With Facebook's IPO a week past and looking pretty lukewarm, it is a good time to look at their business model and explore whether or not there is a better alternative. Facebook essentially earns income through advertising and data mining. This model has worked in the past, with Google being the biggest success story, but even Google has spent the last three or four years expanding its business to include things as diverse as mobile phones, an operating system and virtual reality.
In the case of Facebook their greatest asset is not just the biggest social network in the world but one of the most engaged group of users ever conceived. Facebook's 2011 revenue was $4.27 billion which lead to a profit of approximately $1 billion. As of May 2012, according to Wikipedia, Facebook has about 900 million users; half of whom log in using mobile phones. Another way to break that down is to say that Facebook is earning a little more than $4 a year in revenue and $1 in profit per user.
With this in mind, is there a way for Facebook to generate more income and users to have a better experience on a subscription basis? That is to say, is there an annual fee high enough for Facebook to make more profit off a user through a subscription than through data mining and advertising while still being low enough that users would rather pay the fee to protect their data and remove advertising?
From Facebook's end how much would they need to generate for it to be a worthwhile venture? There are a few things to consider. Since data mining is a relatively new industry and presumably the geographical data gained from mobile connectivity will be more valuable than PC data and will lead to better advertising (for example a well-placed coupon for a restaurant 100m before you walk past it) Facebook would be reticent to accept a one time payout in the form of charging money for an app download. This may change as they produce more apps that work synergistically with Facebook but are outside of the core competency, like the messenger service, photo apps, etc. but for Facebook itself that does not seem likely. Likewise Facebook wouldn't want to risk alienating any user as Google+, among others, is just waiting for a major mistake on Facebook's part to jump in and be everyone's main networking tool.
So from Facebook side it would need to be a voluntary system - a two tiered website which at a fundamental level are not so different that those who are not paying for the premium service feel disenfranchised. There were reports of a Facebook test in New Zealand that allowed people to pay money to force their status through to all friends despite whether or not said friends had turned of status notifications from a particular user. Provided the users weren't spamming, or there was a limit on how many premium updates one is allowed per month, this is about the level of difference Facebook can get away with. Despite the marginal value of a single user being nearly zero (would you pay more to advertise on a site with 900,000,001 users vs. 900,000,000?), it is unlikely that Facebook would accept a rate of $4 gross which with, likely, lower marginal costs would lead to an equal or greater profit per user because the value of the company is based in this yet unknown but perceived future value of all this content being generated and the information that can be extracted from it. Since the majority of costs are probably marginal based on the user a fee of $1 per month would generate approximately $11 per premium user every year. That would mean if 10 percent of users signed up for premium service, Facebook would be earning as much from that group in subscription fees as they currently are generating site wide from all income streams.
From the user side, would this service be worthwhile at this price? That is difficult to say. The current advertisements do not bother me so if it merely turned off the tracking data and removed the advertisements I might not find it all that valuable. On the other hand, the newest form of advertising on twitter, where random tweets are found in your main feed, really bother me and I might be willing to pay some pittance to prevent that from happening on Facebook. Likewise there are plenty of users who take to Facebook to promote their side project, art work, political opinions, etc. who may find the idea of preferential treatment in the Facebook feed a valuable perk. Another perk that a lot of people might find alluring would be to have greater control and ownership of the content they upload and link to the site.
Facebook cannot try to force users to pay because users are their most valuable, albeit intangible, asset. That being said there is certainly room for this to be experimented with. Would I pay $12 a year for Facebook? Maybe.
Sunday, May 27, 2012
Monday, May 14, 2012
An Economic Assault on Pascal's Wager as an Example of Skewness
I've recently heard a few people discussing the merits of Pascal's Wager on multiple podcasts, including my favourite call-in atheism podcast "The Atheist Experience". Pascal's wager is essentially a 2x2 game theory grid in which there are two choices (believe in god or don't believe in god) and there are two outcomes (there is a god and there isn't a god) with the equilibrium decision being that you should believe in god because it not only offers the greatest possible prize (heaven) but also offers a safer result in the case that you are wrong (a moral life vs hell). The following is from the Wikipedia page:
1. "God is, or He is not"
2. A Game is being played... where heads or tails will turn up.
3. According to reason, you can defend neither of the propositions.
4. You must wager. (It's not optional.)
5. Let us weigh the gain and the loss in wagering that God is. Let us estimate these two chances. If you gain, you gain all; if you lose, you lose nothing.
6. Wager, then, without hesitation that He is. (...) There is here an infinity of an infinitely happy life to gain, a chance of gain against a finite number of chances of loss, and what you stake is finite. And so our proposition is of infinite force, when there is the finite to stake in a game where there are equal risks of gain and of loss, and the infinite to gain.
Now one thing I haven't seen is someone make an argument based on the economic principal of "skewness" against Pascal's Wager. Skewness is the idea that people are willing to risk something small for an exceptionally small chance at a very large reward. The most common examples are lotteries; people risk a couple of dollars for a small chance to win millions. When you calculate the odds of winning the jackpot it becomes painfully clear that the present value of your two dollar investment is nearly zero; that is to say that the odds of winning the jackpot are so slim that even though the wager is low and the maximum potential is high the risk involved (odds of winning) are so low that the jackpot divided by the likelihood of winning is nearly zero.
A simple demonstration would be this:
Ticket price: $2
Jackpot: $15,000,000
Odds: 1/100,000,000
Ignoring the complication of calculating how many tickets were sold and discounting the jackpot based on the odds that there are going to be more than one winning ticket (which actually makes the lottery even worse) you see that
$15,000,000/100,000,000= $0.15 or that your two dollar ticket is really only worth fifteen cents and your best option when it comes to the lottery is to not play.
