Storm Clouds Are Coming

| Editorial

Many high tech services are thrown out to see what sticks, hoping that customers will misjudge the utility and security aspects. Sometimes, the service can slowly boil the customer’s frog into a financial commitment and generate a cash flow. It’s the new game for tech entrepreneurs.

In previous times, before the Internet changed the rules, companies would conceive of products, test them for fitness, merchantibility and safety. Then customers would make a considered decision as to whether the product’s utility compared to the price created a favorable sales proposition.

Today, however, the sophistication of software and the Internet has created many more opportunities for products whose proposition depends on customers thinking in old ways in order to achieve success. The classic example is the free app that reads a product bar code in a store and provides a list of all local merchants and their price. The cost to the customer is nothing, so the apparent utility to cost ratio is huge. The developer gets a kickback from the merchant who sells you the product. Together, they collect information about your buying preferences and, in turn, sell or exploit that information. All this is done behind the scenes in software.

It’s nothing at all like buying a blender at Wal-Mart.

As a result, modern age customers need to be especially tuned into these business models in order to make informed decisions about whether to acquire and use a product. That’s whether it’s an app like the ones I described above, Facebook, or the cloud. To make things worse, license agreements associated with these on-line services provide for just about no liability, for any reason, on behalf of the provider. So, for example, if Facebook goes off the air for a week due to a tornado, the company owes us nothing because they charged us nothing. Compare that to how sensitive we are about, and the laws pertaining to, say, lead in toys that come from China.

When a service is free, it’s valuable information about the customer that is obtained in exchange, and that’s a lesson we’re learning every day. You are the commodity to be traded.

The Dark Cloud

Another modern age technique is to lure customers into cloud services. In the name of convenience, a utility the customer has to evaluate, the cloud allows customers to access their personal data from anywhere. There are several downsides, however. First, the customers have to (or will have to eventually) pay to access their own data. Second, the customer’s personal data is stored on the server of the provider without guarantees of accessibility or security. As Richard Stallman pointed out recently, “The police need to present you with a search warrant to get your data from you; [in your home] but if they are stored in a company’s server, the police can get it without showing you anything. They may not even have to give the company a search warrant.”

The Cloud

The Promise

That should be of concern because in the post-9/11 world, tidbits of information passed on the Internet that are, in fact, innocent are data mined for national security. The more personal data you push out on to the Internet into various services, the greater the chance you’ll trip an alarm that can’t put your data into context. Fourth Amendment issues are cropping up al over now.

The advertised utility of the cloud depends on obscuring risks and emphasizing convenience to the point where people misjudge the trade-off. Also, appeals to technical hubris are an often used tool. For example, it’s considered really cool (and clever) to be able to enter  the next dentist appointment in your iPhone while at the office and have it (almost instantly) sync wirelessly back to your calendar program on your Mac at home. Never mind that there may be no one there to view it. For those people who just have to have this immediate level of  technical self-satisfaction and convenience, my reaction is:

Poor baby.

We lived for a long time without that feature, and to suggest that it’s just too much trouble to sync your iPhone when you get home from the dentist is ludicrous.

There is peace of mind in knowing that your personal information is stored and backed up on your own media. That your syncs are conducted on your own home network, not spilled all over the Internet. That you won’t ever have to pay to access your own data. It requires some conscious thought and cussed independence on this, a certain willingness to disregard the momentum of the crowd.

Spy

The Reality

Many Apple customers, who’ve weathered the storm of Apple’s beleaguered days in the 1990s know what it’s like to be the crazy one, the misfit, the rebel, the troublemaker. Are you one of them?

What I call “Crowd Services” like Chrome OS, which makes the Internet your storage medium, some cloud services for personal information, which stores everything about you on a sever that may not even be in the U.S., and some social networks all have the capacity to rob you of your independence, security and personal responsibility. That doesn’t look like a good product choice to me.

[Images courtesy iStockphoto]

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Comments

Nemo

This new method of paying for a seemingly free service by discreetly extracting from the users of it their personal and even confidential information is the new business model of free on the Net.  But, of course, it isn’t free, because the costs is your private data.  Credit goes to the person who said:  If you are not paying for the service, you are the product being sold.

