Paying for Facebook: A Lesson in Economics

Sunday, May 10, 2009 11:32 pm Daniel J. Summers

This is the first time my blog and Facebook accounts have crossed. If you're not a member of Facebook, you may not know exactly what I'm talking about. However, you know my enjoyment of economic discussions, and this is a good learning opportunity.

Recently, several of my Facebook friends joined a group called “We Will Not Pay for Facebook.” They're not alone - this group boasts over 4.4 million members. The group had articles referring to the profit that the current owner is making on the site, and various purchase offers. Then there was this…

Because of Facebook's huge popularity Mark Zuckerberg is getting a lot of offers from people wanting to buy Facebook. People Who WILL turn it into a paysite.

The assumption here is that if anyone buys the service, they will change it to a pay site. This is FUD*, and to illustrate this, we'll look at Facebook compared to another site, Classmates.

What makes Facebook valuable is its large (and exponentially growing) user base. Facebook can charge advertisers a premium for ads placed there, and if they make it paid-per-view, they make even more money, because they get lots of eyes on them. There are people who, like me, pay for very few websites (the only one I'm currently paying to use is Geocaching), and were Facebook a pay site, would not have signed up it. With this high user base, and high business value, comes the innovation - while few people I know like the new “stream” home page, there are things that Facebook can do that few other sites can match.

Contrast this with Classmates - this site has been up longer than Facebook, does pretty much the same thing as Facebook, yet is nowhere near as hot a commodity or as valuable a business as Facebook. Why is this? The fee model. Classmates requires a fee for an account (or at least they did when I looked at them, which hasn't been recently).

If someone bought Facebook and changed it to a fee model, it would kill the business value of the site. Sure, you'd have people who got addicted to the free stuff and would pay to maintain their addiction, but you'd have other people (myself included) who would simply let the account go. I have other ways of doing pretty much anything that site can do. It's nice to have it all in one place, but it's not worth $3.95/mo to me. All this would severely stifle the growth of the site, thereby reducing its business value.

If this happened, there would then be demand - demand for another free bring-it-all-together social networking site. The entire science of economics is defined as the study of the allocation of scarce resources. Demand causes resources to be allocated - whether it was “iShare,” or “Friends and Family,” or “Facepedia,” some other site would sprout up that would provide the services that Facebook used to provide.

That being said - I don't see Facebook going to a fee model, whether it changes hands or not. It just doesn't make economic sense. And, if the owners decide to go that route, it still won't be a big deal, as something else will rise up to replace it. Don't believe the FUD. :)

* Fear, Uncertainty, and Doubt - rumors of impending doom not based in fact