This phrase has gained popularity as a description of the compromise in the heart of many modern platforms-use their service without paying and win by selling your data.
But there are other business models available to social media companies, flow services and applications. Some platforms have been accompanied by paywalls as a protection against privacy -friendly protection, promises that fees will keep them from harvesting and selling user data. Others have pursued a hybrid approach that offers a choice: Use it free and share your data or pay for privacy.
The model chosen by the platforms has a major impact on the lower line, market share and adjustment. After moving Meta to a two -level model in Europe, the EU replied with fine of 200 million eurosdeclaring the “consent or remuneration” system in violation of the Law on Digital Markets.
In a landscape where both established industry leaders and young people have to balance the revenue and privacy requirements, how do these platforms decide which business model is suitable for them?
The new study by Sarit Markovich of Kellogg and Yaron Yaron Yehezkel of the University of Tel Aviv is shining light in this decision by modeling the way online platforms respond to factors such as market competition, data value and network results. They found that the features offered by a platform – and how much it depends on maintaining a large user – has a surprisingly strong influence on whether a free, paid or hybrid model makes the most meaning.
But in the rapidly changing world of technology, it is also important to be agile when the landscape shifts.
“Electronic companies need to understand that this is not a binary decision – it is more dynamic than that,” says Markovich. “If they start with a model, this does not necessarily mean that they have to stay there. They should always think about the commercial value of their data and the power of their network’s impact and if these changes, their strategy should also change.”
More than competition
To tease how companies choose between these approaches, Markovich and Yehezkel have created a mathematical model that studies the interaction of three factors: the intensity of the competition facing the company, the commercial value of the data it can collect to its users and its results.
In traditional economy, competition is usually the most important factor in price decisions. If there are more competitors in a market, this will lead to prices lower as companies are chasing market share. On the contrary, monopolies have more room for how much they can charge, since customers have little choices.
So why do today’s dominant online platforms, such as Google and Meta, offer their basic services free? The difference is the data – most of the revenue of these companies are not guided by customer charge, but by the sale of users’ attention to advertisers and their personal data to third parties. This changes the accounting for companies when they decide to offer customers a free, paid or hybrid plan.
Facebook, for example, collects incredibly granular data for its users: their social connections, sympathetic and dislike, locations and much more. This data allows advertisers to perform over-site ads on the site-and advertisers pay an premium to do so. Netflix and Spotify, on the other hand, collect lower value information to its users, which are mainly limited to their flow options. In these cases, a subscription model can make sense.
However, companies can also be encouraged to attract more users for one technical reason: the results of the network. Many of the attractive features offered by online platforms are powered by the size of the user network and therefore reinforced when more people use the application.
For example, people want to participate in social media sites where their friends are also users and the more people follow, the higher the value they receive from the service. Flow services such as Netflix and Spotify use network -based algorithms to suggest music and movies that you can enjoy and navigation applications such as Waze collect data from other people’s phones to give you the best directions.
To create the critical mass of users needed to supply these features, a platform can offer their product for cheap or free, even if they do not benefit directly from the sale of data.
Are all about the network
In their analysis, the researchers found that the optimal business model depends more on the power of these impacts of the network.
When a platform is based on strong network effects for its features and It has the ability to collect granular, commercially valuable data to its users, it is more profitable for this company to choose the free data -based model. However, when network results or data price are low, it is more reasonable for a company to choose the subscription model.
But in the middle, when the results of the network and the value of the data are in between, competition becomes more important. In the customers’ race, platforms benefit from both free and paid -level bid – whether it is a market leader or a company trying to challenge market share.
Markovic notes that this is just the shift Netflix made In 2022, after years of only a service service, a “basic with ads” option began in response to the intensification of competition in the constant flow, explains in an attempt to attract a wider range of customers.
But Markovich says he was surprised to find that the hybrid model was not always the most profitable choice.
“You might think, Hey. It’s flexible and you give consumers what they want,” he says. But it can also make these platforms vulnerable to entry.
“Introduces competition,” says Markovich. “If two competitive platforms choose the hybrid model. Both compete all users. Having a subscription model and offers a free model, they differentiate. Users then select on the basis of their privacy preferences and this allows for a softer competition on the platforms. ”
Platforms often fail to appreciate how to adapt their business model, as these factors change, Markovich says. For example, when a company starts for the first time, it has few users and weak network effects, making a more optimal subscription model. But as it attracts more users, it can generate more revenue from user data, making a shift to a free model more attractive.
Companies can even invest in improving these factors by collecting more beam data or shifting their business model to differentiate themselves in an increasingly full arena.
“This is where I believe that businesses may be missing the point of realizing that there is a way to influence where they want to be, in terms of the strength of the network’s impact or the commercial value of their data,” says Markovich.
Price against privacy
The researchers’ model also provides guidance to policy -making managers who want to balance the protection of privacy and prices.
Corporate arrangement often focuses on maintaining low prices by splitting monopolies and encouraging competition in a market. For electronic platforms, Markovich and Yehezkel found that price competition was more intense when multiple hybrid models coexist in a particular space.
“If we do not allow the platforms to choose the hybrid model, then they are going to separate the market,” says Markovich. “They will say,” Okay, I focus on consumers who are interested in privacy, you focus on those who do not ” – and now every consumer group has only one choice.
In addition, if the hybrid model is prohibited or discouraged-as it was for the META in the EU-it will push companies based on strong impacts on the network on the free model that collects and sells more high-value personal data. Allowing the hybrid model and Encouraging market competition will probably reduce the cost of subscription, allowing most consumers to choose the option of protecting privacy.
“Regulators should recognize that there is no solution of a size,” says Markovich. “Privacy does not always require ‘big weapons’ tools, such as banning entire business models. In many cases, simpler measures such as pricing ceilings can better protect privacy. By limiting subscriptions, you can make the choice of privacy more accessible and accessible to users. “
