Elliot Eisenberg, Ph.D.
GraphsandLaughs, LLC

April 1, 2019

Over the last few years large social media and search engine firms have been routinely accused of trading and selling our personal information, propagating toxic content, weaponizing user information, and more generally eroding our privacy. Last October, Tim Cook, CEO of Apple, made many of these same claims while bashing technology companies in front of a receptive audience in Brussels. Yet this is not simply a battle between tech billionaires. Rather, it is a result of a serious design flaw plaguing the Internet.

It is no coincidence that Google, Facebook and Twitter, which each receive more than 85% of their revenue from advertising, are the ones most frequently accused of malevolent activity. Conversely, Microsoft, Amazon and Apple, whose revenues come from selling goods or services or both, fly almost entirely under the radar. It’s because Facebook and Google make their money by giving away their products to one group and then selling advertisements to an entirely different one.

Think about why price matters. It’s how the market rations resources. A price tells sellers how much to invest in a product and it helps consumers decide whether a product is worth buying. But a price of zero messes this all up. Free is great for generating volume and user engagement, but it is a disaster when it comes to quality control.

Some firms offer free entry-level products in the hope of up-selling their users at a later date, like Adobe, and some services like Wikipedia are free due to thousands of hobbyists who love what they do and expect no monetary compensation. By contrast, free is the entire business model of search engines and social media. To generate advertisements, they must maximize users and engagement, and that requires low barriers, if any, to their platforms. And to maximize advertising revenue, the platforms must learn as much about their users as possible. This pits volume and revenue against quality and confidentiality. The result is the steady erosion of privacy.

We all know that free services are anything but. Users not only give away their data, but as a result are exposed to lots of useless and occasionally harmful content, such as phishing attacks which result because senders of email don’t have to pay (buy stamps) to get email delivered. Similarly, there are always fake, or paid-for reviews mingled with legitimate ones on “free” services such as Yelp. And there is always a steady stream of manipulative or fake news that contaminates news feeds. In a world where communication is free, bad communication beats good communication because good communication is costly.

But it doesn’t necessarily have to be this way. Apple prioritizes user privacy and content quality, is more restrictive about what apps can run on its devices and has humans curate content. But that is one reason why Apple devices and products cost more than similar such Android offerings. TV offers another example. Network television was once an ad-supported oligopoly that aimed its content to the lowest common denominator. But HBO and now Netflix have shown that viewers will pay for quality content that is void of advertisements. Pandora and Spotify offer ad-free music streaming services for a monthly fee. And new technologies now make it easy to charge tiny amounts online, making it possible to bypass “free” services if desired.

But there are problems: Apple’s market share has stalled as new potential buyers balk at its high prices, while Netflix, Pandora and Spotify have yet to turn a profit. Lastly, search and social media outlets that might, in the future, charge will have a hard time becoming viable due to the large network effects that “free” incumbents enjoy. That said, some broad-based firm will eventually succeed and show that free need not remain the reflexive internet model of the future and in the process, our privacy concerns will hopefully wither away.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com. You can subscribe and have the blog delivered directly to your email by visiting the website or by texting the word “BOWTIE” to 22828.