Sebastien Gay

The bailout of the Big Three U.S. car companies – General Motors, Ford, and Chrysler – cannot be expected to receive the same public support as did the last bailout.  People rely on a secure financial system to engage in transactions and maintain employment.  Even if they did not understand the underpinnings of the collapse, they appreciated the necessity of intervention.   The Big Three are quite different, however, because they supply non-necessary goods, given the availability of alternative transportation. If Congress bails out individual, goods-supplying firms, people reasonably may feel that Congress might as well launch its own “American Idol” television show to find the next struggling industry to bail out.  Furthermore, it is difficult to imagine that a bailout is the solution per se to the automobile companies. At best, the bailout will help them stay afloat for the next five to ten years; but, if they do not change their strategies, it will be money wasted. Americans are beginning to voice their frustration that the Big Three have been stuck in their ways for years and needed to change their strategic focus toward building products in high demand, like ecologically-friendly cars, to prevent this disaster.  In light of this developing general opinion, the bailout will very likely have a severely negative public relations impact on American consumers.  One compelling argument for Congress’s bailout of the Big Three is that it will prevent the fall of one of the significant symbols of American soft power. Professor Joseph Nye defines soft power as a nation’s ability to influence others through its ideas, culture, and way of life. The automobile industry represents a pillar of the American soft power. If the Big Three were to disappear, part of the visible U.S. culture around the world would follow suit. While it is an initially attractive argument, that line of reasoning leaves no end in sight for future bailouts.

The alternative proposal to the bailout is to force the Big Three to declare bankruptcy, similar to what K-Mart did in 2002.  Those in favor of the alternative praise the benefits of refinancing and the capitalistic cultural of survival-of-the-fittest.  Bankruptcy is a more viable solution than the bailout because it does not involve as much public money and gives the companies much-needed time to restructure themselves.  In addition, it allows the companies to renegotiate their contracts and, perhaps, regain some strength in the market.  There are compelling concerns, however, that refinancing will not be a realistic option for the automobile companies, given the current financial crisis.  Furthermore, opponents argue, there are too many American workers employed directly or indirectly by the Big Three to permit the risk of collapse.

The current framing of the automobile industry problem — bailout or bankruptcy — leaves out a third approach that largely avoids the concerns voiced over the first two options.  As stressful as the automobile crisis is, it is not a new problem to international markets.  Take Renault, a French car company, for example.  Instead of pleading for government aid when it faced collapse in the late 1990s, Renault fostered an alliance with the Asian car company, Nissan.  During that time, the world market for automobiles was witnessing its worst recession in 20 years, but Japanese competitors had a major cost advantage compared to Renault. Despite its financial mess, Renault had the significant advantage of major brand recognition in Europe. Together, Renault and Nissan focused on complementary markets (Renault in Europe, Nissan in the U.S and Asia), shared research and development efforts to more efficiently improve their cars, and in the long run decreased their costs through streamlining European car production. Since then, Renault Nissan has been very successful. Importantly, Renault managed to keep its brand alive as uniquely French. The success of this alliance is that Renault remained in business as a symbol of the French automobile.

There is ample evidence that Asian automobile firms are interested in acquiring the Big Three. In 2006, Renault-Nissan approached General Motors to create an alliance similar to the relationship they had developed in the 1990s. But it was quickly turned down by General Motors. In 2000, Mitsubishi and Daimler Chrysler tried to develop an alliance, but it failed due to both firms’ individual financial difficulties.  The Big Three no longer have the luxury of resisting foreign alliances without a coherent explanation to the American people.  By offering only two options of bailout or bankruptcy, the Big Three and Congress are misleading the American public into believing that successful compromises could not be achieved.  If the Big Three want to stay in business with the long-lasting support of the American people, they need to explain why they refuse to develop international alliances.

