Tim Berners-Lee's "Contract for the Web" Forgets One Thing!

Tim Berners-Lee's "Contract for the Web" (today in his NY Times op-ed) is a worthy effort -- but it seems to ignore the key contract element that he called on us to fight for a year and a half ago.

The new Contract lists Principle 4, "Make the internet affordable and accessible to everyone" -- but the sub-points for that principle gloss over the fundamental problem he raised in his message on the 29th birthday of the Web (3/12/18, emphasis added):

Today’s powerful digital economy calls for strong standards that balance the interests of both companies and online citizens. This means thinking about how we align the incentives of the tech sector with those of users and society at large…

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 in the code will follow. We can design a web that creates a constructive and supportive environment."

The Contract for the Web should include a new Financial Contract to align incentives to benefit not only Web platforms, but their users.

• The contract should require that user pay at a level that corresponds to the value they get with consideration to their ability to pay. 
• It should shift from the zero-sum game of "artificial scarcity" to a win-win game of fairly sharing our digital abundance to benefit both service providers and each consumer. 
• It should also shift from the opaque extraction of attention and data in exchange for supposedly "free" services, to transparently negotiating with each consumer how (and at what price) advertising and commerce should serve all three parties involved:  the service provider, the advertiser, and that consumer. 

I have written on this blog and elsewhere about why that is essential, and how it can be done. Two of the simplest statements of those proposals were published in Techonomy:

• Information Wants to be Free; Consumers May Want to Pay 
• To Regulate Facebook and Google, Turn Users Into Customers.

Details of how that can be accomplished using the FairPay framework have been published in Harvard Business Review, and in journals on pricing and on marketing. Specific comments on Berners-Lee's 2018 message are in these several blog posts.

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[Update 12/13:]  It has been pointed out to me that the Contract does address the topic of business models (with regard to privacy and data rights) in Principle 5, Clause 3(b): "Promoting innovative business models that strengthen data rights, respect privacy, and minimize data collection practices." I am pleased to note that, and look forward to seeing progress. At the same time, this underlines an important point that may not have been clear in my original post.

This question of business models -- while very important to privacy and data rights -- is of even greater importance and urgency with regard to deeper issues of how the Web benefits or harms society.

• As we see in the growing concerns about past and upcoming elections, the harm is not just to personal privacy and data, but to how the advertising-based business models of dominant Web services are inflaming polarization and radicalization of users (with clear effects on politics, elections, and society), rather than enlightening us.
• The reason is that inflaming users increases their engagement and thus the number of ad impressions to be sold, while enlightening users does not advance that business incentive. 
• Social media and search engines could be world-changing forces to not only "bring the world closer together" but to augment human intellect and enlightenment -- instead they are driving us apart and making us stupid.
• That threatens not only our privacy and data, but the foundation of our democracy and freedom.

The articles and blog posts I have linked to above address privacy and data rights as just one aspect of this broader theme. Two additional post that dig deeper into these broad issues are:

• The Augmented Wisdom of Crowds: Rate the Raters and Weight the Ratings
• Reverse the Biz Model! -- Undo the Faustian Bargain for Ads and Data

Reverse the Biz Model! -- Undo the Faustian Bargain for Ads and Data

It is time to reverse the fundamental premise. Many now see that the long-popular model of free digital content (or other services) -- in exchange for advertising and personal data -- has become a Faustian bargain with the devil. It is bad for both users and their service providers. We are losing our souls to empty but addictive engagement -- and to destructive disinformation. Journalism is failing, music is reeling, video is struggling to find viable subscription models, and Facebook is poisoning our democracy.

The public barely took note when newspapers could no longer live off the fat of classified ads. Then "digital pennies" replaced "analog dollars" more widely, and, still, few cared. But now the devil has come for all of us. The increasing price of this deal with the devil has reached crisis levels. The recent PBS Frontline documentary, The Facebook Dilemma, reports in depth on how Facebook sold its soul and still seems to only barely realize it. Or, as the NY Times reports, maybe they do. Why should they care, when they are making billions?

The press and government may investigate, but what can anyone do? Governance, regulation, or breakup do not get to the root of the problem. What we have here is a business model problem. What we need is a business model solution. That is not as hard as it seems. 

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This problem goes far beyond Facebook. Most ad-supported business models suffer from mis-aligned incentives. This post was first written with emphasis on Facebook and other social media, but has been lightly edited [4/16/19] to make it more clear that it applies broadly. 

The next two sections focus on social media, but the rest is applicable to making any ad-supported service more win-win for customers, advertisers, and publishers/platforms.

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Getting to the heart of the problem ... and some alternative paths to a solution

In "A Blueprint For A Better Digital Society" (in HBR), Jaron Lanier and E. Glen Weyl provide a thorough analysis of why these ad-supported services have proven so harmful -- and offer their blueprint for a much better model.

Here, I draw on that as background, to outline a simpler and more immediate path -- one that enables individual businesses act on their own to credit consumers for the value of their data. Starting there would shift incentives to better-enable the wider market in data that they propose.