The other apt saying comes from Scott McNealy, who was referring to Microsoft, but it applies to this discussion as well:  The first hit is free.  After, these new services have seduced you into the Cloud—which is just some one else’s remote servers connected to you through the Internet—by offering seemingly free services in exchange for all of your data, then you will be completely dependent on someone else’s cloud for access to your data and access to the apps that you need to run your life.  After that, the next hits won’t be free, and you can expect to have to pay in your personal information and with your money to for access to data and apps that you can’t do without.

Why fall for this?  Computers and local storage are cheap and are getting cheaper by the year.  So why make yourself utterly dependent on the Cloud, which, once that dependence happens, will, I assure you, end by costing you far more than your computer and your local storage?  As Mr. Martellaro explains, supra, there is no good answer, so don’t fall for it, or at least read those tedious and nearly impenetrable privacy agreements so that you will know what you are giving up for your “free” service.

MadMac

“Poor baby”?!?!  You sound like those old folks that said, who needs them there fancy computers?  We’ve gotten along without them for hundreds of years.

Really?  In a tech blog no less?  An advancement in personal time/data management is something for “poor babies”?  Really?!?!

This would have been a much more useful article if Mr. Martellaro would have put forth some thoughtful ways to improve cloud security and reliability rather than castigating its users as “poor babies”.  I’ll make sure not to waste time on another of his articles.

Lee Dronick

if Mr. Martellaro would have put forth some thoughtful ways to improve cloud security

Go and read, or reread, Nemo’s comment.

Nemo

Poor Baby?  Yes, you really are if you don’t know what you are trading for, for example, being able to immediately sync an appointment over a wireless network that you can sync just as well and with no loss of utility, when you get home.  Now, if you realize that most of the free syncing services retain all the information that you sync, about where you’ll be and when you’ll be there, and may also track your location and if you still wish to sync anyway, all is well and good. 

But if you don’t know the terms of the deal, you are quiet literally like a baby, though the law will treat you like an adult, for if you have occasion to want to sue the provider of your free syncing service for harm that you suffer as a result of that provider using your privacy/personal data, not giving you access to your data and/or apps, and/or for selling your location, that service provider will produce the privacy agreement that you executed but that you didn’t read or, if read, didn’t understand, and shown the court that you gave it/him permission to use and dispose of your information as it/him saw fit to do.

Big Baby.

Bosco (Brad Hutchings)

The thing I miss the least about putting my 3GS in a drawer and going with a Nexus One is syncing with iTunes.

I like a lot of the cloud stuff and don’t like a lot of it. I also recognize that a cost of doing things the Apple way and manually syncing everything with iTunes is that your data is captive to Apple and iTunes. That has a cost too.

Nemo

Well, Bosco, unlike Google’s orthodox and unmodified Android, which requires a Google account and the use of Google’s cloud services for search, email, etc., with Apple’s iOS devices you have your choice to either subscribe to and use iTunes and/or MobileMe or not and to go with any other third party services that you want, such as Google’s services, Amazon or others to purchase your music and books, pretty much whatever you want.  You can’t do that with orthodox Android and won’t be able to do that with the orthodox Chrome OS.  With Google’s products its a Google account and at least Google’s basic services, or you can go to Hades, unless you get Android in China.  The Chinese carriers and OEMs, which sell into China’s domestic market, have dispensed with Google, its accounts, and its services.

Bosco (Brad Hutchings)

Sorry Nemo. Not true. gmail is not required for Android. You don’t even have to use Google’s official POP3/IMAP mail app (unlike the situation on iPhone when I ditched it). I use K9 Mail and connect to the same POP3 accounts I’ve used for years.

I won’t argue that there isn’t potential for user abuse in the cloud, no more than I would ask you to deny the potential for user abuse in the walled garden. However, one thing to note about the cloud and the free model is that it has often times reset pricing expectations on services that have (effectively) zero marginal cost. gmail was the prototype, and you can hear a great discussion of how disruptive it was on EconTalk (my favorite episode). But it also extends to what Google did with GOOG-411 and voicemail transcription. And even to what Google is doing now with phone numbers and “long distance” calling. These benefits to the wider market depend on a level of usage being attained that these services set the pricing agenda, kinda like how vaccination effectiveness depends on enough people being vaccinated. If they scare you and you opt out, probably no incremental harm to public health or service pricing is done. If they scare everyone, the viruses and markup masters win.

