FreeConomics Part II - or why your data is free but everywhere in chains

FreeConomics Part I dealt with the illusion created by "Offset" economics - ie where things that look free are actually being paid for in other ways. Part II deals with the other way of capturing value from free services, ie owning the user data in some way by capturing and processing the data.

(Nota bene - I've not put all the links in yet, but I wanted my (not free) lunch first )

This is another form of collective obfuscation occurring today among some “New Media” commentators, who confuse and conflate “Free to User” with "the data is free". This is in my experience because it is the harder issue to grasp compared to offset economics - so we think of it simply like this :

You have an expected Net Present Value (NPV) over your lifetime (the average Brit earns c £0.75m over a lifetime in todays money) and it is thus fairly valuable to a number of organisations to know where, how and when you intend to dispose of it.

Getting that data - from store cards to free offers if you register your details - is usually via a form of subsidised service, giving the illusion of "FreeConomics", and drives the other great Myth - that “All Free to Use” services use data or services that are "Free" (ie not owned). This resolves into the following three main submyths:

(i) A Free to User service means the data and/or service you are using is free and not down tied in any way
(ii)A corollary – that a service using "Common Data" is therefore itself Free and owned by the Commoners – i.e. is not controlled or owned by any entity
(iii) If we remove ourselves from the money economy, things will all be free to use and the data will be free too. Yay.

Looking in more detail at the main Sub-myths operant here

A Free to User Service uses data that is unchained and Free

Every time you make a search on Google, that is not free. Don Dodge calculates that it costs Google about $0.12 to run that search. Fortunately for Google, it makes about $0.19 every time - by advertising (vaguely) relevant stuff to you. Have you ever stopped to think how it does that?

As the old song by The Police goes, Every breath you take, every move you make, they are watching you. Everything is recorded. Your searches are aggregated against your history, against other's searches,and it is all constantly datamined to high heaven. They are constantly testing your response to stimuli X, your reaction to proposition Y and so on. (And not just Google, nearly everyone with a n eye to your data is in on the act - Facebook's play is just a Beacon shedding light on this)

This is because the key to your NPV is not in what you say you are, but what you actually do - your Behavioural Economics. (Skip over the next two paragraphs if you are familiar with this arena)

Although it started with a couple of pigeons pecking keys on simple schedules of reinforcement, Behavioural Economics stands as a well-developed, quantitatively sophisticated and theoretically rich part of behaviour analysis and brings a fresh understanding to complex human behavioural issues such as decision making, consumer choice, gambling, drug use, and therapy, and is now poised to provide innovative answers to vexing applied questions.

One of the most common conditioned reinforcers of all is money. Clearly there is overlap between the interest that behavioural analysts have had about the factors that determine the efficacy of reinforcers and the interests of economists who study the factors affecting demand and market dynamics in microeconomic theory.

Social Networks are bloody great test labs for applied Behavioural Economists - Datamining, Testing, Comparison and Adjustment were initiated by credit card companies such as Capital One, but the real time, closed loop social network is the best lab yet invented. Google at the moment is the biggest player of them all, but all Social Network owners aspire to this level of acuity.

That data, once captured, is chained in all sorts of causal webs, and is constantly being sifted and tested.

And will they let that data go, willingly - heck no! This explains why "Data Portability" is getting huge resistance, and why for example Facebook yanked up the drawbridge when Google approached it with a "more open than thou" play - or why Google will never let you scrape its search history (though Dogpile does display their, interestingly), and why a hundred and one PR agencies are scraping Twitter and Facebook as we speak.

Does this have impacts on privacy - yes,and various people are trying to wrest it away - the VRM movement for example - but this is going to be tough, as to do so people will need the tools to replace these services with truly open ones- which we will discuss more in the next section.


A Service using Common Data is owned by the Commoners

A typical FreeConomic stance is that because (Insert Web 2.0 Icon du Jour here) is free, and We Luvs Them cos they iz Cool Peeps (and haz gr8 PR) and a Groovy GUI 2.0, then the information in there is “free” and thus should be yours, and portable, and re-usable, and all those good things that Nice Guys who are not Evil would do, right?

Wrong!

