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How do free digital products affect prices and living standards?

Through our smartphones, we have access to many free services, such as apps, social media and internet search. As we don’t directly spend money on these products, they’re not included in measures of inflation – but we often pay in other ways, whether in terms of our time or access to our data.

Many of us use a smartphone every day for things that would have previously required all kinds of additional products that we would have had to pay for – including watches, diaries, maps and cameras. We also use them for newer services such as social media and online search. But how do these free digital products affect inflation and living standards?

Since the launch of the Apple iPhone in 2007, the spread of 3G and beyond mobile networks, and the development of software for apps, smartphone use in the UK, as elsewhere, has become widespread. Ofcom (the UK’s regulator for all communications services) reports that in 2020, 85% of internet users over the age of 16 were going online using a smartphone (see Table 1). Further, these devices account for just over two-thirds of the five hours plus that the average user spends online.

Table 1: Devices used to go online, among those who go online, by age group

16+ internet users16-2425-3435-4445-5455-6465+
Smart TV41%42%46%50%43%34%26%
Smart speaker20%23%22%24%25%16%11%
Wearable tech12%12%17%16%13%8%4%
Only use devices other than a computer to go online26%32%34%29%22%23%13%
Only uses a smart
phone to go online
Source: Ofcom Adults’ Media Literacy Tracker 2020

People have to pay for their data plans (which in the UK usually include the handset), and for some subscription services, such as paid-for streaming services like Netflix or some magazines. But much of what can be accessed either by smartphone or other devices is ‘free’. Some of the functions and apps are entirely free – such as the camera or calculator – while others we pay for with attention to adverts, or with personal data, rather than money.

Items that we stop purchasing are removed from the ‘basket’ of goods used to calculate the Consumer Price Index (CPI). When the amount spent on them out of total budgets is so low, they get no weight in the measure of inflation. For example, 2022 saw the removal of reference books such as road atlases and dictionaries, with the Office for National Statistics (ONS) commenting: ‘The rise of the internet has seen the need for reference books fall, all age groups are resorting to electronic maps to plan journeys etc while dictionary and thesaurus apps are also available’. These substitutions are good news for consumers, allowing people to spend their money on other items.

What about the money that we do have to pay to access apps and services? Over time, the price of telecoms services has declined, but its measurement is complicated. As consumers pay for bundles of voice calls, texts and data services in packages, it is difficult to compare. The bundles might also include fixed line charges and access charges, as well as (part) payment for the device itself.

In practice, the lowest price of a bundle that specified types of consumers would choose is used in constructing a price index. Recent work on the price index for telecoms services has found significant declines in prices over recent years, with the extent of the fall depending on how the complexities are treated (Abidrahman et al, 2020 and 2022 forthcoming).

The ONS has adopted the option, showing a fall of over a third in telecoms services prices since 2010 (see Figure 1). This price fall tallies with a surge in the volume of data used.

Figure 1: Current and improved telecoms services deflator, 1997 to 2016

Source: ONS, 2020

When it comes to the range of apps and services for which we pay in attention or data, there is no settled way to estimate the benefits that people get from them. The zero price for a social media app or bundled free apps does not feature in the CPI, precisely because we are not spending money on them.

One approach to ascertaining the consumer value of free goods, widely used in environmental economics, is to use either an experimental approach or a carefully structured survey to find out how much money people would require to give up access to one of the free goods for a period of time.

Their ‘willingness to accept’ (WTA) loss of the app or service is a measure of the total benefit (or ‘consumer surplus’) that they gain from using it. This differs from a market price, which is lower than the total consumer surplus (because there are always some people who would have paid more if they had to).

A number of studies have tried this approach, with varying results. In the United States, research has focused on Facebook. One study found that the median US Facebook user needed around $37 to give up the service for a month – although just $322 to give up ‘all social media’ for one year (Brynjolfsson et al, 2019). Another found a median annual figure of $59 WTA loss of Facebook (Sunstein, 2018), while other research has found that it was over $1,000 (Corrigan et al, 2018).

One UK-based study found a wide range of median annual WTA values for different free goods, with search (£1,500) and personal email (£3,500) the most highly valued categories. In comparison, Facebook and many free apps had much lower values, at £150 to £10 a year, respectively (Coyle and Nguyen, 2020).

This last study has been used to explore changes in stated values since the Covid-19 pandemic. It shows significant gains in the value that survey respondents gave for categories like online shopping and online learning. While unsurprising, these increases suggest that there is useful information about the value that people assign to digital services via this approach.

Although there are large uncertainties about how to value them, it is a great benefit for many millions of people to be getting things that they want for free. Digital services are competing with each other for our time, but equally many of them save us time or fill our time enjoyably or productively.

As is increasingly widely appreciated, they also acquire personal data about our preferences and purchases to sell advertising or marketing analytics – the revenue sources that enable the services themselves to stay free. Free digital goods have not affected measured inflation because anything on which nothing is spent will not be included in the index; but they have been a source of gains in consumers’ living standards nevertheless.

One OECD study identified other sources of digital gains, in addition to the free apps, particularly improved quality and more choice (Reinsdorf and Schreyer, 2019). If they were incorporated into inflation measurement, they would have tended to reduce the inflation rate.

But the more that reliance is placed on digital services, the more important it becomes to have universal and affordable access. For example, there is evidence that children in lower-income households in England had worse access to lessons online during the pandemic.

And while the price of telecoms services has declined over time, the cost of data plans is a significant one for low-income households. Just under one in five UK households (4.2 million) have struggled to afford at least one of the communications services they need, and around a third among households claiming benefits, according to Ofcom. Zero prices for much-valued free digital apps do not tell the whole story.

Where can I find out more?

Who are experts on this question?

  • David Nguyen, OECD
  • Manuel Tong, University of Sussex
  • Cahal Moran, LSE
  • Rebecca Riley, Kings College London
  • Kevin Fox, UNSW Sydney
  • Erik Brynjolfsson, Stanford University
  • Paul Schreyer, OECD
Author: Diane Coyle
Image credit: grinvalds on iStock
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