Business

Users Built Facebook’s Empire, and They Can Crumble It

Facebook’s true value resides in its 2.1 billion users, and investors need to worry about what happens if enough of them decide that free social media isn’t worth the cost.

First,  a disclosure: I’ve never used Facebook. I get that it’s an awesome way to keep in touch with family and friends, meet new people and get a personalized online experience. But I value my privacy, and it’s hard to reconcile that with the fact that Facebook is in the business of selling its users’ information.

And it’s a great business. Facebook generated earnings from continuing operations of $15.9 billion in 2017 on revenue of $40.7 billion, 98 percent of which came from advertising.

If it isn’t already obvious that Facebook is a money-making dynamo, consider how it stacks up with digital ad rival Alphabet Inc., the parent of Google. Facebook’s gross margin was 87 percent last year, and its net income margin was 39 percent. That compares with 59 percent and 11 percent, respectively, for Alphabet.

User Experience

Facebook’s data become more valuable with every additional user

Source: Bloomberg

Users Built Facebook's Empire, and They Can Crumble It

One obvious takeaway from those numbers is that Facebook’s users’ information is hugely valuable. Less obvious is that the value of Facebook’s data trove grows exponentially with additional users. Facebook generated $3.2 billion of ad revenue in 2011 with 845 million monthly active users, or $3.79 for each one. In 2017, Facebook scooped up $40 billion of ad revenue with 2.1 billion users, or $19.05 for each one.

As Facebook grows, in other words, so does the appetite for its data. It was only a matter of time before that data was wielded in ways that Facebook’s users disliked. I suspect that the Cambridge Analytica debacle is just the first of many revelations to come. Regulators and investors are troubled. The Federal Trade Commission announced on Monday that it is investigating Facebook’s privacy practices, and the company’ shares continued to slump in an otherwise advancing market, down more than 5 percent.     

There are also growing concerns that Facebook’s users are giving up more than their privacy. The company has a huge incentive to expand its ranks and to keep them clicking — at a terrible cost to users, according to some observers. Early Facebook investor turned critic Roger McNamee says that Facebook is designed to appeal to users’ fear and anger because it’s an effective way to keep them hooked. That’s a far cry from Facebook’s mission to “bring the world closer together.”