Rethinking the Internet: A New Model (Part 1)
We need the Internet. The invention of the Internet allowed for the sharing of information on an unprecedented scale, facilitated global communication, and all of it was built on open architecture. However, over time, its usage has morphed as technology has shaped our society in unexpected ways. It has become centralized, pervasive, extractive, and in some instances, weaponized.
The Internet platforms most used today launched without a business model. The plan was to amass scale and figure out the economics later. The best model for monetizing applications built atop an open, interoperable protocol wasn’t clear cut. Google determined advertising was the best (or perhaps quickest) path to revenue. Their success cemented advertising as the default business model of the US Consumer Internet.
This business model has evolved over time and as it has, human interaction with the Internet has gradually evolved in destructive ways. This is not a series of posts about moral imperatives or one that condemns advertising as evil; advertising can be useful and effective. Instead, this is a series of posts outlining an alternative- a route to a different and better US Consumer Internet. This is a series of posts about inflection points, paradigm shifts, and options.
“ The data-driven world will be always on, always tracking, always monitoring, always listening & always watching…..Traditional paradigms will be redefined, and ethical, moral, and societal norms will be challenged.” IDC, The Digitization of the World — From Edge to Core
Note: For the purposes of these posts, I will use the term surveillance advertising to differentiate between digital advertising curated by trusted sources and a more pervasive variant of digital advertising that relies on the near constant surveillance of consumers across online and offline activities, and which oftentimes has the ultimate goal of influencing and/or manipulating consumer behavior. I will use the term Internet platforms to describe the likes of Facebook, Twitter, Google, Snapchat, and other Internet applications at scale that derive the majority of their revenue from surveillance advertising.
The Internet Isn’t Broken, the Business Model Is
US Internet platforms provide valuable services to consumers- that’s why billions of users access them daily. I am not arguing that these platforms don’t have value or that the technology underlying them isn’t useful; the problem with the US Internet is that the business model that supports it is extractive.
The current surveillance advertising business model of major US Internet platforms requires the collection of as much information as possible about the individuals that use these platforms. This data is then pieced together and tied to a digital identity to create a unified profile, which is effectively sold to advertisers. To get a sense of the scope of data tied to a digital identity, when one Facebook user asked the platform for all the data the company had collected on him, he was sent a 1,200 page PDF document on a CD-ROM with data broken down into 57 categories.¹ This was in 2010. The collection of data has only grown since then with the proliferation of connected devices and the expansion of Internet platforms into myriad business lines.
All of this user data is owned by the platform. Users are not compensated for this data and they are oftentimes unaware of the ways in which it is used to influence and/or manipulate their behavior. This business model has resulted in a dependence on our devices (which borders on ‘tech addiction’), the promotion of outrage in order to drive engagement, the manipulation of elections, a widespread degradation of truth, the development of a vanity/micro-celebrity culture, and teen depression. In short, “Free is the most expensive business model ever created.”² The good news is that there is no inherent reason that the Internet needs to have such a business model.
“As the fight continues for control of our phones, our homes, our cars, our wallets, our food, our health, our time, a key weapon on the battlefield will be what business model they wield.” Eric Feng³
This Isn’t Just Bad For Consumers, It’s Bad for Business
Technology in and of itself is not the problem. Surveillance advertising doesn’t have to be the default business model, and it may not even be the best default. There are natural limitations to ad load. Americans are exposed to 4,000 to 10,000 ads daily⁴ and efficacy decreases with each incremental ad. Data regulation (GDPR, CCPA) increases consumer awareness of data privacy and extractive practices. Privacy backlash and outright fines further limit the success of this business model. US Internet platforms recognize this and realize that they must adapt.
If the current concentrated business model (primarily advertising-based) of US Internet platforms is no longer working, where might they look for inspiration? How about Asia, which is generally ahead of the US in terms of mobile everything, digital payments, interactive media, etc.? Notably, Asian Internet platforms already benefit from a multimodal business model with diversified revenue streams.
