Saturday, May 15, 2010

Should Facebook Go Freemium?

I haven't weighed in on all the Facebook privacy brouhaha, primarily because (a) better minds than I have weighed in on it already (I particularly recommend Steven Hodson's post that differentiates between privacy and control of your data), and (b) I didn't have anything to contribute.

Well, I have contributed one thing to the conversation so far. I think that Facebook's negative press has reached a point where, instead of using the common "blame Scoble" epithet, it's time to "blame Facebook" for everything. @fbihop has already started:

Facebook hit on your sister. #FBfacts

But then I ran across a proposal from Jake Kuramoto. After noting that Facebook will not truly be affected by the actions of Leo Laporte or Jason Calacanis or whoever, Kuramoto suggested the following:

Flickr makes you pay to store photos beyond a certain number. Facebook doesn’t, and they are the largest online photo sharing site by a very large margin.

Worried about privacy changes? Don’t be a sour puss and delete your account, pay to keep it private.

But will a good idea make money? To analyze this, I've taken a look at a company that's been around for a while - AOL.

You remember AOL - well, some of you remember AOL. AOL was a huge moneymaker back in the day, that was best known as a provider of a place where you could store - and control - your content. Of course, to get to that content, you had to get to it, so AOL sold subscriptions that let you use your modem to dial in to a special phone number to access your AOL content.

Needless to say, the business landscape has dramatically changed since then, and the Internet service providers are now separate from the content providers.

So how does AOL make money today?

According to its most recent quarterly report, AOL income comes from the following sources:

Advertising revenue: $354.3 million in 2010 Q1
Subscription revenue: $282.7 million
Other revenue: $27.3 million

So today, AOL gets the majority of its revenue from advertising. Well, Facebook certainly knows about the advertising business (on Friday, I finally got around to disliking the myriad of "Rich Dad, Poor Dad" advertisements that kept on showing up).

And as for that subscription revenue, it appears to be drying up:

Once best known as an Internet access provider, AOL is attempting to wean itself from the access business, streamline operations and develop a media business based on Internet advertising and services.

Still, it remains highly dependent on its subscribers as a captive audience.

The company said its steep decline in search queries, for example, was partly the result of a 26% decline in subscribers compared with the period last year. Paying subscribers tend to search more frequently than "nonpaying visitors" to its properties, according to AOL.

Overall, AOL's subscription revenue dropped by 28% to $282.7 million.

But AOL doesn't solely depend upon subscribers and advertising. Although the revenue seems to be pretty low at the moment, AOL does offer a variety of products for sale, most if not all of which are offered as a 30 day free trial. Internet security, a PC optimizer, various utilities - you can buy them all from AOL.

So perhaps Facebook could sell a higher-tiered level of Facebook service to its customers. The question is, how many of its hundreds of millions of customers would pay for the service? And if they did, how many of the hundreds of millions of customers would regard it as another example of the "Facebook will charge you" hoaxes from December 2009 and February 2010?

Now I'll admit that I only looked at AOL. Perhaps there are other businesses that more closely parallel the freemium model that Kuramoto mused about. If you know of a business that has successfully (or unsuccessfully) adopted a multi-tier model, share your thoughts in the comments.
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