Investors vs. Users: A Look at Big Tech Incentives

Guest post by @EntropyDevs

There have been many ways of analyzing the behavior of Silicon Valley corporations, examining groupthink, political pressure, the ideology of the leadership, etc. but I would like to add one form of influence that deserves more attention. A good rule of thumb when analyzing the actions of a corporation is to start with the motto “Follow the money”. Ideally, the incentives for a corporation should be best summed up by this quote from The Wealth of Nations,

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” 

The world of software has challenged much of our classical thought, this is no exception. There is a hidden assumption embedded in this quote: That the consumer, and the one purchasing the product, are the same person. This has not been true in the software world for a long time. For much of the software we use, the “consumers”, us, don’t pay a cent for our services. If we were to fix this quote to better reflect the modern software industry it should read: 

“The interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the purchaser.”

One of the more widely known models that negatively impacts consumers is where the advertisers are the purchasers, the software companies are the producers, and we are the product. (Examples of companies with this incentive structure are YouTube, Twitter, Facebook, Instagram, and Snap Chat). 

Some have argued that by avoiding advertising as a source of revenue companies will be more accountable to their users, however, this is not the only strange business model that has cropped up in Silicon Valley. 

I want to explore the, all too common, case when the investors are the purchaser, the stock is the product, and the service the company provides is just a liability. At first, one would assume that this is a rarity, but it is significantly more common than even the advertising model. Of the tech companies that had their initial public offering last year, only 16% were profitable.


Patreon as an Example:

To understand how so many Tech IPOs are unprofitable let’s look at an example that many readers are probably familiar with: Patreon is a crowd funding service started in 2013 by Jack Conte, its current CEO. Patreon earns 5% of what it processes in donations, which, given that it processed 250 million dollars last year, would mean that in 2018 it took in $12.5 million in revenue. Despite that, Mr. Conte believes Patreon’s business model is unsustainable, and he says that his company does not make any profit. Luckily for them, this is not Patreon’s only source of capital. Over the course of its 6 years of operation the company has taken five different rounds of investment. How does this compare to the revenue earned from their primary business? 

Here is a breakdown of their capital streams as far as I have been able to track: 


Revenue Investment
2013 $0.00 $2,100,000.00
2014 $250,000.00 $15,000,000.00
2015 $1,000,000.00
2016 $3,750,000.00 $30,000,000.00
2017 $7,500,000.00 $60,000,000.00
2018 $12,500,000.00
2019 $25,000,000.00 $60,000,000.00
Total $50,000,000.00 $167,100,000.00

As you can see, Patreon has received over three times the amount of investment as it has ever made in revenue. This creates a strange set of incentives. Those investors are not using Patreon’s service, so their perceptions of Patreon’s success is not affected by improvements in service but they are affected by negative press. Beginning in December of 2018, Patreon engaged in a series of reforms, starting with the banning of many prominent political commentators including Sargon of Akkad, Milo Yiannopoulos, and James Allsup. This was followed by the announcement in January of a broadly unpopular series of service changes including a totally different pricing model, that many people felt was inferior to the previous version. The rollout of these changes took place in May, and just two months later in July, Patreon announced that it had received $60 million in its Series D round of investing. This appears to be a clear case of the company acting against the best interest of its users, while still making more money than it has ever made with its primary service.

What this means for Alt-Tech:

This is unfortunately becoming more common. As previously stated, only 16% of new technology IPOs last year were for companies that turned a profit, the lowest it’s been since the dotcom bubble burst in 2000. What does this mean for Alt-Tech platforms like Gab and Entropy? Its impact is threefold, first, it highlights the challenge for Alt-Tech in competing with companies that have abnormal business models and different streams of capital we will not have access to. Second, it emphasizes the need for Alt-Tech in an environment where the existence of seemingly strong companies can be at the mercy of investors’ erratic whims. If there were to be a crash like in 2000, how many of the vital services people rely on could disappear in an instant? Third, it reminds us in Alt-Tech that there is a greater burden on us to create better products, tailored more closely to the needs of our users than traditional technology companies have been making, and that our boss has always been and will always be our loyal fans and users. 

