Recovered from the original publisher: Kellogg Insight
This phrase gained popularity as a description of the trade-off at the heart of many modern platforms—you use their service without paying, and they profit by selling your data.
But there are other business models available to social-media companies, streaming services, and apps. Some platforms have framed subscription paywalls as consumer-friendly privacy protection, promising that the fees will keep them from harvesting and selling user data. Others have pursued a hybrid approach that offers a choice: use it for free and share your data or pay for privacy.
The model that platforms choose has big implications for their bottom line, market share, and regulation. After Meta moved to a two-tiered model in Europe, the EU responded with a 200 million Euro fine, declaring the “consent or pay” system in violation of its Digital Markets Act.
In a landscape where both established industry leaders and young upstarts must balance revenue and privacy demands, how do these platforms decide which business model is right for them?
New research by Kellogg’s Sarit Markovich and Tel Aviv University’s Yaron Yehezkel sheds light on this decision by modeling how online platforms respond to factors such as market competition, data value, and network effects. They found that the features a platform offers—and how much it depends on maintaining a large userbase—has a surprisingly strong influence on whether a free, paid, or hybrid model makes the most sense.
But in the fast-moving technology world, it’s also important to be nimble when the landscape shifts.
“Online companies need to understand that this is not a binary decision—it’s more dynamic than that,” Markovich says. “If they start out with one model, it doesn’t necessarily mean they should stay there. They should always be thinking about the commercial value of their data and the strength of their network effects. And if these change, their strategy should change as well.”
More than competition
To tease out how companies choose between these approaches, Markovich and Yehezkel built a mathematical model that studies the interaction of three factors: the intensity of competition the company faces, the commercial value of the data it can collect on its users, and the network effects that drive the platform’s features.
In traditional economics, competition is usually the most important driver of decisions about price. If there are more competitors in a market, that will drive prices lower as companies chase market share. Conversely, monopolies have more leeway on how much they can charge since customers have little choice.
So why do today’s dominant online platforms such as Google and Meta offer their core services for free? The difference is data—most of these companies’ revenues aren’t driven by billing customers but by selling users’ attention to advertisers and their personal data to third parties. That changes the calculus for companies when they decide to offer customers a free, paid, or hybrid plan.