The hidden value of digital free goods

James Surowiecki frames the Twitter IPO frenzy in the context of perhaps the most important unanswered economic question of today: How do we value the part of the economy that is free? How, exactly, do we find $24 billion in just $535 million revenue and 30 million active users?

Surowiecki points out that the measurements of value we place on digital goods (Twitter, Facebook, Skype) do not equate with our primary measuring stick for the overall nation's economic health: the GDP. 

The basic assumption is simple: the more stuff we’re producing for sale, the better off we are. In the industrial age, this was a reasonable assumption, but in the digital economy that picture gets a lot fuzzier, since so much of what’s being produced is available free. You may think that Wikipedia, Twitter, Snapchat, Google Maps, and so on are valuable. But, as far as G.D.P. is concerned, they barely exist. The M.I.T. economist Erik Brynjolfsson points out that, according to government statistics, the “information sector” of the economy—which includes publishing, software, data services, and telecom—has barely grown since the late eighties, even though we’ve seen an explosion in the amount of information and data that individuals and businesses consume. 

Advertising revenue accounts for only one side of the coin - the business-end value of a digital service, and not the consumer facing value. What are the implications when we forego the parts of the internet that are free? Workarounds like time spent online (a metric developed by economists) get closer to a solution. In one case Surowiecki makes, open-sourced web tools democratize ecommerce. And in turn, this begets a rising welfare. But the back-end calculation is a lowering GDP compared to a world where Microsoft's server software has a pricetag that small business owners have to pay in order to use the service. In another example, digital innovation actually shrinks GDP: Skype has reduced the amount of money that people spend on international calls, and free smartphone apps are replacing stand-alone devices that once generated billions in sales (think Garmin vs Google Maps). 

The additional layer to Surowiecki's questions is how a miscalculated GDP affects emerging markets. As Google's Project Link brings high-speed fiber optic connectivity to Kampala, Uganda in 2014 we can expect the same economic measurement hiccups. And these hiccups hold larger table stakes in a much less developed environment like Africa. Whereas the United States experienced the digital age in a logical metered rollout (first came the mobile app marketplace, then Square, then Squarespace, and only then, the nomadic retail pop-up shop in Brooklyn), bringing the next billion people online brings all of these tools overnight. Like turning on a light switch, a huge population without access to some opportunities will now have access to the latest news, a tool to join in worldwide commerce, or a platform to create and contribute photos, video, and more. All great things no doubt. But the question of measurement will be tenfold the conundrum we've just seen with Twitter in the US. 

I plan on picking up Erik Brynjolfsson and Andrew McAfee's The Second Machine Age to get a better grasp at how we are/aren't collectively adjusting to the phenomenon.