Signal: Pricing and Privacy

This will not inspire confidence, but still: I am one of those idiots who actually paid Whatsapp money before it got taken over by Facebook.

Back in the day, before Facebook had completed its takeover of Whatsapp, the service used to charge a nominal fee for its users. Actually, even that fee was a farce, because after the first year (which was always free), you could in effect simply continue to use Whatsapp without paying a dime.

But so impressed was I with the app, and so much of a believer in paying for what I really liked, that I went ahead and actually paid up.

Doesn’t much inspire confidence in my ability to understand economics, let alone teach it, but there you go.

We all know what happened next of course, including Facebook swallowing up Whatsapp, and then the change in the terms and conditions of 2016 – and now of course, the latest proposed change. Which, if you’ve been keeping track, has itself been pushed out to a later date.

Never a dull moment, as they say.

And the whole brouhaha has resulted in Signal and Telegram seeing record sign-ups. A couple of Whatsapp groups that I am a part of have also migrated over to Signal, because of Whatsapp’s (Facebook’s, really) privacy issues, and because I am a sucker for trying new things, I have installed the app and the desptop version.

Which so far isn’t actually going all that well, because all that has happened is I now have two messaging apps and two desktop apps, but let’s see how it goes. Signal, of course, is much more about privacy than Whatsapp:

…our engineers spend all their time fixing bugs, adding new features and ironing out all the little intricacies in our task of bringing rich, affordable, reliable messaging to every phone in the world. That’s our product and that’s our passion. Your data isn’t even in the picture. We are simply not interested in any of it.

Now, I usually provide a link to the place I take the excerpt from, as indeed I should. In this case, I didn’t because I wanted to spend some time speaking about where I was a little sneakt. I took it from not the Signal website, but the Whatsapp blog. This particular post was from 2012, and it actually begins with a quote from Fight Club. Yes, seriously.

So, as I was saying, I’ll give Signal a shot, but I’m not holding my breath this time around. Without some way to get people to pay for what they use, things are not likely to work out, and that’s just the way it is. You pay with your money, or you pay with your information – unless you’re Wikipedia, and even they need the occasional helping hand.

That Whatsapp blogpost ends with this line:

When people ask us why we charge for WhatsApp, we say “Have you considered the alternative?”

… and my current view is, there isn’t one. You can pay with your information, or you can pay with your money, but as I said in a Principles of Econ course I taught last semester, you gotta pay one way or the other.

But it’s the other way that I wanted to speak about today, by citing an idea that more people should be thinking about: dominant assurance contracts. Lengthy excerpt follows:

The dominant assurance contract adds a simple twist to the crowdfunding contract. An entrepreneur commits to produce a valuable public good if and only if enough people donate, but if not enough donate, the entrepreneur commits not just to return the donor’s funds but to give each donor a refund bonus. To see how this solves the public good problem consider the simplest case. Suppose that there is a public good worth $100 to each of 10 people. The cost of the public good is $800. If each person paid $80, they all would be better off. Each person, however, may choose not to donate, perhaps because they think others will not donate, or perhaps because they think that they can free ride.

Now consider a dominant assurance contract. An entrepreneur agrees to produce the public good if and only if each of 10 people pay $80. If fewer than 10 people donate, the contract is said to fail and the entrepreneur agrees to give a refund bonus of $5 to each of the donors. Now imagine that potential donor A thinks that potential donor B will not donate. In that case, it makes sense for A to donate, because by doing so he will earn $5 at no cost. Thus any donor who thinks that the contract will fail has an incentive to donate. Doing so earns free money. As a result, it cannot be an equilibrium for more than one person to fail to donate. We have only one more point to consider. What if donor A thinks that every other donor will donate? In this case, A knows that if he donates he won’t get the refund bonus, since the contract will succeed. But he also knows that if he doesn’t donate he won’t get anything, but if does donate he will pay $80 and get a public good which is worth $100 to him, for a net gain of $20. Thus, A always has an incentive to donate. If others do not donate, he earns free money. If others do donate, he gets the value of the public good. Thus donating is a win-win, and the public good problem is solved.

Will this work for Signal? Can those of us who believe in paying an amount (how much is a function of which country, how generous you are feeling, how much you use the app, how much revenue you stand to earn by using the app etc, etc) be coordinated by a rather visible hand?

I don’t know the answer, but if any budding microeconomist out there is looking for a cool problem to play around with, I have a free blogpost to sell to you.

(For the budding microeconomist, further reading: Vitalik Buterin not getting what’s so cool about dominant assurance contracts, and an MR post about the issue. Further further reading: be sure to take a look at Rahul’s comment in the MR post.)