Nemo

Gmail is the default on orthodox Android, and that a technically savvy person might be able to avoid it does not defeat might central point:  That for orthodox, unmodified Android you must have a Google account and use Google’s basic cloud services to make any productive use of an orthodox Android device, while that isn’t the case for Apple’s iOS devices, where you are free to use third party services.

As for particular clouds, e.g., Amazon, Google, Faceboo, et al., the point that they are all walled gardens is well taken, and they are all at least as much walled gardens as Apple’s iTunes stores, and usually more so.  So, as far as walled gardens are concerned, iTunes is no worse than other clouds, though the particular walls will differ as the business models of the various cloud vendors differ.  I prefer Apple’s cloud, where I have the option of paying a subscription fee and keeping my personal/private data away from third parties.

As for the marginal cost of the clouds and the services provided on them, you are flat wrong.  It requires a significant capital expenditure to provide cloud services, and while an additional subscriber may no require an increase in the capacity for those services, increases of sufficiently large number of subscribers requires more bandwidth, more servers, more employees, more switches, more backup resources, more management, and more electricity, all of which cost more money or, in other words, increased marginal cost.

And those cost are due to accelerate significantly, because the large ISPs insist that they aren’t getting enough subscription fees from customers to pay the cost of the infrastructure for Google, Apple, Facebook, and others’ cloud services.  They have already said that they want greater payments from vendors of cloud services.  And they will get it, either from vendors of cloud services or from the ultimate customers.  Either way, the customers, who are big users of cloud services, will, over the next few years, get socked with significant increases in the costs of cloud services, as those increased costs get passed along to them.

Nemo

And Bosco, Google isn’t providing Gmail or long distance for free or at not cost.  It couldn’t do that, because its service cost a lot to provide, and it would go bankrupt, if it tried to provide them without a rich stream of profitable revenues.  Google collects valuable information about the users of its services, which it either exploits in profitable ways or sells to its business partners for them to exploit by, inter alia, targeting ads to those users.  That is a very lucrative business and is how Google gets paid.  Google’s Privacy Policy makes this crystal clear, for its grants Google almost unfettered use of the information that it collects from a user, as those users uses its services.  With Google, since you aren’t paying for the service, you are the product being sold. 

Once again, I prefer Apple’s approach, where I either pay a subscription fee for the services that I use, or Apple takes a cut of the revenue from selling music, video, and other content to fund the capital costs of iTunes’ cloud and where my private/personal data stays out of a third party’s hands, unless I give that party express and informed opt-in permission to collect, use, and/or store my data.

Lancashire-Witch

If I have to trust someone with my personal “stuff” I think I would prefer to trust Apple, rather than Google, Facebook or even Microsoft.

In any case, simply buying one iTunes song establishes a contractual relationship -  unless contract law doesn’t apply in your locality.

As always, I could be wrong.

Bosco (Brad Hutchings)

Nemo… Ok, whatever. You need a Google account. I misread your last post as requiring a gmail account because you mentioned email. You can do everything on an Android phone that you would expect to do on any “smart phone” without a Google account. Phone calls, email (with Google’s “mail” app that connects to POP3/IMAP), web browsing, search, play music, buy music from Amazon MP3, the list goes on.

One thing I notice in a quick search in iTunes is that there is no Amazon MP3 store app for iPhone, like there is for Android. I guess Apple doesn’t want the competition in iOS? Strange that you have to go through extra hoops to use Amazon MP3s on iOS devices.

Nemo, you appear to misunderstand incremental costs versus sunk costs. Some cloud based services require very little network bandwidth, processor time, or storage per user. These would have low incremental costs, perhaps pennies to add the next new user. Some cloud service (like screen sharing with cloud servers in middle) have very high network bandwidth requirements. When you buy a WebEx session, you are paying for marked up bandwidth mostly. With the low incremental cost services, the business model usually relies on distributing sunk costs over a large enough user base so that each user’s share is in line with the incremental costs. So a service that costs $20K to launch and $1 per user to operate tends to hit the sweet profitable spot at around 20K users. And if you listen to that podcast I linked to, there’s a segment in there where Buchheit talks about how announcing gmail was free and then restricting its reach at first forced competitors like Yahoo! and Hotmail to match their terms.