Lanier and Weyl provide an excellent primer on the problem:

...the dominant model of targeted advertising derived from data surveillance and used to fund free-to-the-public services like social media and search is increasingly viewed as unsustainable and undesirable.

Today, internet giants finance contact between people by charging third parties who wish to influence those who are connecting. The result is an internet — and, indeed, a society — built on injected manipulation instead of consensual discourse. A system optimized for influencing unwitting people has flooded the digital world with perverse incentives that lead to violations of privacy, manipulated elections, personal anxiety, and social strife. 

They set the stage for a proposed solution (emphasis added to points I will address) :

As we wait helplessly for more elections to be compromised, for more nasty social divisions to be enflamed, for more invasive data surveillance, and for more workers to become insecure, the widespread assumption that no other models are possible leads to a state of despair.

But there is an alternative: an emerging class of business models in which internet users are also the customers and the sellers. Data creators directly trade on the value of their data in an information-centric future economy. Direct buying and selling of information-based value between primary parties could replace the selling of surveillance and persuasion to third parties. Platforms would not shrivel in this economy; rather, they would thrive and grow dramatically, although their profit margins would likely fall as more value was returned to data creators. Most important, a market for data would restore dignity to data creators, who would become central to a dignified information economy.

These models have been discussed widely for years. Here, we describe a future based on them by exploring the business and societal structures that will be required to bring them to life. In the process, we will advocate for a more coherent marketplace. Without one, no corrective measure stands a chance.

...A coherent marketplace is a true market economy coupled with a diverse, open society online. People will be paid for their data and will pay for services that require data from others. Individuals’ attention will be guided by their self-defined interests rather than by manipulative platforms beholden to advertisers or other third parties. Platforms will receive higher-quality data with which to train their machine learning systems and thus will be able to earn greater revenue selling higher-quality services to businesses and individuals to boost their productivity. The quality of services will be judged and valued by users in a marketplace instead of by third parties who wish to influence users. An open market will become more aligned with an open society when the customer and the user are the same person.

They refer to this kind of "market economy for information" as providing "data dignity" and note some important challenges:

The foremost challenge in implementing data dignity is the yawning gap between big tech platforms and the individuals they harvest data from. If we asked big tech alone to make the change, it would fail: Too many conflicts of interest exist, and the inevitable concentration of power these platforms create is inimical to competitive markets and an open society.

For data dignity to work, we need an additional layer of organizations of intermediate size to bridge the gap. We call these organizations “mediators of individual data,” or MIDs. A MID is a group of volunteers with its own rules that represents its members in a wide range of ways. It will negotiate data royalties or wages, to bring the power of collective bargaining to the people who are the sources of valuable data. It will also promote standards and build a brand based on the unique quality and identity of the data producers they represent. MIDs will often perform routine accounting, legal, and payment duties but might also engage in training and coaching. They will help focus the scarce attention of their members in the interest of those members rather than for an ulterior motive, such as targeted advertising. 

Boiling the ocean of two-sided markets -- Faust wins the world (for a time)

This vision of MIDs is a worthy one, and one I hope will succeed. But I suggest a path that traverses its way up this hill in a more indirect path might be more feasible.  That still faces challenges, but they may be far more easily overcome.

Lanier and Weyl point out that MIDs are not a new concept, referring to pre-Internet examples. But I find a more concerning case in point to be the still-thought-provoking proposal for "infomediaries" in the 1999 book, Net Worth, by John Hagel and Marc Singer of McKinsey. That drew attention when published, but got little traction in practice. That history seems largely forgotten by those now proposing similar ideas. Their infomediaries seem to be much the same as Lanier and Weyl's MIDs.

I have been wondering for years why this vision did not come to be. I have seen no clear answer, other than that no one found a path to achieve the critical mass needed to establish such a multi-sided market for consumer data. MIDs face the same problem of critical mass.

Instead, the path taken was that the ad model proved wildly successful for Facebook and Google. That gave them the critical mass of users, and huge financial clout. That now makes it even more challenging to introduce infomediaries or MIDs -- whether by convincing the dominant platforms to enable that, or by competing with them.

The "reverse meter" as the essence of a market economy for information

FairPay suggests an alternative path toward a market economy for information -- one that may not go as far as infomediaries or MIDs, but which can be pursued unilaterally by individual businesses, in direct cooperation with their customers. That could set the stage for more customer-driven solutions -- for any ad-supported business.

Infomediaries and MIDs are, in essence, a way to create a "meter" for the value of data and attention:

• Data and attention go from the consumer to the businesses that want to use it, and in exchange, funds go back to the consumer. That reverses the normal "metering" of service to the consumer, in exchange for funds to the business.
• But we don't need infomediaries or MIDs to do that. A more basic kind of reverse meter can be applied by any paid Web service business to compensate users for their data and attention. That reverse meter offers direct benefit to those businesses and their customers.

The basic idea of the reverse meter is much like reverse metering of co-generated power when it is fed back to a power company's grid -- instead of paying the power company, the consumer gets paid. (Jeff Jarvis of CUNY School of Journalism suggested using reverse metering for online newspapers in 2011, when "metered paywalls" were a new thing.)