About the Author:

Emmanuel Constantinidis is the founder of Entropy (https://gab.com/EntropyDevs) an innovative web platform of streaming tools designed to enhance interaction and provide a censorship free environment for live discussions. Entropy’s purpose is to help streamers build stronger communities and keep their channels longer in the face of growing censorship and demonetization. https://Entropystream.live

Sources:


Profitability of tech IPOs: https://site.warrington.ufl.edu/ritter/files/2019/01/IPOs2018Statistics_Dec.pdf

Sources for Patreon Information:

https://web.archive.org/web/20150404133954/https://www.patreon.com/creation?hid=1070951

https://patreonhq.com/creators-have-made-100m-on-patreon-ddfcc9338662

https://www.cnbc.com/2019/01/23/crowd-funding-platform-patreon-announces-it-will-pay-out-half-a-billion-dollars-to-content-creators-in-2019.html

Op-Ed: Zuckerberg’s Hypocrisy on Free Speech

Zuckerburg recently gave a talk regarding free speech. He has referred to Facebook as a technology company. He explicitly stated that “We are a tech company, not a media company.” But then subsequently, in Congressional testimony, he gave a more nuanced answer. “I view us as a tech company because the primary that we do is build technology and products. I agree that we’re responsible for the content, but we don’t produce the content. I think when people ask us if we’re a media company or a publisher, my understanding of what they’re really getting at is do we feel responsibility for content on our platform. The answer to that, I think, is clearly yes. But I don’t think that’s incompatible with fundamentally at our core being a technology company.”


Later, in filing a motion to dismiss the lawsuit from Laura Loomer, Facebook’s attorneys stated that “Under well-established law, neither Facebook nor any other publisher can be liable for failing to publish someone else’s message” and that referring to Loomer and others as “dangerous individuals” and “promoting hate” as constitutionally protected opinions of a publisher. 

Zuckerburg in his recent speech at Georgetown stated:

“People having the power to express themselves at scale is a new kind of force in the world — a Fifth Estate alongside the other power structures of society. People no longer have to rely on traditional gatekeepers in politics or media to make their voices heard, and that has important consequences. I understand the concerns about how tech platforms have centralized power, but I actually believe the much bigger story is how much these platforms have decentralized power by putting it directly into people’s hands. It’s part of this amazing expansion of voice through law, culture and technology.”

“We don’t fact-check political ads. We don’t do this to help politicians, but because we think people should be able to see for themselves what politicians are saying. And if content is newsworthy, we also won’t take it down even if it would otherwise conflict with many of our standards.”

“I know many people disagree, but, in general, I don’t think it’s right for a private company to censor politicians or the news in a democracy.”

“Increasingly, we’re seeing people try to define more speech as dangerous because it may lead to political outcomes they see as unacceptable. Some hold the view that since the stakes are so high, they can no longer trust their fellow citizens with the power to communicate and decide what to believe for themselves.I personally believe this is more dangerous for democracy over the long term than almost any speech. Democracy depends on the idea that we hold each others’ right to express ourselves and be heard above our own desire to always get the outcomes we want.”


I take the liberty to quote Zuckerburg at length as I believe them to be of merit. But that raises the question: is Facebook a technology company that promotes free speech and exists as a public forum exempt from liability? Or is it a publisher with the right of censorship, the right to edit content as it deems at its discretion, whatever the methodology; but must then assume responsibility and liability?

To say you assume responsibility by declaring yourself exempt from liability is an absurd contradiction. It is the assumption of liability that binds the statement of responsibility. As troubled as I am regarding the hypocrisy and contradictions of Zuckerburg’s words and Facebook policy and practices, it is more troubling that the technology community and many progressives have criticized his speech as they take a much narrower view of what speech should be protected and what speech should be permitted.

They have very nice words to use to justify their point of view: fake news, Russian bots, hate speech, intentional misinformation, political extremism, political ads that lie, divisive content, etc.  

Essentially many believe technology should be used as a censor according to the criteria of who controls the technology company in partnership with a mob that wants to repress dissent. Those that want to control our words. Control our thoughts. Control our actions. According to their perspective of what is right, just and moral. That they anoint themselves as the modern version of Torquemada. And make no mistake, it is an Inquisition. A strategy to dehumanize, delegitimize, and digitally exterminate those who disagree. 

During the 1800 election where Jefferson challenged Adams, to a great extent because of the Alien and Sedition Acts, a newspaper supporting the Federalist Party (Adams) wrote that if Jefferson was elected:

“Murder, robbery, rape, adultery, and incest will be openly taught and practiced, the air will be rent with the cries of the distressed, the soil will be soaked with blood, and the nation black with crimes.” 


