The Price of Verification

by Overheard Wall Street May 1, 2023

The Price of Verification

Intro
Business of Verification
A Rocky Start
Ad Market Tumbles
Verification Dilemma
Rethinking Fees
Conclusion

Intro

Social media has been a part of our daily lives for years, but at what cost? We've paid with our attention and personal data, while social media companies have raked in billions from advertisers. In other words, we’ve become the product, while social media companies sell our eyeballs and engagement.

Social media companies have been reluctant to charge us for subscriptions. But it looks like things are changing. Enter the subscription-based model. Companies like Twitter and Meta are now offering users the option to pay for verification under the premise of better security.

Elon Musk was the first to take the plunge with Twitter Blue. After closing his $44 billion Twitter deal in November 2022, Musk has the goal of boosting Twitter's valuation to $250 billion. Meta followed Twitter’s lead in February 2023 by launching a verification subscription.

Twitter started rolling out its premium subscription in the US and Australia before releasing it globally in March 2023. Only a handful of users have signed up for verification services (more on this below). With the rise of bots, spam, and impersonation, security has become a major concern for social media platforms and has become rather costly to combat. Experts say Meta and Twitter are passing the cost of better security to their users.

But is charging for verification a good business strategy?

Business of Verification

The coveted blue checkmark on Twitter and Instagram was once the status symbol and ultimate flex. Verification offered instant credibility, boosting your DM game.

But when Elon Musk came to town he gatekept the blue checkmarks to the tune of an $8/month subscription. And he started stripping celebrities and public figures of their legacy verification, so only those who paid for Twitter Blue could get verified.

Musk said a key reason for doing so was because he wanted to democratize journalism - he doesn’t think any journalist should have credibility/verification just because they work for a major publication. But Musk frequently feuds with the media, so his quest to democratize journalism may very well be personal.

And subscription sign-ups have been paltry, too. About 0.2% of Twitter users have signed up, and our Short Squeez poll last month found that 98% of our readers wouldn’t even consider signing up for the verification subscription. So why are social media companies even charging for subscriptions?

A Rocky Start

A key catalyst for Twitter Blue comes after Musk’s tumultuous acquisition of Twitter in October 2022. Musk bought the platform for $44 billion and, after trying to get out of the deal, took out $12.5 billion in loans to finance the deal.

Twitter is on the hook for about $1 billion interest payments annually, and to make matters worse, Elon reported a 50% drop in advertisement spending in the months after his deal closed.

So with advertisement spending drying up, Twitter Blue is a shot in the dark to firm up other revenue streams. It’s a bet, for sure. While Twitter knows the vast majority of users will be uninterested in paying, they’re betting on the content creators and brands that will find value in the service.

And Twitter isn’t afraid to use some carrot-and-stick tactics to drum up interest. From offering new features like an editing button on Tweets, to only letting verified accounts vote in polls, the company is trying to build a value proposition to buy Twitter Blue. And while the benefits may seem marginal for ordinary people, they could become integral for content creators. Twitter’s trying to take a page out of YouTube’s book and provide tools for creators, such as boosting engagement.

But given Twitter’s astronomical interest payment costs, it’s not looking like verification will be the silver bullet to help the company turn a profit. The latest figures (end of Q1 2023) show around 385k paying Twitter Blue subscribers.

But even if we round that up to 500k, that’s only $40M in monthly revenue at the cost of an $8/month subscription, or a hair under $50 million/annually. In other words, Musk needs to sell around 10.5 million subscriptions just to pay off Twitter’s interest payments, and he’s around 10 million subscriptions short. Musk says Twitter’s total revenue is about $3 billion (down from ~$5 billion in 2022), so right now subscription revenue is barely 1% of Twitter’s total revenue.

Ad Market Tumbles

Twitter isn’t the only social media company struggling with dwindling advertisement revenue.

For years, social media companies have raked in massive profits from their free users. But last year was a wake-up call and showed that relying on advertisement spending might not be a sustainable business practice going forward.

