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Facebook makes less than $10/user, can we find alternatives to advertising?

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Facebook's ARPU (average revenue per user, annualized) in the last quarter was just under $10, declining slightly in the USA and Canada, and a much lower 80 cents in the rest of the world. This is quite a bit less than Google's which hovers well over $40.

That number has been mostly growing (it shrank last quarter for the first time) but it's fairly low. I can solidly say I would happily pay $10 a year -- even $50 a year -- for a Facebook which was not simply advertising-free, but more importantly motivated only to please its customers and not advertisers. Why can't I get that?

One reason is that it's not that simple. If Facebook had to actually charge, it would not get nearly as many users as it does being free and ad-supported. It is frictionless to join and participate in FB, and that's important with the natural monopolies that apply to social media. You dare not do anything that would scare away users.

Valley of Distraction

Being advertising supported bends how Facebook operates, as it will any company. The most obvious thing is the annoying ads. Particularly annoying are the ads which show up in my feed, often marked with "Friend X liked this company." I am starting to warn my friends to please not like the pages of anybody who buys ads on FB, because these ads are even more distracting than regular ads. Also extra distracting are ads which are "just off the bulls-eye," which is to say they are directed at me (based on what FB knows about me) and thus likely to distract me, but which turn out to be completely useless. That's worse than an ad which was not well aimed and so doesn't distract me at all with its uselessness. There is a "valley of distraction" when it comes to targeting ads:

  • Ads about things I am researching or may want to buy can be actually valuable to me, and also rewarding to the advertiser.
  • Ads about things I am interested in, but have already bought or would not buy via an ad are highly distracting but provide no value to the advertiser and negative value to me.
  • Ads about things I have no interest in tend to be only mildly distracting if they are off to the side and not blinky/flashy/pop-up style.

As sites get better at ad targeting, they generate more of the middle type.

Privacy

Facebook's need to monetize with advertising gives them strong incentives to be less protective of privacy. All social networks have an anti-privacy incentive, because the more they can get you to share with more people, the more they can make things happen on their site, and the more they can attract in other users. But advertising ads to this. Without ads, FB would focus only on attracting and retaining customers by serving them, which would be good for users.

As the old saying goes, "If you're not paying, you're not the customer, you're the product." To give credit to many web companies, in spite of the reality of this, they actually work hard to reduce the truth of this statement, but they can never do it entirely.

How we monetize the web

When I created the first internet based publication in 1989, I did it by selling subscriptions. There really wasn't a way to do it with advertising at that time, but I lamented the eventual switch that later came which has made advertising the overwhelmingly dominant means of monetizing the web. There are a few for-pay sites but they are very few and specialized. I lament that forces pushed the web that way, and have always wished for a mechanism to make it easier, if not as easy, to monetize a web site with payment from customers. That's why I promoted ideas like microrefunds as well as selling books in flat-rate pools like my Library of Tomorrow back in 1992. (Fortunately this concept is now starting to get some traction in some areas, like Amazon's Kindle Unlimited.)

I'm also very interested in the way that low-friction digital currencies like Bitcoin and in particular Dogecoin have made it work workable to give donations and tips. Dogecoin started as a joke, but because people viewed it as a joke, they were willing to build easy and low security means of tipping people. The lack of value attached to Dogecoin meant people were more willing to play around with such approaches. Perhaps Bitcoin's greatest flaw is that because its transactions are irrevocable, you must make the engine that spends them secure, and in turn, that demands it is harder to use. Easy to spend means easy to lose, or easy to steal and that's a rule that's hard to break. The credit card system, in order to be easy to spend, solves the problem of being easy to steal by allowing chargebacks or other human fixes when problems occur. While we can do better at making digital money easy to spend and not quite so easy to steal, it's hard to figure out how to be perfect at that without something akin to chargebacks.

To monetize the web without advertising, we need a truly frictionless money. Advertising provides a money whose only friction is the annoyance of the advertising. To consume an ad-supported product you need do nothing but waste a little time. It's a fairly passive thing. To consume a consumer-paid product, you must pay, and that creates three frictions:

  1. The spending itself -- though if it's low that should be tolerable
  2. The mental cost of thinking about the spending -- which often exceeds the monetary cost on tiny transactions
  3. The user interface cost of your means of payment.

