Free, But at What Price?

Facebook has hit the media pretty hard over the past few weeks, hard enough that CEO Mark Zuckerberg got dragged in front of Congress. There have been plenty of takes on Facebook and privacy (one I recommend is Alex Tabarrok’s, which notes that the US government’s sudden interest in protecting the privacy of its citizens is awfully circumstantial), but I’m no expert on digital privacy so I want to focus on a different question – how did we get here in the first place?

I’m not a Facebook user myself, but it would appear that its social networking services are valued by a great many people – its user base is testament to that. And why not? It makes it much easier to keep in touch with a wide range of people, and it’s free, so what downside could there be?

The first I heard about Facebook’s privacy issues was from a friend of mine about 5 years ago. He refused to use it, preferring Google+ instead, his reasoning being that Google makes money from hoarding your data while Facebook makes money from sharing it, so he trusted Google to keep his data private. I don’t know how well this corresponds to reality, but the underlying logic, that you should care how the services you use make their money, is what I want to discuss here.

The thing that it is vitally important to keep in mind with any web service, or for that matter any service at all, is that someone has to pay for it. Facebook’s employees do not work for free, and servers are not provided by the beneficence of the Computer Gods. All the stuff Facebook does has to be paid for, and who did you imagine was doing that, and why? Shareholders only put money into something if they expect to get more money out again, so where exactly was that money coming from?

This is not to excuse Facebook’s behaviour, but merely to highlight a fundamental fact of economics – anything that is to be done, at least anything that is more than an idle pastime, has to have a revenue model – anything that is not paid for directly is being paid for indirectly.

An equally fundamental fact is that institutions, especially for-profit ones, are shaped by their revenue models. A institution views those who pay it as its customers and has an incentive to keep them happy, so the revenue keeps coming. But if you’re not paying them, you’re not the customer, and the company only needs to keep you happy to the extent that keeps their real customers happy.

Advertising-based businesses need you to look at their product, but they need a lot of other people to look at it too. I believe that one of the main reasons why broadcast TV has typically been milquetoast and formulaic is that advertising-based models incentivise content that has very broad appeal, and that means content that takes few risks. Note that creatively daring TV tends to be produced by subscription-based services, who need to create content appealing enough that people are willing to pay for it. It also means that the content producer needs to avoid alienating potential advertisers. This is currently having a malign effect on YouTube, with many videos being taken down or demonetised, often with little or no explanation from YouTube. And let’s not forget that the very concept of clickbait is driven by advertising – sites want clicks because clicks are what earn them money.

Viewed in this light, it is easy to see what led to Facebook doing what it did. Their customers are the people buying its advertising services and user data. Facebook has no incentive to care more about privacy than it needs to to retain users, and as Facebook has gotten bigger, network effects mean that it is more and more socially costly to avoid using Facebook.

I think this issue is more acute with web-based services because of the history of web content. In the early days of the World-Wide Web, web content was predominantly amateur: hobbyists putting up things that interested them (thereby falling under the “idle pastime” exemption for needing a revenue model). What corporate presence existed was basically promotion for their “real” business, which happened in meatspace. What this meant is that while you to had to pay for internet access, you didn’t pay for the content itself.

This changed in a big way with the tech bubble. Suddenly whole internet-based businesses started to appear, like Google, YouTube and Facebook. These businesses weren’t small annexes to a meatspace businesses, they needed an internet-based revenue model to fund themselves. What hadn’t changed though was the idea that web content was free. People tend to get incensed when asked to pay more than what they consider a fair price, and perceptions of a fair price have more to do with what people are used to paying than with the economic logic underpinning how the good is produced. It also doesn’t help that the last couple of media for delivering news and entertainment content – TV and Radio – were advertising-based as well. This means that for as much as a century, we have operated in a media environment where we weren’t paying for much of the news and entertainment we consumed.

But advertising doesn’t seem to work very well on the web – advertising revenue is scant (perhaps due to the nearly unlimited number of places to advertise), and even if it did work, it carries its own problems as I noted above. If we value our privacy enough that we don’t want to sell it (and this is an open question), then we need to find other ways of funding the web services we use. This is one of the reasons why I am so interested in crowdfunding platforms like Patreon and Twitch’s subscription service. If we want the web to serve our interests, we need to find ways to pay it to do so.

image: Facebook Logo (public domain image, logo is a trademark of Facebook)