Digital Audio Insider -- the economics of music and other digital content

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Digital Audio Insider is David Harrell's blog about the economics of music and other digital content. I write from the perspective of a musican who has self-released four albums with the indie rock band the Layaways.

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July 18, 2011

A Radical Idea: Should Social Media Sites Pay You to Use Them?
by David Harrell
Facebook sign-up banner
If you go to the signup page on Facebook, it notes, perhaps to stave off the occasional rumor that Facebook will eventually charge you it use it, that "It's free and always will be."

Free, of course, is good for users. In some ways, the economics of social media sites are no different from what was established back in the 1920s for the new medium of radio -- ad-supported content that is free to consume, provided you purchase the necessary hardware. Ad-supported radio was followed by ad-supported television, and today we have lots of free, ad-supported content online, though the economics aren't quite working for much of it.

Yet there's a major, fundamental difference between traditional media content and that served up by a still-private company that might be worth close to $100 billion after an IPO: Social media content is produced by its users/consumers, not the provider. No matter how inconsequential each individual post appears to be -- your co-worker's lunch plans, Cousin Bob's vacation photos, etc. -- it's the sum total of these parts, each created by individual users, that keep people coming back. Unlike a broadcast television network, Facebook doesn't commission and finance the creation of relatively expensive content, it provides a platform for its users to produce it. So while I have no issue with the founders and early investors of Facebook profiting from the success of the company, shouldn't a portion of that wealth be shared with the content creators, the 750 million users of Facebook?

The problem is, even if there's a strong philosophical argument in favor of user compensation, there's not enough money to go around, barring major changes in the business model or online ad rates. Based on private transactions of Facebook stock, its current implied market cap of about $84 billion represents $112 for each of its 750 million users, but it's not as if Facebook could ever write a check for that amount to each user. All of that money wouldn't go into Facebook's coffers after an IPO, and the value of the company would be considerably less if investors believed that it was somehow going to "share the wealth" with its user base. And if you look at actual earnings, not market cap, there's not much money to share on a per-user basis -- Facebook likely earns less than $1 per user each year. Besides, the example of Myspace, purchased by News Corp. for $580 million in 2005, sold last month for $35 million, and reportedly losing hundreds of millions each year, demonstrates both the fickleness of the public and the weakness of the long-term profitability and viability of the social media business model.

Still, before the launch of Google+, I wondered if offering some sort of payment to users might be the best way for an upstart social media platform to compete with Facebook, even if it were only a nominal amount each year. Or maybe some sort of system akin to frequent-flier miles, where points could be accumulated and redeemed for discounted goods. Perhaps the early success of Google+ shows that it's possible to compete with Facebook on features alone, and that the non-monetary rewards of social media sites are more than enough to keep users coming back. (It's not as if I'm going to stop using Facebook or Google+ unless I'm paid.) Yet some sort of payment or reward system might be an easy way for a new social media service to distinguish itself, or for an established one to grow and maintain its user base.

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