Web companies discover the perils of putting privacy before profits.

Innovation, the Internet, gadgets, and more.
Feb. 26 2008 11:50 AM

Good Guys Don't Make Billions

Web companies discover the perils of putting privacy before profits.

Illustration by Robert Neubecker. Click image to expand.

A few months ago, I shopped around for a Web site to help keep track of my spending habits. I was looking for a service that would charge me nothing yet work flawlessly, protect my privacy, and make me feel good about myself—a tall order, I'll admit. I settled on a little start-up called Wesabe, mostly because the founders seemed so committed to, well … to being cool dudes. The company has a detailed and very encouraging policy on privacy and data ownership and has recruited privacy-obsessed Alpha Geeks like Cory Doctorow and Clay Shirky to serve on its advisory board. In its frequently asked questions, Wesabe comes across as positively saintly: They won't sell ads because ads encourage you to spend, they plan on making money by helping people reach their financial goals, and their security measures are at least as impressive as those used by your credit card company. If Wesabe were a person, I'd be seriously smitten.

Of course, Wesabe isn't the first company to present itself as irresistibly smoochable. The vision of immaculate capitalism, in which no one gets screwed and everyone gets awesome, free stuff, is as old as capitalism itself. The trouble is that filthy lucre needs to change hands at some point, or else capitalism goes kaput. So how does Wesabe plan on making money? The plan, according to the site's FAQ, is to launch a "Pro" version loaded with new features and goodies. And then there is a mysterious revenue-generating feature they're still keeping under wraps. For companies like Wesabe, this is the tricky part: How do you keep your immaculate reputation once you start trying to, you know, make money off your customers?

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The sustainability of immaculate capitalism is one of the key economic questions of the Internet age. This is thanks in large part to Google. Back in 2000, Paul Buchheit, best known as the man behind Gmail, came up with an unofficial slogan for his then-employer: Don't Be Evil. It began as a bit of a goof, yet it also captured something important about the iconoclastic and even heroic self-image of the founding Googlers, who grew up in the shadow of mighty Microsoft. In the heady days of the early 21st century, everything Google touched, from search engines to e-mail to calendars to the quest for renewable energy, seemed magically delicious thanks to its open, freewheeling, creativity-enhancing culture.

That self-image persists even as Google bestrides the world like a colossus. When now-humbled Microsoft announced its hostile bid for Yahoo, Google's chief legal officer, David Drummond, wrote a blog post—the immaculate version of a press release—raising "troubling questions" about the deal. Drummond all but accused the company of seeking to destroy the openness and innovation that fuel the Internet's spectacular growth.

How come the deep-pocketed Google can still manage to come off as a good guy? I think it's because we can barely tell that Google is the world's fastest-growing advertising company. That is, the text ads that have made the company its fortune are unobtrusive enough that we barely notice, or can't be bothered, that Google is shaking us down. In coming up with new ways to serve up these text ads, Google has transformed the way we think about privacy. Remember the brouhaha over Gmail? When it first launched in 2004, privacy advocates were creeped out over Gmail's use of "content extraction" to analyze all of its users' e-mail. In Google's defense, it's not as though your inner thoughts are being read by some censorious bluenose at Google HQ; the content is analyzed by (presumably) harmless Googlebots, much like the friendly Googlebots who keep your inbox spam-free. Clearly, there's a difference between protecting your inbox from unwanted mail and allowing your e-thoughts to be mined to sell you goods and services. Yet Google has lulled us into no longer pondering that difference. Perhaps it's the low-profile way in which the text ads are displayed; perhaps they're placating us with massive amounts of free e-storage.

As Google goes from humble search engine to all-purpose infotopia, it is reaching into other gray areas. How kosher is it to take billions of satellite photos, or to store patients' health records on the Web? As Google's moneymaking ventures become more conspicuous—and require Web users to take more active steps to cover their tracks—the company will have a harder time maintaining its immaculate reputation. To keep its shareholders happy, Google needs to grow its business. And to grow its business, Google can't keep relying on the same old text ads. It has to risk turning off technophiles with newer, eviler business models.

