Classroom Companion: Business

19.4 · Digital Business Models

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the infrastructure hosting the Facebook 
service and the facilities storing and ana-
lyzing personal and behavioral data col-
lected about the users (5). The stored user 
data is crucial for the business operations 
since it is used to provide user-targeted 
advertisement space to marketers. This 
data may also be sold to third parties for 
production of statistics and other materi-
als based on user behavior, for example, 
political preferences, personality type, 
personal economy, and attitudes. Trade 
and storage of such data was the key 
issue in the Cambridge Analytica event 
in 2018 (Facebook value drops by $37bn 
amid privacy backlash, 
2018
).
The major costs include salaries for 
software developers, service manage-
ment, and data storage and analysis (6). 
Key partners are third-party content 
developers (7) who offer content (e.g., 
games) directly to Facebook users.
As seen in 
.
Fig. 
19.9
, there are 
strong positive direct same-side net-
work effects in the user segment since 
gaining new users implies that there 
are more opportunities for commu-
nication and interaction in the social 
network. Content developers exhibit 
positive direct network effects on users 
since gaining more users creates a big-
ger market for content, while attaching 
more content providers means that there 
is more available content for the users. 
Advertisements, on the other hand, may 
have a negative network effect on the 
users. For most users, advertisements are 
disturbing and annoying and reduce the 
pleasure of social networking.
Finally, observe that Facebook offers 
the social interaction service for free. 
Hence, the business model of Facebook 
is based on a model where the average 
return per user (ARPU) is zero.
User
User
Facebook
User
Social interaction service
Service fee
Advertisement fee
Advertisers
Content
developers
Ads
Purchases
Content Purchases
. . .