3/14/15

Internet content and consumer digital surplus

It is increasingly being argued that the Internet provides “digital surplus” to consumers and that this surplus is a means of understanding the value of the Internet to users and society. Measuring the surplus presents a host of challenges, however.

First, the Internet does not produce content. Private enterprises, public entities, and individuals create content with different motives and compensation demands. These are offered under varying business strategies that determine how and how often the content is available on the internet.

Secondly, Internet gateways—ISPs, search engines, and aggregators—have a significant influence on consumers’ content choices. Consumers use relatively few gateway services, but they access content from multiple providers. The nature and sources of that content are highly influenced by the gateways, their preferred content providers, and the algorithms they employ in filtering content.

Determining whether consumers obtain value for money in terms of price, service, and quality from their expenditures for the Internet and its content is complex because it involves two separate transactions: 1) access to internet through the Internet Service Providers (ISPs), and 2) access to content.

The term “consumer digital surplus” derives from the concept of consumer surplus that economists use as a measure of satisfaction of consumer demand. It is based on a determination whether the value received—measured by consumer willingness to pay at given prices—is higher than the market price for the service or product and thus indicating the extent to which consumers are getting a better deal (consumer surplus) than they would have accepted.

There are significant challenges in applying the concept of consumer surplus to digital consumption.

The first challenge is determining what people are willing to pay. There are some accepted methods of calculating it, but it is far easier to measure willingness to pay for access than for content.

The second challenge is that most people now pay for multiple Internet access points rather than a single access point. In Europe, for example, 65% of Europeans have internet access in their home, 52% have internet access via mobile phones, and about 20% of smartphone users also own tablets. Calculating surplus must thus account for use and demand across the platforms. The methods and metrics for doing so remain crude and highly imperfect.

The third challenge is that Internet access through ISPs is often bundled with other services including telephone and television cable services.  This masks the actual price for Internet access and makes determining the surplus related to Internet service and content complicated.

A fourth challenge is that there is a huge oversupply of content creating an imperfect market. Although large amounts of content are used by consumers, there is huge under-use of content because of the scale of content available. There are about 1.2 billion websites on the internet providing at least a trillion Web pages, for example. The overprovision challenge also applies to paid content services and iTunes, for example, offers about 37 million songs, but its average customer has acquired fewer than 100 songs. What is not consumed or consumed infrequently must been seen as having lower value to individual consumers and accounted for accordingly in any determination of surplus.

A final challenge is that much digital content consumption does not involve direct purchase. Most is provided free in exchange for attention or engagement that is desired by others for promotional or advertising purposes. Calculating surplus on consumption without a price is complex. Even when payments are made for content—something done by less than 2 in 10 consumers—most paid content is obtained through a subscription. This creates challenges of accounting for sunk costs and diminishing marginal utility of access to additional content before consumer surplus can be established.

We do know that consumers are receiving value from Internet content and that some types of content are more valuable than others.

There is greater willingness to pay for video entertainment than news and information. However, free video remains highly attractive, evidenced by the 1 billion unique visitors that access YouTube monthly. Nevertheless, paid video content is becoming the norm for professionally produced entertainment. Netflix, for example, had $5.5 billion in revenue from 35 million subscribers in 2014.

Video is more attractive to consumers overall than other types of content and today about 90% of all internet traffic and about 55% of all mobile traffic is video.

Like other communication platforms before it, the Internet has great potential for many types of communication, but is clearly becoming a video entertainment-dominated system that is in direct competition with other video entertainment platforms. Nevertheless, it remains is a platform in which multiple consumer preferences can be pursued and in which the consumer surplus for different content at different times varies significantly. The means for fully understanding that variance and measuring it remain elusive.

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