Something that’s exercised me over the last few years is what I sometimes call “the tyranny of free”, because the instance that everything must be free is actually very costly to us all. But, that’s only part of a bigger picture, and this week’s announcement from Google that they will be killing a number of services people have come to rely on, including Google Reader, got me thinking about this again.

I’ve blogged about the tyranny of free before, so I don’t want to focus on that today, instead I want to take a step back and talk about the importance of following the money.

When it comes to software we generally don’t tend to get locked in anymore these days. Not even Office and Photoshop lock you in now. If we are using an app that suddenly goes out of existence, or changes in some way that turns us off, we are almost always free to switch to an alternative app now. So, understanding the finances behind most of the apps we use is not that important. There is one very important caveat though – apps that act as interfaces to cloud services are very different beasts, because we are using those apps to share our data with a company or organisation.

The really important thing is understanding the financial underpinnings of the cloud services we use. Cloud services are entrusted with a lot of our information, and we can very easily find ourselves locked into them. This is why I think it’s very important to understand how a service is supposed to make money before starting to use it. In some rare cases like wikipedia, online services are run by non-profit charitable organisations, but in general, services are run by companies, and companies exist to make money. Some people like to fantasise that companies are altruistic beings that are there to serve their admirers, but those are the ravings of fanboys. All companies exist to make money. Apple, Microsoft, FaceBook, Google, Amazon, Evernote, DropBox, Yahoo, Instapaper …

While all companies exist to make money, all companies are not the same, because there are many different strategies for making money, and those different approaches affect users in very different ways. You can take it for granted that companies exist to make money, what you need to concern yourself with is how those companies make their money, because that’s what will determine the incentives acting on those companies, and affect how they see you and your data.

As strange as it sounds, the first question you have to ask about a company is whether or not they have a business model at all! You’d imagine that no company could get funding without knowing how it will turn a profit some day, but you’d be wrong. The digital equivalents of South Park’s underpants gnomes are hard at work in silicone valley! Step 1 – get lots of users, step 3 profit!

When you become dependant on a service that’s run by digital underpants gnomes you’re likely to end up suffering in one of two ways. Either, the service collapses because running losses year after year after year is actually a really bad way to run a business. Or, the service changes dramatically once it has attracted enough users to be able to sell them. Sometimes that takes the form of the entire company being sold, e.g. Instagram, and sometimes it takes the form of the company pivoting in some way to convert their users into profit themselves.

Instagram is a good recent example of the first way digital underpants gnomes can convert users into profit, and for me Twitter is the ultimate example of the second. Users, and particularly third party app developers, played a major role in making Twitter the success it is today. Many of the things we consider core features of Twitter were actually developed by third party developers, not Twitter themselves. The two most striking examples are probably the word ‘tweet’ (Twitter called them ‘twits’ originally), and the concept of @replies. Now, Twitter are pivoting to try sell their user base to advertisers. Originally, they had no customers, now advertisers are their customers. Twitter users are not Twitter’s customers, they are Twitter’s product, and the third party developers that played a large part in making Twitter are now a problem that needs to be death with, hence the crushing blows against third part app developers over the last year. As a Twitter user who has relied on a thriving third-party client ecosystem to get a good Twitter experience, I am suffering from Twitter’s pivot. Had I understood what I do now about the dangers of digital underpants gnomes I’d never have joined Twitter in the first place.

Assuming the company you’re evaluating does have a business model, the next key question is who their customers are. The primary concern of any company is to keep their customers happy and coming back for more. It’s in a company’s interest to do the things that their customers like, and it’s against a company’s interests to upset their customers.

When the users who use a service are also the customers, things are pretty simple – companies are incentivised to do right by their users. When users are not the customers though, then their interests are inevitably secondary to the interests of the customers, and when the interests of the customers are at odds with the interests of users, then the customers win and users lose out.

Because, for what ever reason, many people in our society want something for nothing, many services rely on advertising as their income stream. This sets up precisely the kind of perverse incentive I worry about. If users were customers then it would be in the company’s interest to protect their data, but since they are not, that’s not the case. But, it gets worse, because it is in the advertisers interests to get as much information as possible about the users they are paying to advertise at, so, companies are incentivised to give as much data about their users to their customers, the advertisement agencies, as they can get away with.

