Charging users for subscriptions is Meta Platforms’ latest bid to build a business outside advertising. The company badly needs it to work, but its chances don’t look great.
Expanding non-ad revenue wasn’t an especially urgent problem until recently. Before the artificial-intelligence boom, Meta could use profits from its vibrant advertising business to try other things, from videoconferencing devices to the so-called metaverse to smartglasses. If the returns didn’t measure up to the investments, there was always more ad revenue to be had.
Last year, 97.6% of Meta’s revenue came from advertising, a measure of how little progress it has made in growing beyond its core business in the more than two decades since its founding. Google, a company of similar vintage that was also built on ads, had more non-ad revenue a decade ago than Meta had last year.
That is an increasingly acute problem now because of AI’s growing cost. Meta is already further over its skis than its competitors in that area. Planned capital spending this year is larger relative to its market value or revenue compared with Google’s parent, Alphabet, Microsoft or Amazon.com. Meta is borrowing more to finance its spending and could look to raise equity.
Meta’s one-track business makes finding new AI revenue streams all the more difficult. It can’t apply the AI magic that comes from its labs to a cloud-computing business, software sales or an e-commerce operation, because it doesn’t have any of those things.
Enter subscriptions. Chief Executive Mark Zuckerberg’s latest bid to diversify Meta’s revenue sources is to charge some of its 3.5 billion daily users a monthly fee for extra features on Facebook, Instagram and WhatsApp. It is also testing subscriptions for an AI chatbot.
In tandem, Zuckerberg is trying to sell businesses on the idea of using Meta’s AI agent to do such things as answering customers’ questions, booking appointments and even closing sales.
Investors haven’t been overly thrilled, and the company’s relatively cheap valuation, at around 18 times forward earnings, appropriately reflects a wariness about its position in the AI race.
But many analysts are relatively sanguine. Truist Securities recently estimated that subscriptions could bring in $20 billion of high-margin revenue annually by 2030. Deutsche Bank said in a note that subscriptions could deliver as much as $15.6 billion of additional revenue next year.
Those are heady forecasts for a company that didn’t clear $5 billion of non-ad revenue last year. And it is far from clear that Meta’s subscription offerings will entice even a sliver of its users.
For about $4 a month, users of Instagram get some personalization features, more information about who is watching their videos and a “super heart” animated reaction they can use on Instagram’s Stories videos. Similar upgrades are available for Facebook and WhatsApp subscribers.
That could be popular among influencers who want to boost visibility and want more control over their feeds. It could also appeal to younger, wealthier users.
Those are relatively small segments, though. Numbers on influencers are spotty, but a 2023 study suggested there were about 11.6 million of them working full time in the U.S. That is a revenue pot worth about $555 million a year if all of them subscribed to one of Meta’s $4-a- month plans. Even if the number of global influencers who subscribe is several times that number, it isn’t a game-changing figure.
Meta’s AI chatbot, meanwhile, which the company is testing with a $7.99 monthly subscription in a few markets, is a late entrant in a field that is already crowded.
Meta can try to leverage its users to bring in subscribers, but it will likely struggle to peel people away from OpenAI, Anthropic and Google. They all have offerings that look more attractive. For about $5 a month, for example, Google offers its Gemini AI tools with higher use limits, plus 400 gigabytes of cloud storage and AI features in Gmail.
Add to that Meta’s repeated struggles to improve its cutting-edge AI models, and it is hard to see the company becoming a strong chatbot competitor soon.
Meta’s bid for corporate AI customers is even more far-fetched, with competitors including Google and Microsoft entrenched. Meta says it already has a million companies using its corporate AI agent, for which it eventually plans to charge a subscription fee.
But companies have never been core customers for Meta outside ad sales, and its commitment to them has wavered over the years. It discontinued VR headsets geared toward companies earlier this year as its priorities shifted.
Meta has used AI more effectively than pretty much anyone else to improve the performance of ads, and its revenue is expected to grow quickly because of that. Analysts expect around $60 billion of revenue in the second quarter, according to FactSet, a 27% increase from the prior-year period.
But with the bill for AI’s big outlays coming due, that likely isn’t enough. Meta’s attempts to find other sources of money to pay for it all might be too little, too late.