A large part of the outrage stemming from Facebook’s (and everyone else’s) apparent lack of care when it comes to users’ privacy is derived from a fundamental misunderstanding of how internet economics work. I think that the majority of users of Facebook, Google, Twitter, LinkedIn and so on make two assumptions that are incorrect about the services that they use on a daily basis.
- Free internet: internet services have never been free. The user either pays with cash (subscription) or with personal data. That data then becomes the property of the internet service company and can be used to generate revenue. In effect, the user has bartered his data, and to some degree his privacy, in return for a service.
- Who the customers are: the users of Google and Facebook services are not customers – they are the product. The customers are the advertisers who pay the internet companies for an audience to which the market their wares.
Unfortunately, this reality has been very badly communicated by the internet service companies who appear to be more than happy for everyone to scroll to the bottom and click ‘agree’. There is also a lot more that these companies could do to ensure that the data that they collect is being used for their monetization and targeting, and only that.
I suspect that users would have been far more wary about exposing their entire lives on Facebook had they been fully aware of this reality, but this is what needs to made clear now. Consequently, something will be needed to ensure that the relationship is clear – perhaps something along the lines of “We are able to provide this service to you by selling using your data for targeted advertising. If you would like us not to do this, we can offer you a subscription for $X per month”.
I suspect this would result in a good part of the higher end of that market opting to pay a subscription for these services, while the low end – and China in particular – would go for the advertising option.
However, it is here that a problem arises – it is the high end of the market that most advertisers want to target, as it is this segment that has the highest disposable income. This is one of the reasons why Google earns far more per user on average from iOS than it does from its own Android devices. Hence, if the high end moves towards subscription and the low end towards advertising, there is a possibility that revenues earned overall will fall.
Combining this with Facebook’s intention to make news feeds more relevant to users and reduce the quantity of promoted videos and advertising makes the short to medium term revenue picture look difficult. Furthermore, Facebook’s weakness in AI has meant that it is having to substantially grow opex this year to employ humans because its machines are not good enough.
The main beneficiary from this mess is Apple, which monetizes its ecosystem by selling devices, meaning that it can push the privacy angle with no impact on its short to medium term revenues.
This all adds up to a pretty bleak outlook for Facebook in 2018, so I would continue to prefer Baidu for AI, and Tencent for its fast growing ecosystem.
This article was originally published on RadioFreeMobile