The recent launch of Google + has prompted much commentary on the battle between Google and Facebook and the need for Google to establish a foothold in the social space where people, rather than algorithms, do the work.   Google + has still not gone on general release, but the consensus seems to be that it is a good product which stands a better chance of success that Buzz or Wave – Google’s previous ‘Big Social Thingies’.  The smart money is saying that it might not kill Facebook, but it could kill Twitter.  Ultimately though, it doesn’t matter what the digerati think, a social tool only becomes relevant when it secures mass adoption, or, as Clay Shirky has put it – tools only become socialy interesting when they become technically boring.

All this speculation his has prompted me to think again about the whole Google versus Facebook battle and conclude that we are missing a trick here.  This isn’t simply that the business model for both companies is based on the assumption that both are forms of media and thus advertising platforms, when in reality Facebook in particular is more akin to an infrastructure (as previously blogged here and here in relation to LinkedIn).  It extends to the fact that society as whole has not developed a form of social consensus around the business models of Facebook and Google (et al).  Basically Google and Facebook have not yet acquired a social licence to operate and, potentially, may not be able to secure such a licence.

This may sound a pretty abstract concern and I can bet  considerations of social consensus have not worried the awfully clever chaps at Goldman Sachs when they have been devising their models for valuing Facebook.  But I think they should be worried about it, and this is why.

There is a form of social consensus that has developed around the business model of the traditional media.  This is based around the recognition that being a conventional media business involves a lot of cost – not just in making the content, but because distributing the content is expensive.  This high cost of distribution is what actually creates the high cost of producing the content – it has to be high quality / mass interest in order to make it worthwhile putting into expensive distribution channels.  Therefore if we want to receive the content the mass media produces, we have to give something in return – we either pay for it, or we allow our consumption of it to be interrupted by advertising.  This basic social contract is hardwired into our understanding and behaviour.  Even if individual citizens don’t connect all the dots, society as a whole has worked this one out and thus this business model has gained social consent.  It is a balanced relationship – what we give is reflected in what we get: advertising revenues or subscriptions cover the production and distribution costs – with a modest margin on top which represents the media’s profits.

How much money is enough?  Why Craig Newmark is smarter than Sir Martin Sorrell

A few years back, when Craigslist was eating up the classified advertising lunch of regional newspapers in the US, Craigslist and founder Craig Newmark drew the ire of the likes of Sir Martin Sorrell, boss of WPP, the world’s largest advertising and media network.   He accused Craigslist of destroying value, in the sense that here was a market that was worth billions and Craigslist was taking it apart and not replacing it with a model that yielded similar billions.  For a chap like Martin Sorrell this just seems inconceivable – why waste an opportunity to make billions for yourself.  Craig Newmark himself was often asked why he wasn’t making more money from his idea.  His response to this was incredibly revealing in more ways than one.  He simply said “I don’t need that much money”.  Now while Craig, unassuming chap that he is, may have meant that he, personally, didn’t need or want  billions of dollars; his reply actually reveals a much more profound truth.  Craiglist, quite literally, didn’t need that much money.  It replaced something that cost a great deal of money to organise (regional newspapers and classified advertising) with something that largely organised itself, requiring only some software, some rules of participation and some server space.

The rules of basic economics dictate that in a functioning market economy, in the medium to long-term you cannot make super-profits. A couple of hundred years ago David Ricardo proved why this is the case, based on the theory that marginal revenues can never significantly exceed marginal costs.  If you apply Ricardo’s theory to Craigslist, Craig may have been able to charge millions for his service initially, but because the costs of being Craigslist and entering this market are so minimal, it was always going to be easy for a competitor to set up an offering at a lower price and relatively soon the market will stabilise at a point where the price of using the service (value opportunity) sits pretty close to cost of providing the service.  And because the cost is minimal the value opportunity will also be minimal.   Craig Newmark was not destroying value, he was actually liberating capital to be employed more efficiently elsewhere.  Mr Sorrell, arch defender of capitalism and the free markets that he is, really should have known that Craigslist is capitalism and free markets in action, even if Craig himself eschews the behaviours of a traditional capitalist.

