Twitter Gnip Shows Why Social Media Should Share Revenue With Users

Source: Financial Times

Like Google's declaration of war on the human race, the news that Twitter will buy Gnip illustrates why social media platforms should share their Big Data revenue with users. Indeed, they would seem to have no choice if they are to survive in the longer term.

Gnip's CEO claims that:

"We have delivered more than 2.3 trillion Tweets to customers in 42 countries who use those Tweets to provide insights to a multitude of industries including business intelligence, marketing, finance, professional services, and public relations."

And that's not all. Gnip also has "complete access" to data from many other social media platforms, including WordPress, the blogging platform, and more restricted access to data from other platforms, such as Facebook, YouTube and Google+. 

Quite whether users consent to all that is an issue we'll return to in another post shortly. 

Meanwhile, Twitter suggests that Gnip's current activities have "only begun to scratch the surface" of what it could offer its Big Data customers in the future. Yet, from a user's perspective, Twitter has barely changed since Gnip began its data-mining activities. So are users receiving enough 'value' for their participation to keep them interested?

The social media operators would argue that their platforms would never have been built were it not for the opportunity to one day make a profit from users' activity on those platforms. And it may look like the features have not changed much since launch, but part of the value to users is the popularity with other users and it costs a lot to keep each social media platform working as the number of users grows. Each platform also has to keep up with changes to other platforms so users can continue to share links, photos and so on. That means platforms tend to lose a lot of money for quite a long time, as the FT's comparison chart shows. 

But analysing the value to users gets mirky when you consider that the social media are already paid to target ads and other information at users based on their behaviour, and that the cost of that type of Big Data activity is reflected in the prices of the goods and services being advertised. 

And it doesn't seem right to include the cost of buying and operating a separate Big Data analytics business, like Gnip, in the user's value equation if the user doesn't directly experience any benefit. After all, that analytics business will charge corporate customers good money for the information it supplies, and the cost of that will also be reflected in the price of goods and services to consumers. 

In other words, social media's reliance on revenue from targeted advertising and other types of Big Data activity means that social media services aren't really 'free' at all. Their costs are baked into the price of consumer goods and services, just like the cost of advertising in the traditional commercial media.

And if it's true that the likes of Gnip are only just scratching the surface of the Big Data opportunities, then the revenues available to social media platforms from crunching their users' data seem likely to far exceed the value of the platform features to users. 

Yet user participation is what drives the social media revenues in the first place (not to mention users' consent to the use of their personal data). The social media platforms aren't publishing their own content like the traditional media, just facilitating interaction, so there's also far less justification for keeping all the revenue on that score. And it seems easier to switch social media platforms than, say, subscription TV providers. 

So the social media platforms would seem to have no choice but to offer users a share of their Big Data revenue streams if their ecosystems are to be sustainable.

Bischoff's Understated Record Speaks For Itself

The departure of Lloyds Banking Group chairman, Sir Win Bischoff, provides another reminder that nothing much has changed in UK banking. 

The so-called 'City grandee' has spent the past five years as chairman of a banking group that's been fined at least £40m so far, and owes customers £10bn in compensation for mis-sold PPI. The fines have included £28m for mis-selling individual savings accounts and income protection insurance products between 2010 and 2012. Yet Win still talks of banking with his 'stomach' (as did the Lehman's gang) and trots out the languid understatement that "all of us have to be very much more mindful of whether the product or service we provide actually meets the needs of the customer." 

Win doesn't need to say that he hates all this new-fangled regulation - we get that from the career stats - but he reminds us anyway, in typically understated fashion: "I still hark back to the days when I would have tea with the governor of the Bank of England and he wouldn't be sitting there with the rule book. He would say '"Win... is this the right way of going about it or should you be in this kind of business'." 

History doesn't record how often the governor actually said this to Win, or what Win said or did in response (if anything). But it's pretty clear that tea consumed in this manner was spectacularly harmful for the UK economy. Unless, of course, you count steadily declining bank competition, mortgage endowment mis-selling, consistent underinvestment in payment systems and a century of under-funding small businesses as wondrous achievements... (and, you know, I think Win just might!).

Anyhow, Win will have plenty of opportunities for cosy chats over a nice cup of tea in future, as he's off to head up the Financial Reporting Council, the accountancy 'watchdog'. They'll relish his capacity for understatement over there, too. You see the FRC has been having a little difficulty in defining the nature of scepticism in the audit context...  biscuit?

Optional Annuities Could Mean Working Pensions

Odd that Will Hutton should claim in The Observer, of all places, that making the purchase of pension annuities optional will end in long term social disaster. UK pensions are already a long term social disaster. Hutton himself points out that "400,000 people buy £11bn of annuities every year", yet "the annuity market [has become] overstretched, offering indifferent and often wildly different rates." 

This is because consumers have no choice. There's no competitive pressure at all on the insurance companies or their agents to remove unnecessary middlemen, reduce fees to customers or simplify products. In fact, the Financial Services Consumer Panel recently found that the annuities industry continued to focus on increasing its revenues through product complexity, even when consumers were given the option to shop around. No one in the industry seized the opportunity to make annuities more transparent and better value for the consumer. [Update on 26 March: Legal & General has suggested the market for individual annuities will shrink by 75% - rather endorsing the government decision to make them optional!].