“We’ve outgrown our ability to build our business on essentially a single, very distinct revenue stream.” CEO Buzzfeed Jonah Perertti⁵
Asia’s relationship with the Internet is different, in part, because consumers access it primarily from smartphones. A mobile format limits the space available for ad inventory and the proclivity towards digital payments in the region, given the relative inefficiency of payment alternatives, has allowed payments to be more integrated from the start. As a result, the business models of major Asian Internet companies rely on a diversified mix of revenue streams from advertising, gaming, financial services and/or payments, membership and/or subscription fees, and tipping or in-app purchases. Tencent derives less than 20% of its revenues from advertising versus ~99% at Facebook.⁵ In WeChat Moments (FB newsfeed equivalent) ads are limited to just two per day.⁵ As a result, those two ads are probably actually useful, relevant, and effective for consumers.
Diversification not only results in a better user experience while allowing these companies to create and collect value from consumers in different ways, but it also allows these companies to monetize consumers to varying degrees. The current advertising revenue model is constrained in that it monetizes all “eyeballs” roughly equally. While a platform’s best user may be willing to spend significantly more than its average user, advertising-based models monetize all users as if their willingness to pay were the same. Eric Feng, co-founder of Packagd and former Partner at Kleiner Perkins, advocates for business models that instead leverage what he calls “shared value transactions.”³ The key to shared-value transactions is that they allow platforms to monetize consumers at different rates. This is important because a platform’s very best consumers may deliver 1,000 times more value than an average consumer. For example, less than 2% of free mobile game players make in-app purchases, and of the consumers who do pay, the top 10% drive 50% of all revenue for games.³ Similar dynamics were exhibited when Tim Ferris recently decided to experimentwith a paid podcasting model. While 83% of listeners chose to donate the lowest amount offered as an option, several listeners ended up donating more than $1,000, which ended up comprising 13.4% of total monthly recurring revenue (MRR.)⁶
When a business model allows platforms to monetize consumers at different rates, some of the spend from power users can be recycled to create better products for average consumers, improving the user experience across all services and ultimately converting average consumers into power users.³
What are the Options for US Internet Platforms?
US Internet platforms will diversify where and when they can. We could see a continued move towards two-tier subscription services (an ad-subsidized version and an ad-free premium version.) However, asking consumers to pay for something they’ve had free access to for years is jarring and a two-tier system creates a dynamic wherein the market segment that is most valuable to advertisers becomes inaccessible to them. Considering the difficulty of pivoting existing business models, it’s more likely that the US Internet platforms will pursue new revenue streams.
Facebook’s Libra announcement (my full take) strongly supports that view. However, not every tech company can move into financial services, and it remains to be seen if regulators will even let Facebook do so. In this context, gaming and eSports present an interesting opportunity for US Internet platforms since gaming already has diversified, digital revenue streams. According to New Zoo, advertising will comprise less than 20% of total eSports revenue in 2019.⁷
Still, it is unlikely that these Internet platforms will drive true business model innovation. Vested interests will persist and enormous amounts of time and resources have been dedicated to developing core competencies that fit the surveillance advertising paradigm. To date, most innovations on the Internet have been on the supply side. What might business model innovation on the demand side look like?
In Search of a New Model
“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” Buckminster Fuller
In a period where technical innovation is becoming increasingly commoditized, it is business models that present the best opportunity for innovation. Below are several alternatives to surveillance advertising-based business models, each with varying degrees of plausibility and development.