Actually, most newspapers then were affiliated and backed by political parties and served as propaganda machines. And the public was considered mature enough to process and filter the noise on their own. If there is doubt as to the intent of our founders, permit me to cite:


“If all printers were determined not to print anything till they were sure it would offend nobody, there would be very little printed.”
— Benjamin Franklin

“If men are to be precluded from offering their sentiments on a matter, which may involve the most serious and alarming consequences that can invite the consideration of mankind, reason is of no use to us; the freedom of speech may be taken away, and dumb and silent we may be led, like sheep, to the slaughter.”— George Washington


“In those wretched countries where a man cannot call his tongue his own, he can scarce call anything his own. Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech; a thing terrible to publick traitors.” -Benjamin Franklin


“The press, confined to truth, needs no other legal restraint; the public judgment will correct false reasonings and opinions, on a full hearing of all parties; and no other definite line can be drawn between the inestimable liberty of the press and its demoralizing licentiousness.” -Thomas Jefferson


“To preserve the freedom of the human mind … and the freedom of the press, every spirit should be ready to devote itself to martyrdom; for as long as we may think as we will, and speak as we think the condition of man will proceed in improvement.”Thomas Jefferson


And it is not only the founders who have expressed the sanctity of free speech without censorship, independent of its content. 


“The freedom of speech and the freedom of the press have not been granted to the people in order that they may say the things which please, and which are based upon accepted thought, but the right to say the things which displease, the right to say the things which may convey the new and yet unexpected thoughts, the right to say things, even though they do a wrong.”— Samuel Gompers


“We are reluctant to admit that we owe our liberties to men of a type that today we hate and fear — unruly men, disturbers of the peace … in a word, free men. … Freedom is always purchased at a great price, and even those who are willing to pay it have to admit that the price is great.”— Gerald W. Johnson


“You tell me that law is above freedom of utterance. And I reply that you can have no wise laws nor free entertainment of wise laws unless there is free expression of the wisdom of the people — and, alas, their folly with it. But if there is freedom, folly will die of its own poison, and the wisdom will survive.”— William Allen White


Tyranny is defined as the arbitrary use of power or control. The oppressive power over the mind of man. If so-called social media places limits on speech, censorship, then the right honest and accurate label should either be platforms that practice tyranny or publishers liable for the content that it’s editors decide to remain posted. 


Technology, decentralized, without any controlling authority like bitcoin, liberates us. No censorship. Freely transferable. Independent of any third party. Absence of force. 
Unfortunately almost all technology developed today has a controlling authority acting as a censor.  Which is fine if they acknowledge themselves as publishers and should be responsible, as all publishers are, by being liable for the content it chooses to publish.

Whether it is their words or the words others have agreed to submit and they have agreed to remain posted for all to see. This is the danger of centralization of power and authority. Eliminates checks and balances. The end of due process. A challenge to the preservation of all our civil liberties enshrined in our Bill of Rights. 


Where there is not contestability, there is little to no competition. A condition for a free society is political competition and economic competition. Free of persecution. The reliance on markets and contract law entered into voluntarily. And the existence and recognition of inalienable rights. 


If not, we breach our social contract. We punish dissent. We choose might makes right. We choose to impose on others, through tyranny of the majority or even tyranny without a majority 


The choice is as stark as deciding what we stand for between the following:
I wholly disapprove of what you say and will defend to the death your right to say it OR
I wholly disapprove of what you say and will digitally exterminate you if you dare try to say it. 
An only true public forum is censorship resistant. And censorship resistant can only prosper and nourish in an environment where ther is no authority entity, no controlling party. Permissionless. 
Where permission is required and the party that grants consent is not contestable, tyranny exists. 


Rabbi Hillel said “that which is despicable to you, do not do to your fellow.” If you want the right to speak, express your ideas, express your opinions. Assert your point of view. Assert your beliefs. And if it would be despicable to you if someone prevented you from doing so, persecuting you, dehumanizing you, deplatforming you, digitally exterminating you. Then it is despicable for you to do it to your fellow. Censorship is despicable. Torquemada or Jefferson. Torquemada or Franklin. Torquemada or Washington. Torquemada or Rabbi Hillel. Trial by Inquisition or Inalienable Rights. Liberty and Freedom or Tyranny.


About the Author

Jeffrey Wernick is an experienced independent private investor in various sectors of the world economy. Jeffrey has more than 40 years of experience including investments in worldwide known companies. Then Jeffrey shifted the focus to banking operations, credit platforms, and tech startups. Also, a frequently invited speaker including multiple times at his alma mater, The University of Chicago.

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