J A N U A R Y 2 0 11

t e l e c o m m u n i c a t i o n s p r a c t i c e

The Web’s €100 billion

surplus
Jacques Bughin

Consumers get the bulk of it with free services like social networks. Will industry dynamics
shift as providers and advertisers try to get a bigger share?

Consumers derive significant band becomes ubiquitous around

value from all they do on the Web, the world and as new services
and since advertising pays for and wireless devices come to
much of this, it involves no immedi- the fore.
ate out-of-pocket cost. We all
experience these benefits each time For Web service providers, this
we log onto a social network or is a large parcel of value to leave on
watch a free Web video. the table. In fact, it amounts to
more than three times the €30 billion
But how much is all of this Web use companies pay providers to adver-
worth? About €150 billion a year, tise on their Web sites and is almost
according to new McKinsey research as much as the €120 billion con-
involving a survey of 4,500 Web sumers pay for wired and wireless
users across Europe and the United broadband access. One reason
States, as well as conjoint analysis for this seeming largesse may be
of their willingness to pay for various that once a Web service is cre-
online activities.1 ated, the cost of distributing it is
very low, and most Web compa-
Consumers do pay for some of this: nies are satisfied covering their basic
€30 billion for services such as costs with advertising. In the off-
music subscriptions and gaming Web line world, things are different, of
sites. In a sense, they also pay course: the surplus is more evenly
for the “pollution” of their Internet divided between consumers and
experience by intrusive pop-up suppliers, since in many markets—
advertising and perceived data pri- books, movies, or cable TV, for
vacy risks, an amount we esti- example—consumers pay for content.
mate to be €20 billion after asking
consumers what they would pay Three ways Web economics
to avoid further clutter and privacy could shift
concerns. That leaves a substan- Web players may try to recapture
tial consumer surplus of €100 billion some of this large, growing source
a year, a total that we project will of value. One not-too-distant
grow to €190 billion by 2015 as broad- example of such a move is how
 2 The Web’s €100 billion surplus

Q1 2011
Consumer Surplus
Exhibit 1 of 1

Four Internet services generate 52 percent of the

consumer surplus created on the Web.
Four Internet services generate 52 percent of the consumer
surplus created by the Web.

Business model

C Communications W Web services E Entertainment

Online service Consumer surplus1

Є per month

E-mail C 3.2

Search W 3.1
52% of total
Social networks C 2.2 surplus

Instant messaging C 2.1

Internet phone C 1.4

Web mapping W 1.1

Videos E 0.9
Surplus share by business model
Comparison shopping W 0.8

Music E 0.8
Communications
Wikis W 0.8
44%
Yellow pages W 0.8

Advanced uploading E 0.7 Web services

Podcasts, content reading E 0.7
38%
Blogs W 0.6 Entertainment
18%
Games, gambling E 0.6

Directories W 0.5

1 Surplus is derived from estimated value of consumer service minus the price for paid services and the amount a
consumer is willing to pay, both to avoid being disturbed by advertising formats and to limit private-information abuse
while using ad-funded Internet services.
Source: IAB Europe; McKinsey analysis
 The Web’s €100 billion surplus 3

As more business and Advertising grows

Another strategy would be to ramp

individual activities move up Web advertising, and here, the

“pollution factor” may be the key. At

online, early movers present, Web companies are reap-

ing more in advertising revenues than

should be well positioned consumers are willing to pay to

avoid them (€30 billion versus €20 bil-

to capture higher ad lion). This imbalance suggests

that today’s levels of advertising are

revenues and perhaps, over sustainable and that there could

be room for more ads or other mon-

time, higher service fees. etization plays, such as asking

consumers to provide more personal
data to access services.

It’s hard to say how much more,

though, because there’s no data on
how consumers would respond if
Web pollution grew a great deal. Is
broadcasters gradually shifted ser- there a tipping point where their
vice from free programming to willingness to pay to eliminate pollu-
pay-TV to capture a bigger slice of tion would increase so dramati-
value. While it’s not clear how cally that business models would
things will play out on the Web, at shift in response? For example,
least three scenarios seem worth if ad revenue grew to €40 billion or
contemplating. €50 billion, it is not clear whether
consumers’ willingness to pay to
Service costs rise avoid the new ads would grow so
One obvious possibility is that Web much that Web service providers
players will charge more for services, would be better able to extract
they already do for certain pre- more surplus by charging users more,
mium offerings, such as multiplayer as opposed to selling still more ads.
video game sites or subscription-
based access to unlimited music Monetization by other means
libraries. So far there’s been strong Web players operate in multisided
resistance to this approach from markets that allow them to collect
consumers: only about 20 percent revenues from both their advertisers
of online users pay for some ser- and their users. They may be betting
vices, and our research shows that that by creating a large consumer
expanding the scope of fees to surplus today with free services and
an amount equaling the value of the big audiences, they will bolster their
surplus would reduce usage by as online brands, leading to higher prof-
much as 50 percent, torpedoing the its or market value down the road.
economics of Web services. The rationale for this approach is
4 The Web’s €100 billion surplus

pretty compelling, though a for-pay In turn, advertisers may have bet-

walled garden would work only for ter revenue options because of
premium brands and services. Even Web innovations. Some are already
for those, reach will be limited—as moving beyond distracting dis-
will companies’ ability to use their play ads; they’re designing branded
Web platforms to launch other content promotions to attract the
businesses. attention of users and shaping mar-
keting campaigns around mes-
Preparing for change sages that travel virally among socially
Of course, we’re still in the early networked “friends,” thus making
days of the Web economy, and only these campaigns more acceptable
recently has the consumer surplus to the consumer.
swelled with the rise of blockbusters
such as Facebook and always- For consumers, the benefits of Web
on connectivity. Clearly, this is a surpluses will continue. Engagement
market that’s far from equilibrium, with consumers is the key to value
so players should be planning creation in multisided markets, so
for major change and preparing their they should expect continuing ser-
strategies accordingly. vice innovations and tolerable adver-
tising levels that keep the prices for
Service players trying to stay ahead Web use and access low.
of market shifts must be attuned
to rapid market consolidation: the 1
 ecause users pay a flat rate to access free
B
top 100 providers accounted for services, we used a conjoint-analysis
45 percent of Web traffic in 2010, up technique to help unbundle the willingness
to pay for services from access. The value
from only 20 percent in 2007. To of services in the conjoint analysis was
stay ahead, leading players are compared with the cost of advertising
interruption as well as the value of online
already broadening their base of ser-
privacy.
vices on robust proprietary plat-
forms, particularly services that can Jacques Bughin is a director in
be offered at low cost via the cloud McKinsey’s Brussels office.
and mobile devices; Twitter and Face-
book are prime examples of such Copyright © 2011 McKinsey & Company.
multiuse platforms. As more busi- All rights reserved. We welcome your
comments on this article. Please send them
ness and individual activities move
to [email protected].
online, early movers should be well
positioned to capture higher adver-
tising revenues and perhaps, over
time, higher service fees.