media… they pay for tangible guaranteed physical products and services. I argue this will never change, and combined with the internets ability to aggregate and distribute information quickly and cheaply, destroy more industries than it creates.
Even if 25% stay on after charging $ for FB actually happens per the hypothetical scenario, that still changes what FB inherently is. A smaller community of paying people is not the same as the FB world today. This will therefore affect people’s desire to be on it in the first place. One reason people love FB is because everyone and their sister’s cousin is on it…not 25% of their sister’s cousins.
Do you WANT to pay for the service? My parent’s do not like me using money online, especially not for playtime on facebook and other networking sites that they deem unimportant because it is not making me money.
If they charged, I might not get to be a user. :/ : (
So just keep that in mind in the case of some users. I have not read your post yet but perhaps you already realize what I have said. :) I hope you have at this point.
And yeah I noticed that Facebook charges for such things as sending their own personalized alphabet for birthdays and such.
dominiq
Posted on November 11th, 2009 at 8:13 am.
Thanks for the article.
I don’t think a fee model would work. Looking at my list of friends in FB, very few people use it on a day to day basis and fewer would pay even $5 box… on which Paypal would take a cut, and the admin another cut aso.
Frankly, i think they would have a hard time even moving 5% towards a pay model. The figures I get from friends entrepreneur is that moving from free to anything is a cut of 90 to 99% of users.
These services are not rocket science, their only value is their user base.
Also, there would be a domino effect. If only 10% stay then the other 90% cannot be reached anymore and this delete the value of FB.
I would not pay and wait for the next “free” player to provide a similar feature set.
Your comment on cable TV is interesting. The value of cable comparing to the free content you can get on the web will, to me, drive more and more people to cut their cable plans.
Best