How is it possible to get free services? This question, until the early 2000s, was not particularly common, with the number of actually free services being very low. The digital revolution turned this question to be very common now because so many services are delivered completely free. Think about the various social networks, from Facebook to Twitter, from Instagram to TikTok, all of these services have millions, if not billions, of users, but no one pays to use them. We can make a similar argument in many other sectors...We can pay a few euros a month to have access to all the music in the world on Spotify, but we can even have it completely free if we accept advertising and some functional limitations. Still, only a few decades ago it was normal to spend about 20 euros for a CD of 12 songs. And if we stay in the world of mobile apps we can find many other examples, games, apps for video or photo editing, newspapers. Don’t they pay their employees? The answer to these questions starts before digital services, and takes up back the very last example on the list: newspapers. In many cities around the world, newspapers are written, printed and distributed. They need human capital as well as materials like ink, energy and printing equipments. Who pays for this if newspapers are almost free? The answer is simple: advertising. The few euros we pay for a newspaper are not enough to make it profitable, any more than paying for a subscription to the digital edition. They are a subsidy, a contribution to the sustainability of their business model, which is made completely sustainable by advertisers. Newspapers have two customers: readers and advertisers, the former pays for the content, the latter pays for the attention, in jargon "the eyeballs" of the readers, giving rise to a two-sided orthogonal platform. As in all two sided platforms we have a central company, the newspaper, and two distinct customers: readers and advertisers. We call it orthogonal because the platform, the newspaper, does not enable a direct transaction between the two. In other words, in order to buy the product advertised by the advertiser you will have to go to a physical store or use another digital platform, unlike in a transactional two-sided platform. The second difference is related to network externalities, which exist between the two sides, but are unidirectional: as the number of actors on the first side, the readership side, increases, the value for actors on the second side - advertisers - increases, but the reverse is not true. As readers we do not care about how many advertisers buy services from a newpaper. This particular type of platform, similar to commercial television or any advertising-based business in general, uses a strategy called "client-as-target." Let’s go back to the initial examples now. How can Facebook and other social networks be economically sustainable? The answer is still through a two-sided orthogonal platform model, like newspapers... but their digital nature enables something more. Let's take Facebook as an example: the popular social network based its economic sustainability, especially in its early stages, on the use of the advertising mechanism. In the following years, yet, it expanded its business model to include other types of value capturing mechanisms. The mechanism on which Facebook is based, however, is not a simple Client-as-a-Target strategy, it has something more, something different. Their advertisements are targeted, but not on the basis of the content of the platform in a generic way as it happens on a newspaper. For example, if you sell tennis shoes you may buy advertising spaces on a sport journal. Still, not all the readers play tennis and part of your advertising effort will be wasted. Facebook, on the other side, will be extremely more specific in targeting the customers looking for tennis players, tennis fans and people near to the tennis world. This is made possible by the data that Facebook can leverage. Our behavior scrolling through the feed, our likes, the pages we follow, the content we comment on, the data coming from the apps we have given access to and many other data can be used to improve the company ability to profile the users. This data feeds an algorithm that allows the platform to personalize the advertising that the user sees, with the aim of increasing its effectiveness. In this mechanism, the user has a double role. On the one hand, she is the target of the advertising, but on the other hand, she is the main supplier of the information that feeds the algorithm which makes those advertisements more effective. Thus, the user turns from being the customer who doesn’t pay to be the main source of value. Hence the second strategy that companies like Facebook deploy in their being two-sided orthogonal platforms is called client-as-a-Source. The double logic client-as-a-target and client-as-a-sources gives origin to what in literature is called "Enhanced advertising", making the typical mechanism of orthogonal platforms more effective ...especially for the second side. Facebook didn't invent this mechanism, historically used by Google in its search engine, but it certainly represents one of the greatest examples of application. It's important to note, at the end of this video, how all of this is stated in the policies for using digital services according to current regulations in different countries, such as GDPR in Europe. Obviously this disregards any reasoning on ethics and customer awareness that we will see in the final part of this Mooc.