You can't eliminate #1 of course, but you can realize that the monetary cost is less than the negatives introduced by advertising. Eliminating #2 and #3 in a secure way is the challenge, and indeed it is the challenge which I devised the microrefund concept to address.

Will we pay the cost?

I think lots of people would pay $10/year for Facebook, particularly if alternatives also charged money. It's a bargain at that price. But would people pay the $50 that Google makes from them? Again, I think Google is a bargain at that price, but for a lot of the world, that could be a lot of money, and that's Google's average revenue, not its revenue for me. (I click on ads so rarely that I think their revenue from me is actually a lot lower.)

I already bought my ticket on Iberia!

At the same time, Google's ads are among the least painful. The ads on search are marked and isolated, and largely text based. The only really bad ads Google is doing are the ones in the valley of distraction in Adsense. As I wrote earlier, we are all constantly seeing ads for things we already bought.

And so, even though a Google search might only cost you a couple of pennies, I doubt we could move Google to payment supported even if we could remove all the friction from it.

This is not true for many other sites, though. Video sites would be a great target for frictionless payment, since showing a 30 second video ad to watch a 2 minute video is a terrible bargain, yet we see it happen frequently. There are many sites who do much worse than Google at monetizing themselves through advertising, and who would welcome a way to get more decent revenues via payment -- though of course they can't get greedy or they friction of the payment itself will reduce their business.

In addition, there are zillions of small sites and sites about topics of no commercial value who can't make much money from advertising at all. Some of these sites probably don't even exist because they can't become going concerns in the current regime of monetizing the web -- what fraction of the web are we missing because we have only one practical way to monetize it?

Comments

"That number has been mostly growing (it shrank last quarter for the first time) but it’s fairly low. I can solidly say I would happily pay $10 a year — even $50 a year — for a Facebook which was not simply advertising-free, but more importantly motivated only to please its customers and not advertisers. Why can’t I get that?"

Because, quite simply, there aren't many people who share your willingness to pay. Witness the difficulty sites that offer subscriptions have attracting customers. Some things, like disabling ads, can be done on a subscriber by subscriber basis and the content provider can offer both methods. But you're talking about things that go deeper into how a site operates--and the only way that works is if you can get a significant portion of people to buy in. And if your site is subscription only you have a hard time attracting people to your service in the first place.

I go into that in the article. But my point is, if it's the case that Facebook would be a bargain if we paid for it, is there a way to get past these barriers and create a world where it would make sense for it, or something else like it, to be a pay site.

The only viable means I can think of is an opt-in public fund taking a percentage of all your private purchases that you then must dole out in public to fund people/services you use most and/or choose to prioritize support of, a fund that must be spent say every week or month. I see this as encouraging meritocracy and charity. Payouts only happen when the amount accrued exceeds the costs of transaction and revocation. Someone with little to no money could still use services requiring funds or a limited version thereof, their fund and contribution may just be smaller and require "some" ads to get them to spend in order to contribute to the public fund and dole it out where required. Making the interface extremely easy to use to purchase and including an ad network would be key to adoption and to the willingness of people to opt into the fund system, along with themselves then being able to then receive funds or spend to advertise for funds. How you prevent people from funding themselves or entities they own and thereby cheating the public system out of funds would be an interesting problem to solve, it possibly has to be more "costly" to do so. Therefore account holders may require real identities or at least reputation to receive funds from public fund transactions, which being public can be audited and policed by the network. The cost of private transactions thereby being a public fund which encourages more of an open market. I see this as having the best of both worlds. It may be required that any public funds received also be transacted in public by the recipients, or at least contribute to the public fund.

There will be attempts to defraud any frictionless payment system -- there is lots of effort to defraud ad systems, of course -- but that's one reason that having a government pool pay the money is inferior to it coming from private hands. If it's not your money, you don't have much incentive to stop fraud.

" I am starting to warn my friends to please not like the pages of anybody who buys ads on FB, because these ads are even more distracting than regular ads."

um. Lots of small business owners buy those ads, dude. Not many buy them twice because Facebook does a terrible job of serving ads (unless you're Volvo and can afford to pay $100,000 a day to get your ads out there) but putting things you see in ads on a "Don't Buy List" is going to screw a bunch of independent producers and won't affect the big players one iota.

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