Mark Zuckerberg stands before the first iteration of his Facebook page (credit and link below).
As part of its filing for a May IPO, Facebook revealed that it makes about $5 in revenue from every monthly active user. That’s what Spotify, Rhapsody, MOG and Rdio make from their desktop-only music subscriptions per month by charging for them [updated].
Facebook’s statistic is quite stunning, considering that none of these people pay a cent to use it. Each month year, advertisers and marketers pay about $5 to display ads to us and mine our personal data, according to the numbers quoted by my former Wired.com colleague Alexis Madrigal of The Atlantic. To be precise, Facebook makes either $4.39 or $5.02 per year [updated] from each monthly active user depending on how you do the calculation.
Even those numbers might not be enough to please shareholders, even if Facebook grows considerably. As analyst Trip Choudry observes on CNET, even if Facebook grows 300 percent to three billion users, and every single one of them uses the service “actively,” Facebook would make $13 billion per year, which might not justify its market capitalization of $100 billion.
In that case, it would need to extract more revenue from each user by
- including more advertisements — maybe even splashscreens and video pre-roll, which command a higher premium;
- selling more virtual credits within Facebook games and other apps;
- creating new features that convince people to divulge even more of their personal information to make them more valuable to marketers;
- and, perhaps, charging companies such as Spotify for integrating with Facebook (which has, after all, boosted their user bases significantly).
Each of those options has a downside for Facebook’s users or partners. Whenever Facebook adjusts its privacy settings in a more revenue-generating direction, its users — even the non-techie ones — tend to complain. As a result, Facebook’s new balancing act between pleasing shareholders and not scaring away users could be trickier than anticipated.
That said, if Facebook succeeds in pleasing both shareholders and users, it wouldn’t be the first time it has proven the doubters wrong.
[Update: This article originally stated that Facebook makes about as much from active free users as music services do from the paid version of their desktop-only music subscriptions. In fact, Facebook makes about $5 per year from its monthly active users. We regret the error. Based on Madrigal's calculations, Facebook will still need to increase its revenue per active user significantly.]
(Photo: Flickr/Niall Kennedy)