As we now know from above, just because the Information is freely available - heck, even if its yours given by free will - does not in any way mean the Information is yours, or free, or anything like that once once it is pressed into Service – just read Facebook’s Terms and Conditions to dispel yourself of this Myth. They want that data to make money from your digital footprint, and ain’t going to give that up in hurry.

Google Books is another example of this, in that in theory the Book is free to you as its Real Life copyright has run out, but the Google platform – even though it is comprised of this “free and common” material – is closed and belongs to Google. They are essentially using an “enclosure” strategy – taking content that is in the Commons, using their resource to enclose it within their system, and then giving it “free” back to you – all you have to do is give them your (Ad) attention and your digital footprint. (Have you ever read “Faust” – it may be on Google books by now )

So, just because something's source is Free (as in not owned), does not mean it therefore must be Free itself. If anything, the temptation to round it up and sell it on is never higher - the recent play by Offbeat Guides exemplifies this perfectly - take data given freely by many people to Wikis, round it up, and sell it on.

Where this battle gets really piquant, though, is in the various attempts to get Open Portability of data between closed networks. This attempt, worthy though it is, is bound to fail as the game theory says that every Social Net is very keen to get the data, but far less keen to give it up. That data is their Passport (remember that one) to unlocking your Behavioural Economics.

We are in the days of AOL vs CompuServe vs Prodigy in Social Networking today.

As we noted above, people need a full set of tools to avoid this - and the only way this will be executed is when the "Open Social Net" espoused for example by Tim Berners Lee (the GGG or Giant Global Graph) comes to pass. Last time round Marc Andreessen et al broke the dreadlock with Mosaic, this time round he's building closed networks with Ning. Who will step up to the plate this time?


If we remove ourselves from the money economy, things will all be free to use and the data will be free too. Yay.

There appear to be two main threads here, both trying enchain your digital self in non-tradeable systems. Firstly, by trying to legislate or protest away economic reality, and secondly trying to form non-cash economies.

The three main areas of the legislation / protest confusion are those around Open Source software, Net Neutrality and Open Rights.

(i) Open Source = Free Software?

Open source development ab initio is actually a very simple offset model, as we noted in Part I – people are giving of their “Free” time to create free software etc, which – because their time input is free – can then be sold on for free.

Now before you get all hot and bothered and tell me that collaborative communities (Enter Linux stage left, Mozilla stage right) have created Marvellous Things, and that For-Profit corporations are now contributing enthusiastically, I’ll tell you that you are absolutely right. Then I'll ask you why you think that is, and whether it is sustainable at scale.

In fact, a recent report believes that the value destruction by Open Source today is c $60bn, which (compared with the c $30bn total value of the global online Ad industry over the last 10 years and the c $ 20 bn of VC money that has gone in from the VC industry - preliminary numbers, need to firm up), shows it is probably the largest driver of Web 2.0 FreeConomics to date.

The issue, though, is whether you can scale an Open Source, Offset FreeConomy such that it sustainably replaces the whole "PayEconomy". At present, you can look at the FreeConomy as a sort of “edge economy” that sucks up “Free” time and converts it into more useful work – which is fine and dandy so long as the hosts paying for the offsetting don’t die. If the Offset economy gets too large so the Real Economy can't pay no more, then what? This is bad parasite game theory - the idea is to tax, not kill, your host.

So my contentious contention is this – Open Source software creation is the “edge” of the Edge economy, but it is marginal economics – ie it is driven by people operating at way below sustainable economic cost if they wish to eat, live and reproduce. For Open Source to grow above a certain % of the ICT ecosystem, either (i) it needs to be done in places where sub-economic cost is sustainable (Go East young man), or (ii) The Olde Economy needs to be introduced, along with its wallet. And hosts aren't stupid, so they are looking very carefully at how they can take a bite of the hands that feed off them.

But these changes will destroy the delicate offset economic game theory of working for reputation, especially if others start to make out like bandits on your work. In other words, can you really run Open Source as a significant proportion of any ecosystem without significant change to its precepts?

And what does that change look like in terms of the motivation of those people who are giving their “Free” time? Its one thing to give of free time to write cool code, its another thing entirely to support a “heritage” system based on release 3.4.1(bis) at 3pm on a Saturday night in a 24x7 production environment.

