Why Data Portability will change the “Facebook” model
We are all aware of the response that when a digital or Internet service is Free; you are the product. It is most probably an adaption of a 1970 quote from the TV/media industry. Free to Air TV, which is advertising supported, means you watch for FREE in exchange for attention to watch adverts, as product and service owners hope you will buy. I want to explore this line of thinking a little further, as with the introduction of PSD2, GDPR and many other new regulatory frameworks from the US to Australia: the user/ consumer can now get their data back – aka #data_portability/ #data_mobility, so the model of FREE needs to be looked at again with our updated digital glasses on.
The purpose here to raise questions as I am thinking about BigTech and the reaction of companies to new regulations. Who benefits and who is threatened, specifically exploring if branded Banks / Fintech gain or lose with data portability?
The thesis is that the Free Facebook model breaks because this is their model, based on an outcome that their Derivative CASH FLOW model is about to iterate towards direct value exchange again.
Definitions for this post
- Derivative: A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying digital data asset (like your social media posts) or set of data assets (like an index of all your digital footprint
- Cash: Should be seen as the payment from one party to another party in exchange for a product or service, including both the physical and the electronic payment form.
- Cash Flow: the total amount of money (cash physical and electronic) being transferred into and out of a business
- FREE: there is a perception that what you are using is free, insomuch that there is no direct exchange of cash for a product or service between the consumer and provider.
CASH FLOW MODELs
A classical model of a business is to collect cash in exchange for a product or service. This direct relationship (B2B or B2C) is conducted using one of three broad methods.
- Method 1 is subscription, pre-pay, pay in advance; irrespective of the label it is where the payer pays in advance of receiving the product or service.
- Method 2 is pay on demand, pay now, pay for use. In this case the payer pays at the point of use, consumption or acquisition. Within a short period of time there is a full and final settlement.
- Method 3 is pay later. In this model the payer receives the product or service and promises to pay at some agreed point in the future based on some form of contract/ trust. This post pay can be typically seen as invoicing, loans or credit.
Whilst there is far more depth and subtlety to each model and indeed combinations thereof — the point is that the cash flow for the business is based on a direct relationship between who is paid and the payer. There is an exchange ( let’s ignore how the cash used in the exchange is funded for now)
To add to the direct relationship model, we know that there is an indirect relationship model (not to be confused with traditional indirect sales meaning that the sale of a good or service by a third-party, such as a partner or affiliate [intermediaries], rather than a company’s personnel) — in the indirect relationship case the enterprise, in the course of doing business is able to collect and sell on data, information, IP, skills, waste, or anything else which is a by-product/ by-service from the direct relationship (cash for product). By example a Bank/ telco/ utility gains data, insights and knowledge about enterprises and customers in the delivery of the direct relationship but is able to sell such data which is a by-product. (to be clear; for a credit agency selling data it is a direct relationship business)
A majority of businesses are a complex mix of direct and indirect relationship cash flow. Then there is Free.
The FREE model as a Derivative
The FREE model created a derivative of the classic direct and indirect models. Stealing an idea from the finance community where; “A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). If we adjust this a little for the digital/ data world it could read “A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying digital data asset (like your social media posts) or set of data assets (like an index of all your digital footprint).” What does this mean — in the direct and indirect relationship models the business makes an exchange. In the Free case an intermediary removes the direct piece by substituting FREE for the direct exchange and opts to only operate an indirect relationship model (a derivative).
Facebook, Google and free-to-air TV, as examples, are based on the same ideals; a free service is sufficiently needed that we (users/ consumers) will provide our attention and data (not that we always realise). The companies take said data and sell access to their users’ attention, based on their analysis of the data (matching and personalisation). There is no direct exchange of cash/ value between the primary user and primary provider. The primary provider derives value from a third party who wants to reach the same users and offers a direct relationship product/service — what a mixed-up world ! However up to now — nothing that revolutionary, this is all context.
Who will dis-intermediate Facebook : the user
Let’s add into the equation ideals about data portability, GDPR, PSD2 and regulation concepts which enabling the user to take/get their data back. Users can now have their data in their own place and can offer consented access to their data, under their own control.
Why does this become interesting. Facebook and many free-to-air TV players are 100% dependent on the derivative (relationship) model today, other players are a more complex mix of direct, indirect and some adding derivative.
Users tend to use a diverse set of services so their data is spread across many silos: Health, fitness, shopping, grocery, fuel, utilities, phone, entertainment, banking and many more.
The derivative players have access to typically one set of silo data today (the one they collect) and this is unlikely to change (broken trust), but the prospect is real that users may collect/ assimilate/ their data from these diverse sources into one place. (or someone may do it on their behalf)
Whilst data will remain in the silos in which it was created (for many good economic and regulatory reasons) the direct business model can continue to find value and service the customer.
The derivative relationship model business may find that their own customers (other enterprises who pay to gain access to profiled users) may be more willing to access a complete data set/store which the user now holds (data portability.) With the view that the user’s data set will be (should be) richer, deeper, fatter, wider and more relevant.
An important point to interject here is a concept that growth innovation happens at the intersections or gaps between the silos of data/ industries e.g. (Finance + Health), (Finance + Search) etc. This creates a subtle but interesting innovative disruption. (Innovative Disruption here being that a new model can emerge that creates growth in a market and is not a margin migration/ erosion)
As brands hunt for growth and seek edge cases (at the intersections of other verticals) getting the data is going to be hard and very expensive. (broken trust, defense, bigger lake, more data, consent to name a few) However, knowing users can get the data – legal requirement - it will be in the interest of some key brand players to promote data portability to be able to gain a first mover advantage and access growth, indeed enter into a new and better customer relationship – which is based on a direct relationship and a fair exchange of value.
Like in 2008, we may see that those dependent on a derivative (FREE) model may find that the risk was not completely understood, and a lack of transparency leads to a new set of very challenging times for these BigTech players.
Users (via a platform or intermediary) will find that they are able to bring the derivative model back from FREE to “paid” and in the process gain an offset or income from the share of the value created on their own data. What this means is you pay for social/ banking/ utilities/ health/ communications, but as they get paid you receive a share of the income) - obviously favoring those who already have a direct paid relationship. The model was predicted, the route was unknown, but the regulation now supports an iteration.
In this new model the user, rather than being the buyer has a new role as a seller of access to their data. We intrinsically know that our disposable income, trades, interactions, searches, location and relationships has value, now we can access it. Whilst we have known this, we have been unable to access it or how it may emerge. The very creation of the derivative model may well have created its own end game by not having the direct relationship, leaving brands and key direct relationship players to access a new growth market.
Such interesting times