Do social media platforms extract value from consumers?

It is a common trope that social media extracts value from their users as though they are minerals being mined by the Zuckerberg’s and Dorsey’s of the world. Even as people say they dislike social media platforms, they continue to go online and consume stories, news, photos, and videos to the tune of 1,300 hours per year. Something keeps them coming back.

Those 1,300 hours offer a subtle way to estimate what social media is worth to its users. As explained below, consumers value social media sites between $3,800 and $4,500 each year, depending on the site. As such, they retain at least 96 percent of the total value of social media and upwards of 99 percent in some cases. In other words, users receive close to all the value in these products, leaving social media companies with the remaining 1 to 4 percent.

“Data is the new oil” 

 In 2006 Clive Humby said that “data is the new oil.” He was invoking the idea of unrefined crude. In his thinking, extra steps were required to make data into something useful, much like crude oil. 

The crude oil metaphor never cleanly matched onto data, however. Once oil is taken from the ground, the steps might be complicated but they are well understood. It gets shipped to a refinery, made into final products, and then sold off. Data has none of that certainty. It might be valuable with enough analysis, or it might not be worth anything at all. 

The imagery of extraction is powerful, evoking a one-way relationship where consumers are mined of their value, left hollow, and depleted. Tom Hodgkinson wrote back in 2008 that, “we are seeing the commodification of human relationships, the extraction of capitalist value from friendships.” 

Harvard professor Shoshana Zuboff described personalization as “a camouflage for aggressive extraction operations that mine the intimate depths of everyday life” in The Age of Surveillance Capitalism

Kalev Leetaru laid out the platonic ideal of the argument, saying that, “The web has become a dystopian surveillance state in which companies stalk their unsuspecting victims across the web, extracting maximal profit from removing any shred of privacy or dignity and socializing the risk of data breach or damage to the user, while privatizing all the monetary benefit of exploiting them.”  

Data extraction frameworks are incomplete. 

And yet, the extraction framing runs counter to the experience of most online. Users are not simply passive or unthinking in their choices. They must find some value in the exchange offered by social media platforms, as evidenced by the amount of time they spend online. 

A survey from Consumer Reports in 2019, which allowed respondents to select multiple reasons for social media use, found that 72 percent of Facebook users take advantage of the site to stay connected with others. A quarter of all people use Facebook to connect with groups, while a much smaller share, only 19 percent, say that they are there for news and information. 

Tahmina Osmanzai, a reluctant Facebook user, explained: “I also use the Messenger app heavily to communicate with some of my closest friends. We have different phones (iPhone v Android) and Messenger has become our preferred communication outlet.”

The key insight driving this analysis is that every action has a cost. Consumers give up other experiences when they’re using social media sites, and importantly, they aren’t earning an income. Since the cost of an action is the best alternative you otherwise would have chosen, one way to value social media sites is to tally up all the time spent on platforms each year and then multiply this by the average wage rate, subtracting taxes. In economics, this is known as a shadow price.  

Social media’s value nuance

Average hourly wage earnings were $30.54 per hour in July 2021, and in 2019, the Congressional Budget Office placed the economy-wide marginal tax rate on labor income at 27 percent. Roughly speaking then, the current after-tax average wage rate stands at $22.29 per hour. This rate offers a rough estimate of the value of an hour on social media. 

The research firm eMarketer estimates that U.S. users will spend 33 minutes a day on Facebook in 2021, a steady drop from the 39 minutes in 2017. Thus the average Facebook user values the site by $4,474.71. That value is lower than my last estimate, which was $4,886.56. 

Facebook’s most recent quarterly earnings put average revenue per user (ARPU) in the U.S. and Canada at $48.03 for a total of $192.12 per year. Summing these two numbers, the consumer value calculation and the ARPU from Facebook, yields $5,078.68 of total value. Consumers get the better end. They get 96 percent of the total value of the deal. 

Even in the case where these numbers are off, consumers still get the bulk of the benefits. Assuming that the $4,471 estimate is off by half, consumers still receive 92 percent of the total value created by Facebook. Of course, the wage rate method has its critics, but other research drives this point home. In a study meant to elicit the value of the service, Facebook users valued the site to the tune of $2,205.49 on the top end and $1,210.05 on the bottom in 2021 dollars. In this case, users still get between 92 percent and 86 percent of the value of the exchange.     

The table below duplicates the same calculation above for a range of different social media platforms using eMarketer data and ARPUs. 


Source: Analysis of data from eMarketer, Macro Ops, and Statista (each company’s 2020 revenue per user).

When the above data is reframed and placed in a bar chart, it is clear that consumers get the vast majority of the value in social media.

Given the extraction rhetoric around social media companies, it might be surprising to see the numbers lopsided in favor of consumers. Yet this is a typical result from economic research on innovation. Work by Nobel-winning economist William Nordhaus found that innovators only capture about 2.2 percent of the total surplus of their new ideas. Developers of HIV/AIDS therapies appropriated only 5 percent of the social surplus arising from these new technologies. Yet again, consumers get the vast majority of the benefits. 

The creators of new platform technologies have become wildly rich, but they did so by creating products and services that people use and enjoy. While this doesn’t excuse bad behavior, like sharing data without permission or using tricks to get consumers to buy products, everyone would be better served by doing away with the extraction rhetoric and instead adopting a more nuanced theory of mutual exchange. 

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.

Get the latest from The CGO!

Name
Hidden