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.