Facebook is in an even more nettlesome situation than Google. The company's extraordinary success lies in its pervasiveness. In high schools, colleges, and an increasing number of workplaces, the decision to resist assimilation by the Facebook Borg is the rough equivalent of holing up in Ruby Ridge. Founded by cherubic youths dedicated to being even less evil than Google, Facebook (like Wesabe) had an almost countercultural quality. Mark Zuckerberg's site was less garishly commercial than MySpace, and it was zealous about protecting privacy. When users flipped out over the Facebook News Feed, which allows people to monitor their friends' activities on the site, the top brass successfully reassured the base; the News Feed is now one of Facebook's most celebrated features.

If Facebook were a nonprofit dedicated to bringing millions of people together in a dense cyberworld, it would be an extraordinary success. If it were an NSA-funded initiative to track evolving enthusiasms, it would be a stroke of diabolical genius. But Facebook is supposed to make its founders billions and billions of dollars. And they still haven't figured out a really good way to convert happy freeloading users into dollar signs.

Social networks are widely considered dreadful advertising platforms. People go to Facebook to socialize, not to buy stuff. A Google search for "leopard-print ballet flats" probably means you're in the market for "leopard-print ballet flats"; listing Megadeth as your favorite band doesn't necessarily mean you want to buy Pantene for your long, flowing man-locks. That's why advertisers love Google and why they are generally reluctant to pay top dollar for text ads on Facebook. Facebook's response was to launch a service called Beacon. Actions taken on partner Web sites, like renting from Blockbuster or buying movie tickets from Fandango, would loop back into your News Feed for all your friends to see.

From Facebook's perspective, Beacon was a relatively unobtrusive way to integrate commerce and social networking. After all, Facebook is an advertiser-supported site, and this was just a fancy new way of selling ads. But the site's crazily devoted acolytes—who think of Facebook as their personal playground, thanks to years of immaculate rhetoric and behavior by Facebook's founders—revolted against the new ads and demanded new privacy protections. Sure enough, after days of devastating news coverage, the users won, and Facebook converted Beacon from an opt-out (if you can figure out how) to an opt-in feature. By cultivating an image as a free social utility you could trust with your friendships and your photos, Facebook had backed itself into a corner.

The same goes for scores of smoochable start-ups. The great thing about the Web 2.0 boomlet is that, unlike the original dot-com boom, it requires much smaller start-up costs and has generated many more real success stories, like Flickr and Del.icio.us and YouTube. But most of those success stories have involved an already profitable company—Yahoo in the case of Flickr and Del.icio.us, Google in the case of YouTube—scooping up the little guys at a healthy valuation. Great little companies start out with a terrific idea they have no way to make money from. While they're burning through other people's venture capital, they can afford to be as noble and un-evil as they want. The Googles and Microsofts of the world, alas, don't have that luxury. Perhaps immaculate capitalism is just a phase, like teething or dying your hair magenta. Talking the non-evil talk builds your user base and gets you noticed, then evil Uncle Moneybags swoops in to rescue you from your own rhetoric.

Chris Anderson, the editor of Wired and the author of The Long Tail, is more optimistic about the sustainability and breadth of immaculate capitalism. In the March issue of Wired, Anderson previewed his next book with an essay called "Free! Why $0.00 Is the Future of Business." He argues that the bounty of free stuff on the Web—Radiohead's music, ad-supported casual games, all of Google's services—signifies that "digital technologies … have become too cheap to meter." What's scarce these days, he writes, is the world's "limited supply of reputation and attention. … Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today."

As a confirmed cheapskate, I certainly hope he's right. But when we're thinking about the future of the Web economy, it's worth remembering that not every start-up with venture money has Google's inherent advantages. I, for one, am worried about the fate of my beloved financial site Wesabe. With a recession on the way and Yahoo about to go the way of the dodo, Uncle Moneybags looks set to retire, or at least go on a diet. With fewer gigantic Web corporations around to buy up the minnows of the Web 2.0 world, immaculate capitalism will have to put its money where its mouth is. Can Wesabe keep to its un-evil creed and still make enough money to survive and thrive? Will it compromise, by selling ads here and there? Or will the best personal finance start-up out there crash and burn? We're about to find out.

Reihan Salam is a columnist for Slate.

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