Will Instagram teach users that, in digital media, there’s no such thing as a free launch?

Instagram CEO Kevin Systrom has backpedaled on the company’s privacy policy changes. Though that might be enough to comfort a gaggle of amateur photographers, surely everyone else now knows that Instagram will live to monetize its data another day.

Of course, Facebook has led us through the dark bowers of digital exploitation before. It will be interesting to see whether, with such highly publicized privacy policy blunders from Facebook and now Instagram, users have finally wised up to how this all works. Even now, it’s sort of baffling why exactly these “breaches” give people the willies—does anyone really think there’s value in invading their privacy as an individual user? Or is it more that, despite realizing the fault that lies in not reading the terms and conditions in the first place, users still feel the nagging sense of a bait and switch at play?

If the latter, they certainly should—because it is. Even if it takes a few more privacy policy outrage episodes to sink in, this latest controversy is nudging us closer to a digital media divergence into two clear models: either users pay for the commodity/service or they are the commodity/service.

What the Instagram controversy crystallizes more clearly than the Facebook episode is the why the “switch” part of the equation is so disquieting, even if individual privacy per se isn’t actually in peril. Because Instagram is mainly about photographs, and it has attracted users on the basis of the quality of those photographs, it is now apparent that harvesting user data isn’t the only monetizing method. The fruits of users’ labor is also a precious resource—their photographs in Instagram’s case, and all manner of miscellaneous content that Facebook users produce. It’s what Nick Carr inimitably terms the “digital sharecropping” model:

As Techcrunch noted, Facebook reported that it earned an average of $1.21 in revenue from each of its members during the first quarter of this year. What Facebook calls ARPU – average revenue per user – is one of its crucial financial measures…. Because Facebook’s content is created by its members, ARPU also tells us the monetary value of each member’s labor. If the average Facebook sharecropper were to be paid a revenue share for his or her work on the site, that member would make a buck and change every three months – about enough for one crappy cup of coffee.

Needless to say, the amount is so small that Facebook members never think about it. The amounts only become economically interesting when, as I wrote earlier, you aggregate them on a massive scale.

Part of the problem here derives from the scale-conquest phase of this digital sharecropping model. Startups that charge for their services in a straightforward way can’t compete with the “free (for now)” alternatives. And, tellingly, start-ups that clarified right off the bat how they planned to monetize their user base are similarly unlikely to attract willing users.

This is important because of the unique landscape of digital media and how users experience it. As Clay Shirky pointed out in the mid-Cretaceous period of the digital world, the only models that can get away with doing things that “users hate” are monopolies or cartels. Unfortunately for duped-feeling users, that is exactly what superior social media startups that aggressively share-grab morph into: monopolies. After they reach critical mass, individual resistance—e.g. flight to MySpace?—is pretty much futile.

What remains unclear, though, is the degree to which slightly-less-than-superior platforms can get away with doing things that “users hate.” In the current evolutionary stage of the digital media business, users appear only to grasp how to vote with their usage habits—and, in the absence of a viable substitute, only the most indignant of photographers are likely to stick to their boycott guns. This bodes well for Instagram. So too does the fact that users haven’t yet accepted to notion of voting with their dollars. And until users accept that they have to pony up for the services that they want, the competitive field for digital sharecroppers will remain comfortably sparse.