Why is this relevant to social consent, Facebook and Google? Neither of these organisations are making super-profits.  Google is certainly making healthy profits almost all of which comes from advertising around its core search product.  Facebook had estimated revenues in 2010 of $2 billion and while we don’t know how this translated into profits this figure seems very low when compared to a valuation of $41 billion.  Well, as with Craig Newmark you have to ask the question “how much money do you they really need” – what does it actually cost to deliver Google or Facebook.  And the reason this question is important is because it is this – the true marginal cost – that will ultimately determine what it is that people will be prepared to give them in return. Of course we think that we don’t give Google or Facebook anything, because they don’t charge us to use their services.  However, in reality we do give them something.  We give them information about ourselves.  This is where the problem starts, because we are only just beginning to understand the implications of giving away vast amounts of personalised information, not just through our usage of Google and Facebook but actually via our participation in the social digital space.  It is not just a question of the commercial value of this information it is also a question of understanding a whole host of implications – both positive and negative – that stem from giving away this data.  In all probability no-one, not even Google or Facebook, really has a thorough grasp on the implications of a world where so much personalised data in being generated and has the potential to be used either by themselves, sold to, or otherwise obtained, by interested parties.  One thing is for certain, the individual users of Google and Facebook have no idea about the consequences of giving away so much knowledge about their lives.

Understand the true cost of Google and Facebook

If you want to start to get a handle on exactly what these implications are, a very good place to start is Eli Pariser’s book The Filter Bubble.  The Bubble in question is a unique to each one of us, individually crafted via our actions and choices as tracked via our digital activity.  This bubble not only controls what information comes in to us, it also reflects an image of us to the outside world – albeit an image that has huge potential for distortion, manipulation or mis-use.  Pariser does a very good job of highlighting the dangers of creating highly personalised worlds,  showing how this can isolate us from the experiences and serendipitous encounters that are necessary both to develop a balanced world-view and also generate creativity and innovation.  He also touches on the dark side – the potential for personalised digital information to be used either in ways which are far removed from the intention or original usage when we decided to share this in the first place, or to create identities of ourselves which are either misleading or far more revealing than we would wish (or believe we have given consent for).   One example that caused me to thumb-mark a particular page was the fact that banks can, or are, using social data to determine creditworthiness.  And this is not just derived from data you may have shared about yourself, but data derived from your network of friends or contacts.   Thus, if you have friends who have not paid their bills, this will have a negative impact on your own credit score.  This one single fact should be enough to make anyone think twice about their participation in social networks.

The other, rather scary thought, is that there is no one single ‘digital file’ held on all of us.  Neither Facebook or Google can easily pull their own files on a particular user – largely because that file is so big and distributed.  Instead information is pulled out through windows shaped by the questions that are asked – you can isolate specific characteristics, but you can’t get the whole picture.  At the moment, in the case of Google and Facebook, these questions are framed by advertisers and the need to become more targeted in the selling of products and services.  Advertisers don’t really need to know the whole picture, they only need to know the bits of it relevant to what it is they are selling.

Where this becomes more worrying is in areas where it is in someone’s interest to make broader or more significant conclusions about an individual.  Take the example of a government intelligence agency.  All of us share a very great deal in common with your average terrorist or member of an organised crime syndicate.  We go to the same shops, buy similar clothes, eat the same food, listen to similar music etc.  In fact, the vast majority of what we do makes us look exactly the same.  It is of course, a very few but highly significant, differences that mark us apart.  The problem is that the instinct and abilities of most intelligence agencies are not to try to find evidence to disprove who is a terrorist or criminal – it is to look for similarities in patterns of behaviour and then search for more evidence to confirm these initial suspicions.  This means that it is theoretically possible for you or I to very easily end-up on a list of terrorist suspects, despite that fact that there may be huge amounts of available evidence to dissprove that conclusion, were anyone actually looking for it.  But because we don’t know we are on the list in the first place; neither we nor anyone else, really understands exactly what activities got us onto that list and no one is looking for the easily available evidence to get us off it – on the list we remain.  We, and to extent even our interrogators, are powerless because no-one really knows what ‘the internet’ thinks of us, we can only derive an imperfect picture of ourselves based on the question we ask it.

