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2017-09-05 04:27:26
But economists struggle to work out how much
FACEBOOK, whose users visit for an average of 50 minutes a day, promises
members: It s free and always will be. It certainly sounds like a steal. But
it is only one of the bargains that apparently litter the internet: YouTube
watchers devour 1bn hours of videos every day, for instance. These free lunches
do come at a cost; the problem is calculating how much it is. Because consumers
do not pay for many digital services in cash, beyond the cost of an internet
connection, economists cannot treat these exchanges like normal transactions.
The economics of free are different.
Unlike conventional merchants, companies like Facebook and Google have their
users themselves produce value. Information and pictures uploaded to social
networks draw others to the site. Online searches, selections and likes teach
algorithms what people want. (Now you ve bought The Communist Manifesto , how
about a copy of Das Kapital ?)
The prevalence of free services is partly a result of history. In the early
years of the internet, consumers became used to getting stuff for nothing. They
have little idea of how much their data are worth; since digital companies have
access to billions of people, the value of one person s data is tiny anyway.
More fundamentally, scarcity is not a constraint in the digital world as it is
in the physical one. Data are both inexhaustible and super-cheap to transport.
In 1993 MCI Mail was charging people 50 cents for the first 500 characters of a
digital message, increasing by ten cents for each extra 500. The internet
slashed that price to zero. Charging would have been impractical, so small is
the marginal cost.
Users may pay nothing, but companies like Google and Facebook have fixed costs
to cover: engineers, data centres, etc. To make money, they squeeze their users
indirectly, by charging companies to put appropriate advertisements in front of
captive eyeballs. In the second quarter of 2017, Facebook eked an average of
$4.65 out of each of its users by peppering screens with ads and promoted
posts. (By comparison, just eight cents came from payments and other fees,
mainly from people paying for stuff within virtual games.)
In the absence of prices, economists struggle to work out what people are
getting back when they barter their data and attention for digital services.
Some evidence suggests that they are doing rather well. A recent study by Erik
Brynjolfsson, Felix Eggers and Avinash Gannameneni of the Massachusetts
Institute of Technology offered people different cash amounts in exchange for
giving up Facebook for a month. Based on the responses, they then estimated its
average annual value to the consumer at around $750. A simpler survey in the
same study (without real cash offers) suggested that on average people value
free search engines at $16,600 per year, maps at $2,800 and video at $900.
This sounds like a wonderful deal for the consumer, but it generates problems
elsewhere. Take taxes. Professionals are not allowed to evade tax by selling
their services for benefits in kind, so why should consumers not be taxed if
they are paid for their data in the form of services? Statisticians also
struggle in a post-price world. GDP is mostly measured by transactions at
market prices. A recent study by Leonard Nakamura of the Federal Reserve Bank
of Philadelphia and Jon Samuels and Rachel Soloveichik of the Bureau of
Economic Analysis used the amount spent on advertising to estimate uncounted
output, and calculated that in 2013 American GDP should have been $19bn higher
than reported.
Privacy activists also worry. Consumers tend to respond much more strongly to
free offers than to prices that are only fractionally higher than zero. When
Amazon first offered free shipping in European countries, orders surged but not
in France, where by mistake it charged around ten cents. The activists concern
is that the free label fosters poor decisions, making people, for example,
reveal more about themselves than they would in a more formal exchange.
Researchers talk of the privacy paradox : when asked, people say that they
care much more about their privacy than their actions would suggest.
The free economy also troubles competition authorities. Excessive market power
can be defined as the ability to raise prices above what would be charged in a
competitive market. With no prices to compare, and other options only a click
away, companies such as Google seem to operate in an environment of cut-throat
competition. It is naive to think so. Consumers are more captive than the low
cost of switching might imply. Google, for example, commands a market share for
internet search of over 90% in most countries in the European Union, where
antitrust authorities in June fined it 2.4bn ($2.7bn) for promoting its own
comparison shopping services above its competitors . Its services may have been
free, but the trustbusters judged that its market power was curbing consumers
choices. In the absence of prices, lack of competition will show up in other
ways: demanding more information from users than they want to give, for
example; or irritating them by stuffing their service chock-full of adverts.
No such thing as a free exchange
Opinion is divided on whether the free economy needs fixing, and if so, how. In
his book Who Owns the Future? , Jaron Lanier suggests that tiny payments for
digital contributions might correct yet another problem, a misallocation of
labour. If companies paid people for useful data, rather than mopping up what
they leave behind as they use online services, then prices could nudge people
towards more productive online activity. Others advocate tougher regulation,
mandating that consumers have the option of paying for a version of their
social-media platforms free of advertisements and digital profiles. Neither
seems imminent, and each comes with its own problems. But both would at least
force people to start counting the cost of that priceless lunch.