The bill advertisers pick up for the Internet we freely use

Recently I was commissioned to write a white paper for The Internet Advertising Bureau (IAB UK). The report is called The Data Deal and it is aimed at UK policymakers. It examines the different ways in which digital advertising directly and indirectly benefits the lives of UK citizens. The full report can be found here but below is the opening chapter. It looks at the bill picked up by advertisers for the Internet we freely use and enjoy.

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“Who is in charge of the distribution of bread in London?”

From the point of view of the Soviet Union official, who asked this of the economist Paul Seabright in the 1980s, it was a straightforward question, but the answer foxed him. Nobody, it just happens.

So too the content and services on the Internet have been largely organised by market forces, driven by consumer demand. What is available to UK consumers is vast. Video, gaming and music sites, as well as the written word (newspapers, blogs, etc.) and services like email, price comparison sites and search engines.

The Internet is user friendly because companies find profit in organising and producing content and offering online services to the consumer at either little or no cost. In the main, they operate business models based on advertising.

On top of the cost of broadband, the bill that advertisers pick up has a per annum value of £269 per Internet using household in the UK. This figure was calculated by dividing the amount of money spent on digital advertising in the UK in 2013 (£6.3 billion) by the number of UK web using households (23.4 million). The amount that advertisers spend on this medium is expected to increase, with forecasters predicting this advertiser spend for 2014 to have grown by approximately 18.6%.

In a Censuswide survey on behalf of Ebuzzing, 98% of individuals said they would be unwilling to pay their share (a per person rate of £140 p.a.) to have access to an Internet without advertisements. The Guardian asked the same question via a poll on their website and discovered that 69% of their (skewed upmarket, heavier Internet using) website visitors would not pay that amount either. Generally, people would rather the advertiser pay.

McKinsey estimate that if Internet users were required to pay instead of advertisers, as much as 40% of them would not access the Internet. Losing around 40% of Internet users would have a big impact on cost per person. The bill would need to be split between considerably less people and would almost double per person.

In this scenario the equality of Internet access would suffer. A recent study by the Reuters Institute for the Study of Journalism found that those more willing to pay for online content (in this instance, news) tend to be older and more upmarket than the average person reading news online. Such people tend to be heavy users of the Internet in the first place. Likewise ComScore figures confirm that lighter users of the Internet tend to be older, less affluent and in regional and non-urban locations. They would be the ones most likely to withdraw from the Internet should they be required to pay instead of advertisers.

ComScore estimate that light users of the Internet make up roughly 50% of users. Heavy users make up only 20%. They estimate that the 20% of heavy users account for 61% of the time spent online. If that is taken into consideration and the 20% were required to pay 61% of the amount advertisers pay then 9m people would each need to pay £427 per person per year. No small sum.

Are Internet users grateful to advertisers? On the basis of evidence, it isn’t something they think about day-to-day but most Internet users can make the association between advertising and free content. According to the IAB’s sponsored content report 86% of people who use business, entertainment and general news sites are aware that the free content they view online is made possible by online advertising.

Perhaps what we don’t appreciate is what McKinsey point out; Our key finding is that user benefits from Web services are large—very significantly larger than the advertising revenues earned from providing those services”. They estimate the consumer service surplus is more than three times revenue from ad-based services. “In other words the scale of online advertising revenue significantly underscores the massive value consumers derive from the online services they use.”

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