Non-monetary costs of free and paid services

Are offers of free digital content misleading?

Let’s have a look at two educational websites – Quill and Prodigy. Both offer free tools for children. Quill – to develop writing skills, Prodigy to practice math tasks.

Quill is a non-profit. It does not display advertisement, but it does collect users’ personal information such as email address, gender or age as well as gather data on users’ behavior when interacting with Quill. This data is processed to personalize and enhance users’ experience. Quill also offers a premium paid version that contains additional features.

Prodigy is a for-profit. It does not display third-party advertisement but, according to Fairplay organization, it bombards its users with advertisements of a premium paid membership. It also collects users’ personal information (except for students) and data on users’ activity to provide them with personalized experience (including personalized advertisements of the premium version).

Though both websites can be used for free, i.e., without paying any money, some may argue that they do impose non-monetary costs on their users. Courts in several countries (Germany, Italy and Hungary) have dealt with a question whether businesses collecting personal information of their users to provide them with personalized advertising can describe their services as “free”. The courts in Italy and Hungary found such offers misleading because they deemed collection of personal data a counter performance provided in exchange for the service.

This raises important normative questions: What type of a counter performance should be classified as costs that make a ‘free’ offer misleading? Is using personal data to personalize internal advertisement (as in case of Prodigy) such a cost? Or does personal data need to be used to personalize third-party advertisement in order for the personal data collection to count as non-monetary cost? Is a freemium model, (basic free version, paid premium version) when the business hopes to convert a non-paying user into a paying one, misleading?

Before addressing those questions, I decided to first understand what types of non-monetary costs are imposed on the users of free digital content. How diverse are these offers? Do they impose higher non-monetary costs than providers of paid digital content?

I first run a pilot study collecting data about music streaming services. I gathered the following information about 48 services (46% paid):

  • Do they contain ads?
  • Can users opt-out of newsletters?
  • Do users grant a license to the content they generate?
  • Is the scope of the license broad or narrow?
  • What types of personal data does the provider declares to collect?
  • What information is gathered from users upon the registration?
  • What is the content of privacy policies and terms of use? Do they contain consumer-unfriendly provisions?

The preliminary results revealed that free online music streaming services do not differ much from the paid ones. The major difference are the advertisements – whereas the majority of free services contain ads, only 2 out of 22 paid services do so. Paid services do collect more types of personal data. This finding is, however, easily explained by the fact that paid services need to collect payment data. When it comes to the content of terms of use and privacy policies – it does not differ between paid and free services including the same number of disadvantageous terms.

Summary of results comparing free and paid online music services
Number of consumer-unfriendly terms grouped in three categories

Further data has been collected to test if these observations hold also with other types of digital services and products such as navigation applications, personal finance applications and online news. The results will be posted here soon!