Biz Stone has ideas for Facebook.
Biz Stone is one of the guys who started not just Twitter but also Blogger. To say he?s made his mark on social media is a massive understatement. Perhaps he surprised some then, when he took to the fledgling new social site Medium?(which he also helped create), to admit he?s only recently becoming a regular user of Facebook Facebook. He?s enjoying ?keeping up with friends and family on Facebook like a billion other people.? What he?s not enjoying, though, is the ads. And he has an idea. Unfortunately, it?s just not a very good one.
I?m with Stone on the ad problem and have discussed it before. At Forbes, Paul Tassi recently showed that Facebook?s ads are basically out of control. Stone?s fix is ?Facebook Premium? a $10 a month service with no ads and some unspecified special features. He figures perhaps 10% of Facebook users will sign up for a cool $1 billion per month. That?d be nice for Facebook given it only sold $4.3 billion worth of ads last year and seems on track to do about 40% better this year if the results of first quarter continued through 2013. (We?ll learn more this coming Wednesday when Facebook reports earnings.)
So what?s the problem then? Well, it?s three-fold. (1) Nowhere near that many people would pay for Facebook (2) A reasonable subscription fee is much lower than $120 year and (3) Everyone getting Facebook for free would, of course, lower the ad revenue so that free lunch comes with another price. Let?s break down some of those numbers.
How many might pay?
While it?s true Facebook has 1.1 billion users, it?s also true that a lot of them aren?t flush with disposable income. In fact, just under 200 million come from North America and another 270 million are in Europe. While there are certainly upper-income Facebook users in Brazil, India and Russia, the reality is paying for Facebook just to make the ads go away is what a Twitter user might label a #firstworldproblem.
Stone cites Pandora?s fast subscription growth as an example to demonstrate how ?freemium? services are seeing high uptake of ?pay-to-avoid ads? models. But there are some important caveats there. First, Pandora is an outlier. The average mobile app is cheaper than ever?and often supported by ads.
Second, Pandora recently limited the amount of mobile streaming to 40 hours per month, driving its biggest listeners to paid subscriptions. Third, Pandora?s audio ads literally stop the music; they are more disruptive to the experience than Facebook?s ads. Those might be increasingly obnoxious, but they?re still one quick swipe from being off your screen. Fourth, the paid Pandora service costs only $36 a year, far lower than the proposed $120 for Facebook. And, finally, Pandora has 2.5 million paying customers out of 70 million active listeners ? a 3.5% pay-to-free ratio.
What?s noteworthy about that figure is that 2-4% is a fairly standard ratio for freemium services like Evernote and Dropbox so it?s not likely Pandora will see the number grow tremendously over time.
A generous ratio for Facebook would be 5% conversion in Europe and North America, 3% in Asia and 2% in ?rest of world?. That yields only 38 million paying customers, nowhere near the 100 million Stone?s 10% would produce.
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