Facebook moving to the subscription model

• Phenomenal growth of social networking in the new millennium
• The success story of the world’s largest social network
• Competitors of Facebook
• Why did Facebook decide to foray into subscription model?

Facebook, the company or more precisely the social network need no introduction. It has finally decided to launch a subscription-based service for its users. In this blog, Televisory has tried to explore the reasons for this move.

Facebook, no doubt is the world’s largest social network with a market capitalisation of $600 billion and 2.129 billion monthly active users. However, the platform has been free for its users since the inception. Facebook earns almost all of its revenue from advertisements displayed by businesses to its users while they browse through the Facebook. It is, therefore, obvious that a high number of daily active users and more time spent by users on the platform will result in a higher revenue-generating potential for Facebook. Understandably, the success of Facebook lies in keeping its users engaged and addicted to the website.

But, why would a user want to login into Facebook every day? What would make a user spend most of his or her leisure time on Facebook?

Facebook as a social network, which helps people to keep in touch with their friends, relatives and acquaintances. The concept of social networking began in the new millennium with the launch of websites like Orkut and hi5, long after the internet came into existence. The concept of social networking helps long lost friends to connect. People feel happy to get in touch with their friends and relatives they had lost contact with. However, what sets Facebook apart from other social networking sites are additional features such as regular updates on one’s Facebook friends’ activities, the ability to upload unlimited pictures, liking and commenting on friends’ pictures and updates. Facebook was able to beat its competitors through these added features and achieved deep penetration around the globe. The below chart shows that the daily active users on Facebook increased at a steep pace from 0.62 billion (2012) to 1.4 billion (2017). Further, users enjoy to spend time on Facebook and upload quality pictures for likes. Users post updates on their recent excursions, like and comment on updates of their friends and watch shared videos. The increase in the number of users and the time spent by them brought in more advertisers to Facebook and resulted in a steep increase in revenue for the company. Facebook’s revenue increased eight-fold from USD 5.09 billion to USD 40.65 billion over 2012-2017 with advertisement income contribution to the total revenue increasing from 84% to 98% during the same period.

Additionally, the time spent by users on Facebook is more for entertainment (apart from developing a social network to stay in touch). The primary competitors of Facebook are websites with large daily active users, where businesses can place advertisements. The secondary competitors are other online sources of entertainment, where users would like to spend their leisure time. Finally, the last level of competitors for Facebook are other social networking websites and applications. Facebook does not have a well-defined purpose and it can be used by people for a broad spectrum of purposes other than creating a social network such as dating, watching photographs, forming a community of people with like-minded interests and spreading knowledge. The needs served by Facebook are also served by competing businesses which specialise in serving those specific needs. For example, LinkedIn, the competing social networking website operates in a niche segment and serves the purpose of connecting professionals and also serves as a job search portal. Uploading photographs and viewing photographs of others in the network can also be done on Instagram, which specialises as a picture sharing platform and allows users to edit photographs to make them look more attractive. The messaging applications such as WhatsApp and WeChat help people remain connected through the internet. Online video streaming for entertainment can be done on specialised websites such as YouTube and Netflix. Quora has emerged as a knowledge sharing platform that seeks information through crowdsourcing. These alternate platforms are growing in terms of the number of users and this poses a challenge for Facebook to ensure that its registered users continue to spend their time on Facebook to sustain its growth. One way to do so would be to offer something unique or different like its competitors. It is possible that the same person may use YouTube to watch videos and Instagram to post pictures, though Facebook provides the medium for both the activities. This is so because YouTube and Netflix have a much larger collection of videos than Facebook and Instagram offer innovative ways to upload and view photos and videos with better quality. The same user would use LinkedIn if the purpose of networking is purely professional as LinkedIn specialises in professional networking, although the same can be done on Facebook as well.

Moreover, Facebook took a strategically right decision to acquire its competitors; WhatsApp and Instagram. WhatsApp was acquired in 2014 for USD 16 billion and Instagram in 2012 for USD 1 billion. The number of monthly active users on Instagram has grown from 1 million (Dec. 2010) to 1 billion (Apr. 2018). In case, Facebook had not acquired Instagram, it would have posed a strong competition to the Facebook today. The acquisition of these competitors has helped Facebook to sustain its growth. However, these acquisitions were pricey and also to an extent reflect Facebook’s inability to bring something innovative to satisfy the needs of its users. YouTube with 1.5 billion monthly active users is currently offering a tough competition to Facebook. In response, Facebook has also launched Facebook Watch and the IGTV on Instagram. However, YouTube is owned by Alphabet (Google) and the synergies associated with Alphabet poses a threat of surpassing Facebook’s active users count. 

Though Facebook is a social networking platform, it is used more for entertainment and it is the time spent on entertainment that contributes to the revenue of Facebook. It is not in the interest of Facebook to ignore the alternative sources of entertainment that are gaining traction. Therefore, in a bid to search for alternative sources of revenue, Facebook has decided to launch a paid subscription-based version, in addition to the free one. This would be similar to LinkedIn, which has a free basic account and a paid premium account comprising additional features. How would Facebook distinguish its paid account from the free account? The charges for its paid account and the most important, how many users would choose the paid subscription? Is yet to be seen.