Wednesday, April 25, 2018

Privacy AND Innovation ...NOT Oligopoly -- A Market Solution to a Market Problem

The crisis caused by the Internet oligopolies has us careening toward regulation that will likely entrench those oligapolies -- to the detriment of the consumers we seek to protect (and the innovators who might benefit us). One need look no farther than yesterday's front-page stories in both WS Journal and NY Times.

However, many recognize that the real problem with the Facebook-Google duopoly on advertising stems from "the original sin of the Internet," the reliance on the ad model that mis-aligns incentives by making users "the product, not the customer." The problem is that few see how to fix that underlying problem, so very few are even trying!

How can we get services that serve all of of us affordably?  It seems impossible (as Zuckerberg, himself, explains), but this is just a failure of imagination (as called out by such notables as Tim Berners-Lee and Jaron Lanier).  My previous post explains in some detail how Zuckerberg has just thrown up his hands, and how we can all be far more imaginative about that.

But let's consider how our current response is likely to make matters even worse. The problem is that we are moving to regulate the symptom instead of treating the disease. 

Some view this a a simple matter of regulating data privacy and control, but as many now observe, regulating that will concentrate even more power in the oligopolies. Such regulations (going into effect with Europe's General Data Protection Regulations next month, and increasingly likely here) will be cumbersome and costly in a way that will constrain innovation and market forces. They may bring some relief, but at what cost? As Zuckerberg testified: "A lot of times regulation by definition puts in place rules that a company that is larger, that has resources like ours, can easily comply with but that might be more difficult for a smaller startup." And there is high risk that regulation will overshoot.

And on the flip side, many critics of regulation point out that many consumers care little about data privacy and control as long as they get services they want at affordable cost (as advertising enables). That brings us back to the question of business models.  With or without regulation of privacy, will consumers really get services they want, if we stick to the ad model?

Why regulation is a band-aid, not a cure

Maurice Stucke offers this analysis in Harvard Business Review, "Here Are All the Reasons It’s a Bad Idea to Let a Few Tech Companies Monopolize Our Data:"

  • Lower-quality products with less privacy
  • Surveillance and security risks (Government capture, Covert surveillance, Implications of a data policy violation/security breach)
  • Wealth transfer to data-opolies
  • Loss of trust
  • Significant costs on third parties
  • Less innovation in markets dominated by data-opolies
  • Social and moral concerns
  • Political concerns (Bias, Censorship, Manipulation)

Regulating data privacy and control will not eliminate most of these problems -- in fact, it may make many of them worse.

As Tim Wu outlines in the Times, "Don't Fix Facebook. Replace It," what we really have here is failure to align business models. He quotes Walter Lippman on "free" TV (in 1959): it is ultimately "the creature, the servant and indeed the prostitute of merchandising." Things have only gotten worse, -- merchandising has gotten far more sophisticated, and we prostitute more and more of our life to it.

This is not to say that there is no need for regulation of data privacy and control, but that it should be limited to areas that business model solutions can not address well.

Aligning the business models

What we need is to move aggressively to change the business models.

A key part of the issue is to ensure that users are compensated for the value of the data they provide, as outlined in a recent WSJ article by Posner and Weyl, "Want Our Personal Data? Pay for It." That can be done as a credit against user subscription fees (a "reverse meter"), at levels that users accept as fair compensation. That would shift incentives toward satisfying users (effectively making the advertiser their customer, rather than the other way around). Paying for user data is long overdue -- independent data agent "infomediaries" were proposed and richly explored in 1999, in Hagel and Singer's book, Net Worth.

But a the deeper challenge is to address the total value proposition -- to balance the varying value exchanges of users, platforms, advertisers, and other participants in this network market. If platforms pay users for their data, at what level? If users pay platforms for service, at what level? Different users get different levels of value and have different abilities to pay. Serving an added user costs little, but continuing to provide and improve services take investment. That is where we need real creativity in our business models. How do we make the subscription price fair and affordable to provide essentially universal access, and still make the business sustainable? (Consider this thought experiment for directional guidance.)

FairPay points to one possible market-based path to dealing with this high inherent variability in value -- as outlined in "Who Should Pay the Piper for Facebook? (& the rest)" (and in the rest of this blog and in a recent journal article). Companies like Facebook, Google, and Twitter could move in in that direction on their own initiative. But they are so seduced by their tens of billions of dollars in advertising that they see little reason to try. Trying might cost them in the short term, even if it could make them more profitable in the long run.

One way to force the platforms to move toward business models to better serve consumers is with simple regulatory mandates, as outlined in my previous post: "require that X% of revenue must be user-derived by some date -- with X starting small, but then increasing in stages over time. As X increases, incentives for tolerating ad-related abuse would be reduced and offset by pressure to be customer-first. Let [each platform] figure out how best to do that, but give them targets over time, and hold them to it." This kind of light touch works well for vehicle emissions, as a market-based solution -- why not for Internet platforms?

The drunkard's search

Our challenge is much like "the drunkard's search" (as illustrated above). The light of regulation is much brighter than the light of innovative business models. But the cure we seek is down that street.

FairPay offers us a flashlight that points down that street. It is not yet clear how broadly and effectively FairPay can enable this kind of transformation of business models to work. But it illuminates a direction that should take us closer, if not all the way. Maybe others have better ideas, but FairPay is easy to try, and maybe better ideas will become apparent once we start down this road -- even if the flashlight of FairPay does not take us all the way.

But in any case, it is urgent that we start moving in that general direction -- that is where the real cure is.

More on business models: Who Should Pay the Piper for Facebook? (& the rest)

Broad suggestions on opening up the platform oligopolies are in a post on my other blog:  "Architecting Our Platforms to Better Serve Us -- Augmenting and Modularizing the Algorithm"

Update 2/26/19: My article in Techonomy, To Regulate Facebook and Google, Turn Users Into Customers.

Update 5/4/18: Bloomberg reports: Facebook Weighs Ad-Free Subscription Option

More about FairPay

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at There is also a guide to More Details (including links to a video). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, read my highly praised book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)  

(My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)