Why Facebook Will Eventually Go Premium

There's more bad news for Facebook as it seeks to justify its huge valuation -- the world's largest advertiser is not finding Facebook to be fertile ground, according to Randall Stross in The New York Times.

The most successful effort that Procter & Gamble was willing to point to on Facebook was a 2006 page for Crest Whitestrips, which attracted 14,000 fans at its peak -- many apparently lured by free giveaways such as concert tickets. Out of Facebook's 130 million users that's not a rousing success.

That the Crest Whitestrips experiment left a funny taste in P&G's mouth was reinforced by the comments of a senior P&G marketing executive, who said, "I really don't want to buy any more banner ads in Facebook."

(The article also brought me a bit of deja vu when it described P&G's "America's Favorite Stains" campaign for Tide detergent on Facebook. This took me back to a meeting I participated in with P&G for Excite about 12 years ago, when they eagerly described their desire to have an online stain finder application on Excite -- an idea that as a product guardian made me feel a bit dirty. Apparently P&G persists in its noble quest to bring stain information to the world online. I felt vindicated to learn the Facebook version had attracted only 18 comments.)

There is further evidence of problems at Facebook when we consider the news that Facebook CFO Gideon Yu was in Dubai in October seeking to raise additional funding. Why Dubai? Because U.S. investors weren't interested at the proposed valuation, the reports said. And seemingly Dubai investors weren't either, as we've yet to learn of any recent new investment.

There was more bad news last week when it was reported that Facebook cancelled plans to allow employees to sell some of their shares at a $4 billion valuation. Why? Because potential purchasers were balking at the valuation.

It's not difficult to understand why this is happening. Facebook is the latest to apply the classic Silicon Valley model which says build a big audience first, and then figure out how to monetize it. Investors, meanwhile, pile on in hopes of enjoying a big payout once monetization happens.

But, oops, monetization looks like it's going to be very difficult on social networks such as Facebook. At least, it will be if it's dependent on advertising. Investors are looking for some evidence that Facebook is succeeding in leveraging its vast audience to generate advertising revenues, and so far the evidence is scant.

The many of us who use Facebook addictively can certainly attest to its value in our lives. However we can also probably attest to just how irrelevant advertising is to us on Facebook. That's Facebook's problem, and it's a huge one.

The solution? Start charging a premium for access to certain Facebook features. The basic Facebook membership would continue to be free, but enhancements would be extra. This might include photo and video storage beyond a certain limit, or sharing of certain data, or friends beyond a certain amount. I'm just guessing at the ideas. But given how essential Facebook has become for so many of us, it's easy to envision many users paying a monthly or annual fee for an enhanced membership.

At 130 million members, if 10 percent paid $5 per month for enhanced memberships, Facebook would be clearing $65 million per month or $780 million per year. There are other revenue streams to develop too.

That's not enough to justify an overly inflated valuation, but it's a pretty good start. And it's likely a lot better than they're going to do helping P&G teach young people about stains.

So watch this space. Subscription is increasingly the future, and Facebook will eventually join the bandwagon.

Comments

[Pablo Kang]

Good observations here, Evan. It'd be interesting to see what percentage of Flickr's users use their premium service and whether those numbers could apply to Facebook. More importantly, what does this mean for other social networking apps like Twitter and how they monetize?

[Evan Rudowski: Web Transplant]

Thanks Pablo. Good point that Flickr would be a good comparable for a possible premium Facebook. I think you're also right -- Twitter and similar services may also look to the premium model in the future. I think the days of saying "we're not worried about a revenue model right now" are over -- it sounds increasingly like an evasion.

I also think that LinkedIn could provide a good model -- especially because of their mutual connections at the investor level. If LinkedIn is a business networking utility and Facebook is a social networking utility there are probably lots of commonalities in terms of premium revenue opportunities.

Evan

[Faulkner Hunt]

The potential premium-service revenue numbers are interesting. Call me old fashioned (circa 1998) but I'd posit that $780M/year after simply tapping the first new revenue stream easily makes a $4B valuation start to look reasonable.