Revisiting FREE : The Derivative CASH FLOW model for Digital is about to change.

The majority who read this will be aware of the response that when a digital or Internet service is Free; you are the product. It is most probably an adaption of a 1970 quote from the TV/media industry. Free to Air TV, which is advertising supported, means you watch for FREE in exchange for attention to watch adverts, as product and service owners hope you will buy. The idea of this post is to explore this line of thinking a little further, as with the introduction of PSD2, GDPR and many other new regulatory frameworks from the US to Australia: the user/ consumer can now get their data back, so this idea needs to be looked at again with our digital glasses on. The purpose here to raise questions with the hope others will help explore what it means through commentary. 

Definitions for this post 

Derivative: A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying digital data asset (like your social media posts) or set of data assets (like an index of all your digital footprint 

Cash: Should be seen as the payment from one party to another party in exchange for a product or service, including both the physical and the electronic payment form. 

Cash Flow: the total amount of money (cash physical and electronic) being transferred into and out of a business 

FREE: there is a perception that what you are using is free, insomuch that there is no direct exchange of cash for a product or service. 

CASH FLOW MODELs 

A classical model of a business is to collect cash in exchange for a product or service. This direct relationship (B2B or B2C) is conducted using one of three broad methods. 

• Method 1 is subscription, pre-pay, pay in advance; irrespective of the label it is where the payer pays in advance of receiving the product or service. 
• Method 2 is pay on demand, pay now, pay for use. In this case the payer pays at the point of use, consumption or acquisition. Within a short period of time there is a full and final settlement. 
• Method 3 is pay later. In this model the payer receives the product or service and promises to pay at some agreed point in the future based on some form of contract/ trust. This post pay can be typically seen as invoicing, loans or credit. 

Whilst there is far more depth and subtlety to each model and indeed combinations thereof – the point is that the cash flow for the business is based on a direct relationship between who is paid and the payer. There is an exchange ( let’s ignore how the cash used in the exchange is funded for now) 

To add to the direct relationship model, we know that there is an indirect relationship model (not to be confused with traditional indirect sales meaning that the sale of a good or service by a third-party, such as a partner or affiliate [intermediaries], rather than a company's personnel) – in the indirect relationship case the enterprise, in the course of doing business is able to collect and sell on data, information, IP, skills, waste, or anything else which is a by-product/ by-service from the direct relationship (cash for product). By example a Bank/ telco/ utility gains data, insights and knowledge about enterprises and customers in the delivery of the direct relationship but is able to sell such data which is a by-product. (to be clear; for a credit agency selling data it is a direct relationship business) 

A majority of businesses are a complex mix of direct and indirect relationship cash flow. Then there is Free. 

The FREE model as a Derivative 

The FREE model created a derivative of the classic direct and indirect models. Stealing an idea from the finance community where; “A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). If we adjust this a little for the digital/ data world it could read “A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying digital data asset (like your social media posts) or set of data assets (like an index of all your digital footprint).” What does this mean – in the direct and indirect relationship models the business makes an exchange. In the Free case an intermediary removes the direct piece by substituting FREE for the direct exchange and opts to only operate an indirect relationship model (a derivative). 

Facebook, Google and free-to-air TV, as examples, are based on the same ideals; a free service is sufficiently needed that we (users/ consumers) will provide our attention and data (not that we always realise). The companies take said data and sell access to their users attention, based on their analysis of the data (matching and personalisation). There is no direct exchange of cash/ value between the primary user and primary provider. The primary provider derives value from a third party who wants to reach the same users and offers a direct relationship product/service - what a mixed up world ! however up to now - nothing that revolutionary, this is all context. 

Who will dis-intermediate Facebook : the user 

Let’s add into the equation ideals about data portability, GDPR, PSD2 and regulation concepts which enabling the user to take/get their data back. Users can now have their data in their own place and can offer consented access to their data, under their own control. 

Why does this become interesting. Facebook and many free to air TV players are 100% dependent on the derivative (relationship) model today, other players are a more complex mix of direct, indirect and derivative. 

Users tend to use a diverse set services so their data is spread across many silo’s: Health, fitness, shopping, grocery, fuel, utilities, phone, entertainment, banking and many more. The derivative players have access to one silo data set today and this is unlikely to change (broken trust), but the prospect is real that users may collect/ assimilate/ their data from these diverse sources into one place. (or someone may do it on their behalf) 

Whilst data will remain in the silo’s in which is was created ( for many good economic and regulatory reason) the direct business can continue to find value and service customers. The derivative businesses may find that their own customers ( other enterprises who pay to gain access to profiled users) may be more willing to access a complete data store which the user holds. The user set will be (should be) richer, deeper, fatter, wider and more relevant. This creates a subtle but interesting disruption. 

Like in 2008, we may see that those dependent on a derivative (FREE) model may find that the risk was not completely understood and a lack of transparency leads to a new set of very challenging times from these players. The reason will be that users (via a platform or intermediary) find that they are now able to bring the derivative model back from FREE to paid (share) but gain upside from a new direct model. 

In this new case, rather than being the buyer the user is now also a seller. Because we use our disposable income, trade, interact and have relationships – our data has value. Whilst we have known this we have been unable to access it or how it may emerge. The very creation of the derivative model may well have created its own end game by not having the direct relationship. 

Such interesting times