Value of online media to consumers understated by £17 billion

April 28, 2015

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By John Hawksworth

Statisticians generally measure the size of the economy by GDP, which is an estimate of the total value of goods and services produced at market prices. But, as economists have increasingly recognised[1], there are limitations to GDP. One important aspect of this is that consumers can now access a great deal of content online for a basic charge that may significantly understate the value they put on online content. 

This reflects the difficulties companies have in charging directly for content when so much is available for free on the internet (though there may be indirect ways of raising revenue, for example through online advertising that users may need to endure when accessing free content). So how large is this ‘consumer surplus’ between what people pay to get online and the value they get from the content?

Valuing consumer surplus is not easy, but a 2013 study[2] by Boston Consulting Group (BCG) used survey techniques to estimate that connected UK consumers paid on average only around £100 per year for online media access, but perceived the value of the services received at around £800, giving an estimated annual surplus of around £700 per connected person.

I have combined these estimates, adjusted over time for inflation, with official ONS data on the proportion of the UK adult population engaging in internet activities of different kinds between 2007 and 2014. I focus on two categories of online media and entertainment for which the BCG study contains separate consumer surplus estimates:

  • Online reading: reading or downloading online news, newspapers, magazines and books; and
  • Online entertainment: playing or downloading games, images, films or music.

The proportion of UK adults engaging in the online reading activities has gone up from 20% in 2007 to around 55% now, while for the online entertainment category it has risen from 24% in 2007 to 44% in 2014.

Allowing also for growth in the adult UK population, I estimate that the total consumer surplus from these online activities has risen from around £6.7 billion in 2007 to over £17 billion in 2014. Interestingly, the fastest rate of increase was during the recessionary period between 2007 and 2009, when the proportion of people active online was rising particularly rapidly. But there has been a steady upward trend over time as the chart below shows.

  Consumer surplus

An estimated online consumer surplus of £17 billion sounds impressive, and compares to total internet retail sales of £38 billion in 2014, but it is still only around 1.5% of household disposable income in that year. However, this was up from just 0.7% of disposable income in 2007, so this is a factor of increasing relative importance to consumers.

These estimates are only for categories of online activity related to media and entertainment. Our analysis does not capture the potential consumer surplus from a wider range of activities such as online banking or buying, selling and searching for goods and services over the internet.

Nonetheless, our analysis does give an indication of how large the consumer surplus is from online media and shows that this has been growing strongly through both the recession and the subsequent recovery in a way that is not captured by conventional economic statistics like GDP.

The challenge for statisticians will be to address this gap in the data on a more systematic basis. The challenge for businesses will be to find imaginative ways to capture more of the value from their services without unduly curbing consumer access to online content.


 

[1] See, for example, this book by Diane Coyle or our own work on good growth with the Demos think tank.

[2] ‘Follow the surplus: European consumers embrace online media’, Boston Consulting Group, April 2013. Their estimates were based on a survey for the UK and other European countries carried out in November 2012, so we have taken their figures as relating to the year 2012 in our analysis.

John Hawksworth:
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