So how does this relate to Pascal's Wager? Well it requires us to look at his supposed payouts one more time the issues should be clear:
It is probably fair to note that the benefits/costs of heaven/hell if there is a god is probably correct. Where the trouble lies in what he supposes are the costs and benefits to different decisions if the result is there is no god. If there is no god then why would the belief in a god and its moral code be a net benefit? Belief in god causes people to do all sorts of horrible things. These range from war and terrorism, subjugating women, disrespecting the environment and refusing to give gay people equal rights to wasting money on tithes, being unable to enjoy life because the way you were born conflicts with church teachings, potential psychological trauma caused by ignoring the biological urge to have sex well past puberty and wasting time studying incorrect science.
Likewise, disbelieving in god if there is no god, is very much a positive. It isn't immoral as Pascal says but rather an affirmation of freedom. When one accepts that he or she on average has less than 80 years on this planet life becomes precious. You appreciate everything, work toward freedom for everyone and aiding the environment because ultimately the only thing you have even close to immortality is your legacy. So in that way I would adjust the chart as follows:
The other very overt error in Pascal's Wager are the first two assertions:
1. "God is, or He is not"
2. A Game is being played... where heads or tails will turn up.
This is a logical fallacy: Just because there are two possibilities doesn't mean they are equally likely. If I put 5000 red marbles and one blue marble in a leather pouch and draw a marble there are only two possibilities: I draw a red marble or a blue marble. This doesn't mean that because there are two possibilities they are equally likely outcomes. Do your own research on the next point, although it may end up being my next blog post, but I argue that the odds that there is a god (and beyond that there is not only a god but also the god you chose to believe and that you chose the correct way to worship him or her or it or they) is extremely small such that the best way to live is as though there isn't one.
1. "God is, or He is not"
2. A Game is being played... where heads or tails will turn up.
3. According to reason, you can defend neither of the propositions.
4. You must wager. (It's not optional.)
5. Let us weigh the gain and the loss in wagering that God is. Let us estimate these two chances. If you gain, you gain all; if you lose, you lose nothing.
6. Wager, then, without hesitation that He is. (...) There is here an infinity of an infinitely happy life to gain, a chance of gain against a finite number of chances of loss, and what you stake is finite. And so our proposition is of infinite force, when there is the finite to stake in a game where there are equal risks of gain and of loss, and the infinite to gain.
| Choice | God exists (G) | God does not exist (~G) |
| Belief (B) | +∞ (heaven) | +1 (moral benefits) |
| Disbelief (~B) | −∞ (hell) | -1 (immoral consequences) |
Now one thing I haven't seen is someone make an argument based on the economic principal of "skewness" against Pascal's Wager. Skewness is the idea that people are willing to risk something small for an exceptionally small chance at a very large reward. The most common examples are lotteries; people risk a couple of dollars for a small chance to win millions. When you calculate the odds of winning the jackpot it becomes painfully clear that the present value of your two dollar investment is nearly zero; that is to say that the odds of winning the jackpot are so slim that even though the wager is low and the maximum potential is high the risk involved (odds of winning) are so low that the jackpot divided by the likelihood of winning is nearly zero.
A simple demonstration would be this:
Ticket price: $2
Jackpot: $15,000,000
Odds: 1/100,000,000
Ignoring the complication of calculating how many tickets were sold and discounting the jackpot based on the odds that there are going to be more than one winning ticket (which actually makes the lottery even worse) you see that
$15,000,000/100,000,000= $0.15 or that your two dollar ticket is really only worth fifteen cents and your best option when it comes to the lottery is to not play.
So how does this relate to Pascal's Wager? Well it requires us to look at his supposed payouts one more time the issues should be clear:
| Choice | God exists (G) | God does not exist (~G) |
| Belief (B) | +∞ (heaven) | +1 (moral benefits) |
| Disbelief (~B) | −∞ (hell) | -1 (immoral consequences) |
It is probably fair to note that the benefits/costs of heaven/hell if there is a god is probably correct. Where the trouble lies in what he supposes are the costs and benefits to different decisions if the result is there is no god. If there is no god then why would the belief in a god and its moral code be a net benefit? Belief in god causes people to do all sorts of horrible things. These range from war and terrorism, subjugating women, disrespecting the environment and refusing to give gay people equal rights to wasting money on tithes, being unable to enjoy life because the way you were born conflicts with church teachings, potential psychological trauma caused by ignoring the biological urge to have sex well past puberty and wasting time studying incorrect science.
Likewise, disbelieving in god if there is no god, is very much a positive. It isn't immoral as Pascal says but rather an affirmation of freedom. When one accepts that he or she on average has less than 80 years on this planet life becomes precious. You appreciate everything, work toward freedom for everyone and aiding the environment because ultimately the only thing you have even close to immortality is your legacy. So in that way I would adjust the chart as follows:
| Choice | God exists (G) | God does not exist (~G) |
| Belief (B) | +∞ (heaven) | -100 (self-righteous oppression) |
| Disbelief (~B) | −∞ (hell) | +100 (freedom and empathy) |
The other very overt error in Pascal's Wager are the first two assertions:
1. "God is, or He is not"
2. A Game is being played... where heads or tails will turn up.
This is a logical fallacy: Just because there are two possibilities doesn't mean they are equally likely. If I put 5000 red marbles and one blue marble in a leather pouch and draw a marble there are only two possibilities: I draw a red marble or a blue marble. This doesn't mean that because there are two possibilities they are equally likely outcomes. Do your own research on the next point, although it may end up being my next blog post, but I argue that the odds that there is a god (and beyond that there is not only a god but also the god you chose to believe and that you chose the correct way to worship him or her or it or they) is extremely small such that the best way to live is as though there isn't one.
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