The business of attention capture and resale can be traced back many years.  According to Tim Wu’s The Attention Merchants, Benjamin Day began the business model of reselling attention when he started The New York Sun.  The New York Sun was the first newspaper to sell for below its cost to produce and rely on advertisers to create profitable revenue streams.  Hence, the beginning of the business model depending on selling user’s eyeballs.  

Once other newspapers caught onto the idea they specialized in certain niches and adopted the business model. According to Wu:

“We’ve already seen the attention merchant’s basic modus operandi: draw attention with apparently free stuff and then resell it. A consequence of that model is a total dependence on gaining and holding attention. This means that under competition,the race will naturally run to the bottom…[to] whatever stimulus…engage[s] what cognitive scientists call our ‘automatic’ attention as opposed to our ‘controlled’ attention…[This]…poses a fundamental, continual dilemma for the attention merchant – just how far will he go to [harvest attention.]”  The Attention Merchants by Tim Wu @ 16. 

The more things change, the more they stay the same.  The obvious difference today is the scale at which the attention capture and advertising distribution changed.  In the past there were regional barriers to distribution.  Today, the only barrier to distribution is a company’s ability to capture the incremental user.

The risk to attention exploitation is customer revolt.  Historically people have lobbied government to step in.  Again, to quote Wu, “when audiences begin to believe that they are being ill-used –  whether overloaded, fooled, tricked, or purposefully manipulated – the reaction can be severe and long-lasting enough to have serious commercial consequences and require a significant reinvention of approach.” Id. @ 21.  Without users there is no attention to merchandize.  As of November 2018 that risk feels particularly heightened with Facebook.

If this risk materializes and customers revolt the business erodes and dies; like My Space and AOL. If the users leave then other users have less incentive to stay because the network shrinks.  In that scenario Facebook’s inventory becomes less valuable to advertisers.  Therefore, the value of Facebook’s platform depends on the user base connecting with each other. 

The most important investment question: Will People Leave?

The key investment question is whether Facebook’s current negative publicity cycle results in users disengaging from the platform.  A recent Pew Research study suggested people were deleting the Facebook App en masse.  Subsequent company released user metrics put that report in doubt.  It’s possible for both things to be true.  Facebook doesn’t report engagement through its app.  Rather, the company reports daily and monthly active users (DAU and MAU, respectively).  Thus, it is possible for someone to continue accessing Facebook, Instagram, or WhatsApp but not do so through the app. But I disgress…

To begin to answer the sustainability question its important to understand users access Facebook only when they are infront of a screen.  Facebook is an immense beneficiary from smart phones making screens accessible all day.  Moreover, data plans have enabled consumption on the go.  Today, the average person looks at their phone 39 times per day.  Irresistible by Adam Alter @ 14.  People’s screen time addiction is so powerful that the mere presence of a smart phone is disruptive to people’s ability to concentrate. Id @ 16.

How sustainable is this trend?  46% of people say they couldn’t bear to live without their smartphones.  Id. @ 27.  80% of teens check their phone every hour (Snapchat tends to dominate this cohort’s social media usage).  Id at 28, parenthesis added. Only 24% of people spend less than two hours in front of their smartphones every day. Id @ 15.   It seems as though screen usage isn’t going away anytime fast.  That said, a transition to another media consumption medium would be a direct threat to Facebook’s business.

Why Do People Choose Facebook, Instagram and WhatsApp?

The next issue is to identify what factors enable Facebook to capture people’s attention when they look at their phone. 

Facebook gives people a platform where they can feel heard and be a part of a group.  Therefore, it can be a good tool to satisfy people’s fundamental needs of friendship, intimacy, family, and sense of connection. An even more utopian view of the Facebook platform could surmise that those feelings lead to fulfilling higher human needs of increased self-esteem, recognition, and status.  A dystopian view is the platform enables spreading hate speech, entering filter bubbles, and elevating trolling.  Regardless of the view point, a key psychological insight driving Facebook’s success is tribalism. 

When Facebook began it was only available at select colleges.  If you’ve ever been to a nightclub (or just thought about your high school days) you may remember not being part of the “cool” kids.  There is an intense desire to be a part of the cool crowd. Please see the movie Mean Girls for an entertaining analysis of this desire.  The exclusivity created a buzz around the product that made it different from a site like My Space.  So as it rolled out around the country students signed up in droves. Finally, college kids everywhere could be in the cool crowd.  Merely being in Facebook was joining a tribe and it signaled that you were part of the “in crowd.”  

