Why investors would love to see Facebook offer a paid premium service
A paid premium offering from Facebook (FB) could be a value-add for the tech giant, according to Tigress Financial Partners’ head of research and asset management, Ivan Feinseth.
“Facebook has already proposed several changes to allow its users to better protect their privacy which has been expected and will most likely result in paid levels of services that offer exclusions from advertising,” Feinseth wrote in a note to clients. “I have said for many years that at some point Facebook could offer tiered services offering a basic free product along with a paid premium product that could generate significant revenue for Facebook.”
In a survey of over 4,000 Yahoo Finance readers, 13% of respondents said they would be willing to pay $5 per month for a Facebook account that gave them more control of their personal data. Meanwhile, 87% said they would not pay.
That said, even if a small percentage of Facebook’s 2 billion users opted to pay for a premium service, it could generate meaningful revenue.
“Let’s say $5 a month, or $50 per year — not a significant cost to anyone — but you start getting a few percentage points of participant penetration into the 2-plus billion users, it’s a lot of revenue and it doesn’t come with any additional costs,” Feinseth said in a phone interview.
For example, if 5% of the 2 billion users paid $5 per month, that would be $6 billion in extra revenue (minus transaction costs) flowing to the bottom line. Facebook posted about $40 billion in revenue in 2017.
“The return on capital and the increase in profitability would be dramatic,” Feinseth, who’s been covering the stock since April 2013, said.
Presently, there are no plans for a paid service. While testifying on Capitol Hill, Facebook CEO Mark Zuckerberg signaled that it’s something that might be thought through.
“[A] number of people suggest that we should offer a version where people can not have ads if they pay a monthly subscription, and certainly we consider ideas like that. I think that they’re reasonable ideas to think through,” Zuckerberg said. “But overall, I think that the ads experience is going to be the best one. I think, in general, people like not having to pay for a service. A lot of people can’t afford to pay for a service around the world, and this aligns with our mission the best.”
Zuckerberg emphasized that there “will always be a version of Facebook that is free.”
“It is our mission to try to help connect everyone around the world and to bring the world closer,” Zuckerberg said. “In order to do that, we believe that we need to offer a service that everyone can afford, and we’re committed to doing that.”
On Monday and Tuesday, Zuckerberg appeared before Senate and Congressional committees to testify in the wake of 87 million users having some of their data compromised in the Cambridge Analytica scandal. In Wall Street’s view, the 33-year-old tech CEO performed well, with the stock price posting its largest daily gain on Tuesday in nearly two years. The stock is down about 10% since the Cambridge Analytica story first broke in mid-March.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