The Emergency Economic Stabilization Act of 2008, more commonly referred to as the “bailout plan,” has caused significant debate, suspicion, and anger among the American people.  As giant companies cried out for help in the face of imminent collapse, Congress wrote a $700 billion check ostensibly to rescue the economy from the alleged devastation that would otherwise have occurred.  The economy, however, continues to struggle.  The New York Times reports today that unemployment in the United States has reached a 14-year high, rising to 6.5 percent.  The stock market continues to bounce uncontrollably, which does nothing to help restore consumer confidence.  It has been widely reported that the bailout money is not being used to restore the economy, but rather, for executive bonuses.  Time magazine reported that executives of those firms receiving bailout funds can expect to earn bonuses worth about “15 times the income of the average American household.”  The American people, watching prices rise, job opportunities fall, and their retirement funds slip away, are asking themselves what went wrong.

One of the main arguments in favor of the bailout package was that the collapse of some companies, notably AIG, would have too much of a negative impact on the economy.  American citizens were cautioned that the economy would crumble if these companies weren’t propped up.  Perhaps that is true.  The question, however, is: Why were these companies allowed to become so singularly powerful in our economy? If a company has too much power in its own market, the government intervenes through antitrust law to rein it back from excessive power.  There is a vital, relevant market that appears to have been neglected by the antitrust movement:  The Public Market.

The United States government is familiar with protecting Americans from unfair and corrupt business practices, largely through antitrust law.  Antitrust law, initiated by the Sherman Act in 1890, protects American consumers and competitive firms from the harm that arises out of anti-competitive activities, such as price fixing, cartels, and predatory pricing.  The Act was supplemented by the 1914 Clayton Antitrust Act, which granted the government the authority to intervene earlier to prevent such illegal behavior. The spirit of the Sherman and Clayton Acts is rooted in the fact that consumers are often coerced into paying higher prices and competitive firms generally struggle to stay in business when monopolies exist.  The Antitrust Division of the U.S. Attorney General’s Office and the Federal Trade Commission (FTC) are responsible for monitoring signs and symptoms of anti-competition in the market.  One of the ways in which the Attorney General and the FTC have measured unfair business practices since 1985 is through a market share analysis:  If a company has too high a percentage of the relevant market, the Department of Justice is responsible for investigating its excessive power and punishing the company for it.

It is time for the United States government to enact similar legislation with its eye towards the Public Market, which we shall define as any market with significant public involvement.  Significant public involvement can be established in the following ways:  (1) significant financial investment by individuals, (2) significant repercussions to individual financial investment in the event of collapse, and/or (3) significant ties to other firms that have significant investment by individuals.  Significance should be understood as an unreasonably risky level.  The legislature should establish a threshold, past which significant public involvement is deemed unacceptable and must be hedged in.  If and when the FTC and Attorney General report significant public involvement, the accused firm must post bond to insure the public against any negative repercussions as it corrects itself.  An index, similar to the one used in antitrust law, must be established as a function of significant public involvement.  The index will be a function of the firm’s aggregate public involvement as a fraction of United States Gross Domestic Product.  The bond required for those firms with significant public involvement will be a function of each firm’s involvement.  The bonds will only be reimbursed if the firm reduces its public involvement without damage to the economy.  Through such legislature, the United States government would achieve both short-term and long-term goals necessary to revitalize the economy:

(1) Improve consumer confidence;

(2) Increase transparency;

(3) Increase firm responsibility for harming consumers; and

(4) Minimize the need for a similar bailout in the future.

Of course, there is some responsibility on the part of consumers for the economic crisis in which we find ourselves.  To minimize the future risk of poor individual credit decisions, we recommend Credit Licenses, similar to drivers’ licenses:  If a consumer wants a loan or a credit card, she must take a class and, later, a government-administered exam to demonstrate her competence at making significant financial decisions.  In particular, each consumer must be able to comprehend the details of any consumer credit agreement and must be able to calculate the financial effect of revolving credit.  If the consumer credit agreements are excessively complicated such that a consumer with a high school diploma cannot comprehend them, the government must enact regulation to improve transparency.

