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Why Facebook Doesn’t Charge

Facebook, currently the popular social networking site (at least in the US), is without a doubt one of the sites that have highly impacted and defined our lives.

And like all online social services that have achieved “critical mass,” or roughly the number of users necessary to achieve the the tipping point mentioned in lecture yesterday, Facebook is occasionally plagued by viral chain letters that allude to that dark, unspeakably grim future where users will need to pay for their accounts (really, the stuff nightmares are made of).

Au contraire, Mashable’s Adam Ostrow, points out the reasons why Facebook users needn’t ever fear the panic-inducing notion of a pay-to-use Facebook account. First, Ostrow mentions that Facebook doesn’t need the money from its users, having raised more than $2 billion through venture capitals alone, and a 2011 revenue of $4 billion. Add to this the fact that it plans to go public for an estimated $80-$100 billion, and it will be clear for anyone to see that money is no big deal to Zuckerberg’s crew of big-shot minions. In fact, “Facebook didn’t even introduce its ad platform until 2007,” states Ostrow. The reason for this was simple: maximum profit just wasn’t yet the goal so much getting the 100%. Facebook didn’t just want to overcome its tipping point, it wanted to make everyone with access to internet into a Facebook user.

At a quick glance, Facebook’s business model might seem a little fishy–especially for a private company in the business of making money. Facebook does not charge users at ALL for creating or maintaining an account. So, based on mandatory entry/maintenance costs alone, Facebook’s price-to-consumers equilibria graph would look roughly like this:

price-to-consumer graph with no costs

If this were the case, then reaching the “maximum” user goal is terribly easy. As long as Facebook manages to get more than one person using the system, the logic learned in class suggests that the equilibrium will be pushed all the way to 1, or 100% of users. This is cool, but despite them snatching all their target users, they’re not charging, so they’re not earning any money, right? Wrong. Keep in mind this is what Facebook wants because it is in the money of milking our information. The more users Facebook has, the more information it can aggregate and sell off to companies who use highly targeted advertising to spread knowledge of their products.

However, despite our speculations with this ideal model, not everyone is on Facebook. Not paying money for an account or for maintaining an account does not mean the user is getting the service for free. For social sites, first-time user setups can be extremely tedious tasks. With sites like Facebook and LinkedIn, first-time users need to fill out a huge amount of information for the service to actually yield some benefits (Facebook needs the schools you went to and optionally every single detail about your personal life, LinkedIn needs your skills and work experience); and then, when that’s done, users quite often must pick out their connections. In Facebook’s case, there are, in addition, growing cases of concern regarding user privacy. In fact, the cost of privacy (or lack-thereof when you sign yourself away to Facebook) is so high that it is the sole reason some individuals decide to turn away from the colossal social networking site. When these hurdles are considered, Facebook’s price-to-consumers equilibria graph would look more like this:

price-to-consumers with implicit, noncash costs

Though Facebook seems to have successfully reached the the z” equilibrium (seeing as “everyone including your mom is on Facebook”), it has still not captured the small fraction of those who consider the costs of setup, privacy, and whatever else too high. Thus, with all these implicit, non-cash costs Facebook has to worry about lowering in order to gain more users, they don’t need something like charging users for accounts further increase the price of their service and decreasing customer count. So, all-in-all, Facebook hasn’t captured 100% yet. But they’re close, they’re still doing pretty darn well for themselves, and they sure as heck won’t start charging users if they want to keep up the info-milking.

Source: http://mashable.com/2011/09/29/facebook-pay/

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