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How Facebook can win you back

Facebook's momentum on Wall Street has finally wobbled. Its share price dove Wednesday after its ...

Posted: Jul 27, 2018 8:21 AM
Updated: Jul 27, 2018 8:21 AM

Facebook's momentum on Wall Street has finally wobbled. Its share price dove Wednesday after its reported user growth for the second quarter came in under expectations. The company's apologetic campaign of TV ads notwithstanding, users around the world appear to be reconsidering Facebook's effect on privacy, politics and mental health. The company lost over 23% of its value in less than two hours after its earnings release. Early Thursday it stood at 176, which is a 19% decline from Wednesday's close.

Facebook's stumble prompts a question: Is there any way it can head off further loss and make the world a better place? Yes: by paying users for their data.

Despite the negative headlines, Facebook's numbers still outrun the rest of the economy by a hefty distance. On Wednesday, it reported profits of $5.8 billion for the quarter, and its operating margin of 44% doubles that of IT firms in the S&P 500 and quadruples the margin of the entire index. And that's Facebook's lowest reported operating margin going back to the first quarter of 2017.

Facebook might argue these staggering profits are the result of the vision of its leadership and the brilliance of its engineers. But this explanation misses a critical ingredient.

Facebook gathers so much more money than it spends in part because it doesn't have to pay for its most essential asset: data. The Economist wrote in 2017 that data has replaced oil as the world's most valuable resource. It is the fuel for almost every digital service. And Facebook and other digital empires get it free.

Meanwhile, income inequality is nearing all-time highs. Concentration of wealth and income among the top 5% of earners is at levels not seen since the late 1920s.

Our hypothesis is that these phenomena are connected. Why do we think this? In the industrial era, people got wealthy when they invested in innovative companies that delivered useful products and services to the market. These companies relied on the mass contributions of workers, and wealth was shared with workers through wages.

In the digital era, the most innovative companies still rely on mass contributions to build great products. But the contributions are data, and the people making contributions are unrecognized and uncompensated.

Despite Wednesday's disappointing numbers, it's no wonder Facebook's profits continue to swell unstoppably while the middle class steadily deflates.

But paying people for their data could narrow the yawning income gap. On the low end of the possibility spectrum, paying users for data could provide a modest subsidy. Wibson, a data marketplace company, recently estimated that each American's digital advertising data is worth around $240 per year.

On the higher end, as the "internet of things" and machine-learning systems expand data collection and processing throughout our homes, public spaces, and even our bodies, payments for data could become a substantial source of income. In "Radical Markets," scholars Glen Weyl and Eric Posner calculated that if data-hungry AI systems grow to represent 10% of the US economy, payments for data could amount to an increase in median income of $20,000 for a four-person household.

And while paying people for data would dampen digital companies' profits, it need not destroy their business models. The calculation that each person's digital advertising data is worth $240 per year was based on a study finding that of all digital advertising revenue, 38% could be attributed to data-enabled targeting.

By that math, if Facebook paid users for 50% of what their data was worth to advertisers, their Q2 operating margin would fall to 26%, still more than double the S&P 500's average margin and substantially above that of their IT peers.

Many of the elite in Silicon Valley, including Facebook CEO Mark Zuckerberg, have proposed a Universal Basic Income to address income inequality and fears about automation replacing jobs. But rather than compensating people for doing nothing, paying for something of value, like data, seems inherently more respectful of people's contributions and more reflective of shared labor and wealth.

To pay people for data, we still must develop new accounting methods and technologies to determine its financial value, track its provenance, and pay users when their information leads to someone making money. Research in support of these needs is in its early stages, and further work is needed.

In the meantime, Facebook and other digital giants should consider compensating users for their data on their own. There would be no surer way to pump up sluggish user growth than to pay them for content.

But look beyond the company's financial performance; Zuckerberg wrote in 2017 that Facebook should "build the new social infrastructure to create the world we want for generations to come." Even before the Cambridge Analytica scandal broke, Facebook was polling subscribers on whether they think the company cares about its users.

As an unfettered data-driven economy continues to create unprecedented wealth for the few, Facebook could use data payments to attract new users, and create trust and shared prosperity for the many.

Now that would truly make Facebook a force for good for generations to come.

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