I have recently been reading (well, listening to – getting a book out and resting it upon the handlebars of my bike every morning is probably a tad more dangerous than just turning on the audiobook) the new book, Free: The Future of A Radical Price by Chris Anderson, author of the Long Tail.  It’s a very interesting read and you can pick it up for, yes you guessed it, free if you look in the right places (Spotify has the audiobook and Wired.com has the eBook).  The general theme is about how the digital revolution is turning economics on its head with marginal prices tending towards zero in a large number of industries.

I’m just going to cite one example that I found pretty interesting.  Talking about the ‘reputation’ economy, i.e. one of the non-monetary markets, Anderson tries to value Facebook from the bottom up, by looking at the economic value of a friend.  A while ago Burger King ran a promotion in the US that gave away a free Whopper to anyone who de-friended 10 people.  Since this turned out to be a pretty popular and effective marketing idea, it makes a good/amusing basis for the analysis.  So the maths goes like this:

Facebook has 250m users, each on average having 120 friends.  Of course, it takes two to tango so each connection that is broken is worth two friends.  So, (250m x 120)/2 = 15,000,000,000 or 15bn.

If a Whopper is £3 then each broken connection is worth 0.30p.  So, according to the Whopper Index (which is very different from the Economist’s Big Mac Index), facebook is valued at 0.30p x 15bn = £4.5bn or $7.5bn.

This is not far off the $10bn valuation at which they recently raised funds and very close to the more recent valuations given by most analysts.  Assuming these people aren’t using the price of burgers to do their modelling, it’s a pretty interesting result that seems to indicate that a) ‘friends’ do indeed have their price and b) that we are innately valuing them at the right price – 1/10th of a large, sloppy chunk of meat.