Wednesday, August 3, 2011

Net benefits at $50 billion and climbing

Like many major new technologies before it, the internet is steadily remaking a host of our industries - music, film, travel agencies, banking, newspapers, bookselling and now retailing more generally. You've heard a lot about the pain this is inflicting on businesses and their staff, and you'll hear a lot more.

But while we're being asked to feel bad about all the business people and workers displaced, there are two things we shouldn't lose sight of. New technology is always reshaping our economy; it's the price we pay for 200 years of ever-rising affluence. And the costs to the producers of the old technology are always outweighed by the benefits to the users of the new technology.

Today Google Australia is releasing a study by Deloitte Access Economics which attempts to measure those benefits. It finds about 190,000 people are employed in occupations directly related to the internet, with its direct contribution to the Australian economy worth about $50 billion a year, or 3.6 per cent of gross domestic product.

But the internet's wider benefits, only partly captured in GDP, include about $27 billion a year in productivity increases to businesses and governments and benefits worth about $53 billion a year to households: a more efficient way to search for information; a greater variety of items for purchase; greater convenience and a new source of recreation.

Internet browsers and search engines allow consumers to quickly and easily find information on anything from products and services, academic papers, the availability of jobs or houses to simply obtain directions or the latest on the weather.

One study finds it takes an average of seven minutes to search for a particular item online, compared to 22 minutes for an offline search. Assuming a person asks one answerable question every two days, and that workers value their time at the average after-tax wage of $22 an hour, this yields a saving worth $1.40 a day or $500 a year. Multiplying that by all internet users we get $7 billion a year.

Many markets are dominated by a small number of best-selling products. But the internet's search capacity makes it easier to find a wide range of niche products, which a study shows is reducing the market share of the big sellers. In 2000, an online store such as Amazon had about 23 million titles available, compared to 100,000 in the largest bricks-and-mortar bookshops.

In the old days you could spend a lifetime rummaging through second-hand bookshops searching for a particular out-of-print title. These days you can find it in a trice on the internet (and sometimes they'll print up a new copy just for you).

Specialised price and product comparison sites - such as Webjet, Wotif and Booko - compare prices from across the internet. And here's the trick: this doesn't just allow you to find the best price with ease, the heightened competition - and heightened emphasis on price - encourages businesses to lower their prices.

In the old days, hotels and motels charged people who walked in off the street a ''rack rate'' much higher than they charged people who came via travel agents or their employer. These days, competition often forces them to ensure the price they list on their site is their best price (a truth I learnt the hard way).

Even so, a study finds that the increase in variety provided by the internet is of greater value to consumers than the decline in prices. Assuming 40 per cent of all goods and services bought online wouldn't be readily available in the absence of the internet (as is the case for books), the increase in consumer welfare across all online retailing activities would be worth about $16 billion a year.

Now convenience. Before the widespread availability of the internet, most banking transactions involved a physical trip during opening hours and waiting in line to be served. Likewise, registering a car involved a trip to the motor registry, paying bills and submitting a tax return involved buying an envelope and a stamp, filling out the form and dropping it at the nearest post box.

For the majority of the working-age population, the ability to perform these tasks and more online saves a substantial amount of time each week. Assuming it saves a typical internet user half an hour a week, its estimated value to consumers is $8 billion a year.

I'm always using it to pay parking fines and my kids use it to fill out their tax returns (where the taxman helpfully ''pre-fills'' the return with information about your income he already knows). The latest is you can fill out next week's census form online. As for banking, I darken the doors of my bank branch only a few times a year.

On average, Australians spend 1.5 hours of leisure time a day online. If half this time is spent on recreational activities such as using social media, email and browsing, the annual value of this ''consumer surplus'' is about $1600 per person which, with a few additions, multiplies to a national benefit of $22 billion a year.

When you remember not all households and businesses are yet on the internet, that use of the net will broaden and deepen with the rollout of the national broadband network, and that we're just scratching the surface of the uses to which it could be put, its ability both to disrupt industries and to benefit consumers has a lot further to go.