- Subscriptions: This is easier said than implemented. As highlighted above, depending on implementation, a two-tiered subscription service creates an unattractive dynamic for advertisers wherein the most valuable consumers become inaccessible. Furthermore, charging consumers to access platforms on which they create most of the value (via user-generated content) is illogical. However, consumers may be willing to pay a membership fee for a premium digital experience that would allow all their on-device interactions to be privacy preserving and ad-free. An OEM with broad distribution would be ideally suited to offer such a membership, but the economics (setting a realistic price point that allows more value to accrue to all parties) are unproven. Finally, consumers may not actually prefer a paid model in all instances. Tim Ferris found that his podcast listeners actually have a strong preference for an ad-supported model compared to a paid model since they consider ads on his program to be “curated and trusted.”⁶
- Token Economies: As explained in Radical Markets, the current Internet business model provides “no incentives for developing productive abilities or providing valuable, high-quality data. It also gives no freedom to individuals to spend the value of their work in places other than the platforms. It is a sort of techno-feudalism, which is unproductive and inequitable.” Blockchain-based token models can theoretically solve these problems. Token economies provide an enormous opportunity for business model innovation since, in theory, they should allow proper incentive structures to be built directly into networks while facilitating micropayments. However, despite +150 D’Apps listed on Blockstack⁹ (a Dorm Room Fund community company), the token-based business model hasn’t taken off yet. According to Fred Wilson of Union Square Ventures, the primary inhibitor of token-based business model innovation is that it requires consumers to “own crypto-assets, store them in a wallet, and be comfortable using them to interact with D’apps.”⁸ Despite valiant efforts, consumers are still far from comprehending, let alone embracing, a full blown Web 3.0. Recent developments such as new smartphones that include built-in crypto wallets and Libra could be the first steps forward. Blockchain-based business models also highlight the need to apply further innovation in developing open source business models.
- Contributions for Content: Most US Internet platforms would be valueless without user-generated content (e.g. Wikipedia, Craigslist, YouTube, Instagram, Facebook, Twitter, Snapchat, etc.) With viable micropayment mechanisms, consumers could accrue a portion of the value generated by the content they contribute. To be fair, Instagram influencers can accrue value from the content they contribute to platforms, but they remain a small percentage of all users that contribute content to these platforms.
- Data “Ownership:” There are a growing number of advocates that consumers should be directly compensated for the data they generate. As much as I’d love to advocate for this business model, direct monetization of personal data via a data marketplace it is not as plausible as it sounds. Valuing individual user data is extremely difficult and while consumer awareness of data privacy is growing, it’s not a consumer problem that resonates strongly enough to induce large behavioral changes. We still have to educate and incentivize people to put data under their control and this creates challenging economics sub-scale. That being said, GDPR regulation may spur the creation of tools/applications that make the process of regaining control of one’s data simpler (i.e. social portability tools.) A more viable alternative to direct data monetization via marketplace is privacy-preserving data analysis and exchange (covered extensively in the third and final post of this series.)
- Vendor Relationship Management: Doc Searls, author of The Intention Economy, outlines an alternative paradigm, and corresponding business model, that he refers to as vendor relationship management (VRM.) VRM is proposed as an alternative to client relationship management (CRM) and places the consumer at the center of commercial relationships and contracts via direct ownership and control over their data. This would invert the current advertising model from push to pull. It would also require a massive mindset shift by all parties involved. Furthermore, the user interfaces of the VRM tools developed to date are a large obstacle to adoption.
Still in Search
Recent attempts at business model innovation have often unintentionally re-engineered many of the frictions of our current Internet. Re-engineering current processes and frictions atop new infrastructure or into new applications will not improve the user experience.
To create a better US Consumer Internet, we need to look to Asia for inspiration. We need to figure out how to create scarcity-based business models as opposed to ubiquity-reliant ones. We need to develop business models that require platforms to compete for our trust, rather than our attention. We need to leverage decentralized technology for core functionality without expecting consumers to fully embrace Web 3.0 just yet. We need the Internet, but we need to unbreak the business model.
The second part in this series , Rethinking the Internet: A New Foundation, will analyze the ways in which the Internet can be “re-built” from the ground up in a way that creates more options for business model innovation.