The internet and the cost of free
Delivered on 02 December 2018 by Justin Pyvis. About a 6 min read.
The internet as we know it today is largely one where most things we encounter are provided for free. You can browse this website for free. When you search for something on Google, it doesn’t charge you. Facebook? Free. But as we economists are fond of saying, there’s no such thing as a free lunch. Someone is paying. In terms of this website, I provide the content for free because I enjoy writing about technology and want to share my thoughts on a platform where I have full creative control. GitHub bears the cost of hosting this site on the hopes that I’ll upgrade to a paid plan sometime in the future. But that’s not true for Google and Facebook, two very profitable public internet companies that directly charge their users very little.
I would have added EconByte to the chart but there’s not much point when it would only show as a flat line across the $0 intercept. Also, note that I’m singling out Google and Facebook only because they’re the largest companies with “free” products of which I’m aware. So how do Facebook and Google generate those profits? One word: advertising.
Follow the money
Google and Facebook charge companies for access to their users. The more people that use their services, the more companies are willing to pay for access to those users. But that model essentially removes prices from one side of the equation, meaning users of the “free” service - unable to weigh up the costs and benefits in dollar terms - have to decide whether or not to consume more through some other means. One way is through simple enjoyment. If Google and Facebook show too many adverts, or adverts that are too intrusive, people will leave the platforms for a competitor. That’s one reason why Google’s adverts are so discreet - if it plastered obnoxious advertising all over its homepage, people - and then advertisers - would quickly abandon it.
Facebook’s adverts are a bit more intrusive and show up either directly as adverts (e.g. in the right column) or as “sponsored” posts, images and videos. Here’s an example Facebook advert from Neil Patel:
The sheer number of people who use Google and Facebook mean that they’re generally happy with the trade-off. I’m personally not a fan of the exchange; the price of using Facebook is too high for me and I eschewed the social network several years ago. Admittedly Google can be hard to avoid and I still rely on it for a couple of services, but I haven’t missed Facebook.
There are other ways
I recently started using Brave browser instead of Firefox (I’ll post a referral link at the bottom of this post). It calls itself “a free and open-source web browser developed based on the Chromium web browser and its Blink engine”. It’s a privacy-focused browser which blocks adverts and trackers, but with one big difference: a pay-to-surf business model. Users help to support content creators through microtransactions by either tipping or through the “Brave Rewards” mechanism, whereby you set aside a pool of funds that is distributed every month to websites that grab your attention.
The whole thing is built on top of the Ethereum blockchain, using the “Basic Attention Token” or BAT. That means transaction fees are far lower than with traditional banking, allowing microtransactions to actually take place (PayPal and Stripe, for example, charge around 2.9% and 30c per transaction).
I’m not sure whether it’ll survive in the long run but I think it’s a move in the right direction. Advertising is obnoxious and always involves a breach of trust and privacy to some degree. At least with the Brave browser, you’ll be able to opt-in to advertising and be compensated for the inconvenience.
Amazon is on board
Well, kind of. Amazon just announced the Amazon Quantum Ledger Database, or QLDB, based on blockchain technology (the “AWS Managed Blockchain”).
Amazon QLDB is a fully managed ledger database that provides a transparent, immutable, and cryptographically verifiable transaction log owned by a central trusted authority. Amazon QLDB tracks each and every application data change and maintains a complete and verifiable history of changes over time.
For crypto enthusiasts such as myself it’s good news: finally one of the big tech companies has entered the blockchain space. I wasn’t sure which of the FAANGS would get there first but was pretty sure it would be Apple or Amazon, given neither of those companies rely on advertising for their revenue. It also makes sense for it to be Amazon over Apple; the company’s most profitable division is AWS (its on-demand cloud computing platform), whereas Apple is still in the device business.
Amazon’s blockchain implementation looks to be centralised, with the AWS Managed Blockchain run only on Amazon’s servers. Amazon will charge a fee for the service based on usage, a step in the right direction - and the centralised solution is essential for corporates that need to tick all of their regulatory boxes - but it’s certainly nothing revolutionary.
What I want
What I would love to see is more decentralisation with data controlled by individuals, not corporates. Centralised solutions are always going to be more vulnerable to failure (e.g. hacking) than their decentralised equivalents. As I was writing this post, news broke that the Marriott hotel chain had been breached, exposing 500 million customers’ data, including names, addresses, phone numbers, email addresses, date of birth, gender, trip and reservation information and passport numbers.
If a more robust, decentralised system had been available for the Marriott to store its data - for example, a distributed blockchain where user data are encrypted with private keys - there would have been nothing to steal in the first place. Hotel guests would verify themselves when booking or checking in using their private key, ideally secured with multi-factor authentication (e.g. a password and physical token such as a YubiKey). No backdoors or master key for hackers to exploit.
Unfortunately, I think we’re still a while away from that model. The Marriott hack was no doubt a public relations nightmare, but I’d bet that from a purely financial point of view a centralised option would still be preferred. For if it had a fully distributed, decentralised database as described above, it wouldn’t be able to harvest its users’ personal information to sell to a third party or improve its own direct marketing ability. There’s also the fact that privacy and security are less convenient for the average user than more vulnerable, centralised alternatives, meaning some clients might be put off by having to take responsibility for their own data.
People vote with their feet (or in the internet’s case, their hands) and so the evidence suggests we’re not yet at a point yet where the cost of “free” is greater than the inconvenience of having to pay a few dollars for an alternative. Facebook was hacked and has an awful history of abusing its users’ privacy, yet not only do people keep using it but its user base keeps growing. It’s not as if there aren’t alternatives.
I think whatever model eventually triumphs, it won’t just have to equal the likes of Google and Facebook, but far exceed them. People can be reluctant to pay for something that they currently get for “free”, even if it’s not actually free.