We give more than we receive: re-negotiating a social contract with social media

I could go much further into this whole issue – but the important conclusion from all of this is that the implications and value of what we are giving away is far greater than what we imagine it to be.  To take us back to the issue of social consent and the bargain we have struck when using ‘free’ social media services – we are giving away much more than we are receiving in return.  This fact is already implicit in the business models or valuations of both Facebook and Google.  In the instance of Facebook it is reflected in the fact that its valuation is many times greater than its current earnings would suggest.  In the instance of Google it is the fact that Google is probably making super-profits – but they are hidden.  Taken in isolation, its core search product is hugely profitable – but the organisation is using these profits to sustain investment in acquisitions and in developing range of ancillary products that are loss making, but which it believes are necessary to creating a sense of lock-in to the Google world, or which have the potential to generate more data and thus improve the proposition to advertisers.

The question therefore is what will happen as society as a whole develops a greater awareness of the value and implications of giving away information?  What will happen as we collectively comes to negotiate, or re-negotiate a social contact with social media?  What is unlikely to happen is that Google or Facebook will have to increase their offer.  People are not going to say that the best way to even up the relationship is for Facebook and Google to give us more.  Instead it is far more likely that people will start to demand that Google and Facebook take less – and how much less they have to take brings us back to Craig’s question and how much money Google and Facebook actually need in order to provide their services.

In Facebook’s case, the answer is probably “not a lot”.  What it took to create Facebook was a clever geek, a couple of good insights and some server space.  Outside of the actual costs of running the servers and developing the product – Facebook has added more cost, but this is related largely to the ability to generate revenue via advertising and these costs are essentially discretionary or are derived from the business model Facebook has decided to pursue, rather than the business model it has to pursue (albeit in reality the business model it has to pursue has now been set via the value it has placed on itself via the selling of shares in the business).  In essence, Facebook now needs to generate a lot of cash to fulfil its valuation expectations – but it doesn’t need a lot of cash to actually ‘be’ Facebook in the same way that Craigslist didn’t need a lot of cash to ‘be’ Craigslist.

In Google’s case the answer is more complicated.  Google is technologically a far more sophisticated set-up that Facebook.  Its core search algorithm and its associated technical processes have a great deal more intellectual property within them.  However, Google is not the only search engine, but it is the most popular search engine.   At one level you could point to the existence of several much less popular alternatives as evidence to demonstrate that in order to secure the profits Google makes from search, it is necessary to carry the costs of providing the rest of Google World thus creating the necessary lock-in or search loyalty.  It is difficult to make this call, and in many ways, the difficulty in getting a real handle on the business models of Google and Facebook stems from the absence of a real competitor.  Maybe it is not so much the absence of a competitor, but the absence of a genuine market within which the rules of competition have become established.  And implicit in the creation of a genuine market is the necessary element of social consent – or perhaps, in light of everything discussed thus far, informed social consent.

Taking less – why this may be the key to comparative advantage

Both Facebook and Google have grown up, and shaped their business models, in a digital world characterised by the absence of rules.  The social digital space in particular is new, it’s very different, and we are only starting to work out how to deal with it.  It is therefore quite likely that as we start to develop the necessary rules and as genuine markets start to emerge, this will be an environment that is increasingly hostile to the business models of the pioneers than opened up the space in the first place.  For example, as society starts to recognise the implications associated with giving away data, rather than demand more in return, it will instead demand far more restrictions around how personal data is used.  This may  manifest itself in demands for greater privacy or control from the likes of Google and Facebook – demands that these companies may not be able to satisfy and still continue to operate to their current business models.  But what is more likely to happen is that competitors will emerge – but these won’t be like Google or Facebook.  The main reason they won’t be like Google or Facebook is that they won’t have to generate the quantity of cash Google and Facebook need – either to sustain an artificial valuation or to preserve an enormous corporate empire, 90 per cent of which is loss making.  They will be able to approach consumers and say “we can do everything that Facebook does (because it is not difficult or expensive to do this) but what we don’t need to do is sell your data”.  And because of the emerging sensitivity about giving away data, this benefit will have a high perceived value.  In effect, these new players will be the ones that have the competitive advantage necessary to negotiate the necessary social licence to operate.

