Back in the ‘70s, the average consumer in the U.S. saw around 500 ads per day. That number has since increased by a factor of 10 to upward of 5,000 ads per day. If there’s a breaking point, my best guess is we reached it long ago.
The backlash is already evident. Concerns over how Facebook shares user data and targets ads has landed it in the crosshairs of Congressional investigations and Parliamentary hearings. Ad blocking software is more popular than ever, with 86 million users blocking $20 billion worth of ads each year in the U.S. alone. Retargeting has grown so invasive it’s drawn comparisons to online stalking. Research shows that we’re sick of ads and we’ve also grown increasingly adept at tuning them out.
For those in the social media space, this raises a critical question: Does the future of social media still rest in selling ads? Not long ago, I would have said yes. After all, a good chunk of the population just won’t pay for something they can get for free. (Case in point: 55 million people in the US still rely on free, broadcast-only TV reception.) Lots of people out there are happy to put up with ads — a tried and true model familiar from generations of consuming ad-supported media, from TV and radio to newsprint. Not to mention, questions about Facebook going down the subscription route (i.e. letting users pay for ad-free access) have been around for years and pretty much gone nowhere.
But now may be time to take those questions more seriously. More to the point, it’s time to recognize that social media monetization isn’t necessarily a black-and-white matter of ads or subscriptions. As a growing number of platforms in China illustrate, diversifying revenue streams — finding a hybrid of advertising, subscription and transaction-based revenue — may be the surest path to long time viability and financial success.
Learning from China’s revenue models
Currently, Facebook generates upward of 98% of its revenue from ads, while for Twitter the share is around 85%. Compare that to Tencent, the Chinese Internet services giant that counts more than a billion users across its WeChat and QQ messaging platforms (and is also the first Chinese company to be valued at more than $500 billion). Tencent earns only 17% of its revenue from ads. The rest comes from a highly diversified revenue stream including gaming (37%), online payments and other fees (23%) and value-added services like video subscriptions (24%).
One result is that while users on Facebook now scroll through countless ads, WeChat Moments (the equivalent of the Facebook News Feed) shows users just two ads per day. It’s not hard to see how that might leads to an overall better user experience and greater user loyalty.
Other Chinese platforms are getting even more creative. (Andreessen Horowitz recently published a very detailed look at some of the more innovative monetization strategies.) QQ Reading, for example, allows users to read up to two-thirds of an e-book for free. Readers only need to pay if they’re genuinely hooked and want to finish the book. Other authors offer their books for free but include a “tipping option” at the end of each chapter for tips from $0.15 and up.
On video platform iQiyi, which has more than 500 million users, roughly 35% of revenue comes from ads. But in contrast to YouTube’s ads, those on iQiyi are AI-powered and directly related to the video content being viewed (i.e. a makeup tutorial might include ads for lipstick, not Grammarly.) Meanwhile, 40% of revenue is derived from iQiyi’s 80 million paying members, who subscribe for ad-free viewing and higher-quality video, as well as VIP perks like customizable app skins. The on-screen experience, admittedly busier that Americans are used to, engages viewers with everything from live comments to GIF creation and even the ability to shop for relevant products while you watch.
Streaming music, too, has been taken to the next level. Tencent Music, for instance, allows artists to block streaming of their new releases. Users have to pay for exclusive access, which generates new revenue for both the performer and the platform. The app also allows users to buy concert tickets and livestream concerts, creating a kind of 360-degree experience missing on American services like Spotify.
Diversifying revenue for U.S.-based social platforms
But would any of this work in the American context? Certainly there are nuances to Chinese social media — from high levels of government oversight to the way Chinese users leapfrogged straight to a mobile experience — that need to be accounted for. But my point isn’t that these strategies can be imported wholesale and applied by Facebook, Twitter, YouTube and other American platforms. Rather, what’s salient here is the insight that monetization is not a binary matter of ads (Facebook, Twitter, etc.) or subscriptions (Spotify, Netflix, etc.) There are countless permutations — incorporating everything from payments to games and one-off transactions — that better account for consumer tastes and help to capture more lifetime value.
In some ways, we’re already seeing this diversification happen in the American context (or, at least, try to happen). YouTube has been a pioneer in this respect. Subscribers have been able to pay for access to ad-free YouTube since 2015, currently $12 a month for YouTube Premium. The experiment, however, has hardly been a success story, with just a few million people signing on, and indications are that YouTube Premium may be pivoting back to ads.
On the other hand, last year YouTube allowed creators with more than 100,000 subscribers to start charging their users a $5 monthly fee for “channel memberships,” which include access to badges, unique emoji, live streams and other perks. Meanwhile, the new Premieres feature lets content creators build a public landing page with a countdown clock to debut new videos and provide a space for fans to chat live.
Once upon a time, Facebook generated more than 15% of its revenue from games and other non-ad sources (nearly $1 billion in 2014). That sum has since dwindled to less than 2 percent of total revenue. But as concerns over the volatility of the ad market have grown, the network has begun exploring new monetization options, both for itself and its users.
Last year, Facebook began testing out paid monthly subscriptions for some Groups pages, which confer access to exclusive content. Among the participants in the small pilot, one Group called Grown and Flown Parents created a paid subgroup dedicated to college prep and counselling, available for $30 a month. (As to whether Facebook would ever offer a wholly ad-free, subscription service — an option many users have clamoured for — Mark Zuckerberg made clear in testimony to Congress last year that this was likely not on the table.)
Facebook also made a much publicized entry into the online payments space back in 2015, enabling peer to peer payments via Messenger. However, the network hasn’t chosen to monetize this platform and payments remain free to send. Meanwhile, Facebook’s Craigslist killer, Marketplace — a classifieds section where users can sell their wares — has grown by leaps and bounds and is now used in 70 countries by more than 800 million people. But Facebook has limited monetization efforts thus far to letting users pay to boost their listings through the News Feed and allowing brands to purchase ads.
On Instagram and Pinterest, meanwhile, shoppable posts and Buyable Pins hint at a possible convergence of ecommerce and social media. But, at present, social commerce doesn’t represent a major revenue driver for either platform. And it certainly doesn’t enjoy the kind of penetration rates seen in Asia, where social commerce can account for up to 30% of all digital sales.
The end of the eyeball monopoly?
Indeed, eyeballs remain the primary currency among U.S.-based social networks. The priority remains attracting as many users as possible and keeping them on site as long as possible, the better to harvest data and, in turn, target and sell ads. In this light, even initiatives like Marketplace or Facebook’s Instant Games platform are really less about generating revenue than just about getting users to stick around longer.
But in the era of “peak ad,” that strategy may not be viable forever. Awareness of data — and data privacy — has never been higher among consumers, 60% of whom no longer trust social media companies. As ads grow ever more sophisticated and ubiquitous, they’re also attracting more scrutiny and backlash. (If you’ve been chased around the Internet by retargeted ads, you know exactly how invasive the ad experience has become.) Relying solely on ads is undeniably bad for user experience. It’s only amount of time before that has an impact on networks’ bottom lines.
For Western social networks, Chinese platforms can offer a more nuanced model. Ads remain important, but users can pay to opt out. On-site transactions are seamless. Value-added services, from VIP access to customizable skins, are relevant and plentiful. Above all, the lesson that Chinese platforms offer is that people — across the socioeconomic spectrum — are willing and able to pay for a better experience. The billion-plus users of Tencent’s various platforms are living proof — there’s a better, more sustainable way out there to make money off of social media. Ads aren’t everything.
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