Financial analysts, politicians, and reporters have described the current crisis in such a complicated, complex fashion that American consumers may understandably feel disempowered.  It is important to remember, however, that the complexity of an industry must not protect it from inquisition.  Consider the case of the physician:  If a physician makes a mistake on a patient – no matter how technical or complex the procedure – he may be sued for malpractice and may pay damages.  In the case of the current economic crisis, there were, simply put, traders and analysts lacking the competency and wisdom to understand the repercussions of their mistakes.  When the economy was doing well, those mistakes were accepted or ignored.  But when the economy began to slip, the lacking abilities turned devastating.  The financial institutions have a responsibility to their shareholders and consumers to make appropriate staffing decisions.  At the end of the day, regardless of whether the financial institutions could accurately predict the damage they would cause the economy, economists and lawyers will be prepared to estimate the damages now.

This article was written by Dr. Sebastien Gay and Nadia Nasser-Ghodsi.  Nadia is a 2011 J.D. Candidate at the University of Chicago Law School.

Growing vegetables and fruits for fun, often called “agritainment”, has become a new leisure for rich Americans.  Overwhelmed with frantic city life and chaotic schedules, many professionals now turn to the peace and quiet of a farm for relief.  With the failing economy and the housing market plunge, there is an undeniable pleasure to see that we can still accomplish something, even if it is as simple as growing a perfect, bright red tomato.  In the wake of this trend, some people have taken the idea of agritainment beyond leisure and turned it into a lifestyle called “permaculture” with a mission to save the planet.  According to the co-founder of the so-called permaculture movement, “People and nature are both preserved and enhanced by thoughtful planning, the careful use of resources, mimicking the patterns found in nature (bio-mimicry) and a respectful approach to life.” (http://www.midwestpermaculture.com).  Permaculture communities, called transition towns, have sprouted across the country, providing a haven to those who want to live among environmentally-aware neighbors.  The name “transition town” is based on the idea that society must transition into a post-petroleum era.  The residents of the towns are coming together to prepare for the drastic, fundamental change they anticipate will jolt our global community.

It is understandable that permaculture followers may be attracted to the opportunity to have a stronger voice in support of the environment in their small community than they would if, say, they lived in Chicago or New York City.  They may appreciate seeing their friends and neighbors treat the environment with respect rather than watch garbage pile up on the streets of downtown San Francisco.  Furthermore, the anxiety rooted in the impending transition we face into a post-petroleum era is widespread and expected.

However noble the spirit of permaculture might be and however understandable their frustrations are with the current state of the environment, the question remains:  Are these communities effective?  In answering this question, a few factors need to be considered:  First, let’s recall the simple fact that the Earth itself is a limited resource.  Isolating oneself from the billions of people also sharing it does not mean he or she is suddenly living on a healthier planet.  Second, the development of environmentally-conscientious energy resources will be driven by demand for them.  If all the environmentally-conscientious people isolate themselves from domestic and global markets, the remaining aggregate voice will be less environmentally-conscientious for having lost them.  In the long run, if permaculture followers isolate themselves from the rest of us, they might actually contribute to a less healthy planet than had they stayed engaged.

I think that the “transition town” residents need to consider the driving economic forces behind oil in order to succeed in their endeavor:  Oil is a limited resource, which means that eventually we were going to run out of it.  As the remaining amounts of oil deplete, the price of it will continue to get higher and higher over time.  If we demand alternative forms of energy, inventors and scientists will, in theory, develop an energy source (or multiple energy sources) that is cheaper than the rising price of oil.  Therefore, in theory, oil should be replaced with a different source of energy before it is entirely eliminated.  I hope that calms those of you who are panicked about the depletion of oil.  The next order of business is to consider the extent to which our next energy source is environmentally-conscientious.  Whether or not we use environmentally-conscientious energy as our next energy source is based on a simple concept:  incentives.  The depletion of oil has provided the incentive for companies, inventors, and scientists to find a new source of energy.  The government can provide incentives for environmentally-conscientious energy sources with tax breaks or other rewards for new ideas.  Vitally important, however, are the incentives that consumers bring to the market.  We called for organic food products?  They now stock the aisles of the grocery stores.  We demanded hybrid cars?  You have plenty to choose from these days.  Do we want an environmentally-conscientious energy source to replace oil?  Then we need to establish the demand.  If permaculture followers disappear, the demand will be weakened because of them.