Will Hutton argues that rather than make annuities optional "the response should have been to redesign [the market] and figure out ways it could have offered better rates with smarter investment vehicles". But that seems naive, given the FSCP findings. The industry had that opportunity and declined it. 

It's equally naive to suggest that less demand for annuities will mean losing a valuable opportunity for insurance companies to 'pool the risk' of funding pensions. The industry merely sees risk pooling as a chance to exploit asymmetries of information to line its own pockets. 

The only way for the government to shake up the cosy annuities cartel was to remove the implicit guarantee that everyone would have to buy an annuity. 

Mr Hutton then seeks to set up some kind of moral panic that the 'freedom to buy a Lamborghini' instead of an annuity will result in people simply frittering away their life savings. Not only does this suggest that he'd rather your life savings were placed in the grubby mitts of the annuities industry so they can buy the Lamborghinis, but it also insults the consumers who face the abyss of the annuities market. Their concern clearly arises from the lack of decent returns, not because they're eager to spend the cash on exotic cars.

Finally, Will suggests that the State is entitled to control how you invest your pension money because it allowed you to avoid paying income tax on your pension contributions in the first place. If you agree with that, then presumably you would say the State is entitled to control how you spend every penny of your income that it has allowed you to keep. This of course places a great deal of trust in the State's financial management capabilities that we know from bitter experience is ill-deserved. As a result, it's more likely that citizens will gain greater control over the allocation of 'their' tax contributions, not less (as I've joked about previously). But regardless of whether it's the State or the taxpayer who is in control, neither party wants the State to be saddled with the consequences of an uncompetitive and opaque annuities market. That would only suit the annuities spivs. Again, the only alternative is to expose the market to competition from all manner of transparent savings and investment opportunities. 

Importantly for economic growth, the freedom to avoid annuities opens up the potential for £11bn a year to be invested directly into the productive economy at better returns in much the same way that the new ISA rules will liberate 'dead money' from low yield bank deposits. Not only could we see some pension capital crowd-invested into long term business and infrastructure projects in a way that won't be interrupted by the need to purchase an annuity, but those in draw-down might also consider some 3 to 5 year loans to creditworthy borrowers as a way to generate some additional monthly income.

At Last: ISAs Go To Work

Finally, the last lines of resistance have fallen and the Chancellor has announced that ISAs will go to work: 

"To further increase the choice that ISA savers have about how they invest, ISA eligibility will be extended to peer-to-peer loans, and all restrictions around the maturity dates of securities held within ISAs will be removed. The government will also explore extending the ISA regime to include debt securities offered by crowdfunding platforms."

In addition, from 1 July 2014 ISAs will be reformed into a simpler product, the ‘New ISA’ (NISA), with an overall limit of £15,000 per year. You will be able to hold cash tax-free within your Stocks and Shares NISA (if your provider allows it). And you'll be able to ask NISA providers to switch your money between cash-NISAs and Stocks and Shares NISAs.

As has been pointed out repeatedly, these changes offer a huge boost to the real economy, because savers will be able to lend their 'dead' savings directly to each other and to small firms to help fill the funding gap left by the banks. At the same time, savers will improve the value of their investments, not only by diversifying into a new asset class, but also one that provides a decent return.

In 2012, the Treasury estimated that about 45% of UK adults have an ISA, with a total of £400bn split equally between cash and stocks/shares.  But others had found that cash-ISAs were only earning an average of 0.41% interest (after initial ‘teaser’ rates expire), and 60% of savers never withdraw money from their account. That amounts to £120bn worth of 'dead money', because only £1 in every £10 of bank loans goes to small firms, and we rely on those firms for 60% of new jobs.

Hats off to the government and the Treasury for putting in the work to turn this situation around.

Wolf Attacks On Local Authorities

It's a vicious coincidence that 'lobo' means wolf in Spanish and a 'Lender Option Borrower Option' in derivatives sales jargon (not to mention parallels with the infamous Timberwolf deal and even The Wolf of Wall Street).   

As explained to me by a researcher from MoveYourMoney in December, LOBOs were sold to UK local authorities to provide (very little) additional funding and to replace the authorities' long term, fixed rate loan contracts with terms that give the lender the option to increase interest rates every 5 years, while the borrower's only 'option' is to repay the loan. This introduces huge uncertainty over local authority funding costs that did not exist before.

How big a problem is this? 

Well, this post suggests that in 2009 at least 30 housing associations may have mistakenly replaced stable long term loans with high cost LOBO facilities in return for only small increases in net funding. But responses to recent Freedom of Information requests suggest that the problem goes further back in time. A response from Brent Council, for instance, shows that in the eight years to April 2010, the council agreed nearly £100m worth of LOBOs, with £21m of funding at risk of being 'called' this year, another £20m in 2015 and £35m in 2016.

Brent's last LOBO was agreed in 2010 and the lender has the option to raise rates in 2015. That was a deal for £10m at an interest rate of 6.75%, even though 'Liebor' rates were at rock bottom. The previous LOBO, agreed in 2008, had a rate of 3.95%. There's no telling what the lender might charge next year...

Now why would local authorities agree to LOBOs? Did they understand the value of the long term deals they were giving up? 

There should be yet another inquiry, but I suspect it will reveal the same old problems amongst the usual suspects that were highlighted by the Banking Standards Commission. Banks are only in the market to make money for themselves.