locore (locore) wrote,

Economics, Openness, and Honesty - The Cost of Free Services

The internet is full of free services, as are the app stores of cell phones and tablets. At first glance, this is way cool - who doesn't like a freebie? But let's look at it from the point of view of the providers.

With a few exceptions (governments, non-profits etc.) the providers are in business, and wish to make money. So why would they give things away for free? Well, it's pretty easy to list the standard reasons:

  • encourage people to buy the full version
  • sell advertisements, which are pushed along with the free product
  • build reputation so as to sell other products
  • sell virtual goodies associated with the free service, e.g. games supported by cash shops

These really aren't objectionable, and don't tend to present the user with surprise costs. But do they cover the whole field? IMO, no. The elephant in the room is google, though Facebook seems to have a similar strategy.

What these "free" services do is gather data about their consumers. They aggregate a lot of free services under one virtual roof, and work hard to identify their consumers. They don't upsell - google never tries to sell me premium services, etc. They do push advertisements, and google at least claims (claimed?) an ad-selling business model. But it's trivially easy for consumers to suppress those advertisements - 2 simple installations and you'll never see in-browser ads again - and google at least isn't putting significant effort into evading those tools.

Let's presume that google is old enough, and large enough, that it can't be still indulging in loss leaders, intended to get consumers so used to its services that they'll pay money to retain them once they are no longer free. Let's also presume the management is economically rational, and is pursuing a course they expect to be profitable - more profitable than alternatives. Where is the money coming from?

In the short run, it's coming from advertisers and similar. But where do they get their money? Ultimately, it comes from sales. Which means, among other things, that it's coming from consumers. Put another way, on average, each consumer pays more as a result of consuming the "free" service than they would if they'd simply paid for the service. At least, that's the hope/intent of all the businesses involved, assuming they are economically rational. The consumers may wind up with one or more advertised products as well as the free service - but without the serivce and resulting ads, they wouldn't have bought the product, would have paid less for it, etc. etc.

And this ignores 2 other things. One of those is externalities - costs to the consumer (or even to society) that don't provide corresponding benefits to the various suppliers. As a trivial example, consider time wasted waiting for ads to download, or get off one's screen. But there are far more important costs. Google appears to tailor search results based on some algorithm which takes into account consumer "interests". Does this mean that "conservatives" never even see political positions they might object to, and vice versa? What does that do to civil society - we've got enough of that with self selection of news sources, etc., without making the process invisible to the consumer?

The other potential cost is embarassingly paranoid. I'm not privy to the economics of advertising, but for me, the numbers just don't add up. I don't see how advertising can pay well enough to fund these businesses. So what else is going on? Well, what else can be done with aggregated data? I'm sure there are a lot of people who'd find it useful to know all about someone. These range from private detectives on up through increasingly dangerous people. Stalkers. Terrorists. Repressive governments. And on the less negative side, how about bankers, investment advisors, and anyone selling something with a non-fixed price? At a trivial level, are those annoying cold calls you get the result of searching on google?

Years ago, the promise of the Internet seemed entirely positive. Why is it that humans are so good at finding ways to turn good things into risks and problems?! This entry was originally posted at http://locore.dreamwidth.org/3021.html.

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