The first businesses to offer such reverse metering have not been in social media or search, but as the model is proven effective, it can motivate similar changes in those business sectors. The easiest place to start is in businesses that already charge users -- data/attention credits can simply offset fees for service, so no funds need be paid out directly. Thus services for news, music, video or social media that now charge users -- as alternative to showing them ads -- can offset those charges using a reverse meter that meters the value of attention they provide. (Some already do, as noted below.)

The beauty of the reverse meter, much as Lanier and Weyl explain, is to make for an exchange that benefits all parties of that exchange. The consumers gets credit for their attention and data (as quantified by the meter). The advertiser or data user gets value that they are willing to pay for. The service provider profits from operating this marketplace. This has great power because it aligns the incentives of all three parties:

• Now the deal is obscured, arbitrary, and one-sided -- "We give you free service and you surrender whatever amount of your attention and data that we extract. We hope you will just accept that."
• With a meter, the deal is quantified -- "For X units of attention or data we give you $Y of credit against the fee for our service. The meter will quantify that."

Reverse metering can be simple, done by any business

There are already many basic examples of reverse metering:

• A number of services (such as Hulu, Spotify, USA Today) already offer a simple alternative to advertiser-supported "free" service:  instead, opt for ad-free service with a paid subscription. That puts a specific value on advertising, and gives consumers a basic level of choice over whether to accept that value proposition.
• Some ad-blockers offer similar options to control ads, and some publishers are participating.
• One clever new service, Paytime, offers a kind of reverse metering that entirely decouples the advertising from the primary service (a bit like a very simplified infomediary or MID). Consumers with more time than money can watch video ads to get credit, to use to subscribe to Netflix, Spotify, or other services. Instead of interrupting the primary service experience, the consumer can watch the ads whenever they wish, and has some choice as to which ads they watch. Equivalent functionality could also be integrated directly into an individual service business.

[Update 12/20/18: The IAB (Interactive Advertising Bureau) has recognized forms of this as "Opt-in Value Exchange advertising...an honest transaction that provides value to the Advertiser, Publisher (developer), and the Consumer," and provides detailed guidance on why this is important. Here I suggest a broader context.]

Win-win-win for consumer, provider, and advertiser

Think about how even a simple reverse meter changes advertising. Now:

• Consumers are annoyed by intrusive and annoying ads and abuse of their personal data. 
• Advertisers are frustrated that they cannot get their message through, even at high cost.
• Publishers/service providers are caught in the middle, as ad rates fall, customers get angry and install ad blockers, and their business suffers on many fronts. 

With a reverse meter, consumers are compensated for their attention and their data. Just having such a meter quantifies the value of data and attention, and implies a price for that value. So once it is metered, consumers will see that, and can judge if the price is right. If the price seems fair, they will accept the ads, if not, they will pay to avoid them. (FairPay provides advanced methods for setting this price for value from the consumer, as well as the price of metered value to the consumer, but even simple methods change the game.)

Once we begin to think in terms of metering the value of attention and data, we are able to get far more efficient in maximizing that value, even within a single service business:

• For consumers, what is the value (or cost) of the ad to the user?  Is the message relevant, timely, interesting, entertaining, useful? Or is it a just annoying. Is the delivery of that message intrusive? Can I enhance that by having some say in what messages I get, and when I get them?
• For  advertisers, what is the value of a more balanced relationship with the consumer? Am I getting my message to a good prospect, in a way that builds my brand? Can I build a relationship with the consumer, so that they help me craft just the right message? Can I get a direct response to my ad (including simple feedback, even if there is no purchase). Or am I turning off the people I want to reach, and wasting money on the wrong ones? 
• For  publisher/service providers, how can I maximize that shared value so that I can earn a share for myself, and make my service more popular (to get more value share from more consumers)? Do my customers feel that the ads add value or subtract it? 

Remember that advertising can be valuable when relevant and useful, or entertaining. Don't you get value from ads for products you want, or may want -- or those that make you feel good? There are many examples of valuable ads: just look at magazines for fashion, style, travel, sports, lifestyle, or hobbies. Some buy them mainly for the ads. Why do people like to watch and talk about Super Bowl ads? (some watch just for the ads). With simple reverse metering, service providers can provide a basic marketplace where their customers can interact with their advertisers to maximize value all around.

Economics and business models are all about aligning incentives. Metering data and attention enables everyone to manage incentives so they can all maximize value. That is the sustainable path to long term profit. Quietly addicting users to engagement, by spreading disinformation and sensationalized content, provides no real value -- it destroys it. Sooner or later, that model will self-destruct.

Customizing services and prices to serve all

If we can bring this kind of flexibility and economic efficiency to the reverse meter, why not the primary meter? To fully align incentives, we must customize the value proposition to optimize all forms of value for each party. Why should all consumers pay the same? Why should we all get the same level of advertising? Why should we have few choices about how our data is used, and get no compensation, whatever the level of data usage?