As time passed further subtribes emerged as people became “Friends” and joined groups.  The creation of tribal identity is very powerful, especially when combined with Facebook’s like and comment features.  Why?  Because people within a tribe are more likely to “like” each other’s posts (social proof and reciprocation tendencies drive this behavior). And likes are the secret sauce.

As Rameet Chawla said, “[They are] our generation’s crack cocaine. People are addicted.  We experience withdrawls.  We are so driven to get this drug, getting just one hit elicits truly peculiar reactions.  I’m talking about likes.”  – Rameet Chawla, founder of Lovematically, as quoted in Irrestistible @ 128. 

Every time someone logs onto Facebook and sees a red icon indicating that they got likes/comments on their posts their brain releases dopamine.  The dopamine released causes the brain to want, desire, seek out, and search.  It reinforces the impulse to visit Facebook’s properties.  But why do so many people seek the dopamine hit on a daily basis? 

In Irresistible, cited throughout this post, Adam Alter set out to determine that answer.  He found the answer in an odd place.  In 1971, Michael Zeriler, a psychologist, set up an experiment to see how pigeons respond to stimulus.  The experiment required pigeons to press a button in order to receive food.  During his experiment Zeriler altered the amount of times a pigeon had to press a button before receiving food.  Zeriler found that pigeons feverishly pecked the “feed” button when they received a relatively consistent but not guaranteed reward (50-70% of the time).  They were less interested in the button when the reward was guaranteed. See Irresistible from 126-127.

And herein lies the genius of the like button, comments, and notifications.  No one knows whether and how much feedback they are getting on any given Facebook post, Instagram upload, or WhatsApp message string.  The feedback loop is uncertain and has the potential to release dopamine and satisfy base human desires.  Facebook’s properties capture people’s screen time as they feverishly check to see whether people “like” us and whether the world is passing us by. 

A Nod To Charlie Munger

One of the best speeches I’ve ever read is Charlie Munger’s Psychology of Human Misjudgment.  In it he outlines what he believes are the reasons people make poor/irrational decisions.  These are what I believe are the pertinent psychological forces further driving Facebook usage: 

• Liking/Loving Tendency – Humans care what people think about them and a desire to get more people to like them.  People go to Facebook and Instagram and share their life.  Voila.  Likes galore.  Or they head over to WhatsApp and feel connected to their text chains.  These platforms enable engagement with otherwise tenuous relationships.  Much of the time that affirmation feels great, even if it comes from a tenuous relationship. 
• Disliking/Hating Tendency – The opposite of the liking tendency is the tendency to seek conflict.  Look at the human races’ history of war.  A more common illustration of the disliking/hating tendency takes place seemingly everyday as politics is difficult to escape.  The need to feel heard in a cultural war drives traffic to Facebook, in my opinion.
• Envy/Jealousy Tendency – Humans seem unable to avoid situations that leave them envious.  Instagram and Facebook are fantastic places to feel envious.
• Excessive Self Regard Tendency – Most people suffer from overconfidence.  They assess their ability and prospects too highly.  Facebook and Instagram are the best platforms to showcase how fantastic a person’s life is.   
• Lollapalooza Tendency – The tendencies above, when together, can create exponential effects.  I’d go add that the issues identified in Irresistible compound the effects even further.  Facebook understands these principles and created its algorithm to exploit them. 

The current narrative is Facebook’s properties are harmful to its users, disintegrate public discourse, and people don’t trust the company.  I have no idea whether the sentiment accusations are accurate (what people say is different from what they do).  Even if they are true, history can offer some clues about how this all may play out.  Did people trust cigarette companies after the 1980s?  Are Coke and Pepsi “good” for you?  No and no. Yet, the companies continued to perform well.

Habit and addiction are very hard to break.  I believe many people are addicted to Facebook and its properties.  Which is why I don’t think Facebook was lying when it reported the following stats:

Those stats might be somewhat inflated because of fake accounts.  That said, I believe they are on a like for like basis.  Which is to say I suspect the number of fake accounts randomly fluctuates and the reported numbers convey an accurate trend.  Some people, myself included, were surprised about Facebook’s lack of customer attrition given the negative news cycle.  For the reasons cited above, combined with data that disproved my original thesis, I now suspect Facebook’s customer usage trends continue.  

Which brings me to my final investing point.  Change your mind when the facts change.  And remain open to changing your mind again.  

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