The Value of Information

Why is Facebook worth anything? I’ve had this question a number of times since Facebook announced their upcoming public Initial Public Offering (IPO). This is an interesting question to me because it speaks specifically to our understanding of what is valuable. And more importantly what is valued by the marketplace versus the public.

Caveats first: I’m not an economist nor financial advisor so don’t assume anything in this column has any value beyond a bemused, “Hmm” and you’ll be safe.

The premise of the question above, as I understand it, is what does Facebook sell. This is an important question. When we thing about value we think about goods and services. Now Facebook has goods (e.g. games) and services (communication), but they don’t charge anything for them. How does that work?

Well, let’s look past the forest to the trees for a moment: you are Facebook’s goods. More specifically the data about you is what Facebook sells. And even more specifically what Facebook truly offers is a filtered marketplace to other companies that want to sell you things.

When I say filtered what I mean is Facebook can offer a company, that wishes to sell a product, the ability to specify the customer with a greater degree of specificity than almost any other company out there.

Let me give you an example: if I were to create an ad for the Wapiti Music Festival I can pick which cities, the age groups, the people that have Fernie and/or Music in their profile, and the people that have connections to the people that have those words in their profile. That’s a remarkably targeted environment for a small non-profit organization. There’s no way we could afford to create any form of traditional marketing that would zero in on the market like that.

Facebook goes deeper than that. If you mention wedding, staggette, shower or any of a bunch of other trigger words in your profile, and by that I mean: your status; messages to others (including private;) photo captions; you name it; and your profile is anything other than married, and you’re a woman (also if you’re a guy, but less so,) then you can expect to start seeing ads for caterers, jewellers, etc. from your city and region.

So, you might ask? Well, if you’re the kind of person that appreciates the fact that the advertising you get actually might have some relevance to you, then you’re probably happy about this. Not only that, but the more accurate the information and the greater the quantity about you on Facebook then the better the ads will get.

If, on the other hand, that raises your eyebrows slightly you may want to consider the nature of the information you post. As an example of how little attention people pay to this sort of thing I’ve seen a number of posts on Facebook from people over the last few months about privacy issues associated with the use of Smart Meters. This amuses me as the best a smart meter can do is report power usage. The Facebook pages of the people posting their privacy concerns lists their city, spouses, children, employment status, friends, vacation plans, birth dates, marital status, what they like to eat and drink, what activities they participate in, what TV shows they like, what political views they support and whether or not they’re a dog or cat person for crying out loud.

Circling back to the original point we’re now at what is Facebook worth. Well, if their latest reported numbers are correct Facebook has over 800 million users. That is a big market. Not only that, but it’s a large enough sample set that you can start using it not just for targeted marketing, but now you can use the data like a census. Large manufacturers can learn whether or not people will like their products before they build them. That kind of information about both broad and narrow spectrums of society is a powerful tool for marketers … and others.

Will I invest? Not likely, and I have a bunch of reasons for that. But there’s no denying that Facebook is a valuable tool and worth a lot, because what they sell is information. Welcome to the new marketplace.