Is it time for big tech to rethink the “free” business model?

Professor Howard Yu was recently interviewed by Inc. Southeast Asia on Facebook and customer data. Extracts below: 

There’s been a lot of noise surrounding the Facebook controversy. What must founders and entrepreneurs in Southeast Asia know about the Cambridge Analytica scandal? 

Howard Yu:  In a nutshell, Facebook has encouraged third party developers to provide services via application programming interfaces (APIs). APIs are rules and guidelines that facilitate information exchange between two pieces of software. Third parties are thus able to tap into Facebook’s massive user base. This creates vulnerability inside of the platform. A researcher named Aleksandr Kogan built a personality quiz and because of the design of Facebook at the time, he was able to access tens of millions of user data by signing up 300,000 people. He then shared the copious database to Cambridge Analytica.

The biggest learning for founders and entrepreneurs is the limit of an open platform. Historically, an open platform has been the golden playbook for growth among startups built on the premise that a product’s best feature will never be invented in-house. Creative apps must be conceived by outsiders instead. Steve Jobs understood this too. No matter how perceptive the CEO was to the end-consumer’s needs, he could not have predicted that some of the most prominent features of his iPhone would be used for hailing a cab (Uber) and taking automatically erased pictures (Snapchat). No single company, even Apple, could have come up with both of these killer apps internally.

What founders and entrepreneurs must learn now is the risk of the unbridled openness. Facebook Platform, with the goal of turning its ecosystem into an innovation hotbed, has enabled people to log into apps and share who their friends were and some information about them. But by embracing openness to the extreme, Facebook also fails to review apps that are using the social network improperly.

This understanding is especially critical for Southeast Asia, not only because the sheer size of Facebook’s base in the region, but also in certain countries, including the Philippines, Facebook is synonymous to the Internet, as it is the only portal for certain population to get connected online.

Should founders and entrepreneurs in Southeast Asia begin to change how they conduct their Facebook marketing based on what’s happening with the platform? If so, how?

Howard Yu: Now that we understand the vulnerability of an open platform, founders and entrepreneurs must then trace what customer’s information their companies have gathered and how they have shared the information further with other service providers and data brokers.

For instance, it is commonly known that outside app developers can gain access to a wide range of user data—including their full names, hometowns, work histories, religious affiliations and Facebook “likes”—without explicit permission. Data brokers such as AggregateIQ and CubeYou, both of which have been suspended by Facebook recently, had historically harvested such data using techniques similar to Cambridge Analytica, by providing quizzes, feigning academic research, only to sell data to marketers.

Such customer information, essentially inappropriately acquired, has sprawled a cottage industry of targeted marketing, allowing companies to generate marketing leads for potential customers whose profiles correlate with their propensity to buy. Once considered a “smart” tactic, this practice is now highly questionable, and most likely to be ruled as illegal in the future. Founders and entrepreneurs must therefore re-examine what current these activities and stop all questionable practices immediately.

But efforts must go even further. In Southeast Asia where the reliance on Facebook by end-consumers is particularly high, companies may need to contact their previous marketing vendors and to request deletion of customer’s information from earlier campaigns. Though it might seem troublesome, such a precaution is no different from a supply chain audit. Just because a company outsources its manufacturing to an external supplier, it doesn’t abdicate the company from responsibility for wrongdoing.

What can brands in Southeast Asia do to protect the data of their users on Facebook?

Howard Yu: The situation for established brands in Southeast is no different from that of fast growing startups in the region. The biggest asset of a brand is consumer trust. All questionable practices should stop and err on the safe side. For instance, consumers now may grow sensitive about any targeted marketing. Though uncommon in Southeast Asia in the past, brands may now consider an opt-in arrangement. That is, sending customers an explanation why and how they are chosen for a targeted message before giving them the campaign message. A transparency about how marketing is being conducted can only generate positive affiliation among end-users.

Further, as we realize the fundamental weakness of Facebook, brands must conduct internal audits and put together regular review processes. At minimum, brands need to review any irregular behaviors among consumers on their Facebook page, and trace back where data now resides if they have used external vendors who manage the brand’s marketing activities.

Perhaps most importantly, how can brands in Southeast Asia do to show their users that the company is actively protecting their data on Facebook?

Howard Yu: This is where brands can even take up a more active role in educating end-consumers in Southeast Asia to better protect themselves, turning a potential risk area into an opportunity that builds trust.

For example, a brand can inform consumers that it is reducing the data stored. They can tell consumers they are putting into place a more restrictive practice using APIs. They can even advise customers how to change certain settings on their phone to prevent or limit data leakages.

Strictly speaking, such educational efforts go beyond the responsibility of a brand. But since the level of concern is becoming unprecedented, it is worthwhile for brands to step up efforts and educate consumers, which in turn reinforce the image of a trustable partner.

If brands wish to advertise on platforms that have stronger data protection for users, which platforms do you recommend, and why?

Howard Yu: The core problem of Facebook again is its fundamental set up of letting other companies create apps within it, and give advertisers significant control of how to position and target their ads. It was this “out of control” design that caused the downfall of the platform. But this is common problem for all platforms. From Google to Snapchat to LinkedIn to Facebook, they only differ in degree, not in kind. So rather than switching platforms in order to feel reassured, brands need to rebalance their marketing mix in its entirety. One trend we have seen is that some companies are cutting back social media spending because of ineffective conversion to sales despite the data risk.

In Southeast Asia, I often heard brands saying online campaigns get clicks not because of the targeting customers but because of “click farms.” Given the risk we now face, I would think brands should take a holistic view of their marketing spend, rebalancing their exposure across all channels.

How do you recommend we avoid having more data scandals in the future?

Howard Yu: The biggest learning is how high-tech firms must shift away from a purely advertising model to a service model. Facebook, Google, Snapchat, Instagram, YouTube, are all generating revenues by getting paid by advertisers. Consumers get services for free. This creates what economists call the “principal-agency” problem. That the high-tech firms may not act on behalf of the best interest for end consumers despite their motto of “do no harm.”

In fact, high-tech firms must explore an alternative business model such as monthly subscriptions to better align themselves with the consumer’s interest. Netflix, Amazon Prime, and HBO are all practicing subscription models and deliver superior content for their loyal customer base, rivaling YouTube which is based on mostly an advertising model. It is exactly what Sheryl Sandberg, Facebook’s chief operating officer, told NBC News last week that Facebook users can’t opt out of sharing their data with advertisers because that would require Facebook to be “a paid product.” That a paid product might become the future roadmap for the high-tech sector will be something high-tech firms have to reconsider, Facebook included.

Howard Yu is professor of strategy and innovation at IMD Business School with campuses in Switzerland and Singapore.

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