Online models must change

14 January 2011

BRUSSELS: Advertisers and media owners must overcome a €100bn ($131bn; £83bn) "surplus" between the value consumers extract from the web and the amount of money it generates, McKinsey has said.

The consultancy surveyed 4,500 Europeans and Americans about their online preferences, supplementing the results with analysis of popular behaviour, and suggested the annual value of internet usage stands at €150bn.

Such value might be generated from common online behaviours, such as browsing social networks or watching free video.

But McKinsey also found that shoppers only spend €30bn to access digital services like gaming and music platforms.

"Consumers derive significant value from all they do on the web, and since advertising pays for much of this, it involves no immediate out-of-pocket cost," it said.

Protection from intrusive ads and data privacy risks may be worth another €20bn, based on estimates made after participants were asked what they might pay to more tightly control such areas.

Having combined these figures, McKinsey stated a "substantial consumer surplus" of €100bn remains, potentially reaching €190bn in 2015 as broadband and mobile device penetration rises.

It based this total on subtracting the price paid for using services from their real value, and then deducting the cost people would meet to limit interruptive ads and information abuse while continuing to enjoy the ad-funded internet.

"For web service providers, this is a large parcel of value to leave on the table," the company added.

"It amounts to more than three times the €30bn companies pay providers to advertise on their websites and is almost as much as the €120bn consumers pay for wired and wireless broadband access."

Email contributes a monthly surplus of €3.20, ahead of search's €3.10, social networks' €2.20 and instant messaging's €2.10, as these categories yielded 52% of the overall gap.

Internet phones posted €1.40, web mapping hit €1.10, videos registered €0.90, and comparison shopping logged €0.80, the same as music, wikis and yellow pages.

Directories, advanced uploading tools, podcasts and reading content, blogs, gaming and gambling recorded scores of roughly €0.50 every month.

In all, communications delivered 44% of the surplus, measured against 38% regarding internet services and 18% relating to entertainment.

Low distribution costs and an emphasis on recovering expenses through advertising have discouraged the introduction of formalised payment systems, McKinsey said.

Feasible future models include raising access charges, as just 20% of the digital audience currently splash out in this fashion.

But lifting fees to match the existing surplus threatens to reduce usage by up to 50%, "torpedoing the economics of web services."

Advertising constitutes another viable growth channel, as it accounts for €30bn a year, greater than the €20bn netizens might pay to circumvent marketing "pollution".

"This imbalance suggests that today's levels of advertising are sustainable and that there could be room for more ads or other monetisation plays, such as asking consumers to provide more personal data to access services," McKinsey said.

Despite this, it is uncertain whether a "tipping point" exists, where increased ads would fuel a broader willingness to pay and avoid commercial communications.

A possible consequence is that innovative formats like branded content and viral video will become more widespread, as brands move from "distraction" to "attraction".

The top 100 portals were responsible for 45% of online traffic in 2010, expanding on 20% in 2007, and leading sites stepping into mobile, cloud computing and similar fields may gain major benefits.

"Twitter and Facebook are prime examples of such multiuse platforms," McKinsey concluded.

Data sourced from McKinsey; additional content by Warc staff