The economics of digital sharecropping

With a reported 900 million active members, Facebook is, by far, the largest digital-sharecropping operation that the internet has yet produced. About one out of every eight people on the planet sharecrops for Facebook today – and their collective labor is expected to put a billion dollars of cash into CEO Mark Zuckerberg’s pocket when the company goes public in a few weeks. In a 2006 post, I explained why sharecropping is such a powerful business model for social networks and other online businesses:

One of the fundamental economic characteristics of Web 2.0 is the distribution of production into the hands of the many and the concentration of the economic rewards into the hands of the few. It’s a sharecropping system, but the sharecroppers are generally happy because their interest lies in self-expression or socializing, not in making money, and, besides, the economic value of each of their individual contributions is trivial. It’s only by aggregating those contributions on a massive scale – on a web scale – that the business becomes lucrative. To put it a different way, the sharecroppers operate happily in an attention economy while their overseers operate happily in a cash economy. In this view, the attention economy does not operate separately from the cash economy; it’s simply a means of creating cheap inputs for the cash economy.

Facebook’s most recent financial filing provides a great illustration of the “two economies” that underpin digital sharecropping. As Techcrunch noted, Facebook reported that it earned an average of $1.21 in revenue from each of its members during the first quarter of this year. What Facebook calls ARPU – average revenue per user – is one of its crucial financial measures. Here’s what it said about ARPU in its filing:

During the first quarter of 2012, worldwide ARPU was $1.21, an increase of 6% from the first quarter of 2011. Over this period, ARPU increased across all geographies … ARPU in the first quarter of 2012 declined 12% from the fourth quarter of 2011. We believe the sequential quarterly decline was driven by seasonal trends, which also affected ARPU trends from the fourth quarter of 2010 to the first quarter of 2011, during which period ARPU declined by 10%. In addition, the sequential decline in ARPU in the first quarter of 2012 was affected by the fact that our user growth was higher in geographies with relatively lower ARPU. ARPU increased 32% from $3.08 in 2009 to $4.08 in 2010 and 25% to $5.11 in 2011. In these periods, we experienced ARPU growth across all regions.

Because Facebook’s content is created by its members, ARPU also tells us the monetary value of each member’s labor. If the average Facebook sharecropper were to be paid a revenue share for his or her work on the site, that member would make a buck and change every three months – about enough for one crappy cup of coffee. Needless to say, the amount is so small that Facebook members never think about it. The amounts only become economically interesting when, as I wrote earlier, you aggregate them on a massive scale.

I would argue, in fact, that while Facebook very much wants ARPU to grow steadily, it probably doesn’t want the number to get so large that it becomes a meaningful amount to its members. If that happened, members might start thinking about the cash value of their labor rather than just its attention value. The line between the two economies would blur. By keeping ARPU modest (and focusing on scale), Facebook maintains the all-important divide between the attention economy (in which members see themselves as working) and the cash economy (in which the company reaps the monetary value of the members’ work). The last thing a for-profit social network wants is for its members to start seeing themselves as laborers.

11 Comments

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11 Responses to The economics of digital sharecropping

  1. Indulge me on this.

    When I start my social networking company, let’s call it a Sonetco, I would begin first by acknowledging that this is indeed a new, networked economy. But I wouldn’t be like the 99.9% others who only say it but do not take the next logical step, which is to acknowledge that all companies at the core of this new networked economy would also be structured with a new networked, social organization. That means,

    1) First, the distinction between management/employees of the company vs. the users of the company’s product, is no longer a valid one. So, for my new company Sonetco, I would create a new class of shares right from the beginning, at the incorporation. A full 40% of the Sonetco shares will be set aside as Class U (for Users). Remaining 60% are for investors, management, employees (preferred, series A, B, C etc etc.)

    2) Users will be allocated Class U shares automatically at the time when they sign up. There will be a vesting scheme attached to these shares. The more sticky a user’s contribution is, (either by way of the count of his/her followers/fans etc., or some other more useful measure), the more shares are given to this user. The longer the user stays in the network, the higher the % of his/her vested shares. I may have to come up with a “sell or lose” rule upon vesting.

    3) When I take my company public in the IPO, my class U share owners can trade their shares anyway they want, just like in the open market. Management decisions, voting rights etc etc., are still with the management, but now the company is truly social. Users who do not contribute to the growth of the company will be gradually phased out of the ownership because they won’t accrue further shares.

