Meta has long had issues with the EU Regulators. This year the company paid a record $1.3B fine for transferring data from Europe back to the US. While fines can be costly, they typically don’t have a lasting impact on the business. The greater concern is policy changes that would reduce the amount of user information that Meta can gather and thereby limit the effectiveness of their advertising. This is what happened when Apple began its IDFA (which limits Meta’s access to user data) in the Spring of 2021. The effect was Meta lost $10B, or about 8%, in advertising revenue over the coming year. In other words, Meta will go to great lengths to avoid policy changes. The WSJ’s reporting that Meta is considering offering paid versions of Facebook and Instagram that do not track user data and are ad-free is an effort to sidestep more blunt privacy changes from the EU.

Meta (aka Facebook) was founded in 2005 and for the past 18 years has effectively never offered a consumer subscription product. That precedent makes the potential of Meta changing course and offering a paid subscription unlikely. The company’s strategy from the start has been to build platforms with a billion-plus users and monetize down the road. Additionally, when the company acquired WhatsApp in 2014, there was speculation the company would start charging $1 per month for the communication service, which of course never materialized. In other words, it’s a big jump for Meta to start charging users which in our view makes the probability low.

Setting aside the precedence, it makes sense for Meta to charge. Given Meta will still offer a free version of Facebook and Instagram, users who are happy with the current product can continue to use it as is and users who want to pay for no ads (aka Spotify Premium subscribers) should have that option.

There are four factors in calculating sensitivity:

EU and US exposure: Next year Meta is expected to do $149B in revenue, of which 97% will be advertising review. Europe will account for about 23% of that, or $32B. US will account for about 36% or $54B.

Subscriber Rates: Our sense is there is a meaningful percentage of users that will pay for an ad-free subscription. We believe if everything goes right, Meta could convert 30% of free users into paying. This estimate is based on Spotify’s subscription uptake, which is about 40% of total users. We believe a conservative estimate is 5% given it’s likely an ad-free product will appeal to some users.

The Headwind: Meta will undergo a loss of advertising revenue when users switch to paid versions. In Europe, we estimate the average Facebook and Instagram generates $4.30 per month. In the US, the average user generates about $8.40 per month.

The Tailwind: The WSJ reported Meta is considering multiple paid tiers based on whether it’s mobile, desktop, or bundled accounts, averaging out to $13 per month.

Bringing it Together: Factoring in the loss of advertising revenue with the addition of subscription revenue and the range of 5% adoption rate up to 30% results in an additional 2-10% in European revenue and 1-5% in US revenue. Our thinking is if Meta offers this in Europe it will eventually be offered in the US. Adding those two geographies together equates to a 3-15% uptick in Meta’s overall revenue in 2024.

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