Too many people do not recycle.  It is not particularly difficult to put aside the paper or cardboard boxes in one bag, the cans in another one, and the rest of the waste in the trash can.  So why do people decide not to recycle?

The reason, I believe, is that they are not given enough incentives to do so.  Of course, we all want a healthy planet for our children’s children to inherit, but the fact remains that the results of our small recycling acts as individuals are hard to see.  Even if I diligently recycle for years, I will not notice a tangible effect on the atmosphere.  Given this problem, we need to use additional motivators beyond our love for Mother Nature to protect the environment.  For example, when the price of gasoline increases, drivers turn to public transportation more often.  When the price of organic food declines, shoppers are more inclined to buy these environmentally-friendly products.  Similar ideas can be applied to recycling to make a positive impact on the environment.

In simplest terms, when people do not recycle, they put recyclable products (milk cartons, newspapers) in the trash where they do not belong.  Most of us are guilty of participating in this overproduction of trash and, in doing so, are creating a market failure.  A market failure means that there currently exists an allocation of resources, in this case, trash, on the market is not socially optimal:  Real trash should be in the trash can; recyclable items should be in the recycling bin, but we lump them together and, in doing so, create much more trash than necessary.

To resolve the trash market failure, I offer two possible solutions:  (1) a trash (non-recycling) tax or (2) a trash (non-recycling) system of permits.  A trash tax would be put on those people who decide not to recycle.  For example, each city could start picking up only one bag of trash per household each week.  Recycling bins would be available free-of-charge for residents to put their recyclable items.  Extra trash bags would be available at a cost (this cost represents the tax).

Another solution is to create a set of “trash permits” that people would receive from the city.  Every household would be given a set amount of trash bags per month (based on the number of people in the household).  These official bags would be the only ones picked up by the waste management company.  People could then trade between each other to try to find the best allocation of trash bags they would need for a given week.  It would create a socially-efficient allocation of trash and recycling.

A small town in Massachusetts, Hamilton, has already implemented a plan similar to the trash tax I recommended.  On March 12, 2008, the residents of Hamilton implemented a plan under which they are allowed one bag of trash per household each week. Additional bags of trash must be put in a “town bag” for a price of $1.75 per 32-gallon bag; however, recycling bins are free and unlimited.  According to the Hamilton-Wenham Recycling Committee that advocated for the new plan, studies of similar programs in Massachusetts and across the United States demonstrate trash reductions between 25 and 45% in the first year.  Though it is too soon to release the first year results in Hamilton, when residents drive through the town these days, they can see more recycling bins at the end of driveways than trash cans.  Hamilton residents have told me stories about children being scolded by their parents for putting recyclable items in the trash.  A little less than $2 might sound like a small tax, but it is already having an effect.

It may be frustrating to realize (or embarrassing to admit) that people appear to be more driven by small taxes on trash bags than they are by an inherent respect and appreciation for our planet.  It is important, however, to remember that it can be discouraging for one person who puts effort into recycling to watch her neighbors, local businesses, and even local government neglect to do so.  Through the types of plans I outlined above, we can correct for trash market failures by aligning incentives to recycle.

Dr. Brian Wansink, well-known author of Mindless Eating, published an article on the effects of low-fat labeling on eating habits (“Can ‘Low-Fat’ Nutrition Labels Lead to Obesity?” Journal of Marketing Research, November 2006).  He argues that low-fat labeling increases consumption because the labels (1) suggest to us that the products have lower calorie density; (2) influence us to imagine that the serving sizes are larger than those of regular products; and (3) make us feel less guilty about eating the “low-fat” products.  The main source of support for his argument is a study conducted at a university open house in which incoming students and their families were invited to sample either regular or “low-fat” M&Ms (both samples were, in fact, regular M&Ms).  Dr. Wansink and his team measured how many M&Ms were consumed and how many calories the participants thought they consumed.  According to the results, participants who sampled the “low-fat” M&Ms consumed 28% more than those who ate the regular ones, suggesting that we over-consume “low-fat” labeled products.  The participants also grossly underestimated their calorie-intake by 48 percent; those participants who ate the “low-fat” M&Ms were worse at accurately measuring their consumption.