    In my company Sonetco, in the above scenario, users, all billion or two of them, would be more likely to work with the advertisers, sharing whatever they are comfortable with, without feeling like they are in the sharecropping business. Their social interaction has a real value. By keeping their total % ownership to 40% (whatever, but less than 50%), I avoid Sonetco from becoming an anarchy. Yes, my founders, senior management still gets the kind of paychecks they are used to, but now their value also is a lot more clear to the Class U shareholders and the public.

    Why aren’t we seeing companies like Sonetco? Is it not a viable model? Why?

    Raj

  2. In my company Sonetco, in the above scenario, users, all billion or two of them, would be more likely to work with the advertisers, sharing whatever they are comfortable with, without feeling like they are in the sharecropping business … Why aren’t we seeing companies like Sonetco? Is it not a viable model?

    But the users of Facebook and other social networks don’t currently feel “like they are in the sharecropping business.” They’re happy. So there’s no incentive, other than generosity, for a capitalist to give ownership stakes to the users. Why compensate labor when you can get it for free. Others would argue that bringing money into the equation would actually be repellent to the users, who, it’s argued, enjoy creating something without the lure of monetary rewards. (I find that argument dubious, particularly when applied to an ad-saturated site, but maybe I’m a cynic.)

  3. And that “average of $1.21 in revenue from each of its members during the first quarter of this year” comes from a huge amount of (unpaid) work from each sharecropper. The ratio is really amazing – probably worse than vanity press.

    I think there’s more complicated issues than users are supposedly happy. There’s many echoes of entertainment business owners where performers were told they should be content with getting just “attention” and “exposure” instead of “money”, and it’s still a constant battle. It’s not exactly the same. But from one perspective what’s going on is importing that business model to a very large but powerless and naive market.

  4. Dan Miller

    @Raj–I think part of what would hold it back is the pain-in-the-ass factor. I’d be awarded a few bucks every three months? And for this I have to go through what would no doubt be an enormous hassle of confirming that I was qualified, providing means of contact, redeeming my “shares”, etc etc? Doesn’t seem worth it to me, frankly. I just want to use Facebook (or Sonetco).

    And Seth–I think there’s a crucial distinction between Facebook and naive entertainers. The entertainers are placated by attention and exposure, because they expect (mistakenly) that they’ll become big stars and be able to cash in, gaining both money and status. By contrast, Facebook doesn’t make any promises it can’t keep–it tells its users “You’ll have a website where you can push status updates to friends, create events, and so on” and then delivers exactly that. Nobody’s getting deceived as to what they’re getting out of the deal (as opposed to what Facebook is getting out of the deal, where people are more in the dark).

  5. I think Dan’s right. There’s an element of exploitation in the model – if only because a very small number of people are harvesting the value of a very large number of people’s labor – but, since there aren’t false promises and the laborers receive adequate non-monetary compensation (i.e., enjoyment) for their work, it’s not fundamentally exploitative. Still, because this model can be used for many kinds of work, it’s important to recognize that we are talking about vast pools of free labor that serve to make small groups of people very wealthy. This is something new in the world, at least at this scale.

  6. This is where the analogy with sharecroppers trying to eke out a living on the land wears a bit thin, in one respect, and yet in another a crop failure can be just as destructive.

    The problem is not one of payment for effort, as in sharecropping proper, its one on control.

    The landlord has all the control. If he decides to get rid of you, you lose your livelihood. If he decides to raise his tithes, you go a little hungrier. You do all the work and the landlord gets most of the profit, leaving you a pittance. We all understand that.

    But what if a Web 2.0 landlord simply decides he doesn’t like your face, the way you do business, the fact that you insulted his best friends cat; whatever.

    If you’re relying on Facebook or Google to bring in all of your new customers, you’re sharecropping. You’re hoping the landlord will continue to like you and support your business, but the fact is, the landlord has no idea who you are, and even if he does know, he doesn’t actually care.

    Sharecroppers have put millions of hours into sites like Digg or MySpace and (what’s that other one?). And those sites still exist — but they’re no longer bringing you the traffic they once used to.

    The problem with sharecropping is simply this; for you, or for anyone, the landlord may or may not be there next year.

    Then what do you do? That’s the real issue here.

