When an online service is free, you’re not the customer. You’re the product.

Provocative and interesting discussion at Zuckerberg on Facebook v. Apple by Alex Tabarrok. Illuminating pushback in the comments.

Tim Cook, echoing others, recently said “When an online service is free, you’re not the customer. You’re the product.” Facebook’s Mark Zuckerberg took umbrage in an interview with Time:

“A frustration I have is that a lot of people increasingly seem to equate an advertising business model with somehow being out of alignment with your customers,” Zuckerberg says. “I think it’s the most ridiculous concept. What, you think because you’re paying Apple that you’re somehow in alignment with them? If you were in alignment with them, then they’d make their products a lot cheaper!”

Zuckerberg is only partially correct. Apple and Facebook both want to maximize profits but for Apple a key element in profit is increasing price above cost. Zuckerberg’s point is that one way of doing that is to take advantage of market power and raise price against the interests of customers. But Apple’s market power isn’t a given, it’s a function of the quality of Apple’s products relative to its competitors. Thus, Apple has a significant incentive to increase quality and because it can’t charge each of its customers a different price a large fraction of the quality surplus ends up going to customers and Apple customers love Apple products.

Who pays the bills is always a revealing question in its own right. But I like the corollary questions. Is there a quantifiable difference in outcomes based on your motivation based on whether you are serving customers directly (Apple) or indirectly (Facebook)?