Blogonomics: Seeking Alpha Plays the Ultimatum Game

The Ultimatum Game, in game theory, has two players. It’s very simple:

The first player proposes how to divide a sum of money between themselves, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal.

When this game is played in real life, the second player tends to reject any offer of less than about 20% or so, even though that means getting nothing rather than something. It might not be economically rational, but it’s human. At the same time, of course, there’s also a very human incentive on the part of the first player to try to maximize his own share of the spoils, rather than simply splitting the pie 50-50. You might even say that he’s Seeking Alpha.

David Jackson, the founder of Seeking Alpha, has a long blog entry today which essentially boils down to "I’m the first player, you’re the second player, and if you were rational, you’d accept any offer I made you." From the point of view of a Seeking Alpha contributor, he says, "while the marginal cost is zero, the marginal return is undoubtedly positive."

And yet a vocal minority of Seeking Alpha contributors think that the benefits are so lopsided that they leave all the same. (Does this minority include Barry Ritholtz? Technically he says he hasn’t left yet, but he’s had nothing on SA for a week now, so my feeling is yes.)

Ritholtz says that Jackson commits a "blogosphere faux pas" by responding to his original post without linking to it (except in the comments); I think it’s actually more serious than that. There’s a pattern here, which can be seen in the comments on Jackson’s post: Seeking Alpha, in the first instance, acts to maximize its own share of the pie; only in the wake of repeated and vocal objections does it give an increasing share of the pie to its contributors.

That’s natural, for a player of the Ultimatum Game, but it’s not something which is going to endear Seeking Alpha to its contributors. SA has never been particularly generous with external links, preferring where possible to keep its visitors to itself. It truncates its RSS feeds, presumably also for selfish (if self-defeating) reasons. And, unsurprisingly for a website which is hesitant even to link to Ritholtz’s criticisms, it certainly never published them itself (although it could have, and it would have been fascinating to see the difference between the comments on Ritholtz’s blog and the comments on the SA repost.)

Clearly there’s an incentives problem here. Every dollar David Jackson doesn’t give to its contributors is a dollar he gets to keep for himself, which means that SA’s incentives are absolutely not aligned with those of his contributors. When Abnormal Returns talks about building "a better aggregator", that’s I think one of the main things they’re talking about: a model where the content providers get the same upside as the republishers.

Jackson, in one of the comments, talks of SA’s "quarterly loss": I’m not sure if this is a public acknowledgement that the site is losing money. Even if it is, however, David Jackson’s net worth is clearly rising quite impressively as the value of his site increases. He’s making money, even if the site is cashflow negative. And he’s trying to keep as much of that money as possible for himself. That’s only rational, of course. But he shouldn’t be surprised if some of his contributors are less than enthusiastic about it.

Update: David Jackson tried to respond in the comments, but there was some kind of problem with them. Here’s what he writes:

Felix, as usual this is a thoughtful and thought-provoking post. But it contains some factual errors, and also I think a deeper mistake. First, the factual errors. We did not have the option to publish Barry’s criticism on Seeking Alpha, because he told us to cease publishing his articles until further notice. I named him but didn’t link to his post not because I’m parsimonious with links, but because I believed his post was grossly unfair and misleading. He mentioned that we violated his editorial requests, but didn’t mention that the "violation" was an error by a new editor which was immediately corrected when we picked up his email alerting us to the mistake, and that our editor in chief personally emailed him to apologize *before* he published his post. He also didn’t mention how we had specifically worked with him to promote his blog and new businesses on his articles (just look at his articles on Seeking Alpha), nor the discussions we had had to bounce around ideas for working together. As a result, many of his readers assumed that we were running some kind of automated bot, intentionally disregarding his wishes and trying to take advantage of him.

I faced a dilemma: I didn’t want to focus on the misrepresentative innuendos in Barry’s post that led to the torrent of negative comments, instead of focusing on the core issue of Seeking Alpha’s business model and our partnership with contributors. Not mentioning him wasn’t possible since he’d triggered the debate, but linking to his post without pointing out its inaccuracies also didn’t seem viable. So I chose a middle path: mention him, keep my article focused on real issues, and provide a link to him in the comments below.

I’m explaining this in detail because it’s actually a dilemma that is becoming more frequent as blogs spread: What do you do when someone grossly misrepresents you but triggers a debate which you need to respond to? Should you publicly correct their misrepresentation, or focus on the substantive issue? I’m sure many individuals and companies have faced this issue, and I’d be interested in hearing how others have dealt with that situation.

The core issue is much more important, however: Is Seeking Alpha playing the Ultimatum Game? The answer is categorically "no".

First, your analogy is focused on a single point in time, but our business and contributor relationships are dynamic over time. We’re in investment mode (yup, we’re losing money), and need to grow our audience. If we paid contributors a rev share now, for example, we wouldn’t excite them (who wants to be told their articles generated $5.63 for them this month?) and we’d impede our growth. But investing in growth will allow us to provide even greater benefit for contributors, whether with direct payments, revenue shares or other forms of lead generation and monetization (none of which we rule out). So our current relationship, where we don’t pay rev shares etc, isn’t a zero sum game: our investment in our business will also generate higher future value for our contributors.

Second, your metaphor omits the marginal costs born by the parties — zero to the contributor, but high to Seeking Alpha. We bear the technology, content and editorial costs of developing a platform, but the contributor bears only the cost of an email that says "yes, please republish my articles".

Our lives are full of relationships where we voluntarily participate without payment in something that generates revenue for someone else — because we gain from our participation. Have you ever left a message on a Yahoo Finance messageboard? They made ad revenue from your content. Have you left a comment on someone else’s blog which has ads on it (like I’m doing now)? I’m investing time and effort in this, but Portfolio.com is making the ad revenue. Has Barry appeared on a radio or TV show without getting paid? My guess is yes, frequently; but the stations make money off his appearances. Google, the most extreme example, makes money from placing ads next to searches for your headlines. But that’s fine, becuase someone else has invested in a platform which provides marginal benefit to you with zero marginal cost. We generally don’t regard these relationships as ultimatums; we welcome them.

On the question of whether to link to criticism you’re citing, I think the answer is pretty much always yes. On the question of the Ultimatum Game, I wasn’t actually suggesting that SA pay its contributors; in fact I was quite harsh about that suggestion last month. My point was a bit broader: that incentives aren’t aligned at SA, and that in fact SA has behaved in the past as though it is trying to minimize the benefit to contributors. Looking through the comments on David’s post, I think it’s fair to sum up the attitude of contributors as being cautiously enthusiastic; they don’t seem to think the company is particularly responsive to their concerns, or particularly zealous when it comes to maximizing their non-monetary benefits from contributing.

That said, my own experience with the team at SA has generally been very good. And I do think that they’re undoubtedly the best at what they do. But herding bloggers was never going to be easy, as David is learning.