The Trouble With "Free"

Moneybox
A blog about business and economics.
Jan. 27 2012 8:15 AM

The Trouble With "Free"

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Eric Schmidt, chairman of Google, prepares to testify to the U.S. Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights

Photograph by Saul Loeb/AFP/Getty Images.

I don't really share Kevin Drum's level of anxiety about loss of privacy, but I think many other people do and I know that in some countries (Germany, e.g.) data privacy is becoming a topic of political debate. So it's worth considering the nature of Google's trap, which I think he describes well:

It won't be mandatory, of course. If I want to close my Google accounts, they'll let me. But if I use an Android smartphone—and this is plainly one of the primary targets of Google's new policy—that will be pretty hard. And after years of using Google products like Gmail and YouTube, it's not as easy as it sounds to simply export all your data and move to a new platform. In reality, very few people will do this. Google is counting on the fact that they'll grumble a bit, like I'm doing, and then get on with their lives.
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It seems to me like the real problem here isn't so much the one-time costs of switching, which are admittedly annoying but doable, but the extent to which people love Google's free stuff business model. Gmail is great, and it's free. Google Search is great, and it's free. Google Maps is great, and it's free. Android is not my favorite smartphone software, but you've got to admit it's impressive that Google went through the trouble of creating it and then gave it away for free. But of course Web services actually have a lot of costs associated with them. You either need to engage in a lot of fundraising, à la Wikipedia, or else you need to sell ads à la Google. And so once the basic business proposition is "this company will make the most amazing Web services available and give them away for free in order to sell you to advertisers," plummeting levels of privacy become inevitable. A different business model like "this company will create the best user experience imaginable, including a pleasing ad-free environment" is compatible with a credible commitment to respect your privacy. But the give-it-away-for-free model isn't.

The business question is that if we assume some other firm or set of firms could come up with comparable quality products to Gmail, Youtube, Google Search, etc., how many people would be willing to pay a premium for privacy-respecting ad-free versions of them and how much would they be willing to pay? At the moment, nobody seems to think there's a real business opportunity here. Bing and its related map search work on the same business model as Google except without the profits. Neither Apple nor Microsoft puts much effort into marketing the fact that there might be advantages to buying a phone powered by an operating system that isn't a loss-leader for an advertising sales company. One of the sad aspects of capitalism is that it penalizes people with minority tastes. Everyone gets to choose amongst a menu of options, but an option only gets on the menu if there's a critical threshold of market demand for it. Clearly many more than zero people have strong negative feelings about Google's approach, but it doesn't seem to be enough people to spur the creation of products to serve that market.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.