If we disregard the flaws in Dr. Wansink’s study (small sample size, self-reported weight, to name a couple), the results are quite troubling.  Are we really the clueless eating-machines that he makes us out to be?  I don’t think so.  Let’s consider an economic analysis of the eating choices available to Dr. Wansink’s participants who ate the “low-fat” M&Ms:  When consuming the “low-fat” M&Ms, the participants incurred a substitution effect by consuming a product that they believed had less fat density than the regular M&Ms.  When the participants realized the substitution, their guilt associated with eating the “low-fat” M&Ms decreased.  The decreased guilt led to increased consumption, otherwise known as a scale effect.  The decreased guilt also caused the “low-fat” M&M-eating participants to relax and, therefore, to pay less attention to their consumption levels.

A good way to understand the differing consumption levels of regular and “low-fat” M&Ms is to frame the participants as having lexicographic preferences.  A lexicographic preference structure means that, given a set of M&M characteristics (“low-fat”, calorie content, sugar content), the participants prefer them in an established order, where the first preference is preferred infinitely more than the second:  (1) “Low-Fat” (over regular), (2) Lower Calorie Content (over higher), and (3) Lower Sugar Content (over higher).   As long as the participants consider the decision to take “low-fat” over regular M&Ms as the first preference in their set, we can expect them to continue to consume excessive amounts of “low-fat” M&Ms.

Given the economic analysis above, the  solution to our over-consumption of “low-fat” products is simple:  We need to change the default M&M option from regular to “low-fat” if both options are available, thereby eliminating the first preference in our lexicographic preference set.  We are not irrational eaters, as Dr. Wansink describes us.  If we integrate healthier options into our preference structure, we can focus on the calorie content of our products and make better consumption choices.

Lee Andrew Macon, 49, and Jerome Jackson, 51, used to be next-door neighbors on a quiet street in Lauderdale Lakes, Florida.  They lived in modest pastel-shaded homes with well-groomed lawns out front.  Of course, like many neighbors, they had ongoing squabbles.  Macon and Jackson were known to often argue over the property lines on their adjoining lawn.  On the morning of February 7, 2008, Macon’s lawn service worker arrived to cut the grass.  Noticing the activity, Jackson came out of his house to argue over the contentious matter of property lines.  The argument got out of hand, and Macon pulled out a gun and shot at Jackson.  A brief skirmish ensued before Macon shot and killed his neighbor.

Had Jackson known his neighbor was dangerously unstable, he perhaps would have avoided their habitual heated arguments over the lawn.  Maybe Jackson saw hints of unreasonableness and instability in Macon, but clearly nothing that was sufficiently alarming to avoid their final fight.  It is unnerving to imagine that the people who live around us could be dangerous.  These are the same people who witness our daily actions:  when we pick up our morning paper, when we drive our children to school, when we come home from work each night.  We would like to imagine that the seemingly kind man next-door who waves when we head out for a walk is a mentally-sound person.  We hope that the parents of our children’s friends who live down the street are good people.  The hard and simple truth, unfortunately, is that we cannot know.  One neighbor could suddenly become violently angry over news of infidelity; another might become unstable over the loss of her job.   We just don’t know.

There is one piece of information, however, that we can know.  In 1994, the federal Jacob Wetterling Act mandated that states establish sex offender registries for law-enforcement use.  Two years later, Megan’s Law, a federal mandate, was passed to ensure that states provide public notification of local sex offenders to residents or “at risk” individuals.  Today, notification of sex offenders to local residents is available almost everywhere in the United States.  In addition, many states provide publicly accessible websites with information on each registered offender’s age, physical description, address, description of crime, and conviction date.

There has been much public debate over the effectiveness of notification of registered sex offenders.  Proponents of Megan’s Law argue that residents have a right to protect themselves and their children from dangerous neighbors.  Opponents counter that notification does little to help prevent crime; instead, it creates unnecessary anxiety and erects barriers between society and registered sex offenders who should be allowed back into the community.  According to some opponents, the isolation and harassment that some registered sex offenders experience increases the likelihood of repeat offenses.