This is the age of "mass customization" and "one to one marketing," but we are not being creative about that. Zuckerberg admits the problem applies to Facebook, but sees no solution. He described his dilemma to the Times:

…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.

But the with the reverse meter, an array of variable options can be provided. A full ad load for free access, a full price for ad-free service, and a range of options in between. 

FairPay expands on this idea of tracking value and giving consumers more choice about the value propositions they are offered. It provides an architecture for metering and setting a price on value in the individual context of each customer. An example that explores use of the reverse meter is Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership. 

Self-regulation, government mandate, or new market structures?

The big question is how we get from where we are to "a coherent marketplace" for data and attention:

• Introducing infomediaries/MIDs has the problem of critical mass that is inherent in any two-sided marketplace.

• Simple, company-specific reverse meters do not require a critical mass, only enough scale to justify building the reverse metering system. Very simple forms are already finding success in practice (as noted above). FairPay will take somewhat more effort to develop, but still can be within reach for many businesses (especially if supported by SaaS providers). That can begin to establish a more level market for data and attention. If the marketplace is level for all participants, including consumers, "data dignity" will be a natural by-product.

• Facebook (and similar consumer platforms) could voluntarily begin to experiment with reverse metering now, starting with narrow trials, then learning, and expanding. Premium services could be offered to introduce the idea of consumer fees (offset by the reverse meter). As consumer revenue increased there would be less need for ad revenue. They could start simply, ins specific segments, and then expand and add the richer functions of FairPay. Change at the scale of Facebook might have to be gradual, but it is in their interest to start somewhere. This is explored further in Who Should Pay the Piper for Facebook? (& the rest).

• If Facebook or other consumer platforms fail to act voluntarily, a simple regulatory strategy could force that -- in a market-driven way. Instead of mandating how to fix their business model, the government could simply mandate that X% of their revenue must come from their users -- with a timetable for gradually increasing X.  This is much like how auto emissions mandates work -- don't mandate how to fix things, just mandate the result, and let the business figure out how best to achieve that. Since reverse metered ads would count as a form of reader revenue, that would provide an immediate incentive for Facebook to provide such compensation. This strategy is outlined in Privacy AND Innovation ...NOT Oligopoly -- A Market Solution to a Market Problem.)

• All of the above partial steps would create a market for data that infomediaries/MIDs could compete in. By introducing reverse metering for the value of attention to ads and release of personal data, we would begin to establish a market value for it. Once that value is established, then we have a clear motivation to look to infomediaries or MIDs -- if they can exchange that value more efficiently. 

• If we already have SaaS services that operate reverse meters for multiple consumer service businesses, such SaaS services could, themselves, expand to add infomediary/MIDs functionality. That provides a natural path for evolving into a multi-sided marketplace for all of the consumers and businesses (service providers and advertisers) that they serve.

FairPay is agnostic as to whether that market is directly between businesses and consumers, or includes MIDs.  But FairPay explicitly puts the value of attention and data into the overall value proposition.  Consumers will be able judge to what degree a business compensates fairly for their attention and data, and decide whether they are satisfied with that.  If so, fine -- they can work with them directly.  If not, then they will be motivated to use an infomediary or MID.  In that way a “coherent market” (or at least a more level one) can come first, and so provide fertile ground for the emergence of MIDs.

Of course there may be many paths to this goal, but this one seems to go where we want, in manageable steps. It promises to change the nature of business relationships in a way that enables a more human form of market capitalism. And, at the same time, it can lead to increased profit in the long term -- by being more economically efficient in serving a very wide range of customers with individually customized value propositions.*

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*On that final point I think Lanier and Weyl may understate the business profit value of their proposal. They say (emphasis added):

Platforms would not shrivel in this economy; rather, they would thrive and grow dramatically, although their profit margins would likely fall as more value was returned to data creators.

I submit that the economic value of advertising can be increased significantly by being better targeted and better received, and using more productive and appealing formats -- all driven by aligned market incentives. That might well increase platform profit margins, since advertisers will be justified in spending more than they do now. And as Lanier and Weyl hint at, but do not emphasize, even at lower unit margins, more customers can mean higher total profit margin.

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More on this theme from Lanier and Weyl

Those authors have collaborated with others in other important works that explore the transformative potential of the economics of reverse metering.

• Both are among the coauthors of "Should We Treat Data as Labor?: Moving Beyond Free," which looks more deeply at the economic issues.
• Weyl is coauthor of the book, Radical Markets: Uprooting Capitalism and Democracy for a Just Society, which includes a chapter on "Data as Labor" in that broader context. One passage: "Rather than feeling like passive consumers of Internet services, user might see themselves as active producers and participants in the creation of value." In this blog, I refer in many places to that central idea, the "co-creation" of value.

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[Update 1/27/20:]
Surveillance Capitalism by Shoshan Zuboff:  For an eye-opening wake-up call on the harm of our current business models (even for those who are tuned in), see Shoshana Zuboff's NY Times op-ed summarizing her views on "Surveillance Capitalism."  But the holy grail question is “who does it serve?” Not us, as Zuboff makes so clear -- but instead of killing the growing golden goose of data (as she seems to suggest), we should require that the business model be reversed so that golden goose serves us! -- as I suggest here.

