|Welcome to Econ 050: Economics and business that matters to the Netherlands and the world. In each episode, Northern Times editor Traci White interviews a new expert about everything from trade wars to the psychology in your shopping cart. This podcast is a co-production between The Northern Times and the Faculty of Economics and Business of the University of Groningen.|
YouTube, Netflix, Google, Facebook – these digital platforms and services have all become seemingly indispensable – and inescapable – parts of modern life. But how much do users truly value ostensibly free online services? How much would it be worth to you to walk away from them? That often depends strongly on how you use it. Associate professor Felix Eggers of the Faculty of Economics and Business of the University of Groningen found out that for the average person, 50 dollars a month was enough to convince them to unfriend Facebook for a month.
Eggers discusses his research looking into the value of not using digital platforms, which is something quite different from the value of using them, and came up with a new way to measure the economic impact of platforms where the users themselves may be the most valuable product of all.
How do you quantify the value of a free service?
Felix Eggers: We asked consumers, we offered them money random amounts according to an experimental design and analysed at what price that 50 percent of the users would switch and accept not using Facebook anymore for a shorter period. So we actually gave them the money if they actually said I want to quit. Then we monitored their online activity and if they really stayed away from Facebook for 30 days they got the money. So yeah. So we stuck to one month there just for practicality, but we also asked for the time frames. So like we went up to one year, but then in a more hypothetical setting. So 50 percent of the U.S. population, or the US sample, would quit Facebook for 50 dollars or more. So that’s more the valuation that we got for Facebook.
On how the digital economy is fairly invisible in a nation’s GDP:
Eggers: Economists use the GDP for valuing the economy and they also use it to reflect on the welfare of the population. If for example the GDP grows by 5 percent over time, then you often say that people are better off because they can consume 5 percent more of valuable products. But that is largely missing out all of the digital economy of the products that are provided for free, because the free products are not accounted for in GDP. GDP only measures products the monetary value of products.
Traci White: So tangible products usually, or services as well?
Eggers: Basically paid products. So if it’s provided for free, it has a weight of zero, and therefore it’s not accounted for in GDP. So a large part of the digital economy is not part of the GDP. And the background of establishing this measure and tracking the value over time is to create an add on to GDP, which we call GDPB focusing on the benefits of the products to keep track of how the digital economy is doing and how it progresses over time.
Why do people give up Facebook, and how do they value other free services?
Eggers:We found some systematic effects for why people gave up Facebook. For example if they I use it more, if they watch more videos on Facebook, if they play more games on Facebook, they value it more obviously. But they also we found out also what are substitutes to Facebook. So if they also have an Instagram account or Snapchat account, then they value it less because they can just shift to another products. We also see that younger consumers don’t value it as much as older consumers for Facebook services specifically. So we’ve we see some of those effects. We did some more qualitative interviews specifically for WhatsApp in one of the studies here among the students of the faculty because the students here at the university, the average or the median valuation is about 100 euros a month. But for WhatsApp, it was 500 euros. So it was really surprising that WhatsApp is valued so highly.
On Facebook monopolistic position as the main medium for news:
Eggers: It’s a win for the users and a win for Facebook, but it’s not a win for the news outlet. So therefore the market cannot regulate it really. Because if users demand to have the news on Facebook for free and you are willing to provide the news on Facebook, then there is no equilibrium that says this is unstable. That’s more an issue of antitrust and you’re basically regulators to look into it and see how powerful Facebook has become and to what extent it affects other companies.
How do users who temporarily unfriend Facebook feel?
Eggers: We did some interviews with those who had to leave it and they the overall reaction was more positive. So people valued that they for example had to read the regular news now instead of getting the news from Facebook.
White: The newspapers probably liked that, too.
Eggers: One user for example reported that when he came back to Facebook, people asked him that they missed him and that they didn’t know what happened or anything happened. So that was also that he felt to be appreciated and part of the social network in fact. Most of it was positive feedback, that people valued having a bit of detox. But we also looked more into details there. So we started giving users an incentive not to use it as often anymore, or a maximum of 10 minutes a day, and if it’s for a longer period so not only for one month – which you can foresee quite easily and you can see OK it’s not for forever – but now we do it more for long term. And then we do see that people are just substituting it more with other things, like WhatsApp for example as a substitute for Facebook. In that case they just exchange information on another network.