Why does Facebook want its own currency?
The University of Otago's Dr John Williams looks behind Facebook's 'smokescreen' to discuss why the company would really want to create its own currency
Many people wonder why Facebook would create a cryptocurrency (Libra). The answer is simple: to make money. Any talk about helping the "unbanked", i.e. people in developing economies who are unable to operate a bank account, or empowering consumers by disrupting the financial services industry, is a smokescreen. If the currency was widely adopted, those would certainly be consequences, but those effects are not the motivation behind this move.
Facebook (which also owns Instagram and WhatsApp), like Alphabet (which owns Google and YouTube), gets more than 90 percent of its revenue from advertising. This tells you who the customers of those companies are. It's not you and I, or our friends and family (unless they are business owners who advertise on those platforms). As an aside, efforts to break up 'big tech' because of the harm done to consumers is misguided if it's presumed that their customers are everyday people. Their customers are businesses.
For many advertisers, particularly small to medium enterprises, theirs is the only one game in town: Facebook (the company, not simply the website and integrated services such as Messenger), or a duopoly of Facebook and Alphabet (formerly Google). A monopoly or duopoly is the competitive landscape for advertisers, and it's causing crises in the the news publishing and advertising industries, as businesses perceive they no longer need agencies to help them with advertising, when the "AI" of Facebook and Alphabet can do the job just as well.
Alphabet's value proposition to their customers (advertisers) is this: "We know what people are searching for, and if they're searching for products and services they're probably ready to buy. Don't waste your advertising dollars showing ads to people who have no interest in your offer. Show them to people who are ready to buy. This is a win for you, and it's also a win for your customers, because your advertisement is helping them with a their current needs, and also you won't be annoying people by showing them ads for things for which they have no interest!"
Sounds good, doesn't it? A real win-win for businesses and their customers.
Facebook's value proposition is similar but different. They say: "We know what people like and don't like, what they share with friends, and so we have a demographic, location, personality and interest profile of our users. You have an idea of your ideal customer type(s), so we can show your ads to people who fit that profile."
Both Facebook and Alphabet have additional information about your web surfing history, and additional information that they buy from third parties, e.g. credit rating agencies, and then match against your profile.
It sounds good, and for many businesses it actually is a good deal and seems to be working better than traditional alternatives. However, there's a problem: whether a potential customer clicked on an ad very often can't be linked to whether they actually purchased a product or service. So marketing managers might report to their CEO "our click rate for our new ad has increased!", whereupon the CEO replies "So what? Did our revenue increase?"
Amazon has recognised this problem and is now offering advertising on their platform, thus "closing the loop" between advertising and purchase. It's difficult to understate how important this is for advertisers. It's like the Holy Grail has finally been found. Since Amazon announced this capability, uptake has been dramatic. But although many businesses sell their offerings through Amazon, many do not. So there's vast untapped potential revenue. But how to link up online clicks with sales for offline, non-eCommerce, businesses?
Alphabet has tried to do this by partnering with credit card companies in the USA to track offline purchases. This is also behind tech companies’ support of using mobile phones as an EFTPOS card. But this is a piecemeal solution, because those companies have to enter into business arrangements with each bank separately. What's really needed is to track all transactions, both online and offline, without having to have data-sharing arrangements with all the hundreds of banks and credit card companies.
We can just imagine the board of Facebook brainstorming. "Hmm. I know: let's create our own digital currency!"
And there you have it. A very cunning plan indeed. This is Facebook's motivation for creating their own currency: to get more revenue from their customers, i.e. businesses who advertise on their platform, by showing them, beyond a shadow of a doubt, what happened after someone clicked on their ad. Did that person buy your product? This kind of "ad ops" happens right now in the news publishing world, under the rubric of "AB testing". A publisher will run a story with two different headlines or accompanying graphic, and see which one has highest "engagement", and adjust those parameters to get more engagement clicks for advertisers. Good old trial and error.
With digital currency creating a closed loop between advertising and both online and offline sales, adjusting ads by trial and error (not exactly, but close enough) to be *irresistible* seems just that little bit closer to reality. If you're a business owner, this sounds great, doesn't it? However if you're a consumer struggling to make ends meet, not so much.