What Would Happen If Social Networking Sites Charged

from the a-thought-experiment dept

JohnForDummies alerts us to a suggestion from Dan Lyons over at Newsweek, saying that sites like Facebook, Twitter and YouTube should just start charging for their basic service. He brushes off those who think it's a bad idea as "the prevailing wisdom in Silicon Valley today is that everything on the Internet must be free." Except, that's not true. No one (NO ONE) is saying "everything on the internet must be free." This is just a silly strawman put forth by folks with little understanding of the business models people are actually discussing. Lyons also fails in recognizing that his "example" isn't even a very good one. He talks about PalTalk, who has built a business by offering premium features at a fee. That's the typical "freemium" model, but that's not what he then suggests for Facebook and Twitter, who he says should just start charging. Amazingly, he suggests that Facebook would only lose 50% of its users if it started charging (in fact, he seems to suggest that this is a conservative estimate: "Even if half of Facebook's members were to leave rather than pay...")

Well, there's a problem with both Lyons' math and his crystal ball. In cases where companies have gone from free to charging, the numbers I've seen (and, yes, it does range slightly, depending on the service) the rate of uptake is usually somewhere between 0 and 1% at best. Even if we grant Facebook some credit as being a "necessity" for students, I'd be shocked if they could get 5% of people to pay up to use the service -- and they'd find that number dwindle really fast. With only 5% of people using the service, it certainly becomes a lot less useful. Rather than communicating with all your friends, you can now only communicate with the 5% who ponied up. Or, you jump ship to someone else that doesn't charge.

And that's the real issue. The second that Facebook even hinted at charging users for basic service is the second users would start moving en masse to another (very, very happy competitors would be quick to offer themselves as an alternative). I recognize that it was still back in the days when Dan Lyons hated social media and thought social networking and blogs were evil, but he might want to familiarize himself with the history of Friendster. For a while, there were all sorts of rumors that Friendster was about to start charging, and MySpace kicked off a very well coordinated "grassroots" rumor campaign about how Friendster was about to charge, and everyone should switch to MySpace before Friendster put up a paywall.

In other words, not only will a lot less than 50% of people sign up for a pure fee-based Facebook, but everyone will move elsewhere, making that the place to be (for free). That's not to say that Facebook couldn't come up with some additional offerings of value that it could charge for, but the idea of charging for the basic service is really short-sighted and easily debunked if you think through it.

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  1. identicon
    Ryan, 29 Jul 2009 @ 9:30am

    Re: Re: Re:

    Well, for instance take Facebook four years ago. It had much, much fewer users, but its value to me was the same(if not more). MySpace, for instance, had far more individual profiles at the time; yet, Facebook was able to draw them away in droves despite MySpace never charging for service. This seems to contraindicate Metcalfe's law that measures utility by number of users.

    I am firmly in agreement that charging for Facebook would devastate the user base and probably be a terrible decision. I am merely contending with Derek Kerton and Metcalfe that the utility scales that directly with the number of users; I think Facebook would retain value in a vacuum despite charging, but loses this against free competition.

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