[Dongeul Dongeul] Why Meta, Which Made Big Money from Ads, Is Considering an 'Ad-Free' Facebook

Considering Launch of Ad-Free Paid Service
Charging 10 Euros Monthly for PC Version
6 Euros Considered for Mobile Version
Primarily to Evade EU Regulatory Restrictions

When using social networking services (SNS) like Facebook, you may come across sponsored ads in your feed that seem to perfectly understand your preferences. These ads often relate to products you have searched for multiple times on websites. Since these are products I have been closely interested in, I sometimes find myself clicking on the posts without realizing it when such ads appear.

Advertisements that promote products tailored to the individual characteristics of customers like this are called "targeted ads." Because they focus on specific customer groups with customized promotions, they are also referred to as "pinpoint marketing."

Targeted ads have been a major revenue driver for Meta, the parent company of Instagram and Facebook. However, recent news suggests that Meta is considering launching a paid version of Facebook in the European Union (EU) region that removes ads. Why is Meta, which has made huge profits from ads, considering releasing an ad-free version of Facebook?

Mark Zuckerberg, CEO of Meta [Photo by Yonhap News]

Despite Earnings Surprise from Ads... Considering a 10 Euro Paid Version

Major foreign media outlets such as The Wall Street Journal (WSJ) recently reported that Meta is reviewing the launch of paid versions of Facebook and Instagram that remove ads in exchange for a monthly subscription fee. From the user's perspective, they can either use Facebook for free with ads or pay to use an ad-free Facebook.

[Image source=Yonhap News]

Meta is reportedly planning to charge a basic fee of 10 euros (about 14,291 KRW) per month for the PC versions of Facebook and Instagram, with an additional 6 euros (about 8,500 KRW) charged for each additional account. For users of the mobile version, a monthly fee of about 13 euros (approximately 18,679 KRW) is being considered.

Given that Meta has generated enormous revenue from ads, it raises questions why they are contemplating launching a paid version without ads. Meta recorded an earnings surprise in the second quarter with sales of $32 billion, an 11% increase compared to the same period last year. The surge in ad revenue, which accounts for 98.4% of total sales, was a major factor behind this. Ad revenue increased by 11.9% year-over-year, driving overall sales growth. Although the average price per ad dropped by as much as 16% compared to the previous year, this is still a remarkable achievement.

The market explains that Meta's integration of artificial intelligence (AI) technology into targeted ads was the secret to boosting ad revenue. In 2021, Meta suffered a loss of $5.7 billion (about 14 trillion KRW) annually after Apple changed its iOS policy requiring user consent for data collection. However, by applying newly developed AI technology to its advertising services, Meta improved targeting effectiveness and saw a sharp increase in revenue. Riding this momentum, Meta expects to exceed market forecasts ($31.3 billion) with sales between $32 billion and $34.5 billion in the third quarter of this year.

EU Bans Data Collection Without User Consent... Restrained by DMA Law

Despite earning huge income from ads, Meta's consideration of a paid version appears to be largely due to EU regulations.

[Image source=Bloomberg]

The European Court of Justice, the highest court in the EU, ordered Meta in July not to collect information from external websites including Facebook, WhatsApp, and Instagram without explicit user consent. In May, Meta was fined 1.2 billion euros for violating privacy laws by transferring Europeans' data to US servers to improve ad technology.

Moreover, starting March next year, the Digital Markets Act (DMA), which supplements the General Data Protection Regulation (GDPR), will come into effect, further restricting Meta's operational freedom. The DMA prohibits platforms from combining personal data for ads or other services without user consent. Companies that fail to comply face fines of up to 10% of their global revenue, which can increase to 20% for repeated violations.

After discussing ways to circumvent these regulations, Meta found an alternative in launching a paid service. According to major foreign media, some within Meta suggested that offering users a paid service option to refuse ad-based platforms might alleviate EU authorities' concerns. Since ad revenue from the EU accounts for 10% of total ad income, Meta had to pay close attention to this issue.

Meta Expects Low Revenue from Paid Service... Intent to Avoid Regulation

Meta anticipates that revenue from the paid service itself will not be significant. If the service is launched, users would have to pay an annual fee of 156 euros (about 220,000 KRW) for the PC version. Bloomberg explains that this amount is more expensive than Europeans' annual newspaper subscriptions and mobile phone bills, making the service less attractive to users. Essentially, Meta's attempt seems more aimed at avoiding EU regulations than generating revenue.

[Image source=Bloomberg]

Within Meta, there is also a view that users would prefer targeted ads over the ad-free version. In fact, Meta's CEO Mark Zuckerberg stated in a 2019 lecture at Harvard University, "Data shows that Facebook users prefer viewing ads over exploring the platform," adding, "People like getting information from local businesses, so most want to use the free service."

In South Korea, the Personal Information Protection Commission fined Meta 30.8 billion KRW in February for collecting information about users' activities on other sites without consent for targeted ads. The commission ordered Meta to obtain prior consent and collect information, similar to EU authorities.

As countries continue to impose strict regulations on platforms' targeted ads, attention is focused on whether an ad-free paid Facebook will soon be launched in South Korea. It remains uncertain whether there will be significant demand for paying about 10,000 KRW per month to use ad-free Facebook and Instagram in Korea.