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More about platform regulatory issues is on my other blog.

More about FairPay:

A concise introduction is in Techonomy, "Information Wants to be Free; Consumers May Want to Pay"

For a full introduction see the Overview and the sidebar "How FairPay Works" (just to the right, if reading this at FairPayZone.com). There is also Selected items (including links to videos and decks). 

The Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" provides a scholarly but readable overview. 

Or, 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.)

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.

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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

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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 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.)

"The Square and the Tower" — Hierarchy versus Emergence

For those interested in the big picture of history and how technology affects that (and is shaped by that) -- with implications for the future of commerce in our digital world -- Niall Ferguson's new book, The Square and the Tower: Networks and Power from the Freemasons to Facebook is well worth a look. I have posted a full review, with some proactive suggestions, on my other blog.

A few extracts:

...a sweeping historical review of the perennial power struggle between top-down hierarchies and more open forms of networks. It offers a thought-provoking perspective on a wide range of current global issues, as the beautiful techno-utopian theories of free and open networks increasingly face murder by two brutal gangs of facts: repressive hierarchies and anarchistic swarms.

...I think Ferguson fails to see the potential for better ways to design, manage, use, and govern our networks -- and to better balance the best of hierarchy and openness. To be fair, few technologists are yet focused on the opportunities that I see as reachable, and now urgently needed.

My full review: "The Square and the Tower" — Augmenting and Modularizing the Algorithm (a Review and Beyond)

How Market Commerce Can Become More Cooperative, Fair, and Human

A recent conference on Platform Cooperativism spurred some thoughts on how FairPay offers a path toward a new convergence of traditional ideas about market capitalism and alternative ideas about a "Fairness Economy." (This conference drew added attention from a Wired article about the idea that Twitter should become a co-op, "Let's Build the Next Twitter Like the Green Bay Packers.")

In exploring the concepts of a more win-win approach to commerce called FairPay, I have seen a spectrum of thinking about market capitalism and its limitations as currently practiced, and how to make our economy more in tune with human social values.

• Market capitalism has created our modern world, and proven efficient, productive, and scalable -- despite a degree of blindness to human values. 
• That has led to growing concerns about income inequality, slowing productivity gains, and concentration of power in corporations and investors, spawning a wide range of movements to change the game. These range from
  1) incremental steps like "Corporate Social Responsibility," "Creating Shared Value," and "Triple Bottom Lines," to
  2) benefit corporations and other more softly profit-oriented structures, and to
  3) more sharply different forms of organization like cooperatives (and other non-profits).
• The conference focused on cooperatives, a form of business that has existed for centuries, and harnesses the same spirit as Open Source and Peer Production, and that can now build on the openness of the Internet to put ownership of a business in the hands of its workers and/or customers.
• All of this occurred with a backdrop of the US election, which highlighted deep concerns about an economy that no longer seems to be serving middle- and working-class people well -- a hard push for change, but one with little consensus as to what kind of change can or should be achieved. 

Meanwhile, most businesses may still be far from meaningful social consciousness in their operational core, but increasing numbers do try to tack on some efforts at "good corporate citizenship." Some would argue this is just lipstick on a pig, but others see real potential to make existing businesses much better.

Hints of convergence -- human-centered marketing

The gulf may seem huge, but deep in the heart of modern marketing, a more direct incentive to being more fair and human is emerging. Companies are realizing that in this networked age, their most important customer relationships are ongoing, and that loyalty and Customer Lifetime Value (CLV) are more important than immediate sales. Companies are beginning to see that Customer Experience (CX) is central, and that they must attend at every touch-point to creating desirable Customer Journeys that build Loyalty Loops to cultivate their best customers. (Forrester recently reported that CX leaders grew at 17% per year compared to 3% for CX laggards.) This re-orientation is starting to drive companies toward deeper, more personalized dialog with their customers and more human, cooperative values.

How FairPay changes the game

FairPay enables a shift in business operations to focus on a more cooperative "co-creation" of value that improves the bottom line. That can help bridge the gap between these two very different models, by making ordinary for-profit corporations more aligned with their customers and what they value -- including human values of people and planet.

The magic of FairPay is that it can be applied in any of these ownership structures. It can work very nicely in alternative structures like co-ops, but can also work as a core operational process in ordinary for-profit businesses. It drives everyday business operations to center on the human values of each customer, in a way that makes it profitable to "do the right thing." No tacking on extra bottom lines, or a veneer of social responsibility, that compete with profit motives. FairPay serves as a kind of cooperative judo that aligns the profit motive with what the customer wants. If the customer is an owner (as with a co-op), that just adds to the alignment.

FairPay provides a structure for building relationships around value, by giving consumers limited power to set prices that correspond to the value they receive -- for as long as the seller considers them to be fair about how they do that (but not longer). This creates a balance of powers (setting prices / continuing the relationship) that rewards cooperation. It changes commerce from largely independent one-time games that are inherently zero-sum, to a repeated game that adaptively seeks win-win co-creation of value.