  7. @DanMiller – when you write “The entertainers are placated by attention …”, this is where I think there’s more complexity overall than is captured in that phrasing. The point is, that may be what the business-owners claim, but sometimes entertainers have pushed back, and won – and it wasn’t easy or a given when progress was made.

    This applies also to Nick Carr “laborers receive adequate non-monetary compensation (i.e., enjoyment)” – that parallels entertainers get attention and exposure. The idea I’m trying to outline is that explaining why people do something as a descriptive manner may be omitting some important power aspects in the situation, and making the decision seem like they agree with those power aspects where it’s more they can’t (easily) change them.

    When you say “Facebook doesn’t make any promises it can’t keep”, that’s also true generally of vanity press. The actual contractual promises are kept, overall. But what the prey believe are the promises (or, more accurately, likely outcomes) is another matter. I said above, “It’s not exactly the same.” But I think there’s a kind of scaling of that aspect too.

    [Anti-strawman, just in case - I did not say all Facebooks users are dupes, or anything easy to knock down. The idea is more about discussing known social factors which drive extracting money from desires to have status and connections, in this context]

  8. Anthony

    Another interesting post Mr. Carr – I don’t know why this view is not more widespread or understood. I know you frequently use Facebook in your examples of “sharecropping” but another corporate site that personally drives me crazy is TripAdvisor – especially in their forums. They have users that have tons of knowledge that visit some of their forums every day and freely give away all they know. I know its nice to share – but when someone else is profiting from a lifetime of personal knowledge, something is wrong. And I don’t think most participants even realize this – which is another problem. Anyway – really enjoy your blog, hope to make it to some of your books this summer.

  9. Dan Miller

    @Seth–I think the vast bulk of Facebook users are looking to use it as an easy way to keep up with their grandchildren or post party photos, not as a way to gain status or connections that they don’t already have. Most people aren’t aspiring pundits–they just want a commonly-trafficked area where they can amuse their friends and be amused in turn. And Facebook provides exactly that–nobody is being deceived by this aspect of the site.

  10. @Dan Miller – There’s a concept I’m trying to express, often not succeeding, having to do with the boundary between unpaid vs paid work. I’m not sure how to get it across better, whether I need to anti-straw-man every sentence, which may fail also as being too long and tedious for people to read. I’m trying to push back on an implicit assumption in some of the debates, a sort of assumption about the unchangeability and even correctness about the status quo by virtue of it being the status quo. With Internet implementations of business models, the owners have much incentive to push this paid/unpaid boundary down as much as possible (you-get-attention), while I want to point out that it can and has been raised up (pay-the-writer). This connects to Nick Carr’s sentence above “Facebook maintains the all-important divide between the attention economy (in which members see themselves as working) and the cash economy (in which the company reaps the monetary value of the members’ work).” and “The last thing a for-profit social network wants is for its members to start seeing themselves as laborers.”

    Whenever I try to talk about this though, I go through a set of stock reactions, listing a few:

    1) The boundary can’t be zero, that would be absurd (i.e. all work can’t be paid, or doesn’t deserve to be).

    A – Yes, and I didn’t say it should be zero. I’m talking about how it’s being pushed down, and this is not a good thing (IMHO).

    2) The boundary is, and *should be*, wherever the free market sets it.

    A – That’s a tautology. It’s been changed by unionization, for example.

    3) People at the very low end of the boundary are not primarily motivated by money

    A – I understand that. Of course it’s true. But that’s where I think something goes missing, with neglect of the power imbalances affecting whether they can – and should – be paid.

    I believe this is important as it can act as partial check on what Nick said above regarding “Still, because this model can be used for many kinds of work, it’s important to recognize that we are talking about vast pools of free labor that serve to make small groups of people very wealthy. This is something new in the world, at least at this scale.” When one starts scaling that attention/cash machine, small changes in the boundary have big implications.

  11. I should clarify in specific to reply to your “nobody is being deceived by this aspect of the site.” – I think it gets much more murky when the business starts pushing the activity, as they always do. Consider an argument “When the lottery advertises “Someone wins, it might be you” – that’s not deceptive, it’s perfectly accurate”, while that’s strictly true, there’s a whole rather troubling social context in back of it (Yes, I realized that’s a big-payoff example, but it’s just something I came up with off the top of my head to try to give the difference between the literal and the emotional).