Given nearly all productive functionality on the internet is provided for free to the public in exchange for being advertised to, it is a fascinating question to consider what those web based services are actually worth to an individual if they were made to pay for them. With free online resources like search, maps, video, email, social networking, etc we tend to take for granted what life was like before these major technological, life changing enhancements were part of societal fabric.

As an adjacent consideration with respect to the online world is how people measure economic output, which is primarily thought of in terms of Gross Domestic Product (GDP). GDP basically adds-up all finished goods and services that were purchased by households, businesses, government (i.e. at their market price) in a year, and is the most widely used measure of economic activity in the world. However, GDP excludes products and services that are provided for free, implying they have no direct contribution to the economy and hence go unmeasured. By extension this means most smartphone apps, Google search, Facebook, LinkedIn, YouTube, Wikipedia, etc, etc, go largely unmeasured when we think about economic output. While we do not have an elegant mechanism of retrofitting the effective contribution of online properties into GDP, we do know part of it is picked-up in online advertising spending, however a great deal of output is simply excluded.

An interesting study led by MIT economist Erik Bryjolfsson recently tried to address this very question using the "consumer surplus" concept. As a refresher, "consumer surplus" is defined as the difference between what consumers’ are willing to pay for a good or service and the amount that they actually pay. For example, if you are willing to pay $100 for a pair of shoes, but only had to pay $70 for them, then you would gain $30 of "consumer surplus" from that transaction. By extending this "consumer surplus" framework to a sample of ~80,000 people, the MIT researchers were able to place values on what people were willing to accept monetarily in order to forego various online properties for a year. Interestingly, internet search (e.g. Google) was found to be the most valued category of digital good, with the median of the sample requiring ~$17,500 in annual compensation (~1,450 per month) in order to give up their internet search privileges. Search was followed by email (e.g. G-mail) at ~$8,400 per year ($700 per month), then came digital maps (e.g. Google Maps) at ~$3,650 per year (~$300 per month). Given all of these services are provided for free, consumers are receiving a significant surplus from the products.

A reason cited in the study for these high numbers (relative to nothing) is that many people see these services as essential to their jobs and functioning in society, hence making them reluctant to give up these goods even in exchange for significant monetary compensation. Another interesting finding from the study was in the domain of video streaming services (i.e. YouTube and Netflix), which achieved a median valuation by consumers of ~$1,200 per year (~$100 per month). While consumers pay for some streaming services they usually cost between $10-20 per month, or $120-240 per year, potentially highlighting a large opportunity for monetization which is perhaps part of the reason why we have seen Disney, Apple, Hulu, et al aggressively dive into the space.

Finally, it is worth noting a key topic of debate among regulators right now is privacy and whether consumers are actually paying for free online products by unintentionally giving up personal information. The debate however may prove inconsequential if the findings from the MIT study can be extrapolated to even small parts of the user base for Google, Facebook, etc. As it could mean the internet giants could turn off ads (and hence the need to collect personal information), shifting themselves towards a paid subscription model, making their products unavailable to part of the population who couldn't afford them. This scenario would likely create a significant divergence in the worker productivity and a net contraction in the economy, which would present a significant unintended consequence for potentially overbearing regulators.

Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.