Where in the last podcast episode I talked with Otto Lehto about the concept of Universal Basic Income (UBI), today’s follow up relates to an article in the Financial Times by John Thornhill. Thornhill’s article is fascinating as it provides a unique perspective on the basic income issue. By urging Mark Zuckerberg to practice what he preaches and use Facebook to issue some form of basic income to its users, he is effectively advocating for the privatization of wealth redistribution. The corollary issue of course, is whether individuals should be paid for user data. We will tackle these 2 issues in today’s blog entry.
Privatizing Wealth Redistribution
There are many issues that governments face when discussing UBI, and a privatized UBI should be no different.
First, let’s consider the issue of funding. In his article Thornhill cites the example from Alaska. In this case, a permanent investment fund was approved to redistribute revenues generated from state run oil companies. The amount given as dividends would fluctuate depending on the price of oil; as Thornhill states, this ranged from “$878 to $2,072” annually over the past decade. While the dividends may have generated some positive economic effects, this amount is still far below the state’s poverty levels, where the Office of the Assistant Secretary for Planning and Evaluation defines the threshold in Alaska at $15,060 for a single person household in 2017.
Consider the application of this dividend model on Facebook. According to Zephoria Digital Marketing, Facebook currently has 2.01b monthly active users. If Facebook were to give each active user a dividend of $878, it would have to set aside a fund of more than $1.7 trillion dollars. This is a ridiculous amount for even a decently sized country to generate, let alone a private corporation. Realistically, given Facebook’s 2016 full year net profit of $10.2b, it could provide a dividend of about $5 to each of its users. Fortunately, Facebook is a rapidly growing company that is achieving massive economies of scale. And from data provided by marketwatch, we can see that in the past 3 years, the company has attained a stunning average of about 200% profit growth. This means that if Facebook were to sustain the same level of growth, it could theoretically hit the $1.7 trillion mark in profits in the span of about 4.7 years.
At the moment therefore, Facebook is far from capable of providing a decent UBI to its users. At $5 per year, it is unlikely that it will have any meaningful economic impact, other than perhaps buying a small meal. There is a sliver of possibility that Facebook might hit the critical mass of $1.7 trillion in 4.7 years needed to fund an $878 dividend to its 2.01b users, but that depends on the 2 key factors of keeping a constant user base and maintaining the ridiculously high profit growth of $200%. Let’s not forget too that the dividend amount of $878 is on the low end, and is still far below the annual poverty threshold for most developed economies.
Next, we can question the structural feasibility of a privatized UBI model. The reason why UBI discussions focus on the state is that many consider it the state’s responsibility to “take care” of its citizens. The reason why the phrase take care is in parentheses is because its definition is always in debate. Some might think that the state should not meddle so much in the lives of private citizens, while others think that the state should guarantee the welfare of all in terms of goods such as housing or healthcare. For the case of a private company however, the question of its main responsibility is never in question: to make profit.
The Essence of Private Industry
This is the fundamental essence underlying each private enterprise, driving the thousands of decisions in hiring, firing, or investment. With Thornhill’s suggestion therefore, we must ask how a privatized UBI model will affect Facebook’s structure and its overall business.
For example, consider a light adjustment model. In this case, Facebook pays a dividend out of its profits but retains some portion for re-investment. The trade-off with this model is that you are sacrificing long term growth for short term gain. Since re-investment is what allows private businesses to discover better business practices or develop new products and services, the consequence of issuing a dividend to its user base is a less exciting future for Facebook.
Otherwise, we can try and picture a full adjustment model. Here, Zuckerberg does a complete 180 and reclassifies Facebook as a non-profit committed to the idea of UBI. In this scenario, every last dollar of its profits will be given away as dividends, with nothing left for re-investment. The trade-off then, is seemingly worse. The company is essentially sacrificing all future growth for the short term benefit of its users. With no profits left for re-investment, Facebook has no resources to improve its services or introduce new product offerings; it will maintain the same operations even as other companies introduce virtual reality or self-driving vehicles. Eventually, as competitors keep improving, Facebook will lose out; and the $5 annual dividend checks will stop, along with the dream of a privatized UBI.
If there is anything that we can learn from the full 180 scenario, let it be that you can’t force a company to be something it’s not, much like that old saying “a leopard can’t change its spots”. A non-profit or volunteering organization functions by redistributing charity from donors to its recipients. In contrast, the way a profit-seeking business becomes successful is by providing the most value to its customers. This is the reason why companies invest in research, expand into new markets, and develop new products and features. To redistribute every cent of the company’s success is to change the core of its existence.
Therefore, it doesn’t make sense to say that Facebook is so big it should redistribute its massive profits. Because if it actually did so the company would not be the social media juggernaut that it is today.
Should We Get Paid for User Data?
Of course, you might gripe that I have missed the point of Thornhill’s argument. As he puts it, the main reason why Facebook should redistribute its profits is because they generate income on the data they collect from its users! The travesty being that users don’t get compensated for their data. The gist of Facebook’s injustice is encapsulated in this tidy paragraph in Thornhill’s article:
The most valuable asset that Facebook possess is the data that its users, often unwittingly, hand over for free before they are in effect sold to advertisers. It seems only fair that Facebook makes a bigger social contribution for profiting from this massively valuable, collectively generated resource.
Unfortunately for Thornhill, the glaring mistake is that users don’t really give their data for free. In actuality, Facebook collects data in exchange for using the company’s suite of products and services, as evidenced by their data policy page.
In fact, if you examine its business model, you would hardly find any injustice at all:
- Facebook builds and maintains a social network platform at their own expense
- Users access every product or service (groups, messenger, pages) for free but agree to allow Facebook to collect their data
- Facebook uses the data to improve its own services but also sells it to 3rd parties to generate revenue
- With enough scale in production, Facebook achieves profitability
The beauty about such a model is that it each party wins! Users gain access to the biggest social media platform at no monetary cost, advertisers can get more efficient use of their ad dollars through user data, and Facebook at the end of the day still makes a profit.
So, to put it simply, we should not get paid for user data. In many instances, individual users already benefit from gaining access to the Facebook platform at no cost.Also, remember we found out that user data was worth only about $5 per individual annually. And while you may consider that information valuable, I encourage anyone to try to sell their user data. Not only could it be a potentially helpful lesson in humility, you might also stand to realize that Facebook adds value to collected data in the form of aggregation and filtration before selling it to marketers.
Making Social Contributions
Lastly, Thornhill urges Facebook to make a bigger social contribution to the world, even citing Zuckerberg’s earlier statements that his “purpose has been to make an impact rather than build a company”. This is what irks me that most, has the company not already done so? Does Facebook not provide value when it sells data to its advertising partners? Is the company not making a significant social contribution when it develops better ways for people to keep connected? Do users not benefit when they access the world’s largest social media platform? Is Thornhill oblivious to the fundamental workings of capitalism, whereby voluntary mutual exchange leads to the enriching of both parties? How much of a social contribution does Thornhill expect Facebook to make? Is the value provided to 2 billion users and a slew of 3rd party advertisers not enough?
In closing, while Thornhill’s perspective is unique, the glaring practical and philosophical issues make him appear naive at best. Imagine if Thornhill understood the value that Facebook already provides through its products and services. He might have then realized that the company would be better – and arguably already does – off finding new ways to provide value (virtual reality, messaging apps, increasing access to emerging countries) than by giving each user $5 annually.
I can only hope, before he takes heed of Thornhill’s advice seriously, that Mark Zuckerberg does too.