Consumers value Facebook to the tune of $1 trillion a year
On June 16, former presidential hopeful Andrew Yang took to Twitter to call out Facebook,
Yang asks an important question, “How much of that value are users seeing?” Normally, economists use prices and quantity of sales to measure how much value a sector creates. Since social media services are said to be free, it is confusedly assumed that users don’t value them. A service that is free in price doesn’t mean it is free of cost. Time spent on Facebook, after all, can’t be spent hiking or playing basketball, for example.
To deal with a lack of explicit prices, economists have devised methods to create shadow prices. One class of shadow prices concerns those prices that have been revealed by consumer choice. These are nonmonetary prices, an idea that sounds contradictory at first. Yet it represents the same thing as a normal price: what someone is willing to give up in return for a good or service. Combining two of these methods, the marginal wage model and the travel cost method, provides a bounded value of social media platforms.
One way to understand opportunity cost is through the wage rate. Consider a worker relaxing in the park. In spending time reading a book, that worker gives up the opportunity to earn a wage. In a way, the wage rate that isn’t earned provides a rough idea of the monetary value of leisure. The economic model isn’t any more complex than that, but instead uses marginal rates of work and leisure since people will choose to work until the marginal after-tax wage rate equals the marginal rate of substitution between consumption and leisure. Since it is the effective wage that matters, economists value leisure time through after-tax average wage rates.
May 2020 wage earnings were $29.75 per hour, 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 wage rate stands at $21.71 per hour. To find the total value for a year, this rate was taken over the total amount of time spent on the site. The research firm eMarketer estimates that U.S. adults will spend 37 minutes a day on Facebook in 2020, a drop from years past. So, the average Facebook user values the site by $4,886.56 every year. With 220 million users in the United States, the total value for one year of Facebook stands at just under $1 trillion.
The travel cost method is very similar but comes from applied economists that were trying to understand how to price recreational goods like lakes and national parks. Economist Harold Hotelling first suggested in a 1947 letter to a Park Service director that they should just add up all of the costs involved in traveling to a site, and since then, the idea has been widely adopted. In 2016, the Department of Transportation updated its guidance and again suggested using an hourly median wage rate for business travel. For personal travel, they suggest halving the wage rate, which is a common rule for benefit-cost analysis. Thus, the travel cost method provides a lower bound for our shadow prices since half of the wage rate in May 2020 would be $14.88.
Combining these two estimates with eMarketer data on the total time spent on social media platforms by the average user allows us to chart the values of the social media sites below through a high and low estimate, which are displayed below. Not surprisingly, Facebook stands as the most valued site since users devote the most time to the site. The average users of Instagram and Snapchat users spend between 26 minutes and 28 minutes on these platforms, suggesting that they roughly value the sites equally, which ranges from $3,697.94 on the top end and $2,353.52 on the low end. From the macro perspective, social media users tend to spend a lot of time on any given day on these sites, about 75 minutes in total, which suggests that users are getting nearly $10,000 per year in value.
Andrew Yang wants to allow consumers to take back control, but consumers have already done that by logging off entirely or spending less time on the site. Since the Cambridge Analytica story broke, roughly 15 million people have left Facebook and those that have stayed on spend four fewer minutes per day on the site. In other words, consumers have taken back nearly $200 billion of their time.
Shadow prices have their problems, to be sure, so these estimates must be understood alongside their assumptions. But price tags are only one way to understand the value of a product. Indeed, a vast majority of Internet users, some 85 percent, wouldn’t pay any money if social media sites were priced. At the same time, people consistently say they’d need to be paid over $1,000 to deactivate Facebook for a year, even when the experiment design varies.
Those who want to use regulations to reallocate social media companies’ revenues should recognize first that users value these services. But more importantly, it is not clear what will happen to these platforms and services once an implicit trade is made into an explicit price. Countless goods and services lack a price but are still prized. Having an honest conversation about social media regulation needs to begin with an honest conversation about the value that they provide.