Minimal empirical analysis has been conducted to test whether public notification helps prevent repeat offenses by registered offenders, or recidivism.  The available empirical analysis, however, suggests that the notification laws has no effect on preventing recidivism (Zevitz, 2006b; Welchans, 2005; Walker, Maddan, Vasquez, VanHouten, & Ervin-McLarty, 2005; Adkins, Huff, & Stageberg, 2000).  All these papers make a significant assumption that may be considered rather questionable:  The authors assume that accessibility of information is the same as information usage.  While pondering this point, ask yourself, “When was the last time I checked my local registry?”

The work by Tewksbury (2005) on registered sex offenders in Kentucky supports the criticism that variable information usage may be a problem.  He states, “The data here suggest that the registry may not be fulfilling its goal, as registrants with child victims are less likely to report most people in their lives knowing about their offenses and registration. Only 39.2% of registrants with child victims report that 90% or more of others in their lives know of their registration/offenses, compared with 59.6% of registrants without child victims…Evidently, registrants who have victimized children are more successful than other registered sexual offenders at hiding their status…” (Tewksbury 2005, p. 75).  If the information is publicly available on the Internet in Kentucky (http://kspsor.state.ky.us/), how do registered sex offenders who had child victims hide their status?  It would appear that residents may not be checking the registry.

From an economics standpoint, it is incumbent upon residents to review publicly available information on registered sex offenders in their area.  Given that the information on them is readily available, those registered sex offenders who are your neighborhood expect you to check.  They are aware of how easy it is to search their name in the online registry or to ask at the police station.  It is rational of registered sex offenders to interpret your behavior – friendliness, invitations over to your house, requests for babysitting – within the context of you knowing about their past.  Therefore, we must check.

Levenson, D’Amora, and Hern (2007) surveyed 239 registered sex offenders in Connecticut and Indiana to measure the impact of Megan’s Law on their lives.  One result stands out as rather shocking:  Only 20% of those surveyed agreed or strongly agreed that “I have less access to potential victims because neighbors keep children or others away.”  Perhaps, it is because we are not checking who are our neighbors.

What is Facebook? For many students and young professionals, the question is as obvious as it is simple:  Facebook is a free social network; it is a convenient way to connect with friends and to share (sometimes scandalous) pictures, videos, rumors, and music.  Facebook defines itself as “a social utility” that gives individuals an opportunity to socialize in “a trusted environment.”  It is, however, at its base a for-profit firm that has developed a business model founded on the online activity of young, social individuals.  While users gain free access to the website, the use of Facebook is in no way costless.  Users are faced with enormous costs:  (1) the risk of reputation damage with friends, family, admissions officers, and potential employers; (2) the distribution of their personal information to advertisers; and (3) the loss of their privacy.  In fact, Facebook subscribers are owed money by Facebook for much of their activities on the website.  If a user has a particularly popular or interesting profile, her fans will spend more time browsing through her information and applications, which, in turn, exposes them to more advertising.  What do these users charge Facebook for their service of attracting advertising revenue?  Nothing.

Although the Facebook subscribers are the ones who engage most heavily on the website, they are not, in reality, Facebook’s clients.  True, Facebook has begun to launch applications such as gifts that subscribers can purchase for $1, but that revenue stream is currently more of a trickle.  Facebook’s real clients are companies such as American Apparel, Progressive Direct, Chase Bank, and most importantly, Microsoft (Facebook’s exclusive partner for banner advertising).  These firms provide the source of Facebook’s annual revenue (reportedly $150 million in 2007).  Therefore, if Facebook is the owner, and the advertisers are the clients, then the product is none other than the user base, the tens of millions of socialites signed into their Facebook accounts who are subjected to advertisements as they browse the website.  Those users who facilitate advertising exposure to other Facebook users provide an essential service for Facebook:  They create opportunities for that one-thousandth view or that necessary click on the advertisement to bring in the cash.