Ultimately, we are dealing with market forces here, and as anyone living in a capitalist society knows, market forces are very strong, so when they are working against you, that’s dangerous.

Perhaps it might be helpful to look at some real-world examples. Please bear in mind that these are my personal opinions, obviously I think I’m right, but I could of course be wrong.

  1. FaceBook – it seldom gets more black and white than this IMO. FaceBook’s customers are advertisers! Recently the lines have gotten a little blurred when FaceBook started to treat some of their users like advertisers by charging to have posts ‘promoted’ (i.e shown to all your ‘friends’ and not just to a random sub-set of them), but, even still, it seems clear to me that the vast majority of FaceBook users not FaceBook’s customers, while advertisers clearly are. I think you can understand the way their terms of services have evolved over the years as the inevitable result of the perverse incentives created by having advertisers as their customers rather than their users.
  2. Google are a little more complicated than FaceBook because they do a lot. They are best know as a search engine, but they are a big service provider too, with extensive cloud offerings, and they also make two operating systems, and a number of apps including a popular browser. They are also stating to directly monetize some of their web services by charging customers for their use. E.g., if you want Google Apps on your own domain, you have to pay now, the free tier has been removed. However, when it comes to making the big money, I think it’s still all about the ads.
  3. Amazon – I find Amazon an interesting case – they clearly gather a lot of data about their users – they know everything you search for on their store, and everything you buy there, but they use that data differently to Google, they use it to figure out what else you might like to buy from them via their uncannily good suggestion engine. At first glance, you might think Amazon’s data gathering is no different to FaceBook’s, but I think it is, Amazon are not using our data as their product, they are using our data to sell, us, their customers, more of their products, the things they sell in their stores. I sometimes think of Amazon as the digital Wall Mart.
  4. Apple are not clear-cut either. They sell hardware, they sell apps, they have a cloud service, and they sell ads. When you look at Apple’s earnings reports though, it’s clear that their primary customers are people who buy iThings, followed by people who buy media and software through Apple’s stores. iAds is really quite insignificant in the grand scheme of things. iCloud is also a very different cloud service to Google’s. There are no ads, it’s a freemium service to make iThings more attractive. I think Apple had no choice but to make a free iCloud tier because Google have a free cloud as do Microsoft. Google use their cloud as an ad platform though, while Apple don’t. On the whole, Apple primarily make their money by selling things to their users, so, Apple’s users are their main customers.
  5. I find Microsoft very difficult to analyse at the moment. Historically they were very easy to understand, they made software, and they primarily sold it to corporate IT departments. You could see by their feature sets that corporate IT was who Microsoft focused on. Now It’s very hard to tell what Microsoft’s focus is. They still do the software thing, and they still sell to corporate IT, but, they are also trying to copy Google and become a search and advertisement company, and they are also starting to focus on end-users as well as corporate IT with the XBox and their new phones and tablets. The fact that ads are starting to infest XBox Live shows how complicated the incentives are. I’m not sure if even Microsoft know what their long-term strategy is, so it’s very hard to divine what incentives are driving Microsoft’s decisions, and how they will affect users going forward.
  6. Evernote and DropBox both have, and have had for a long time, business models that work by selling a premium services to a small number of their users, while offering a free service to many more users to help support their ecosystem. Free users on Evernote and DropBox are not their products though, they are their market. The hope is not to sell free users’ data for profit, but to turn a few percent of those free users into paying customers. Those that never sign up are still adding value to the products because both consider easy sharing an important feature, and you can’t expect people to want to share with you if it will cost them! One of the reasons I chose to trust dropbox with my data is that I heard an interview with their CEO on a podcast where he explained their business model candidly I was impressed that even from the early days they knew where their incentives lay, and I thought they were healthy incentives.
  7. Flickr, SmugMug and 500px also have a similar model to DropBox and EverNote, while Picassa by contrast has a very different model, and can be thought of as the GMail of photosharing.
  8. The bottom line is that I’m not interested in telling people what companies or services to choose. Different people will make different decisions based on the same data because we all have different priorities. My hope is that people will stop, investigate, and think, before signing up to a service. It doesn’t matter what decision you make, as long as it’s an informed one – so follow the money before you invest your time and data into a cloud service! Oh, and watch out for those digital underpants gnomes too 😉