Classroom Companion: Business

Box 6.3 Facebook and ARPU = 0
Facebook is the world-leading social networking service with currently more 
than two billion users. None of the users pay anything for using their services so 
that ARPU = 0. Yet, Facebook’s revenue is over $40 billion for 2017, increased 
from $27 billion in 2016 and $18 billion in 2015. In 2018, Facebook is among 
the six most valued companies in the world, according to market capitalization 
(
.
Fig.
6.5
).
6.4 · Zero Average Revenue per User

---

84
6
How is it possible for Facebook to reach such a financial position when it does not 
earn anything from its users? The answers to this question are related to network 
effects and multi-sided platforms (see 
7
Chaps. 
9
 and 
10
).
0
50
100
150
200
250
300
2012
2013
2014
2015
2016
2017
2018
2019
2020
Bi
llion USD
Facebook revenue and market cap
Market Cap
Revenue
. Fig. 6.5 Facebook revenue and market cap 2012–2020. (Authors’ own figure)
6.5 
 Digital Commodities
Commoditization is the process by which digital goods (or any good or service in gen-
eral) end up being indistinguishable from a consumer’s point of view. Competing goods 
will look the same to the user—it is impossible to differentiate between the goods even 
though they are produced by different manufacturers. The only distinguishing factor 
for a commoditized good is the price. It is, for example, impossible for consumers to 
distinguish between lubrication oils from different refineries or electricity produced by 
different power plants—only the price can be used as a distinguishing factor.
Several, but not all, digital goods have been commoditized. Examples of digital 
commodities are Internet access and transport of bits, storage of data, processing 
of data, international news bulletins, and, to some extent, certain types of software 
products (e.g., word editing and spreadsheet software).
Digital goods that have been commoditized compete only on price. A fierce 
competition among companies providing digital commodities tends to push the 
price to zero because of the zero-marginal cost property of digital goods. Standard 
microeconomic theory on perfect markets also predicts this outcome. However, at 
price equal to zero, it is a challenge for companies to be profitable. Most of them 
will run out of business as revenues decrease and profits turn negative. This is a 
strategic dilemma for several companies in the digital economy. To avoid a price