Advertising was first made available on Facebook soon after Facebook hit its 50 million active user mark in October 2007.  With now 80 million active users, Facebook is able to offer advertisers a large portfolio of potential customers that can be targeted every time they log into their accounts.  Advertisers are attracted to Facebook’s detailed knowledge of user characteristics; they can select specific audiences using Facebook’s user data based on age, gender, school, hometown, interests, dating habits, and fetishes.  Imagine the astronomical amount of money it would cost marketers to collect such detail on potential customers.

Now, on to cutting the checks:  Users with more traffic on their profiles should be compensated more by Facebook than those who cause minimal traffic.  The reason is that the number of ads to which a profile exposes its audience is a function of how long the profile’s owner can keep visitors engaged.  Of course, it is difficult to determine what portion of Facebook’s advertising revenue should be distributed to users.  Facebook owns its code and platform, which are clearly essential for the website to properly run.  Subscribers, however, are also necessary to develop Facebook’s popularity and success.  In search of guidance, let us turn to Google, one of Facebook’s former suitors.  The mega search engine offers AdSense API contracts to companies interested in collecting revenue through the activities of their users.  According to Google’s AdSense API Flexible Revenue Sharing guidelines, “A typical partner will share 75-100% of the revenue with their users.”  The guidelines also suggest that “it probably makes more sense to share revenue with a user who maintains a lengthy blog than it does to compensate someone for listing their interests on a profile page. Where it may make sense to share revenue with a user who manages a forum, it may not for someone who just makes a post.”  If we consider Facebook profiles a blog hybrid, we can adopt the middle point percentage – 87.5% – for revenue sharing between Facebook and active users.  Additionally, we will estimate the money owed to Facebook subscribers for the year 2007 by using the widely circulated $150 million revenue statistic, the vast majority of which came from advertising.

Let us suppose for the moment that all of the users generated the same amount of traffic on their profiles in 2007.  In that case, we find that all of Facebook’s 50 million active users are owed $2.62 for that year.  Of course, this model is a bit simplistic.  Let’s focus on those Facebook users who generate interesting content, since they should be owed a greater royalty for their profiles.  Suppose, for example, that 20 million active users generated the most profile traffic in 2007 (based on ComScore’s Top Facebook Applications from November 2007, found in its January 24, 2008 Press Release).  In that case, the owners of the most popular profiles should have been paid $6.56 in 2007 for their work.  These numbers might not be impressive at first, but the dollar amount rises considerably when we consider the monetary value of each profile.  By incorporating Microsoft’s 2007 deal with Facebook that put the fledgling company’s market value at $15 billion, we will find that those Facebook profiles that facilitate advertising are worth a significant amount.  If we apply Google’s API revenue sharing percentage (87.5%) to Facebook’s market value, we can estimate the market value of each profile.  Assuming that all 50 million active users on Facebook in 2007 had an equally-interesting profile, we find a market value of their profiles at $262.50 each.  However, controversy around Facebook’s valuation exploded after internal information leaked from the ConnectU case.   According to the new information, Facebook’s market value in 2007 was $3.75 billion.  Using those figures, Facebook’s 50 million profiles were worth $65.62 in 2007.  Returning to the idea that only 20 million users should be paid for their particularly engaging profiles, the market value of their profiles in 2007 was either $656.26 or $164.06 for the $15 billion or $3.75 billion valuation, respectively.

If Facebook started paying its subscribers tomorrow, the vast majority of them would immediately get to work to make their profiles more attractive to users.  Such activity would lead to more ads from marketers, which would, in turn, lead to more revenue shared between Facebook and its users.  It is easy to forget that Mark Zuckerberg is no longer the “whiz kid” college student writing code in his Harvard dorm room.  He has matured into a savvy businessman who turned down Yahoo!’s $1 billion take-over offer in 2006 to bask in Microsoft’s $15 billion valuation a year later.  He is the defendant who shrewdly mediated his company’s way out of the ConnectU vs. Facebook case in a settlement that finally disappeared in June 2008.  Most importantly, he is the one who has developed a way to earn millions of dollars by attracting people to create content for his website, charging advertisers to post advertisements there, and not sharing any money with the ultimate source of his wealth:  the users.