The Profit Network: Facebook and Its 835 Million-Man Workforce

By Derek Thompson

Facebook is ultra-productive because, like Google, its business model turns consumers into productive workers

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Reuters

Facebook's IPO filing, which analysts expect will value the company at $75 billion at least, inspired Atlantic tech associate editor Rebecca Rosen to compare Facebook's market cap-per-employee ratio to other tech companies.

Facebook "wins" in a blowout. With 3,000 employees, its value-per-worker figure is heads and shoulders above most large companies, including Apple and Google.

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The story Rosen is telling is that tech companies have learned to create incredible production from a few workers. You can see this as a revolution in productivity, a devolution in employment, or both. Fifty years ago, the four most valuable U.S. companies employed an average of 430,000 people with an average market cap of $180 billion. Pretty good! But in 2010, the four largest U.S. companies employed a quarter of the people and had twice the average market cap. Software is eating the world, and its also eating a lot of the world's jobs.

But Rosen's graph tells another story: These huge tech companies are similarly productive, but they're as different from each other as AT&T is different from Berkshire Hathaway.

Apple makes the vast majority of its money from hardware. Amazon is a retail company. It won't even disclose what share of its $17 billion in revenue comes from hardware (i.e.: Kindle sales). Meanwhile, Facebook makes practically no money from hardware or retail. Like Google, it makes more than 90 percent of its revenue from advertising. (How many ads to you see on Apple.com? How many ads do you see on Amazon?)

Before Facebook, Apple was the world's greatest genius of squeezing profit per worker. Some of that has to do with the fact that Apple's workers really are creative geniuses who have designed products of great value to the world's customers. The other part is that Apple has mastered "supply chain productivity," which allows it to sell its products at a huge mark-up while spending very little on shipping and assembling parts.

That sort of supply chain management has practically nothing to do with Facebook's value. Facebook's business plan is much simpler. Get as many active users as possible, collect and disaggregate their data, and show them ads that they're likely to respond to. Facebook "has built the most amazing vehicle for the appropriation of surplus value that the world has ever known," as Matt Yglesias puts it.

Seen that way, Facebook's workforce isn't just 3,000 employees, but also 835 million users, who create information that is valuable to advertisers, and therefore valuable to Facebook (see the chart below, from The Economist). The same way our very interaction with a Google search is used to improve the algorithm and sell lucrative ads, our data on Facebook is used to enrich the site ... and sell lucrative ads. This makes Facebook less like a typical company, and more like, yes, a typical country. A country makes money by levying a tax on its citizens. Now, you don't pay a literal tax to see information on Facebook. But when you step back and consider the business model -- I am allowing Facebook to sell my information, disaggregated, in exchange for money -- it's not hard to see this implicit fee as a kind of invisible tax we all pay to use the site.

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The productivity revolution in the U.S. economy is one of my favorite topics, but the attention around the IPO of Facebook emphasizes how productivity in the tech industry comes in very different forms. What makes Facebook efficient (from a market-cap-to-worker ratio standpoint) has nothing to do with what makes Apple efficient. Facebook is ultra-productive because, like Google, its business model turns consumers into productive workers.

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This article available online at:

http://www.theatlantic.com/business/archive/2012/02/the-profit-network-facebook-and-its-835-million-man-workforce/252473/