Facebook's IPO reveals the value of online audience today. Each registered user is worth on average $4.38 per year in revenue, or $1.18 in profit. The business is hugely profitable, making $1bn profit from $3.7bn revenue.
483m people use Facebook every day, and we know from previous data released that Facebook gets around 100 billion hits a day. Together these stats give a very rough idea of the very low revenue per page impression and per daily unique user it receives. Around 2 cents revenue per active user per day; or, about a dollar from every 10,000 hits.
It's worth noting that not one cent of this income comes from Facebook's core users. Its services are free at the point of access.
But its users are paying in one way or another. EU Commissioner Viviane Reding said in a speech last Wednesday (25th January, video here):
“Personal data is the currency of today’s digital market”On one hand, Reding is wrong; for ad-funded services free at the point of access, the value is in the audience and participation is the currency.
But on the other hand she's spot on, as our "spending decisions" when choosing how to use free online services must be based on how much we are prepared to reveal about ourselves.
Personal data must start to be seen as a currency - if there is to be any hope of market forces conspiring in the public interest rather than the interest of advertisers.
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Without an audience you can't sell advertising.
With today's intricate online advertising products its very easy to forget this simple fact. Everything else is window dressing. Bells and whistles designed either to add value to advertisers or to attract and increase the audience.
Personal data collection and processing forms an important but non-essential part of extracting value from participation.
For many services it makes economic sense to sell adverts targeted at a subset of the audience.
If advertising can't be targeted, it dilutes the impact of each advert by the diversity of the audience over the appeal of the product being advertised:
dilution = diversity of audience / appeal of product
Advertising cats to dog lovers and vice-versa halves the effectiveness of each advert.
Since mass participation online services have a diverse audience, most gather data about their users in order to offer targeted advertising and remain attractive to a wide range of advertisers without significant dilution. Dilution: reducing the price per ad, or adding more adverts thereby reducing the impact of each ad, or a combination of both.
Services learn what they can about each user in order to target adverts and make more money.
However:
- Gathering personal data isn't the only way of targeting, e.g. TV different programmes attract differing audiences based on the nature of the programme
- Highly-focussed targeting can backfire, e.g. you're reaching your existing customers, preaching to the converted
- Social networks aren't the only websites to muster an audience, hence the controversial but highly profitable Megaupload.
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In an economy where the public is the product and personal data the sweetener for each sale, traditional market economics are turned on their head.
In a free market, market forces - the net result from each trader attempting to maximise their own share of profit - actually conspire in the public interest, bringing higher quality products to market at low prices.
And this works, to a very large extent. Yes there are serious legitimate concerns today about the distribution of wealth, political influence and the failure of the market for some - mostly financial - products, but for essential items and consumer products there is a wide range of quality products at highly competitive prices.
Put it another way - although supermarkets make large profits, you don't see the excesses of banking and its bonus culture replicated to anywhere near the same extent in the retail sector. The opportunity to make excessive profits is dampened by competition.
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Taking this theory into a market where you are the product, market forces should conspire in the interests of the advertiser (customer) to increase the quality and reduce the price of the service.
The market should work against public interest when the customer (advertiser) wants more from the public.
Understanding personal data as a currency changes this again.
It turns the public using ad-funded services like Facebook back into customers. You choose how much data you want to give away. You chose which websites you frequent based on whether you trust the operators of the site.
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How much data about me is being gathered? Is it being sold on? Is it being stored securely?
Whilst I have very detailed concerns about many of the EU's regulatory reforms for digital privacy, I fully support the transparency agenda.
Only if companies are fully transparent as to their use of personal data can we even start to hope that the public will learn to make informed choices about the data they choose to give away.
Another important policy is the data breach notification law. Yes, this could be costly to implement for some businesses, but it is vital for public confidence that those affected are informed when things go wrong.
Besides, the cost of notification will only apply if data is lost, thereby encouraging investment in digital security.
And, most importantly, companies who play fast and free with personal data will suffer bad press, denting their audience share and thereby their ad revenue.
There will for the first time be negative drivers for the gathering and storage of personal data.
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There is one noteworthy consequence of treating personal data as a currency. It makes some aspects of self-regulation questionable, since agreeing beforehand with your competitors limits to what data can be gathered, i.e. what price can be charged for this new currency, could constitute collusion; price fixing.
Instead, self-regulation in terms of limits to how much data is gathered comes in the form of self-regulatory system.
A market where the net result of each trader attempting to maximise their own share of the audience - actually conspiring in the public interest, bringing higher quality online products to market with a low personal data cost.
Skip to: [part 2] [part 3]
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