[Update 4/10/18: Zuckerberg hints that "certainly we consider" ideas in the direction suggested here.]
[Update 5/4/18: Bloomberg reports: Facebook Weighs Ad-Free Subscription Option]
[A newer post, Privacy AND Innovation ...NOT Oligopoly -- A Market Solution to a Market Problem, focuses on regulatory issues.]The Facebook fiasco spotlights the perfect storm we now face, as the dream of digital media empowerment turns sour. Many have suggested a range of remedies. But at its heart this is a business model problem -- we may need a multi-pronged remedial effort, but without fixing the underlying business model, other measures will have limited effectiveness. We have not been imaginative about the business model -- but we can do much better. This post explains how.
Tim Berners-Lee (inventor and champion of the Web) put his finger on this issue:
Two myths currently limit our collective imagination: the myth that advertising is the only possible business model for online companies, and the myth that it’s too late to change the way platforms operate. ...On both points, we need to be a little more creative. Create a new set of incentives and changes...will follow.Facebook brought this to a head, but the ugly glare falls on Google, Twitter, and others. Many rightly blame this “original sin” of the Internet ad model that enabled wide access to “free” services. It is now all too clear why it matters that “if you are not paying, you are the product.” We created an “attention market” monster that seeks only to "engage" us -- an economy of clickbait and misuse of our own data. That threatens our privacy, our mental health, and the very democracy we thought digital media would enhance. Internet services have lost our trust. How can we get them to serve our needs? We must realign basic incentives.
regulation on data ownership/privacy and concentrations of power -- but those will take time to shape, and they will always be crude and inflexible instruments.
…having [Facebook] be free and have a business model that is ad-supported ends up being really important and aligned…Now, over time, might there be ways for people who can afford it to pay a different way? That’s certainly something we’ve thought about …But I don’t think the ad model is going to go away, because I think fundamentally, it’s important to have a service like this that everyone in the world can use, and the only way to do that is to have it be very cheap or free.
- The old logic of scarcity, rather than the new logic of digital abundance.
- The old, but aberrant, logic of pre-set prices.
- We are so used to the alienating 20th century model of mass-marketing based on pre-set prices (and driven by advertising) that we don’t see how consumers can work together with businesses to set customized prices that are fair for each of us.
- What is fair depends on realized value (who, what, where, when, how, and why) and on ability to pay. But now we can apply the power of digital to restore and improve on the principles of value-based pricing that humans have relied on for millennia to take those value factors into account. Doing that is not only good citizenship, but good business.
Digital goods and services are not scarce -- but the willingness of consumers to sustain service providers is scarce. FairPay structures an “invisible handshake” to seek a fair allocation of that willingness to sustain over the course of the relationship. (It considers total value, both to the consumer and from the consumer, including use of personal data and attention to ads). To each provider according to their ability to create and deliver actual value. From each consumer according to their willingness and ability to pay to sustain that. (...With incentives that ensure both.)
By harmonizing fundamental business incentives in this way, we will break the vicious cycle of exploitation and abuse, make services both affordable and sustainable, regain trust between businesses and their customers, and shape a new social contract. Working under that new social contract will reduce the need for externally imposed remedies -- and better position us to apply external remediation to our markets where needed.
- Facebook could first test FairPay at the margins, for specific "premium" services like reducing ad loads and giving users more control over filtering criteria and data privacy. [**See update below suggesting Facebook is considering this.]
- This could include "reverse metering" to recognize and give credit for the value that users provide to Facebook, paying with their attention and their data. The same FairPay process can let users individually determine what level of advertising and data usage they will tolerate, in return for reduced payments.
- Even with a significant level of advertising revenue continuing, sharing that revenue with the customer would shift platform incentives toward satisfying users and providing ads that the customer considers relevant (effectively making the advertiser the consumer's customer).
- That reverse meter could also credit user-generated content and viral sharing.
- Many have proposed competitive efforts, new "alt-Facebook"services that offer more customer-first business models and practices. FairPay can help make those strategies successful. But the path to scale at the level of Facebook seems slow and difficult. Given the severity and urgency of the crisis we are now facing, mandated action by Facebook may be required.
- Here too, changing the fundamental incentives -- and monitoring and tuning them to ensure that they work as desired -- is the best way to achieve results.
- Change can be mandated in much the same way that we mandate increasingly strict vehicle emission standards. Shifting at once to a reader revenue model would be challenging, and something Facebook management and shareowners might be very reluctant to pursue. But regulation could be staged to 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 Facebook figure out how best to do that, but give them targets over time, and hold them to it.
- The Bell System was a regulated monopoly until 1982, when it was broken up into independent "Baby Bells" connecting to users, long distance services, and equipment suppliers.
- Telephone service regulation followed the earlier and still continuing example of railroads being regulated as "common carriers."
- Postal services have always been public services, paid in part by users, but subsidized by governments as needed.
- Public radio and TV are government-funded with voluntary payments by users.
Toward a win-win future
- Whatever we do, we need to move quickly and decisively. Facebook still can take the initiative, and perhaps retain a high degree of autonomy. Alternatively, we may conclude we need stronger and swifter measures. In any case, it is essential that we put the consumer (and the public) first, by putting incentives in place to drive that.
- The surest way to do that is by having the consumer pay -- so that Facebook is driven at every level to satisfy them, and not the advertisers and hucksters who seek to buy consumer attention cheaply.
- We need to have the imagination to rethink our obsolete economic assumptions, to get creative about mass-customizing our value propositions, and to seek a path up this ladder of value.
FairPay is one architecture that points in that direction. If you don't like that one, find another. In any case, we need to move aggressively on whatever path we can manage to find, as long as it leads toward full, fair, and transparent alignment of value creation and value capture.
[*Update 4/9/18: An excellent summary of how intractable regulatory solutions are is in today's column in The Information by Sam Lessin. I commented on it: changing the business model economics would reduce the severity of the abuses that regulation can only crudely seek to remedy.]
[**Update 4/10/18: Zuckerberg suggested in his Senate testimony that Facebook would “certainly consider ideas like that.” As reported: "By not rejecting the possibility of a paid product, Mr. Zuckerberg’s comment could be interpreted as endorsing the idea that Facebook might experiment with a version of its social network that relies on subscription revenue instead of advertising."
A newer post, Privacy AND Innovation ...NOT Oligopoly -- A Market Solution to a Market Problem, focuses on regulatory issues, and more on the business model problem is in Cool Hand Zuck -- What We Have Here is Failure to Innovate / Looking Toward a Better, Fairer Future.
Related points are in my previous post, Zuckerberg: How to Fix Facebook -- Stop Hanging Us With the Ad Model! -- A New Economics, and my 2012 post, Beyond the Ad Model - A New Economics for Media.
Other posts in this FairPayZone.com blog explain the key principles that enable this:
- FairPay Changes the "Game" of Commerce -- the basic structure of the repeated game
- The Ghost of Pricing Future -- A Thought Experiment -- pricing for value and ability to pay
- An Invisible Handshake for The Digital Wealth of Nations -- a more cooperative twist on the invisible hand
- Making Customers Want to Pay You -- Research on How FairPay Changes the Game -- the behavioral economics .behind this
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 FairPayZone.com). There is also a guide to More Details (including links to a video).
(My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)