(ii) Net Neutrality = A Permanent Free Ride?

There are a number of very valid arguments for Net Neutrality - non discrimination in terms of service, provider, source, device etc. But somehow non discrimination of price for resource usage got caught up in all this, and is a different thing entirely. The economics of this are actually very simple – when capacity is unlimited and usage is low, to drive it up the Distributors tend not to price for differential usage as the marginal cost is near zero - ie as close to Free as you can get.

This situation drives the particular FreeConomic myth that bandwidth should be free from charge, and (thus) from interference.

However, as peak usage starts to approach full capacity, distributors have to start to upgrade their capital assets – which is a typically a very, very big spend. And at this point they start to get extremely interested (i) who is causing this capacity over-reach and (ii) who will pay for the additional spend to cope with it. As a predictable corollary, they immediately think about asking the heaviest users to pay the most money.

And this is where the Free Ride of the heavy ‘Net user meets the Tollgate of the pipe owner. Its simply tragedy of the commons again, except that the pipes ain't commons. Unless one proposes to legislate (as Korea has) the pipe's economics or nationalise them, there can only be one outcome here. So we must expect to see some form of incremental pricing for Quality of Service, and/or throttling of the heaviest users in constrained systems, at least until the next major capacity upgrade. Its a delicate dance as to who will pay between producer, consumer and distributor, but the distributor owns the bulging pipes and that, as they say, is 9/10ths of the rules.

(iii) Open Rights = Open Wallet?

With Open Rights, the “true” Freedoms again get conflated with Free as in “it cost me nothing, so I should pay nothing”. Now, as with Net Neutrality, there are a number of valid arguments in here that are totally genuine:

- Services that were once charged for by gatekeepers that no longer exist, but old legal frameworks are still in place to protect them in gathering revenues are to be abhorred.
- Ditto gathering excessive revenues compared to the reduced costs of digital delivery.
- Where rights have been unfairly extended in spaces (and time) into areas where they were never intended they should likewise be resisted.
- Privacy
- Democratic access

However, this doesn’t really ethically justify a land grab mentality that says “anything you once owned is now ours” – aka Piracy, which does seem to tinge some Open Rights groups.

Leaving the ethics aside to be trampled in the gold rush, however, the main issue, (economically speaking) with a lot of these Socal Capital ideas is that they soon hit “tragedy of the commons” effects, i.e. the general problem where something “we” all own or want but no-one will pay for is that its typically not cared for, and is either ruined for all (no one Mediterranean country profits from reigning in its water pollution for example ) or goes extinct because some parties abuse their common “rights” (hunting ocean creatures to near extinction for example).

History tells us that there are only 2 long term outcomes to sustainable management of commons wealth, both dealing with increasing barriers to usage:

- A body of rules (law) comes into being, and all users are taxed in some way for its usage
- It is taken over by others and re-sold to users

Sadly, to keep common wealth and social capital “Free” as in unchained, usually consumes resource, and it thus cannot be "Free to User" or it is just not sustainable. And if even it is paid for indirectly, by offset, at some point the piper starts to call the tune.


Makin’ Whuffie

The other "legislate away the economics" approach is to replace it with an entire alternative economy.

Whuffie is from a Sci-Fi novel by Cory Doctorow. It’s a “currency” that replaces money, and is essentially a constantly updated rating that measures how much esteem and respect other people have for you. This rating system determines who gets the scarce items, like the best housing, a table in a crowded restaurant, or a good place in a queue for a theme park attraction. In essence it’s an attempt to construct a digital social capital bank.

The general case for Whuffie et al is called "Gift Economics" (aka a non currency payment economy). However, such “gift economies” have only really existed historically within closed communities, typically because either (i) the real economy imposed too high a friction (tax, currency instability etc), (ii) the "cash" economy was not sufficiently developed, or (iii) the trading in question was really an informal favour system (which we tend not to use cash for) that had grown too large to manage from memory (like bottletop tokens for babysitting circles). These "favour" systems usually broke down over time and were not really scalable - until (in theory) we could digitise that karma. Hence Whuffie et al.

