What is the Economic Contribution of "Free" Services and Apps?

“Free” is an interesting conundrum for economists. it is hard to value something valuable, when it is given away. Sure, it is possible to measure the derivatives, such as advertising revenue generated by providers of free apps and services.

Traditional economic approaches based on measuring prices and quantities do not work well for goods with a price of “zero.” Though economics often is counter-intuitive in its implications, most people could agree that it seems disjointed in some way to maintain that any economy is worse off because people use Skype, Google Hangouts, free web browsers or most Internet apps.

People might agree that some of that usage cannibalizes some product provider’s revenue. But most also would agree that use of those replacement products also leads people to use “paid” products more than they otherwise would have.

And the common sense notion likely also is that such products make people and companies “more productive” than they had been before.

But the value of “no incremental cost” services and apps is hard to measure, since the non-monetized value cannot be captured in conventional ways.

Ever since Netscape “gave away” its browser, the value of "free" has been a source of debate, despite underpinning what is now called the “freemium” business model.

The Massachusetts Institute of Technology economist Erik Brynjolfsson points out that, according to government statistics, the “information sector” of the U.S. economy, which includes publishing, software, data services and telecom, has barely grown since the late 1980s.

That will strike many as a puzzling finding.

Using a new methodology, economists at MIT estimate the increase in consumer surplus created by free Internet services to be over $30 billion per year in the United States, about 0.23 percent of average annual gross domestic product between 2002 and 2011.

Perhaps that is a conservative estimate, but being conservative in applying such new measures is wise, since the methodology involves assigning a “hard dollar” value to a “soft dollar” metric of “time spent online” (on the assumption that time is money). Being conservative is wise since most of us can think of lots of ways that time online is not really productive.

The same sort of caveat might apply to other forms of “attention,” such as watching television. Most people would probably agree that not much of that form of attention adds measurably, if at all, to gross national product, aside from the value to networks and broadcasters of their created ad revenue streams.  
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