What Facebook leakage means

What Facebook leakage means for the Digital Platform Businesses?  In their classic paper titled “Platform competition in two-sided markets”, the Nobel Prize winning Economist Jean Tirole along with Jean-Charles Rochet published in 2003 issue of the Journal of the European Economic Association, explained the characteristics, the externalities, and models of pricing in 2 –Sided Market (2SM). In a typical 2SM, there are two sets of users who complement each other’s usage thereby increasing the network effect for enhanced value for both.  Often, one side of users cannot exist without another and a platform is possibly the only way for them to efficiently get to know each other and transact commercially.

The more one side of users grow,  the value for the users on the other side also grows, typically in a non-linear form and hence provides the required cross side network effects. Typical examples include an e-commerce portal that connects users on one side with suppliers of goods on the other side; a travel portal that intermediates between travellers on one side and the travel firms on another; and so on. Eisenmann, et al in an extremely easy to read Harvard Business Review article (2006) explained further the concepts of “money side” and “subsidy side” of such two sided markets. Pricing is one of the important strategies in a 2SM.

Typically, one set of users are subsidized (aka “subsidy side”) while the other set pays premium (aka “money side”) depending on the price elasticity of the demand. While cab drivers are charged, commuters pay for using services such as Ola cab and auto respectively.

The digital content companies such as Google, Facebook alike, further augmented the two sided market with one more entity – the Advertisers.

These firms invented a new pricing model wherein both the main protagonists, namely “content seekers” and “content providers” of the platform, are subsidized by the third party - the advertisers. However for the advertisers to derive value from the platform, the platform provider has to give large amount of user data so that advertisers can analyze the same and personalize their advertisements at targeted users to maximize their Click Through Rates. In turn, the advertising revenue is being used to completely subsidize the protagonists, thus increasing their adoption of the platform. This has created huge subscriber base for these digital content platform firms.

However, the “secondary use” of the primary information collected from the users has been the basic reason for the problems of the Facebook aftermath. Since there is information asymmetry between users and platforms on the secondary use of such information (though we check mark all fields in the informed consent page provided by the platform provider), or how and in which form it is being provided to the advertisers and the like, when an episode such as the recent one on Facebook is exposed, the users are in general in a shock of disbelief.

Now that there are lot of curbs being put in place both by the platform providers and regulators worldwide on secondary usage of data, the whole pricing model of such digital platforms is set to change. With less information on hand, the advertisers are likely to value the platform’s usefulness less and hence bid less for the ad spots. This will reduce revenue for the platform provider. In order to cover their cost, the platform provider might turn their eyes on users and content providers.

Is it possible that Google might start charging a micro paisa for each search? Will Facebook and WhatsApp start charging annual subscriptions? Do we have to pay for posting in Facebook or sending message on Whatsapp? If so, will the users stick to the platform or they depart, looking for something free?

There ain’t no such thing as free lunch!

As users of these digital platforms, we have been selling our private information for getting free access; now we may have to pay depending on the privacy setting we choose. Welcome to the digital information markets.

The author is professor at International Institute of Information Technology Bangalore