A new lens on market fairness

So with this new lens of FairPay -- and how it works in any kind of business to fundamentally change customer relationships into a repeated game of cooperative relationship building -- a new path becomes clear.

From one side of the divide, if we use FairPay in conventional businesses, we don't need any new enterprise structures (or any new enterprises) to start with.

• Conventional corporations can introduce FairPay into their ongoing operations, as an alternative pricing option -- one that drives a new kind of cooperation between a business and its customers (and they can start to do this in limited, controlled market segments).
• This cooperation focuses on win-win value propositions based on structured dialogs about value that can include broad aspects of value, including "externalities" of people and planet that are typically ignored by our markets (but directly affect the bottom line when FairPay pricing is applied).
• That in itself should improve things for customers, workers, stockholders, and society at large.

At the same time, we can build from the other side and create new platform cooperatives (or other new models in that vein). They show considerable promise, and FairPay can add to that promise.

• The same kind of cooperative dialogs about value that FairPay creates in a for-profit business can be applied by a co-op or other non-profit or hybrid form, with the same benefits.
• Such methods can be expected to be especially effective in such contexts, because of the deeper alignment of values on the part of the alternative business, and the greater willingness to pay of consumer "cooperators" when the business entity is theirs. (More on this in an earlier post, A Better Revenue Strategy for Non-Profits in the Digital Era.)

Thus FairPay offers a common operational logic that can serve as a bridge toward convergence from both sides, wherever along the spectrum we are.

• Conventional businesses can become more cooperative and aligned with customer and social values, and help instill more cooperative behavioral norms in themselves and their customers -- even in a for-profit, capitalist context. 
• That sets the stage for further shifts toward cooperation in for-profits -- as well as a more fertile environment for alternative structures.
• Likewise, alternative structures (non-profits or hybrids) can benefit from the fair and efficient FairPay pricing process that is more attractive and more self-sustaining than conventional pricing. The power of FairPay may be even greater in such alternative structures -- even if such structures are not as operationally efficient as profit-driven structures in some respects, FairPay might enable them to achieve greater price-efficiency to offset that, drawing on their more inherently mutual incentive structure.

Both camps can coexist and seek to flourish as they are able, and each can help drive the growth of an ecosystem that benefits all productive players, as well as society at large. Whatever mix it is that flourishes in any given context, and any point in time, we all can win with FairPay.

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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).

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

FairPay-What-You-Want for Costly Products? Etsy? Everlane? Tiffany?

[UPDATES 12/27/17: Everlane PWYW sales on again.5/10/17 article broadly covers "What do people want to pay for their clothes?" and mentions FairPay (as "Fair PWYW") - reports 13% pay more than minimum.12/29/16:  Everlane has again done a PWYW sale. It is advertised as "Twice A Year," so it must be successful!
7.12/16 article reports 10% of customers voluntarily pay more than the minimum price.] 

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Not just digital? Can FairPay work for real products that have significant replication cost? -- such as for a fashion retailer like Everlane or an artisan marketplace like Etsy? There are actually some very interesting opportunities.

FairPay (short for Fair-Pay-What-You-Want) is a new architecture for participative price-setting that adaptively seeks win-win value propositions in ongoing customer relationships. As discussed throughout this blog, the case for FairPay is most obvious for products that have negligible marginal cost to replicate, such as digital content -- since there is no out-of-pocket loss when the occasional customer does not pay fairly-- but a minor variation of the process promises to work well for costly products as well.

The variation is very simple: set a minimum price floor that allows the buyer to set whatever price they want above that minimum. That can ensure that sales are not at a loss, and limit the FairPay adaptation process to apply only to the profit margin that the seller should receive above the cost. This builds on the simpler idea of Pay-What-You-Want (PWYW) with a price floor, which has been common, as described below.

FairPay goes far beyond PWYW to add in seller controls to nudge buyers to price fairly and to exclude those who do not. (It also shifts price setting until after use, when the value of the experience is known.) 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). [Added 12/30: Also see this background on studies of conventional PWYW.]

A nice example of conventional PWYW with a floor was just provided by fashion e-tailer Everlane.com. They have a 5-day Christmas sale that offers an array of items at any of three different prices [see 12/31 Update below], Using the example described in a news report at Racked a woman's coat said to normally sell for $250 can be had at any of three prices, and a mouseover frames the rationale for those options:

• $110: "$0 to Everlane. This only covers our cost of production and shipping."
• $132:  $22 extra to Everlane. This helps to cover production, shipping, and overhead for our 70-person team."
• $225.  $115 extra for Everlane. This helps cover production shipping, our team, and allows us to invest in growth. Thanks!"

FairPay is a new concept that would enable such sales to become a regular option for selected customers (including those found to pay well on special sales like this Christmas sale).  For customers who develop very good reputations for pricing fairness, many items might be offered that way all the time.  For customers who gain moderately good fairness reputations, such offers could be more limited, but still for many items (often, if not all the time). Thus FairPay becomes an interesting next step for such a retailer, as explained further below. 