Whuffie was fairly frequently used as the symbol of a non financial currency option by “Digital Economy” thinkers a few years back. Sadly, there are a few mental shortcuts usually taken when thinking about it. The things that are usually forgotten about Whuffie itself are that:

(i) it was constructed for a world of few shortages, and
(ii) it was only used within a tightly defined Metastructure, i.e. Disneyworld.

ie it was built for a piece of enclosed, structured "commons" where the way of alleviating the tragedy of the commons was (i) abundance and (ii) rationing via user-generated karma.

The things that are usually forgotten about all “Non currency” currency theses are the side effects of system gaming – inflation, artificial boosting, tit for tat behaviour etc – which are usually easier in these environments as there is no cost to the transaction - just ask eBay or Amazon, or examine the way link love really goes on in the blogosphere (the rich....get richer)

Some of that is got over by the initial condition of lack of scarcity in the novel - it's hard to be poor and oppressed when every material want is catered for (which is why, we suspect, most people arguing for these systems have never experienced real want in their lives!)

Cory Doctorow actually acknowledges the issues in a later post he made ()

The other problem (OK, one of the other problems ) with Whuffie type systems is that it lacks a lot of the critical stuff that makes up the fundamentals of democratic infrastructure, like protection for minority opinions - imagine disagreeing with the social media herd if your next meal depended on user-generated whuffie!

This Whuffie is thus not a “Free” economy so much as a token based “barter” economy, but is sometimes lumped under the Free banner.

(Un petite addendum - a few social network sites make you pay for the allocation of karma etc - by raising the transaction cost above zero, that changes he game from a "low commitment" to a "high commitment" display, and could be an interesting development )

However, none of these cash-avoidance systems are zero cost-pie games, because outside of their FreeConomic Bubble, that real economy wants real cash or they shut down their services. You may think that your Web 2.0 Whuffie gives you a free lunch, but try trading it in down the local pub for a pie and pint. Now that day may come, but only when Mine Host can use Whuffie to buy beer, and the Brewer can use it to buy Hops, etc etc. And as we've noted, it has to start looking a lot more like real currency for that to work.

(In) Conclusion

The aim of these two posts was to make readers more aware of the sleight of minds and tradeoffs between various types of digital Free for Alls, and to be able to tell the difference between the worthy aims of various Freedom Organisations, and the economically unworkable ones.

It was also an attempt to rein in the free reign of the FreeConomists, who - in my view anyway - have not had their ideas sufficiently tested yet. This is a start to that process. (An aside by the way - Techdirt, one of the most vehement FreeConomic support blogs we know of, actually wrote an article last week conceding that "Give it away and pray" is not a useful business model....though they are still struggling with trying to justify why FreeConomics overall is sustainable. Still, small steps.... ) (Update - Mike Masnick has commented below that Techdirt's overall view is that free, by itself, isn't the business model - in which case we are in furious agreement, as that is the main point I'm trying to drive home with these 2 posts)

There can be no real conclusion sadly, as the whole 'net economy is still constantly evolving. There is a constant interplay between capacity and service cost, between Moore's Law reducing costs and Metcalfe's law adding value (and traffic), and Coase's Law reducing the cost of dealing with the changes these bring about. We will deal with these in Part III of FreeConomics, looking at how these laws bound the space in future and what is likely to change.

And now...off for my (sadly, not free) lunch.

Update - I did notice yesterday while writing this article that there was a big spreade on how Starbucks was offering "Free" wifi - no such thing, of course - its a classic offset + data capture model, as readers of this article and Part I will immediately grasp - which others such as the Seattle Times have pointed out today:

The thing that gives pause is Stabucks' registration system. It requires customers to register with Starbucks to get the service. That means you are trading some personal details and entering yourself into Starbucks' customer files in return for a few hours a day of access.

Starbucks and AT&T aren't going to waste that valuable information. Read the fine print: By registering, you also agree to receive four e-mails (presumably selling stuff, so spam) from AT&T per year. In other words, by accepting the free Wi-Fi, you're opting in to receiving their marketing.

It's refreshing how explicit they are about it, so you can decide if two hours of Wi-Fi is worth four spam a year.

Ineed - actually allowing you to see the policy and make the tradeoff is very unusual at the moment - is this a new trend?