Paywalls Cut Interest in Online Services in Half

Ad-supported business models provide the highest value to consumers, and replacing them with paid access would cut the interest in Internet usage by half: That’s the gist of a new McKinsey study titled “The economic value of online advertising-based services for consumers.” The study was commissioned by IAB Europe, so one shouldn’t be too surprised that it came down on the side of ad-based models, but it still delivers a few interesting bits of information, even if you’re a champion of paid content.

The study is based on the idea of consumer surplus, which is the value that consumers get out of using online services after deducting their expenses for broadband Internet access. This surplus is around €38 ($50) per household on average, totaling €100 billion in the U.S. and Europe together. A big part of this surplus is derived from e-mail, social networks and search, but video is an important and growing segment as well. McKinsey estimates that the total value of over-the-top TV to consumers will grow by €15 billion within the next five years.

I know what you’re thinking: How the heck did they estimate the value you’re getting out of using Facebook, and what’s the current Euro exchange rate for a Superpoke? McKinsey surveyed consumers in six countries, asking them to rank their usage preferences for various hypothetical Internet service bundles with different price points.

The results don’t completely discourage paid access models. In fact, the study found that the very users that get the most out of their Internet usage are also the ones that are paying the most for online services. However, McKinsey doesn’t think that this should encourage putting up more paywalls. From the study:

“There has been a recent debate as to whether a more extensive shift to pay will be a way to increase total industry revenue. Our research suggests that the current pay/free mix is already in equilibrium… Calculating this willingness-to-pay premium in Euros per month suggests that it matches exactly what customers actually pay for paid services, leaving them with roughly the same consumer surplus as that captured by free-only users. This means that, on average, paid service price points are at their maximum, and only a decrease in price charged per service will increase the proportion of people paying for online Internet services.”

The study’s authors argue that every user helps to create €6 of ad revenue per month on average. However, most users would want to pay less to get rid of ads. The study continues:

“(R)eplacing the current ad funded model with a user pay model that would compensate for the accompanying revenue loss would cut user interest in online usage by half. This clearly illustrates that, in a world of significant network externalities, one must be very cautious as regards any imposed change to a user-based ecosystem.”

Photo courtesy of (CC-BY-SA) of Flickr user TheTruthAbout…

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