the real cost of free

This article is part of the series the interwebz.

We all love the interwebz. All that great stuff, and it’s all free, right?

Perhaps not universally free. Some sites have put up paywalls to try to gain some revenue for their efforts. Newspaper sites come to mind. But these payment-required sites are very few.

Google helps us find information. Facebook allows us to communicate with family and friends across the world or across the house. Twitter helps us keep our finger on the pulse of what is happening in the world, in near real-time. Dropbox allows us to store digital assets and share them with people. Instagram provides us a means to share our photos of cats or embarrassing selfies. We can check our in-house cameras from anywhere in the world and turn lights and appliances off or on.

And, all of this is free, and free in the sense of “free beer”, and not “born free” or “free speech”.

Using the web is far from free. The currency we use to pay for it is much more valuable than we acknowledge. That currency is us.

I am not discussing internet service provider (ISP) fees for access to the web. I am discussing what happens on the web. ISP fees are a completely different subject, which I will discuss in a later article.

“If you are not paying for it, you’re not the customer; you’re the product being sold.” blue_beetle, on MetaFilter, 2010

Every time we use the web we disclose something about ourself. We disclose where we are, what device we are using, what led us to a site, and what we are interested in. Most of these data are supplied by our browser, and the others we disclose by our activity.

Sites need to know our IP address, so they can send us the page that we requested. They need to know the device we use so they can format the page correctly. They don’t need to know where we came from, the “referrer id” in the header information, but it is part of the standard, and is very useful for statistical purposes. This is called “data leakage”, or our “data exhaust”, and is an artefact of how the web works.

Be aware that our IP address combined with our browser fingerprint is an almost unique identifier.

Once we are at a site they have enough information to uniquely identify us, and we then start telling them about what we are interested in, which is easily derived from our activity. Or, if we are using one of the big service providers, we disclose even more – we log in with personally identifying information, and then gift them all sorts of information.

To be clear; we tell these sites what they want to know, and we have given them permission to use it as they will. I will return to this topic in a later article.

The big internet companies record and accumulate this information. In fact, every site does, even small sites like this. The difference is that for the big internet companies this information and the insights they derive are a commercial asset.

These – or to be accurate, us – are their “rivers of gold”.

The problem is the business model of the big internet companies and this business model is simple. The more they know about us, the greater the value of their offering to the advertisers. They create something that encourages us to use it, and by using it we tell them all manner of things.

Be aware that half their entire development budget is spent on  making enhancements or derivative products that will encourage us to use them more and disclose even more. The other half is spent on taking the data we gift them, and doing things with it to increase its value.

So why does this matter?

It matters because everything we do on the web is being scrutinised for its potential advertising value.

The stakes are high. In fast moving consumer goods (FMCG), small changes in market share are measured in millions of dollars. When an internet company says to a cat food company that they can provide a list of IP addresses and browser fingerprints for people who like ginger kittens, they jump at it. Suddenly, those of us who have ever browsed for ginger kittens find a lot of adverts from Brand B, espousing the benefits of their product for developing ginger kittens. Many of us will not pay too much attention to this, but many will. Even if only a small percentage of us change our purchasing from Brand A to Brand B, then there are millions of dollars at stake. Which is why in-depth knowledge of people and their interests is so valuable, and can be monetised so easily.

We have seen crazy valuations of internet companies. They defy most metrics for applying a value to a business. They make operating losses, they burn cash at alarming rates, yet they are valued at a gazillion dollars. Why? Because they have deep information about their so-called customer base, which is what they sell. Actually, using blue_beetle’s words, they have deep information about their product base. Us, in other words.

Not only are we their product, but we should recognise that we are also their workforce. We are the ones who generate the content, geo-locate that content, create meta-data tags to describe the content and define contact graphs.

We edit and curate content for them, which is what reviews are actually about.

Valuing this “free economy” is problematic but looking at the underlying economics is illuminating.

Facebook earned a little under five dollars per user in their second quarter of the fiscal 2017 year. This is derived from their operating revenue divided by their stated number of users. Of this amount, a little under ten cents was earned from direct charges, such as in-app purchases and fees to promote pages. The rest was income derived from selling to advertisers. And that amount is growing 20% year-on-year.

Further, the cost of providing, running and maintaining the infrastructure that supports this is around eight cents per user, over the same period. This is a serious profit margin. We can now see why they invest so much in keeping us engaged.  We can also see just how much funding they have to make their offering to data consumers desirable and valuable.

If we accept the above income calculations, each one of us is worth at least $20 a year to Facebook. Apply some common techniques for determining long-term customer value, and each one of us is worth about $500 to Facebook.