FairPay with a price floor -- for retailers and for marketplaces

Beyond the example of a single retailer like Everlane, FairPay can also apply to a platform for serving many sellers, like Etsy.com, a platform that provides a marketplace for many designers and artisans. 

Let's look at the details of how FairPay can apply to either:

• The conventional offering is for products to be sold at prices pre-set by the seller. All of the issues with conventional pricing apply here -- notably no allowance for individually varying value perceptions, and no post-pricing that enables the price to be set after the value is known.
• A 100% FairPay offering would allow buyers to set any price they think fair, after receiving and trying the product, even as low a zero. The seller takes the risk that buyers will not be happy or fair, and that they will set very low prices, possibly well below cost. Even with FairPay's reputation tracking and limitation of sales to those who do not maintain a reputation for fair pricing, sellers face the risk of not recovering their costs on some sales.
• A solution is to add FairPay with a price floor -- similar to PWYW with a price floor (as used by Everlane), but with the added controls of FairPay that I propose.
• This hybrid version of FairPay could provide for a minimum "floor" price that is pre-set by the seller, plus a profit margin bonus that is set by the buyer. This floor price set by the seller might be paid prior to shipment (as with conventional sales), to ensure coverage of costs. The FairPay portion would address the profit margin bonus price, which would be set by the buyer, after experiencing the product, as with pure FairPay. 
• Note that just changing conventional PWYW to have sellers set prices after using the product can have significant benefits in getting better PWYW pricing -- buyers no longer need to discount their prices for fear being disappointed by an untried item. Thus sellers should seriously consider this idea of post-priced PWYW, even before moving to the more advanced FairPay process.

How FairPay works with a price floor

Such a hybrid two-level pricing process (conventional seller-set floor price prior to sale, plus FairPay bonus price set by buyer post-sale) could provide a very effective solution to adaptively seek win-win sales.

• The process would be explained up front, so that buyers and sellers understand that the initial price is just a base price that only covers the cost of the product (and perhaps a very small profit margin), but that buyers who are happy with the product are expected to pay more than that, once they see the value of what they have gotten.
• The seller could post a suggested bonus price (with profit margin), but buyers could decide to price higher or lower, based on their own judgment of fair value. 
• Buyer risk is much less than at full price. Refund options could still be provided to deal with serious dissatisfaction over even the "at-cost" base price.  However, with the lower base price, fewer buyers would be so unhappy they would wish to bother with a return for refund. Many would be willing to keep a marginally satisfactory product at a "bargain" price, given that the value is now known, and there is no further effort to doing that.
• Seller risk is low, because they will at least cover their costs (except for a smaller than usual number of returns for refund).
• Both benefit by getting more customers to try the product.
• The bigger benefit is in cooperatively seeking a fair profit margin. Sellers who are happy can decide just how happy they are, considering all relevant factors, now that the value is known -- and can set the bonus prices accordingly. Sometimes this process might lead to a price below a conventional price, sometimes above, but in any case it leads to repeat customers with loyalty.
• The reason that is important is the "long tail of prices." Some buyers will happily pay more than a conventionally pre-set price, and that generates added revenue. Many buyers (the long tail) will be unwilling to pay a conventionally pre-set price, but would be willing to buy the product at the lower base price, and then consider adding a bonus. Any added bonus is added profit. Thus the seller sells more products and makes more buyers happy.
• This can work especially well for quality producers who delight their customers and motivate them to pay generously by triggering the use of communal norms. If Everlane's experience is like that of other PWYW vendors, positioning as a dedicated provider of quality and service can elicit high levels of fairness under communal norms.
• In the case of artisanal/craft products like on Etsy -- and building on the person-to-person nature of sales in such a marketplace -- communal norms of fairness should be especially applicable to motivate high levels of generosity.

The key to making this profitable and manageable is the fairness reputation tracking and feedback controls of FairPay. The seller (or platform) can track how individual buyers respond to individual offers (and sellers), to learn how fairly a buyer sets prices for what kinds of products (and from which sellers). This provides a database on value perceptions and fairness for each buyer that can be used to manage what is offered to specific buyers (by which sellers), so that sellers can control their risk and nudge individual buyers to maximize their fairness.

• Offers can be restricted to only those buyers who have a reputation for pricing fairly for the class of product being offered, so that sellers have a reasonable expectation that they will set a fair bonus price.
• Sellers can decide how much risk they want to take and how wide a market reach they want. Those who prefer a lower number of sales at higher prices can limit their offers to those known to price generously. Those more eager to expand the quantity they sell, at some greater risk to their profit margin, can expose offers to a broader segment of buyers who price fairly but less generously.
• Some sellers will set liberal fairness thresholds for some products for unknown buyers, so that their behavior can be learned at manageable risk. They may do this with selected product lines (or for limted promotions like Everlane's Christmas sale) that they can use for testing. Tighter fairness threshholds can be applied for sellers or product categories for which they want only more generous buyers.
• In the case of a multi-seller marketplace like Etsy, the personal reputation data of buyers that is collected by the marketplace need not be exposed to individual sellers (to protect privacy) -- the marketplace can simply avoid matching a buyer to offers from sellers who set a fairness rating threshold that is higher than the buyer's fairness rating. All the seller knows about the buyer is that any buyer who see their offer has at least the desired fairness rating.
• This mechanism gives a buyer a strong incentive to price fairly and even generously, to maximize the number and quality of offers they see. Buyers will know that it is the most desirable offers (and the most desirable sellers in a multi-vendor marketplace) that set the tightest fairness thresholds -- so the less generous they are, the fewer top quality offers they can expect to see in the future.