Cloud-based (often freemium) business models come with tremendous disruptive power provided they achieve scale. I think that economic incentive will make many if not most of them sensitive to legitimate privacy concerns. The Apple-way as an alternative, where you buy everything from Apple has downsides as an alternative for those who are skiddish about the cloud.

Bosco (Brad Hutchings)

And Nemo, there are ways Google can recover costs for some services without selling your information (in an identifiable way or otherwise). GOOG-411 used your vocal information to train its VR database. As a participant, how does that usage of my personal information do anything but help me? The market result is that carriers could not get away with charging $1.50 for a 411 call anymore. And other providers have come in with other business models for directory assistance. Google took a bowling ball to that whole scam, and we all benefited.

Look, I know you guys are all Apple fans, and that colors your choices and recommendations. Google and Facebook are damned popular despite the criticisms of how they gather and use data. They are providing very valuable services to those who use them. I think you should look deeper than an explanation that they’re duping users into relinquishing privacy and that’s the only way they’re making money. Because the explanation is much deeper and the privacy concern is a marginal one that isn’t making nearly the difference in either user anonymity or profitability that you imagine.

Lancashire-Witch

Google and Facebook are damned popular despite the criticisms of how they gather and use data.

And Banks were popular until the manure hit the Air Co….

A disaster of Titanic proportions could happen any moment….  or stuff could gradually leak out over a long time without anyone noticing - until it’s too late.

Either way, if you suffer any loss - of privacy, or anything else, it ceases to be a marginal concern for you.

Personally, I try to minimise the risk.  The social, financial or technical benefit (to me) isn’t worth it.

And I would advise any teenager who can’t see the potential pitfalls to be very, very careful which services they use and how they use them.  Anything can happen - from a difficult conversation with your boss,  to finding strange transactions on your credit card account.  Or you may go through all your on-line life and experience no problems at all.

Any time data leaves your computer you are exposing yourself to a risk. The difficulty for most people is assessing how big the risk is; hence the widespread use of weak passwords.  And Apple is not risk free.

Nemo

Marginal Costs are: the costs added by producing one extra item of a product.  However with services, marginal costs may only move significantly as you add, for example, a thousand rather than one user.  In other words, the relevant unit of the margin might be 5,000 new users, but for Apple, Google, Facebook, and their ilk, 5,000 new users for all of their services is a number that they hit at least every other day.  For major providers of cloud services like Apple, Google, et al., the number of users increase by thousand and perhaps ten of thousands every ten days, which means a dramatic increase in marginal costs.  And marginal costs, when summed, lead to large increased bill every month.  The only way that isn’t trues is for you cloud services to be unpopular so that you don’t have any significant increase in users, which isn’t true for the types of companies that we’ve been discussing, for which the monthly increase in costs is large.  And that large increase in costs must be matched by a large and increasing stream of revenues.  And that it is for all of the large providers of cloud services, though the revenues are generated differently.

And no. No providers of cloud services for free gets any appreciable revenue from other than fully exploiting the information from its users to either sell to third parties and/or exploit itself to sell ads.  Consider your example.  While Google may improve how well its services work by using your info to train its database, that use doesn’t pay for one watt of electricity, one new server, one GB of bandwidth, or any of the other myriad costs that relentlessly increase with each five or ten thousand users.  Those massive and increasing costs are only funded by the highly lucrative commercial exploitation of its users’ personal data, and fortunately for Google and its ilk those marginal revenues also increase as users increase, except for China.  If you don’t believe me look at Google’s 10K and 10Q filings, where it is immediately and expressly apparent that its revenue and profits come from advertising. 

You can also use the data found in Google’s public fiancial reports to look at Google’s every increasing costs for the ever increasing infrastructure needed to provide its cloud services.  Fit a marginal costs curve on that data and you will see ever increasing costs that increase with each significant increase in the users of Google’s services.  Those costs have to be paid and Google has to justify those costs with right profits, which it does by exploiting it users’ personal data for advertising, which generates commensurate ever increasing marginal revenues.

And you’re right people don’t care about indirect, hidden, delayed, and/or external costs when a good or service appears to be free.  Our instant mortgage crisis has taught us that, but it’s not a new lesson.  Facebook or Google weren’t the first to discover that hiding the costs of thing can be the key to fat profits.  Big business and some small ones too have know for a long time that a sure route to success is to hide the costs of thing, no matte how expensive those costs may ultimately be, as long as you can extract payment in money or in kind that fully covers the costs and provides a great profit. 

