You're a product

Summer 2012

You are much more valuable than you might think, especially if you use the internet.  Of course, all Oldie readers are precious, but your value to those clever people who run websites is often beyond measure.

This all comes from the slightly topsy-turvy way that an internet based business providing a free service is valued.  We have just had an extreme example of this with the selling of a minority interest in Facebook.com on the New York stock exchange at a price that values the entire company at an apparently absurd $104 billion.  This makes it worth more that BP, and yet it produces no physical product, has income only from selling advertising (a notoriously fickle source) and is run and mostly owned by a 28 year old with no business experience who recently paid $1 billion for a two year old loss making company (Instagram) without even mentioning it to his Board.  It all sounds ridiculous.

Or does it?  The truth is, Facebook does have a physical product, and it’s a highly visible, valuable, durable and potentially cash generative one:  it’s you and me.  We are the product; Facebook can already claim well over 900 million of us, and the number is growing.

Remember that a business’s customers are the people who pay it money.  Facebook’s customers are its advertisers, who are paying handsomely to gain access to Facebook users, and for information about them; what’s more, it’s a numbers game.  The more people use Facebook, the more money Facebook can charge.

So, if we see ourselves as the customers of such “free” websites, we are mistaken.  Certainly, the job of those that run them is to give us the impression that the site exists for our benefit, and that we are all chums together, but to the harder noses lurking in the Board Room you are I are the equivalent of widgets coming off a production line, to be flogged to the highest bidder.

Once you realise this, you will understand that unless a website is subsidised (like the massive and expensive BBC site) the only “free” websites that will survive will be those which can generate a band of users that is of sufficient value to advertisers. 

As ever, there is nothing new in this; whilst the internet often speeds things up, it hasn’t changed any fundamental economic laws.  What we are seeing here is a souped-up version of the mailing list business.  More or less since the invention of the post office, entrepreneurs have been collecting names and addresses of people and their interests, and selling them to other people with products to shift.  Each name on those lists has a value and the more accurate and detailed the information about each person, the more valuable the list.

Now translate this to the internet.  Suppose I run a website that’s all about hats, and I have 5,000 registered users.  That means I know of 5,000 people who are probably interested in hats; milliners will already be tempted to buy advertising from me.  If I also know each user’s age, gender and location, my list grows in value.

So, if you sell hats that are popular with women over 55 in Scotland, I can place your adverts only in newsletters that go to such women, or display them online only when one of that group is logged in.  You pay for fewer adverts (so your costs reduce) but the adverts are more precisely targeted (so your sales may increase).  Everyone’s smiling.

Looked at that way, and despite the gigantic numbers involved, Facebook users have been valued at less than $100 each;  that may seem a bit high, but then Facebook has such a huge range of users worldwide that it can probably direct an advertiser to exactly the customer he is looking for, and that’s priceless.

So, remember that if something seems free, it’s because someone else is paying for it.  There never has been such thing as a free lunch and some of the time nowadays it is you and I that are the ingredients of the meal; we are being harvested, diced, marinated, cooked and served up as tasty morsels.  

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Click here to read an interesting article about the prospects for the Facebook share price, if that sort of thing interests you.