Why would this work?

Consider the lessons of conventional pay what you want (PWYW) offers.

• PWYW has proven reasonably effective for both virtual and real products/services. People can be motivated to willingly pay fairly even when they do not have to.
• Many sellers of digital products like music and games have done PWYW offers with a minimum price set to at least cover download and credit card transaction costs, with good results. (Additional evidence may come from sellers like Everlane.)
• Research studies suggest that price floors can be effective, but there is a downside to consider -- setting a minimum can signal a lack of trust in the buyer, or leave the impression that a fair price is not much above the minimum.
• In the case of real goods with substantial costs, it seems likely that the risk-mitigation of a price floor is more important than the signalling concerns.* Care in framing the floor price as not really fair -- in that it provides no profit and is thus not sustainable -- can help push generosity upward -- as can care in how the suggested profit margin is framed.

So it seems there is good reason to think this could work well for many real goods. Everlane seems a promising example, as a retailer seeking to establish an image for value, fairness, and transparency. Similar advantages may be applicable for design/craft/artisan products -- the seller can emphasize the human value of the artisan. Such use of FairPay could benefit a multi-seller marketplace like Etsy, especially where buyers are unsure what to expect from a seller they do not know (and vice versa). This could be good for the buyer, good for the seller, and good for the marketplace.

Could it work for very high-end products? -- such as for Tiffany? Perhaps not as well as conventional pricing, since at the very high end, high set prices are a signal of exclusivity -- a vendor with cachet like Tiffany can command prices that less prestigious brands cannot. I would guess Tiffany will be among the last places to try FairPay, for that reason. But who knows what variations might become workable once FairPay becomes widely used and understood?

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[Update 12/31:]  Wide press coverage of this sale in Business Insider (twice), NY Magazine, Inc, HuffPost, Daily Mail, and others shows the promotional value of PWYW offers, Hopefully they will also report on Everlane's results.

Some of this coverage raised concerns about how well PWYW works, notably in NYMag. Here is an expansion of comments I posted on that article:

This raises many interesting and important questions about how to apply new participative pricing methods like pay what you want (PWYW) that try to find a win-win with the customer -- but we are at very early stages of understanding how to do them most effectively. I believe Everlane is on the right track, and that with proper framing of the offer, and what is expected of them, PWYW -- and more advanced variations on it, like FairPay -- will change how we buy things.

The cited research by Gneezy (which I included in my Resource Guide to Pricing) and others is very interesting, and offers many insights, but does not tell us what results can be obtained with better framing (and after people gain familiarity with such new approaches). A more established example of PWYW is tipping in restaurants. True, it makes some people a bit uncomfortable, and some want to eliminate it, but most of us manage to do it as second nature (apart from any arithmetical challenges that an online system would eliminate). We simply look back on the experience and consider whether service was better or worse than average (intuitively considering many factors, including how we feel about the server, and our plans to frequent the restaurant in the future), to come up with a tip that seems about right. With some experimentation, much more effective variations on how to present PWYW offers can be explored and refined.

(BTW, Panera has been doing PWYW continuously since 2009 in their Panera Cares locations, and are now serving about one million people per year.)

Simple improvements to PWYW:  Here are two very simple things Everlane and others could test to improve their results (even without the sophisticated feedback control process that FairPay adds):

1. Provide a slider that allows any price within an allowable range. For the coat example, the quantum jumps in the allowed prices are quite large: from $110, to $132, to $225. Maybe I am willing to pay $150 or $175 because I want to support them, but $225 just seems a bit steep for an overstock sale -- but I only pay $132.  The same framing levels could be presented, but with the ability to pick an intermediate price that seems fair to me.
2. Let people pay the base price up front, and then follow up to ask them to decide on the bonus price after they receive the product and know how they like it. This would be only a bit more complex to do, would still assure costs are covered, but would gain all the benefits of post-experience pricing. Instead of wondering if I will really like the coat, and pricing low, because I am afraid to end up disappointed, I would know how much I liked it, and not have to discount from what I would later agree would have been fair.

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*Of course a price floor can be used in any FairPay context, including digital goods with low marginal cost (just as is done for PWYW offers). Market testing (as by Everlane) is needed to understand under what conditions that is desirable, and how to set and frame such a minimum price.

(Acknowledgement:  My thanks to Florian Gypser, an architect and designer based in Austria and Thailand who contacted me to inquire about using FairPay for consumer fashion products. That led me to begin this post, to highlight these opportunities. ...And to Everlane for provding a nice case study -- which I hope they will add to with a report of their results.)