Business Models, Commerce, Controversial Topics, Research, Social Media, Social Role, Technology, Tools, World of Tomorrow

The Unstoppable Corporate Force Meets the Immovable Social Network

Electronic Frontier Foundation
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The  general consensus is that the future of media lies in increased social participation and mobile access to that media.  Yet events of the last few weeks have given signs that progress toward that future is not going to be smooth.  We’re seeing more conflicts between companies that need to find workable business models, major corporations mired in obsolete ways of doing business, and users who insist on controlling the products they use while refusing to pay for them.

As any Internet service catches on, the people behind it come under increasing pressure to monetize their product.  Increased usage means increased costs, investors want a return, and the creators of any successful enterprise expect to be rewarded for their ingenuity and hard work.  This seems fairly straightforward until you get into the realm of social networks and social media, where the users are vital contributors to success. Social media ventures are dependent upon the participation and goodwill of the users, who like to feel that they’re in a partnership with the toolmakers. At the same time, those “partner”-users generally refuse to contribute revenue, something all companies need once the VC funding wears out. The day you charge users for a Facebook account is the day Facebook stops being relevant, and the day all those users switch to the next big thing that’s still free.

In order to keep these ventures alive, the companies behind them have to some way other than subscription fees to generate revenue.  One obvious way is to mine the activity and private details of your users for lots and lots of information that can be sold to the highest bidder.  Some of this is fairly innocent, anonymized data covering overall trends (though some would argue there’s no such thing as anonymous data).  But we’re entering into an age of specific targeting, where your individual details are going to be sold to advertisers and open and available to many other third parties, something that’s starting to raise red flags for many. If you’re working for a biotech startup in a highly competitive area, do you want your competitors to know what literature you’ve been reading, what protocols you’ve accessed, what reagents you’ve ordered?  Would you be bothered by an ad pitch that included specific details about your children, their daily schedule, their likes and dislikes?

Many companies are finding it increasingly difficult to align their goals in this space, as the open paths toward monetization are often in conflict with the desires of the users on whom they depend. It becomes even more difficult in a world where users have easy access to tools to organize and loudly and publicly voice their complaints. It comes as a rude awakening to the Twitter user when the friendly floating whale turns out to be a corporation more intent on making money than on making him happy, and it’s just as annoying to the executive when a freeloading user who refuses to pay for a service thinks he should be in control of running the company.

Privacy issues are coming to the forefront with the recent revisions to Facebook, and  an offhand comment from Google CEO Eric Schmidt:

If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.

This is wrong on so many levels, particularly coming from a company that blackballed CNET reporters who used Google to dig up and publish private details on Schmidt himself.  Security expert Bruce Schneier responds eloquently:

Privacy protects us from abuses by those in power, even if we’re doing nothing wrong at the time of surveillance.

We do nothing wrong when we make love or go to the bathroom. We are not deliberately hiding anything when we seek out private places for reflection or conversation. We keep private journals, sing in the privacy of the shower, and write letters to secret lovers and then burn them. Privacy is a basic human need.

The problem is that your basic human need often opposes the needs of corporations and gets in the way of revenue generation.

Facebook has recently taken the first step toward making more and more of your information public.  The Electronic Frontier Foundation (EFF) details the problems with the changes, and Danny Sullivan shows the exhausting level of detail one needs to go through Facebook’s new privacy settings.  This is part of Facebook’s ambitious plan to become the backbone of the Internet, to essentially out-Google Google. It’s interesting to watch the give-and-take here, and the question is whether these intrusions are enough to push users away from a particular platform.  Facebook has backtracked on some of their changes, and the situation in some ways mirrors that seen at Twitter, where every time the company tries to make any change in the system, the users revolt. It’s a difficult balance to maintain.

