How we pay for Facebook

Facebook's second quarter included a surprise scandal that raised concerns about how powerful it can be and what we give up to use the network.

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If you could, would you pay for Facebook?

That was one of the underlying questions users weighed in the past few months as they learned the world's largest social-networking service had conducted experiments on nearly 800,000 people in 2012.

The experiment tried to answer a nagging question: When users see happy things as they're surfing through Facebook's website, does that make them unhappy?

Inside Facebook are researchers called the "data science" team, who worked in conjunction with university researchers to slightly tweak what some users saw in order to test that theory. Their results said one thing, but the way they conducted their research said something entirely different. Politicians and critics cried foul, saying the concept that Facebook could manipulate people's emotions stepped over the line.

"It highlights the insularity of Silicon Valley (with its data-centric culture) and the young age of Facebook's employees," Laura Martin, an analyst at Needham, wrote at the time.

Facebook will have an opportunity to discuss that recent kerfuffle in its second-quarter conference call when its results come out on Wednesday after the market close.

Analysts expect the company to report net income of $853.3 million on $2.8 billion in sales, according to surveys by Thomson Reuters. Excluding items such as stock-based compensation, Facebook is expected to report 32 cents per share of earnings, a 68 percent increase over the same time a year ago.

The question of whether we would pay for Facebook is more an intellectual exercise -- the social network is so inherently tied into the ad business and generates strong enough profits that a pay model isn't really an option. But that doesn't mean Facebook is free.

The trade-off

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Facebook doesn't charge its users to access the service. Instead, it runs ads, both in the flow of news from friends and in the far right-hand side of the site. Google, Yahoo, and many other websites that are also free to use rely on similar advertising strategies for a bulk of their collective revenue.

The tradeoff is that to use a given service for free, users are subjected to ads that are carefully targeted based on key information such as age, sex, location and algorithmically generated details about their likes and dislikes. A Gmail user emailing friends about a hunting trip might see ads for camping gear; a Facebook user who "likes" "Doctor Who" might see ads for a comic convention nearby.

Facebook's data science team is in part an outgrowth of the need to better understand users, and a need to deliver them more relevant ads among other things.

For Facebook, of course, the option to disentangle advertising from its website would almost be impossible. Not only does the bulk of its revenue come from advertising, but free marketing for brands, such as Ford Motor or The Onion satirical news site, is also a large and important part of its offering. When a users say they "like" a page, its owner can send missives to their news feed such as the company's latest announcement, or ads for its products.

That is the lens through which Facebook's data science team is working. That team is tasked with not only better understanding the social network's large and sprawling user base, now counted at more than 1.2 billion monthly active users, but also how to deliver more relevant advertisements to them.

Pay social networks exist

Would users pay Facebook directly if they didn't want to be the constant target of advertisers?

In some ways, we already know the answer. Path, a social network created by Facebook alum Dave Morin, launched in 2010 with just such a promise: A private social network that won't show customers ads.

Instead, the service, which is built primarily for mobile devices, asks users to pay $6.99 for three month subscriptions on the iPhone or $2.99 per month on Android, which gives them unlimited use of virtual goods such as filters to change the look of their photos and packs of stickers, little icons used to convey emotions in messages.

Users also get the satisfaction of knowing they've supported "an ad-free network," Path says. They can also pay for virtual goods individually.

So how many people have paid up? Path won't say. The company said last month that 4 million people use its service daily, up from 1.5 million in January. The company has so far declined to disclose revenue and profit data.

LinkedIn is another example. That social network, which is designed as a way for business professionals to connect, share résumés, and other information, also offers a premium subscription option at $74.99 per month that gives users the ability to send and receive messages from people they haven't connected with, among other things.

LinkedIn said revenue from premium subscriptions in its first quarter totaled $95.5 million, a little more than 20 percent of its overall revenue. LinkedIn also uses advertising on its site, under the umbrella of "Marketing Solutions," which pulled in $101.8 million, more than premium subscriptions. The company will likely update those numbers when it reports its own quarterly earnings a week later.

Facebook on Wednesday will likely take questions about the scandal surrounding the study, as well as efforts to understand new projects such as its "Slingshot" messaging app, designed to allow users to send and receive ephemeral notes to one another, and its recently closed acquisition of Oculus.

Shares rose 1 percent to $69.40 on Monday.

About the author

Ian Sherr is an executive editor for the west coast at CNET News. He writes about social networking and manages coverage of video games, Internet giants, cybersecurity, the sharing economy, e-commerce and wearable tech. Previously, he wrote about Apple, the PC industry and video games at The Wall Street Journal. He's also written for Reuters and the Agence France-Presse, among others. He's a native of the San Francisco Bay Area, though he knows what real weather feels like too.

 

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