Predicting the demise of Google and Facebook may seem a little far-fetched, especially as they currently are the masters of the digital universe.  However, it is worth taking note of a couple of things.  First, in relation to this idea of social consent, we have recently seen some tumultuous events within the traditional media – the phone hacking scandal that has engulfed News Corporation.  Amongst other things this has caused News Corporation to close the News of the World, the UK’s largest circulation Sunday newspaper.  The reason it was forced to do this was due to the fact that the News of the World lost its social permission to operate.  It was also forced to abandon its bid to acquire all the shares in Sky TV – again not because it was forced to do so, but because it became clear that it failed to create the necessary social consent.

Second, we are starting to see the signs that the whole issue of usage of personal data is emerging out of the shadows.  Facebook has obviously had problems about privacy in the past – the introduction of Beacon being the best example of where it has already had its fingers burnt.  Google has escaped significant attention, probably because its products are less social and therefore seen as less intimate or revealing about the nature of their users.  However, take a look at this ‘viral’ presumably released by Microsoft – characterising the Gmail Man as the postman that reads all your mail and then tries to sell you products.  This is a clear indication that privacy has been identified as Google’s Achilles Heel and is an issue worthy of competitive exploitation.  We can expect more of this.

I might also suggest that Google has already been weakened by its desire to collect data in that, pre Google + it has not scored too many successes with its recent product launches.  My suspicion as to the reason for this is that its product development has not been sufficiently driven from a fundamental understanding about what ‘social media citizens’ really want, but more by Google’s desire for them to use certain types of products  – in large part products which will yield useful data.  A good example of this is the now largely forgotten Sidewiki.  As I identified at the time, the sting in the tail of this particular product was the fact that it required you give Google access to your browsing history.

Does this mean that Google and Facebook are wilfully manipulating us?

Probably not.  Google in particular has been very transparent about its ambitions to create a personalised web.  At worst you could accuse Google of a level of naivety in not fully understanding the social consequences of what they are doing.  This is not surprising since Google is at heart a technology company run by geeks – and geeks are notoriously bad at understanding social consequences.  Google also is popular and has a range of fantastic products.  It can therefore generate some comfort that it is ‘doing the right thing’.  Facebook is much less transparent, but there again it offers much less than Google and has much more it needs to gain – because it isn’t sitting on top of super-profitable search algorithm.  Facebook is also much easier to replace than Google and we are already starting to see Facebook alternatives that are explicitly making a play about data protection and privacy.   In both instances the driving commercial imperative is around capturing as much attention and usage as possible – thus making themselves harder to replace.  In essence it the Wild West 2.0 – staking out as much territory as possible before civilisation and its attendant wagon train of rules and regulations catches up.  This isn’t wrong or evil, it is just competition and capitalism.

Should we be worried?

We should probably be vigilant, rather than worried.  When revolutions happen, they tend to generate good stuff and bad stuff in equal measures.  The trick is to be alert so the bad stuff can be managed or controlled and the good stuff enhanced.  At the end of the day, it is going to come down to the construction of some new rules and regulations – either those that are legislated or which derive from social permission (as in fact most rules of society do – we don’t ‘not do stuff’ simply because it is illegal, unless you are a hedge fund manager).  We need to play a part in shaping those rules.

On the other hand, it is probably Facebook and Google which should be most worried.  The Wild West is not going to be wild much longer and they need to start developing a business model which is not simply based on squeezing-out the competition but is based on a world where people attach a much greater value to the data they decide to share.  And this doesn’t mean demanding more bang for their byte – it means either sharing less bytes or demanding much greater control over where those bytes end up.