I recently met with David Kremers, the artist at Caltech (and the fact that Caltech has a conceptual artist on their payroll should tell you something about why they’re so far ahead of most other scientific institutions).  Kremers lives a little further in the future than most people I’ve met, and he explained to me that “privacy is the new luxury.”  Think of it this way — most people aren’t willing to pay for online services, so they’re going to have to put up with things that make them unhappy, or that work against their own best interests.  Those who can afford it will instead pay for services better tailored to their needs and without all the potentially harmful exposure of personal data.  You pay more to drive your fancy car to work rather than riding the bus because it’s a less annoying way to do something you have to do.  If companies see selling your data to third parties as a way to monetize their sites, then you can be sure that they’d be just as willing to sell you the right to keep it private. Done poorly this will come off as extortion–pay us or we’ll tell the Gap what size pants you wear.  Done right it becomes a true partnership between a service and its users, as the company is getting revenue from looking after the best interests of its customers.  Perhaps this is the answer to making the “freemium” business model work — free access for all, but you’ll have to pay if you want any degree of control or privacy.  It may seem far-fetched now, but as abuses and annoyances pile up, it will become increasingly attractive.

In the mobile arena, we’re seeing a different set of problems.  Mobile access is largely controlled by cellular phone companies, who have well-established business models in place and seem reluctant to do much beyond them.  They’re used to providing a barely adequate level of service for their customers.  To quote an old “Saturday Night Live” skit, “We don’t care. We don’t have to. We’re the phone company.”

The overwhelming success of the iPhone is proving particularly difficult for AT&T to handle.  Revenue is up more than 80% on wireless data since the introduction of the iPhone.  AT&T has an incredibly enthusiastic customer base that they can build out into even more revenue, but their network is having issues handling the added capacity.  Their response to this growth opportunity?  Reducing spending on network construction every quarter, and trying to convince iPhone users to use their services less.  As usual, Fake Steve Jobs gets right to the heart of the matter with this imaginary conversation with an imaginary AT&T executive:

Fake Steve:  “Yes, 3% of your users are taking up 40% of your bandwidth. You see this as a bad thing. It’s not. It’s a good thing. It’s a blessing. It’s an indication that people love what we’re doing, which means you now have a reason to go out and double or triple or quadruple your damn network capacity…You’re in the business of selling bandwidth. That pipe is what you sell. Right now what the market is telling you is that you can sell even more! Lots more! Good Lord. The world is changing, and you’re right in the sweet spot…Does any of that make sense?”

Fake AT&T Executive: “Yeah, but we’re still not going to do it. See, when you run the numbers what you find is that we’re actually better off running a s***ty network than making the investment to build a good one. It’s just numbers, Steve. You can’t charge enough to get a return on the investment.”

The “numbers” are then explained in a follow-up posting. There’s no return on investment for making customers happy.  In fact, customers don’t matter — all that matters is making investors happy, and that’s done by driving up the stock price.  Instead of recognizing a great opportunity for long-term growth and the creation of loyal repeat customers, AT&T execs seem to be more interested in the short-term.

This type of thinking is very often directly in opposition to what customers want, and it can destroy any chance of building long-term health for these companies, but few seem to care.  Executives make lots of immediate revenue, but lose customer trust and participation.

As we move into an era of social media and participation, that’s a death sentence. Business as usual will not work, and we’re seeing more and more company/customer conflicts because of it.  In the past, AT&T would have received some bad press here, then the whole thing would have blown over.  Now you’ve got thousands of customers organizing and looking for active ways to express their displeasure, no matter how ill-conceived and ineffective those activities may be (these sorts of protests are just going to get better and more frequently done). This has gone from a minor gaffe covered only by the tech/business press to a major embarrassment reaching widespread awareness.  AT&T have virtually guaranteed abandonment from an already angry Apple and from their iPhone customers once exclusive availability expires.

So the question for companies looking to thrive in the new media arena is not just how to monetize activity, but how to do so in a way that serves both your own interests and those of your users. That’s the key to long-term success in a socially networked world and as many companies are finding, it’s not an easy riddle to solve.

About David Crotty

I am a Senior Editor with Oxford University Press' journal publishing program. Prior to that I served as an Executive Editor at Cold Spring Harbor Laboratory Press, and was also the commissioning editor for their book publishing program. Many years ago, I was a research scientist, receiving my Ph.D. in Genetics & Development from Columbia University, and doing postdoctoral research in neural development at Caltech.