In 2022, advertisement spending (the bread and butter for social media companies) contracted. While social media ad spending had been increasing by around 15-20% over the past several years, it fell by 2% in 2022, and social media companies struggled to respond, and as a result stocks plummeted.

Some of it was because of recession concerns and the overall tightening of spending by advertisers. Twitter was also hit by advertisers unwilling to do business with Elon Musk on Twitter.

To make matters worse, Apple’s new privacy restrictions as of 2021 make it harder to track users’ behavior and preferences. Apple started asking users if they wanted to share data with their apps, and the vast majority of users (over 95%) opted out. This made it harder for companies like Meta and Twitter to sell highly targeted ads to generate revenue.

Building up subscription models is a good hedge for social media companies, especially as they counteract the effects of a rough 2022 ad market. By charging for subscriptions, social media companies hope they can create a steady revenue stream against these macroeconomic headwinds, and overall build a more resilient business.

Verification Dilemma: Balancing Value and Trust

Social media companies need to show creators that there’s value in their verification subscriptions and that it’s not just a money grab. But some users are not fans in the slightest. Some feel that this is akin to a car manufacturer charging extra for seatbelts and airbags. We expect our banks to step in and help if we experience identity theft, so why is verification a luxury we have to pay for on social media companies?

Social media companies are facing a crisis trying to boost engagement and trust among users. While they will argue charging for verification is a path to get there, others nevertheless argue charging for verification is at odds with ideals of trust and authenticity.

Meta and Twitter argue a key reason for launching the verification service is to combat the rise of bots. But it seems like there’s a disconnect between what social media companies and users are seeing here. Social media companies are selling subscriptions as an invaluable tool for content creators and any user concerned with privacy and security. Some users, on the other hand, think it’s just a tax for privacy.

The optics of releasing verification after Musk’s massive acquisition and advertisement spending drying up will raise eyebrows with some users. Social media companies have a path to widespread usage if they can convey how a subscription will help allusers. Right now the added layer of security isn’t sexy enough, and blue checkmarks have become ‘uncool’.

Rethinking Verification Fees: Subscriptions or One-Time Payments

Some like the idea of charging for verification - they just think the subscription model is flawed. Rather than imposing a monthly subscription, some think Twitter should consider a one-time fee to offset the cost of the service. This will not only promote authenticity but also prevent the feeling of paying for status.

Moreover, by giving users the option to pay for features they want, Twitter can focus on value creation for users, not just ads. This can lead to the development of a more meaningful and effective public square, catering to the needs of paying users.

However, the current issue with Twitter and Meta is the haphazard approach to implementing these features. The approach has been met with backlash and is seen as a money grab rather than a thoughtful and strategic approach.

Conclusion

Social media companies are ultimately in the business of perception. Building a positive brand is priceless, as it increases user engagement and loyalty, which ultimately drives revenue and profits.

Ultimately, the decision to charge for a subscription model is a tradeoff for social media companies. On one hand, it could lead to consistent subscription revenue - even if it’s only a fraction of ad revenue, social media companies need that consistent hedge. But charging users also runs the risk of losing its users’ credibility, such as Twitter only showing verified users in its ‘for-you’ pages.

Right now, social media companies need to convey value in their verification subscriptions. A subscription model seems like a prudent business strategy. But Twitter and Meta need to drum up interest and show how their product can provide universal value.

Twitter is a private company, but Meta’s verification plan could be exciting for some investors. Content creators and businesses are constantly trying to reach younger audiences on Instagram especially.

Bank of America projects that Meta could have 12 million paying subscribers by 2024, which would help the company generate $1.7 billion. Analysts think Meta’s subscription is high-margin, and are bullish on the company as a whole because Zuck has cut costs over the past few quarters. Piper Sandler analysts credit Meta’s 170% share performance over the past five months to cost-cutting and say the company has experienced virtually ‘no revenue growth.'

So, could giving everyone clout through blue badges be the missing link in sustaining Meta's bull run? Vanity certainly agrees, because who doesn't want a badge that screams, "Look at me, I'm important!"

The Price of Verification