A young law student with great grades and recommendation surprisingly can’t get employment with top firms.  Why?  Well, we all check Facebook, and that indiscretion on the floor of the bar costs you $110,000 starting salary with benefits.  But Facebook was free, wasn’t it?  Maybe not so much.

Using Google’s Android with its free services or FourSquare.  Well, you may have unknowingly and/or uncaringly given them permission to know your location.  Google or FourSquare intend to sell your location to advertisers for profit.  Well, your Facebook profile says that you live in Miami, Fl, but your current location is Italy’s Amalfi Coast.  You return home from a lovely vacation in Italy to a house divested of all its valuables.  Google and/or Foursquare don’t look so free now, do they?

So the providers of cloud services like Google and Facebook—and unlike Apple, which charges either you or the content providers—make you pay with your personal data, and the future costs of that payment may prove to be unaffordable.

seanieryan

Nemo, thank you for putting my thoughts into perfect words of wisdom. I could not have expressed it so well myself but am in 100% agreement.

I am all for tech advances and am usually the one with the latest gadget, but nothing comes in life for free, and the cost might not always be immediately obvious, but one day…

Ross Edwards

@Nemo,

Your example with FourSquare and being robbed is one I frequently cite when telling friends that they’re idiots to use the service and that they couldn’t pay me enough to do so. 

I’ve had my home robbed.  It wasn’t pleasant.  And that was when the robbers had no idea when I might be back, and had to work quickly, and left many things they might have taken—thank goodness, because recovering the household would have been a lot more difficult without those things.

Privacy has value for a reason.  People ought not to discard their privacy so readily, and for so little remuneration.

PSMacintosh

Well said concept, John!

I hadn’t thought about it that deeply before, but the “independent rebel” in me has always and naturally made me wary, cautious, and avoiding of putting info out into the cloud or storing it on the cloud.

Even having and leaving emails on IMAP servers, raises concern—at least I bring down and save most messages locally (to avoid dependence on 3rd P storage for backup or access).

Additionally, I have become very uncomfortable with a number of “directions” that I’ve seen Apple move in over the last 5-10 years: 
?the App store (as a planned, forced exclusive source of SW….and the imposed function of censorship exerted and undertaken);
?the elitist “pride” in claiming to only want to make a “quality” machine (vs making machines for ALL of us)—when the high priced machine originally came about simply because Apple couldn’t compete on price because of smaller scale, not that they didn’t want to compete on price;
?the heavy priority on “profits” and “high margins” (over making really affordable HW and enlarging market share);
?the priority on amassing a large “war chest” fund for some yet-to-be-clearly-seen purpose (versus lowering prices and versus paying current dividends to investors);
?the seeming lack of priority/focus on the continued extensive development/refinement of the Mac machine (as a personal, individual computer that WE own and control)—having an Apple that moves to quickly correct, refine, and improve the interface (versus becoming very slow to make changes to the UI on Macs).


It appears that the ideals that I associated with Apple in the early years, might have NOT been there in Apple (and Steve Jobs) after all, but were only in myself and some others of the same mindset in the Mac community—were just a projection of our own ideals and desires upon Apple:
?The desire to make a computer for “the rest of us” (for us non-IT professionals). 
?The easy, selfless volunteer giving of help, information and time to other Mac users.  The free sharing….. 

?The desire to continuously improve every aspect of each piece of Mac SW and HW—for the benefit of all of us. 
?The open, bold critiquing of each new offering to give input and assistance into the development of its quality and excellence.
?The learning by trying…and the trying of everything in order to learn (and to improve it).

There seemed to be a brief time when we had a voice and influence upon Apple and Mac products—which now has become entirely cut off by a long series of Apple’s moves over the years. 
Now Apple actually prides itself on its secrecy, on its lack of desire for prior input from the users of the Mac community, and on its exertion of control.  Apple throughly believes that it knows what is best for us.  It rarely “asks” or “surveys”.  It doesn’t really care what we think.

I’m very happy that Apple has become a profitable, successful survivor over these decades!
However I find the reality of what Apple has now become to be disappointing in many ways.  It has become so much of the very things that we feared and were worried about in “Microsoft” and in the “1984 Big Brother ad” concept.

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