Discussion

9 thoughts on “The Unstoppable Corporate Force Meets the Immovable Social Network

  1. David – this is a meaty and thought-provoking post. I wanted to comment somewhat critically only on two of the folks you cited above, however.

    In the case of Facebook and lost privacy, I don’t think Kremers’ analogy holds because unlike a fancy car or other material possession the value of a social network is the potential number of (relevant to you) connections. A high-priced, privacy-protected social network isn’t worth much to the user if most other folks stick with the free, privacy-lacking site.

    What I think is potentially interesting and sort of a synthesis of your points above is that people can use the power of Facebook to educate and spread the meme of how to change the settings and protect privacy. Credit card companies, banks, health insurers prior to HIPPA and many other businesses have trampled on our privacy for decades but often quietly. Trying to lock down your financial or health information required traversing an Orwellian system of forms and 800 numbers and so on. Maybe this is a case where the power of communication given by Facebook can trump the privacy taken away by Facebook?

    On the AT&T issue, I agree that AT&T has service problems that have angered many customers but I’m not sure Fake Steve Jobs is the go-to authority for the back story. For example, AT&T’s stock price hasn’t benefited much from the reduced capex spending, so I’m not sure it’s convincing as a motivation. Over the last year while the general market as measured by the S&P 500 Index has gained 28%, AT&T’s shares are virtually unchanged. I even looked back to the last market bottom in 2003 and it looks like AT&T is trailing the market by a similar vast margin.

    Second, AT&T has a mix of businesses besides cellular and the Capex numbers everyone is seeing include a lot of other stuff, such as spending on the plain old telephone network and the company’s not-very-successful, not-exactly-fiber-to-the-home project called U-Verse. You’d hope and pray as an investor that capex on those two categories would be going down quickly. I’d really like to hear from a more serious source than Fake Steve Jobs on the Capex issue.

    Posted by Aaron Pressman | Dec 22, 2009, 6:22 pm
    • Couldn’t you have one network with different levels of service (first class and coach)? So far we’ve seen things centralize around one network at a time for the reasons you note (Myspace, then Facebook). It seems more plausible that this will continue than the idea of lots of interacting but separate networks. But I could easily see a Facebook where most used free accounts that were monetized through the sale of data, while some paid for a higher level of privacy and control. The free group would have to deal with aggressive advertisers, spammers and scammers, the paid group wouldn’t.

      I do like the idea of using a social network to organize movement against the behavior of the network itself. One wonders how the company behind a network would react (I’m thinking of Apple removing negative threads about their computers from their discussion boards).

      As for AT&T, regardless of their motivation, they’re blowing a great opportunity here. They’ve openly admitted that their network is not good enough to handle the traffic, and have claimed to be working on improving it for quite a while. But it’s becoming more evident that despite the increased profits, they’re not actually doing that, and they’d rather have their customers use their phones less. They’ve reached the point where their poor service is now a national joke. Not exactly the best way to build long term customer loyalty.

      Here’s another recent example of poor customer service reaching the eyes of many more people due to our more networked world. I liked one commenter’s reading of the subtext of Delta’s response:

      The line Delta left out was “and we are growing frustrated, like most companies, that every time we screw up it ends up all over the internet and turns into a big story we used to be able to hide.”

      Posted by David Crotty | Dec 22, 2009, 10:49 pm
  2. A good debate on the question of privacy as a fundamental right or a commodity can be found here:

    Although the US government has taken steps to protect privacy as a right since Louis Brandeis formalized the concept in 1890, there is always a clash with commercial interests who view privacy as a commodity. What we have seen is that those who want privacy are going to have to pay a lot for it, a trend that will continue to trickle down from public figures to the general public. Gated “communities,” “identity theft protection” rackets, etc. are symptoms of the commodification of privacy.

    Posted by David Crotty | Jan 6, 2010, 10:54 pm
  3. Facebook’s Mark Zuckerberg has declared that people no longer want any privacy. ReadWriteWeb disagrees.

    Posted by David Crotty | Jan 12, 2010, 12:08 pm

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