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Facebook Revenue: Paid Memberships Could Be a Business Booster Rocket

By Erik Sherman

Updated on: June 21, 2010 / 12:00 PM EDT / MoneyWatch

Facebook has gone far beyond the quirky college start-up it once was, with revenue around $800 million last year and profit in the tens of millions, according to a Reuters report. But it could do a lot better, and make its critics far more comfortable, through optional premium memberships.

The growth is impressive. Last July, board member Marc Andreessen said Facebook was on track for $500 million in revenue and could do better:

"If they pushed the throttle forward on monetization they would be doing more than a billion this year," said Andreessen, who made the cover of Time Magazine as founder of the world's first Web browser company, Netscape.

Pushing on revenue is certainly one way. However, the company has another potential tool at hand: paid premium memberships. I don't mean mandatory paid memberships for all, which would likely drive away a significant portion of the roughly 500 million audience that makes advertising a viable revenue source.

Instead, Facebook could institute a tiered membership structure much the way LinkedIn does, with additional benefits to make payment attractive. Here are some features that could attract paid members:

additional photo/video hosting abilities
professional or business accounts with additional contact capabilities and tracking for those who want to promote themselves
multi-party chat sessions
free Facebook points
no advertising
protection of personal data

The last two would be powerful enticements. Consumers often complain about ads, and for years privacy has been a thorny issue for Facebook. For many, a promise of no ads and of having their data sequestered from marketing activities would be a strong inducement to pay a reasonable sum. The option would also help quiet critics, because people who were concerned could pay for the service.

Paid membership would likely increase Facebook's per person revenue. Even if you assume that the company gets $10 CPM (cost per thousand ad displays) rates for advertising -- which would put it in rarefied company, given that the average rate in the U.S. is $2.48 -- how much does the average customer bring in? Divide even $1 billion in revenue by 500 million users and you've got ... $2 a person a year. Be generous and divide the billion by 300 million users, assuming 67 percent user growth since January 1, and they would still be just over $3 a person a year. It wouldn't take much to replace that.

Now, heavy users who demonstrate a greater interest in the service would be more likely candidates. How much might they bring in through ad views? If someone uses Facebook several times every day and views 10 ads, the person views 70 ads a week, 3640 ads a year. Revenue for that person would then be $36.40 a year, or about $3 a month. A $5 a month fee would create $24 more a year in revenue than through advertising. The incremental resource costs to deliver benefits would be negligible. Promotional users would likely pay even more.

This would be a freemium business model. Assuming typical conversion rates of 2 percent, and Facebook might expect 10 million paid users with additional revenue of $240 million -- close to a 25 percent increase, even for $1 billion in annual revenue.

Facebook would improve its reputation and sharply increase revenue. Not a bad result for a relatively simple change.

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