Investors pondering the fate of Facebook’s business model should look back at the newspaper industry, circa 2000.
Newspaper advertising revenue peaked in the United States that year at US$67-billion. And it’s been downhill ever since. Industry ad revenue has since shrunk to less than US$20-billion, and it’s still dwindling.
The old newspaper business model was primarily about delivering eyeballs to advertisers, not selling news to readers. Readers paid a nominal price to buy the newspaper that typically covered only a fraction of what it actually cost to gather the news, let alone print and deliver it.
The same arrangement underpins the economics of Facebook and other nominally “free” internet services. People typically pay nothing to use them. But that’s only because users are the product, and they’re being sold to advertisers − a reality laid bare in Facebook’s recent data privacy scandal.
Many internet services are only viable businesses because they harvest personal data and use them to sell targeted ads. That includes search engines such as Google as well as many e-mail, instant messaging, digital map and music and video streaming services.
So far, the model is working pretty well. Facebook, for example, reported last week that first-quarter revenue hit $US11.97-billion, up 50 per cent from the same period last year. On that pace, the company will blow past the record US$40.6-billion in revenue it had in 2017. However, the solid results came with a sobering warning. Company officials acknowledged tough new European digital privacy laws that take effect in May would likely harm its future growth – in users, and possibly in advertising as well.
That raises an intriguing question: What would Facebook look like if it had to rely mainly on subscriptions, rather than ad revenue, as many newspapers now do?
The major online players are taking radically different approaches to generating revenue. Apple and Amazon generally sell products and subscription services directly to consumers, while Facebook and Google rely on ads and data mining.
Apple chief executive Tim Cook suggested recently that it may be time for Facebook to embrace a subscription model. Facebook founder and CEO Mark Zuckerberg isn’t biting.
“The reality here is that if you want to build a service that helps connect everyone in the world, then there are a lot of people who can’t afford to pay,” Mr. Zuckerberg told Vox earlier this month. “And therefore, as with a lot of media, having an advertising-supported model is the only rational model that can support building this service to reach people.”
Mr. Zuckerberg’s staunch defence of the ad-based model is not just about affordability. It’s also about how big a company Facebook would be in a future where regulation curbs its ability to monetize user data.
Facebook currently has a stock-market value of more than $500-billion. The lion’s share of that value comes from its ability to tap personal data to deliver targeted ads to its 2.2 billion Facebook users worldwide.
Facebook’s ability to generate subscription revenue may be limited. A new working paper published by the U.S. National Bureau of Economic Research ranks the relative economic value of various internet services that “have nearly zero marginal cost and often zero price.” Social-media platforms such as Facebook rank well down the value scale, compared with browsers and e-mail services, according to the study by researchers at the Massachusetts Institute of Technology and the University of Groningen in the Netherlands. Based on asking people how much money it would take to give up various services, the researchers estimated the value of search engines at US$17,530, e-mail (US$8,414) and maps (US$3,648). Social-media platforms such as Facebook were well down the list at US$322.
The fee model may not be a value proposition Mr. Zuckerberg wants to test in the real world.
The internet destabilized the advertising-based model for newspapers. And the transition to a subscriber-based model online has been a struggle, except for a few of the world’s best newspapers.
If Facebook users balk at the trade off between price and privacy, Facebook could face a similar challenge.
The company may find, as newspapers have, that it’s tough to get users to pay for something they already get for free.
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