One of the most common questions I get asked, while talking about platforms, relates to the issue of labor on platforms. Facebook and Twitter, among others, get a lot of value from their users and make billions of dollars, but the users don’t see much kickback.
The economics of free-labor platforms
Social networks like Facebook and Twitter leverage free labor from a global talent pool to deliver a business that has near-zero marginal costs of value creation. A mouthful of words but it essentially means the following.
In traditional Pipe models, every act of value creation has an associated marginal cost associated. There are fixed costs of running the pipe’s infrastructure (i.e. the factory, personnel, equipment etc.) and there are marginal costs associated with the production of every new unit of a good or service in that Pipe business. While most Pipe businesses have a good handle of fixed costs, a lot of optimization work focuses on reducing marginal costs, as that directly helps the company scale. If you can produce more units at less cost per unit, your margins improve and your business scales.
This is where free-labor platforms like Twitter and Facebook becomes interesting. They drive marginal costs of value creation to zero. Facebook incurs practically no marginal costs associated with the creation of a new status update. YouTube, likewise, has no marginal costs associated with creation of a new video. It may incentivize the creation of some videos for a variety of reasons but the video creation cost isn’t borne by YouTube.
This allows such platforms enormous leverage. Coupled with the network effect, that creates a natural pull for value producers (in case of YouTube, video uploaders) as the network scales, this model of free labor is guaranteed to create a form of scale, hitherto unprecedented.
These platforms then monetize the value created (in the form of attention, data etc.) but do not pass back any proceeds to these value creators. YouTube, unlike many other platforms, does share some money back with some producers, but most other platforms are run on free labor.
As a result, one of the common criticisms often leveled against such platforms is the argument that they live off free labor and should logically/ethically/morally ‘do the right thing’ and pass some of the kickback back to the users.
That’s a good idea, right? Think Network Effects
When it comes to platforms, the good ideas are typically the ones that strengthen the network effect and the bad ideas are the ones that weaken it.
Is paying value creators a good idea? Only if it leads to desirable interactions on the platform, that in turn, strengthen the network effect.
Every networked platform needs to structure the right incentives for its users. These incentives may be organic (fun, fame, fulfillment) or inorganic (fortune). But platforms need a balance of incentives that leads to the right types of interactions.
Paying someone to use Facebook or LinkedIn may, for instance, possibly encourage the most undesirable interactions. Teenagers in need of some quick money may fill up a professional network. Even when structured on a model that rewards quality, users would tend to game the system. If higher votes mean more money, entire alternate markets could get created to game the system, buy votes and make money. Such markets already exist for gathering fake fans and followers (and votes, actually).
Essentially, shifting the balance of incentives towards inorganic incentives may often lead to unforeseen governance issues.
The problem gets compounded when you realize that higher governance leads to inordinate friction for new users. What sets apart platforms like Wikipedia and Reddit is their reasonably high quality despite the fact that they are open. But this comes at a cost. New users find it very difficult to break through the hierarchy of the Wikipedia and Reddit communities. But conversely, that hierarchy and tight control over actions is exactly what ensure these communities create quality output.
Any platform that functions well on organic incentives may face issues with weakening network effect and frictional governance when moving to inorganic incentives.
The Poverty Line on Platforms
The other issue with paying your users is that it isn’t actually as good an idea as it sounds. Most platforms rely on social feedback as a measure of quality. Votes, likes, ratings, followers etc. typically indicate quality. If platforms were to reward their users, they would likely reward them on the basis of some such parameter that signifies social feedback.
A curious issue with social feedback is the fact that it makes the rich richer and the poor poorer. If I already have more followers on Twitter, I find it easier to add a few more. If my videos are already popular on YouTube, I am likely to have more subscribers making it easier for every subsequent video to also become popular. As a result, platforms develop a poverty line. Users below this line languish in oblivion hoping for their 15 minutes of fame.
The challenge with any form of monetary incentivization is that it would award the rich (in terms of social feedback) way more than it would avoid the poor. This, in turn, discourages the poor (again, in terms of social feedback) all the more from participating further. A feedback loop sets in and the poor start to abandon such a platform. We already see this in Twitter’s challenge in engaging new users who have just been on boarded.
This leads us back to the original debate. Is it a good idea to build a social network that rewards its users? If it can do that without harming the network effect, creating clunky governance, or disincentivizing certain types of users, it possibly is a good idea. But more often than not, we see things work out the other way.
Hence, the entire hue and cry about Facebook not sharing money with its users when it makes some $x per user, is too simplistic an argument to be judged purely on ethical grounds. And platforms that take the moral high ground on launching in competition with free-labor platforms often realize that they completely messed up the balance of incentives.
There is a reason why platforms which cater to organic incentives well, perform better than the more transactional ones.
Social networks that pay users often fail when they end up weakening network effects. Tweet
Platforms with high friction discourage new users from coming on board. Tweet
Platforms reward some users disproportionately owing to the rich-becomes-richer feedback loop. Tweet
This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.