Meta Platforms (META 0.93%) is finally making it possible for users in some countries to use Facebook and Instagram without seeing ads.
The social media specialist launched a new subscription service in the European Union, as well as Iceland, Liechtenstein, Norway, and Switzerland, offering an ad-free experience. But investors shouldn't assume that Meta will suddenly have a ton of subscription revenue rolling in. In fact, management might prefer that nobody actually subscribed to its new offer.
That dirty little secret is an important idea for Meta investors to understand. The better the subscription service performs, the worse off the company could be in the long run.
Why even bother offering a subscription?
Meta made it very clear why it's giving users the option to pay to remove ads from its service. It has nothing to do with improving the user experience or generating more stable revenue for investors. It says it right there in the first words of the blog post announcing the new offer: "To comply with evolving European regulations."
The European Parliament passed a law regarding data regulation called General Data Protection Regulation (GDPR) in 2016, which went into effect in 2018. Questions around its implementation have led to numerous court cases since. This summer, a court ruled on the definition of consent for collecting and using user data for advertisement on a platform like Facebook or Instagram.
The court ruled a subscription model is a valid form of consent. So, that's exactly what Meta's doing.
Why Meta doesn't want anyone to actually subscribe
While Meta would collect about 10 euros per month from users opting into its subscription, it would miss out on the potential ad revenue those users would provide.
Meta generated about 5.50 euros a month per European user from Facebook alone over the past 12 months. Estimates indicate Instagram generates even more revenue per user, and it's growing faster than Facebook. So, the subscription price (about 16 euros per month for a combined Facebook and Instagram user starting in March) will barely exceed the revenue Meta brings in from ads.
And it's important to remember those average revenue numbers spread out across a lot of countries with varying demographics. As of the end of the third quarter, Facebook had 408 million users in Europe. The most well-off users (who also happen to be the most valuable to advertisers) are the most likely to use Meta's new subscription. And they might look a lot more like Facebook's American and Canadian users, who generated about $18.10 per month in ad revenue on average over the past year.
Moreover, Facebook continues to grow its revenue per user every quarter. European average revenue per user (ARPU), for example, increased 34% year over year in the third quarter. It'll be hard-pressed to raise subscription prices at that rate if it actually wanted people to sign up.
Is the regulatory pressure too much for Meta investors?
Meta is among a group of tech giants that are seemingly constantly under pressure from regulators all over the world. That has the potential to curb its growth if regulators ever truly force the company to limit its collection of user data or how it uses said data.
But Meta is better positioned than just about any of its competitors to withstand regulatory setbacks. Remember, any industrywide changes that apply to Meta would also impact its competitors. And it's built the user base across multiple apps, which helps ensure the apps remain essential to anyone's mobile experience.
What's more, it's able to generate tons of cash from operations, which allows it to reinvest in growth and fortressing its position. For example, it's invested heavily in artificial intelligence capabilities to measure advertisement efficacy following changes to how it's able (or rather, unable) to track users' behavior across apps on mobile devices. That's enabled it to recover faster than the rest of the industry.
As regulators crack down on Meta, just as they've tried to through the GDPR, it seems likely the company will actually get stronger relative to its peers. And Meta's management is clever enough to find opportunities within new regulations, such as offering a subscription it doesn't really want to sell, that can show users how valuable an ad-supported application really is.
With shares trading for just under 19 times forward earnings, the stock still offers a great value for investors. It has the potential for strong earnings growth as revenue accelerates and operating margins expand over the next year and beyond.