Would we pay $500 to Facebook to use them, instead of being commercialised? I doubt it. This is well understood at Facebook and is why they will continue to offer a free service. We are of far more value to them as a product than we will ever be as a customer.

They would have a nightmare if we were to become customers . They would have to comply with consumer rights legislation and more stringent privacy regimes. Simply providing a free service that we may choose to use or not use keeps them distanced from most such compliance issues.

To be clear, I am not singling out Facebook, but their published results are the easiest to analyse because they are a pure-play vendor in this space. Remember though, all those services we love, Instagram, Google, LinkedIn, Twitter, SnapChat and so on all use a similar business model.

Free wi-fi? That is another so-called free product that needs examination. We go to shopping centres and they offer free wi-fi. Our immediate reaction is that they are doing this as a service to their visitors. But this isn’t completely true. They use their wi-fi service to determine where we go in their shopping centre. What shops did we go into, what shops did we pass by? Where did we spend our time? What internet sites did we access whilst in the shopping centre?

This is valuable information for their tenants and is very readily on-sold to the advertisers.

Buried deep within our browser settings or in some site settings will be a switch, described using a term like “allow targeted advertising”. The explanation of this switch is that will allow advertisers to deliver advertising that is relevant to us, rather than random adverts.

This is disingenuous in the extreme. The switch is to make us more relevant to the advertiser, not the other way around. This setting allows them to track us in a more sophisticated manner. This of course means that they can know more about us, and can increase the amount they sell us for.

Data leakage, cookies and wi-fi monitoring are one thing, but the most egregious offenders are the free apps that we have on our devices.

The terms of service we agree to with these app providers generally say that they won’t share personally identifying information (PII), but they will sell insights to business partners. And, of course, by business partners they really mean advertisers. But these terms of service are much like many of the other services we use, right?

Well, yes they are, but what we allow these apps to access from our devices is far more extensive than simple browser information.

Why does “Angry Birds” need access to our camera, microphone, location services and contact list? Simply, so it can gather more information about us and maximise revenue from selling our information to the advertisers. Don’t like that? We can certainly disable such access in the settings, but we shouldn’t expect the app to continue to work. And the app provider’s position on this is usually very clear – if we don’t like it, we don’t have to use it.

This is the foundation of the Cambridge Analytica brouhaha. When we decided to do that survey, we explicitly granted the app access to our contact list. We all would have ignored the prompt “this app can access your contact list, camera, etc, etc”. This meant we gifted them data, not just about us, but also about our friends. What they then did with this data is eye-watering, and I will return to this in a subsequent article.

Free wi-fi, free sites, free services, free apps – all are far from free when we consider that we are paying for them with information about ourselves and our friends.

In a later article I will discuss in much more detail what we disclose, how it is used, and where it might end up – and advertisers are just one destination.

If we think this is a breach of our privacy, then we need to recognise that we have explicitly agreed to most of this in the terms of service of these free facilities.

what is the price of free?

To return to my starting comment that we pay for a free web by gifting it data.

So, just how much is that worth?

To determine a dollar value for the data we leak and disclose, I undertook some analysis of companies that have an advertiser-driven business model. I excluded on-line sales through people like Amazon, and only examined social and information sites.

I was amazed. The average web user subscribes to, or follows fourteen sites who use advertising on-sell as their business model.

I checked my own profile, and found that even though I am not a big social media user, I was average, due to non-paid subscriptions to a number of sites, including news sites.

At one end of the site spectrum you have the big players, such as Facebook, Google, Instagram, Snapchat and Pinterest, and at the other end you have sites like this, but who sell user data as their income source. Please note that we do not sell or gift information about you.

I assumed that Facebook represented best in class, and discounted other players. I also factored in reach and coverage.

The interesting part is that our data is on-sold many times, in a chain that adds value at each step. Many companies will sell our data to a data broker who will match it with other data they have to give a rich profile. These data brokers then on-sell their version of our data. I will discuss these data brokers in a subsequent article.

I came to the conclusion that we are worth around USD 500 to the web, every year.

This is the accumulated value that these companies ascribe to the data we give them. If you multiply the number of web users by that value, and discount and take the lowest confidence limits,  you still arrive at two  trillion dollars.

This is big money. This is greater than many country’s GDP. But that is the value the twenty-first century places on knowing about us. And that is the money that funds these free services.

In the next article I want to start examining the notion of privacy in this twenty-first century. But to do so, I first need to unpack privacy, anonymity and security – and that is the subject of the next article.

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