One of the 21st-century blessings to the modern man is internet revolution. Internet has not just made our life comfortable, but efficient and effective in many ways, be it information, communication, entertainment or income earning platform. This revolution through modern tech giants has made this globe almost flat.
Multiple sets of services, through Social networking, search engines, Android applications, and other service payments like credit/debit cards, Amazon, eBay has revolutionized our day-to-day lives with minimum or almost no costs to be paid. Take a case of Gmail, which on April 1 celebrated its 15th birth anniversary.
Gmail is absolutely free of cost service developed by Google in April 2004, which provides users not just service to store messages, but it also automatically organises successively related messaging into a conversational thread. It is one of the most widely used e-communication tool with almost zero cost involved.
So the question is how do these tech giants manage their own business or earn their incomes while providing such services at free. And it is not just Gmail but many other modern internet giants like, Apple, Facebook, WhatsApp, YouTube, Instagram etc. working on the similar economic principle.
But before answering let me tell you to keep this famous line in your mind “If you are not paying for a product, then you are a product” and actually this is how economics of free servicing works, and not just through advertisements only which many of us quite often quote. Although the mechanism behind this free servicing was anticipated long back by the 2014 Nobel laureate Jean Tirole even before the birth of these media/tech giants like Google and Facebook.
Tirole defined it as a two sided market in which one or several platforms enable interactions between end-users, and try to get the two or multiple sides on board by appropriately charging each side, i.e. platforms court each side while attempting to make, or at least not lose, money overall. While conceptually, the theory of two-sided markets is related to the theories of network externalities of market-oriented multi-product pricing, where regulations are difficult to exert mainly due to services being provided at free of cost.
Consider an example of Facebook where services are provided free to attract the consumers but at the same time the cost of production is covered through advertisements which is earned only through consumers being used as products, without any specific market regulation.
This the dual market phenomena according to Tirole and Rochet (2005) is based on the principle that usage externalities arise from usage decisions while having close linkages.
Take one more example of texting on WhatsApp. I benefit from being able to text a friend on his WhatsApp, then my friend’s willingness to give me his number and receive the texts exerts a positive usage externality on me. Thus no doubt internet economy through social networking or other services is highly influencing our lives while acting as a cheap market product with minimal economic costs.
But it’s more of a dual relationship between individuals (consumers) and service providers through a platform and network effect, where these tech giants provide free services to become monopolies and sell consumers as their products. So this free stuffing according to Tirole in his pioneering book (Economics for the Common Good) is something we fail to realize.
While free servicing increases the consumers demand for use but at the same time the changing consumers’ behaviour is enhancing their output through greater advertisement revenue, apart from being selling him as product while controlling his privacy rights.
We may not realise, while enjoying a video on YouTube, surfing something on Google or texting a friend on Facebook, but it is something we are actually paying at a greater cost through giving our privacy while making ourselves a more useful product for them, and implying consumers as products provide them a better platform to earn greater incentives.
While also being products this two-sided market employ them monopoly power, where free servicing provided maximizes their earnings and minimize our share of privacy due to poor regulating mechanism or market control. Thus it is important to understand the cost that we actually pay before going for any free service.
While research is highly emphasizing for creating a participative antitrust with possible regulations and legal entities to avoid being permanently fixed due to monopoly power. But before that we must self-regulate to protect our privacy concerns, which remain otherwise mainly unchecked due to power vested with these monopolies while being sold as products through advertisements in this two-sided market.
Manzoor Malik is a research scholar working on economic demography at HSS, IIT Roorkee