A group of academics from economics, business, and policy schools at Kenyon, MSU, Susquehanna and Tufts performed a series of ingenious experiments to determine how much typical Facebook users value the service, by getting experimental subjects to participate in sealed-bid auctions for payments in exchange for quitting the service.
They found that “the average Facebook user would require more than $1000 to deactivate their account for one year.” Multiply this by Facebook’s user-base, and you get figures that vastly exceed Facebook’s market capitalization — the market has priced Facebook at about $250/user, giving the company a $542B market-cap.
The authors conclude that this means that Facebook’s users enjoy the majority of the value generated by Facebook: “This reinforces the idea that the vast majority of benefits of new inventions go not to the inventors but to the users [43]. Further, our results provide evidence that online services can provide tremendous value to society even if their contribution to GDP is minimal.”
But though their methodology looks good to me (they published it in PLOS One, a top-ranked journal), I think the conclusion is misguided.
Facebook’s value derives from the likelihood that a person you want to talk to is a FB user. When I deleted my FB account in 2006 or so, I was motivated by logging into the service after months of ignoring it and finding literally thousands of friend requests. I realized that for thousands of people, the fact that I was a FB user contributed to the amount of value they placed in FB.
The corollary of network effects is sudden collapse. As people leave the service, the value of the service steeply declines (you might only use FB to communicate with your kid’s soccer team, so leaving FB is the same as pulling your kid out of soccer and that’s worth a lot to you — but if the team leaves FB, then there’s no reason to use FB, and the value of FB to you falls to $0.
So when the authors assume that FB’s worth is $1000/user, they’re assuming stable values. But FB is more like a social ponzi scheme: once people start leaving, the “asset” of your FB social graph becomes a worthless abstraction.
As noted previously, Facebook reached a market capitalization of $542 billion in May 2018 [17]. At 2.20 billion active users in March 2018 [2], this suggests a value to investors of almost $250 per user, which is less than one fourth of the annual value of Facebook access from any of our samples. This reinforces the idea that the vast majority of benefits of new inventions go not to the inventors but to the users [43]. Further, our results provide evidence that online services can provide tremendous value to society even if their contribution to GDP is minimal. If the billions of people who use Facebook and other free online services derive anything close to $1000 per year in benefits, the productivity slowdown cited by Solow and others may not be reflected in a slowdown in the growth rate of welfare measures like consumer surplus. Many observers have commented on the difficulties of measuring productivity growth in great technological change [44]. While our current study does not offer a solution that can be broadly applied to address this challenge, it does present a methodology and results that provide important insight into the scale of the issue when considering the online revolution of our current era.Concerns about data privacy, such as Cambridge Analytica’s alleged problematic handling of users’ private information, which are thought to have been used to influence the 2016 United States presidential election, only underscore the value Facebook’s users must derive from the service. Despite the parade of negative publicity surrounding the Cambridge Analytica revelations in mid-March 2018, Facebook added 70 million users between the end of 2017 and March 31, 2018 [45]. This implies the value users derive from the social network more than offsets the privacy concerns.
How much is social media worth? Estimating the value of Facebook by paying users to stop using it [Jay R. Corrigan, Saleem Alhabash, Matthew Rousu, and Sean B. Cash/PLOS One]