Would You Pay $10 a Month for Ad-Free Facebook?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to a recent  Greenlight survey, 8% of Facebook (NASDAQ: FB) users are willing to pay up to $10 a month for an ad-free Facebook experience. Additionally, 15% of users are willing to pay "some amount" to have ads removed. What does this mean for Facebook?

Background

Based on the advertising success of the company's mobile news feeds, Facebook in March, redesigned user news feeds across all devices to mirror the ad-friendly mobile format.  The initial results are impressive: for 2Q13 Facebook revenues are up 32% YOY, advertising revenues rose 28% YOY, and active daily users increased 32% YOY.

The company looks to be further increasing advertising, with reports that 15-sec video ads will be added soon. These TV-style ads are meant to capture ad revenue that currently goes to traditional TV networks.  If true, the company's video ad plan follows the lead of other Internet players: A year ago AOL began HuffPost Live, a video-ad supported news video streaming service. Also, Google (NASDAQ: GOOG) sells video ads for YouTube, the company's video-sharing site.

Ad Free Facebook: A Source for New Revenues?

Twitter co-founder Biz Stone recently did some back-of-envelope calculations showing that if 10% of Facebook users paid $10 a month for an ad-free service, it would result in $3 billion in quarterly revenues for Facebook. A huge revenue opportunity for a company that posted $1.2 billion in 2Q13 revenues.

Stone's rational for charging for a premium ad-free Facebook? While Stone said he loves the company's social-networking service, the ads "totally suck."

Despite Stone's suggestion, Facebook is unlikely to offer any kind of ad-free service since it would admit that users already have ad fatigue - not a positive message to be sending to advertisers.

Facebook's Business Model: Annoying Users?

Facebook's problem is to navigate the fine line of increasing ads revenue without driving away users. Complicating the company's task - Facebook's ads lack immediate relevance for users which might make the ads more annoying. According to Pew Internet, the most popular activities on Facebook are private messaging, commenting on friends' content, and posting status updates. These are low involvement tasks, unrelated to buying or researching a product or service. Arguably this is an experience similar to TV (low involvement). Unfortunately, Facebook doesn't have TV's built in "content breaks." Instead Facebook ads are more likely to interrupt the user. Not surprisingly, in Greenlight's survey, 70% of Facebook users respond that they "never" or "rarely" click on Facebook ads.

Facebook is well aware of the problem, listing in the company 10-K the risk of losing users if, "the user feels that their Facebook experience is diminished as a result of the decisions we make with respect to the frequency, prominence, and size of ads that we display."

Search Based Ads Are Relevant

Can Facebook increase its ad user engagement level? The answer is yes, if the Menlo Park company can find a solution-based product that appeals to its users.

Consider, two Facebook competitors: Google and Yelp (NYSE: YELP). Users go to the sites (apps) when they need specific information. For Google, a user may be looking for directions, a vacation destination or information on a local business. In the case of Yelp, the user might be looking for nearby restaurants, clubs or hotels. In all these cases, the user is likely to consider ads and promotion tied to their search to be both relevant and valuable.

Facebook's Graph Search product is the company's attempt to provide solution-based search. Graph Search allows users to make queries across Facebook's network of user information. Possible Graph Searches include, "Who are my friends that enjoy cycling?", "Show me pictures of New York City", and "What are some good Italian restaurants in Topeka?" Graph Search is in beta and Facebook has not made any announcements on user adoption rates. 

Foolish Bottom Line

Investor should closely follow Facebook to monitor the company's success in growing ad revenues while maintaining the Facebook experience over the long-term. Of particular interest to Foolish investors will be the company's ability to make ads more engaging to users via solution-based search.

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Bill Shamblin owns shares of Google. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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