What Price Information?

June 2011

What’s the cheapest flight to Houston? Is it raining in Hong Kong? What’s my favorite—or not-so-favorite—politician’s approval rating today? Who was the poor victim of satire on the most recent episode of Saturday Night Live?

Today you can find the answer to any number of questions, both mundane and important, with a simple search and a few clicks of the mouse—and at no cost.

Add to this the fact that many traditional models for monetizing information—newspapers, yellow pages, encyclopedias—are failing; that attempts at selling information online have mostly failed as well; and that technology continues to make both storage and bandwidth cheaper by the day. Taken together, all these trends seem to point to a future in which information is destined to be free.

Or is it? What if I told you that exactly the opposite is happening—that the unit price of information is actually increasing, not decreasing, and definitely not trending toward free?

Of course, no informed person believes anything can be free and sustainable in the long term. Indeed, we constantly remind ourselves that “there’s no such thing as a free lunch.” Anyone who has taken a course in basic economics has been exposed to the “tragedy of the commons” principle—a thought experiment that helps to illustrate why any resource that’s freely shared by people is not sustainable in the long term if it’s unmanaged and unregulated.

So how can information be an exception to the rule? There are at least three explanations.

Payment in kind. Although you do not pay for information directly with real money, you are paying for it in other ways. In most cases, you are paying for it with your time by being forced to watch an advertisement in exchange for information; in some cases, you pay by helping the information provider in some manner—say, by indexing or tagging their information.

Loss leaders. Free information is often provided to you as a way of persuading you to buy pricier goods and services. A typical example is free music or entertainment. The idea is to make you familiar with the entertainer, which, in turn, increases the likelihood that you’ll buy a ticket to a performance, where you’d probably purchase overpriced T-shirts and other paraphernalia.

Too busy to make money. The information provider is so preoccupied at an early stage in the development of its company, business model and customer base that it has not yet turned its attention to making money. Once the company has a loyal customer base, it will hire smart people who’ll figure out how to monetize that customer base.

These explanations aren’t incorrect. But they are somewhat naïve.

Although these scenarios do help to explain how the idea of free information has an underlying economic rationale or business model, they fail to recognize that this ostensibly free information is now delivered through more and more complex information supply chains and business models that actually increase, rather than decrease, the cost of information. In other words, these business models are not just a different way of paying the same price you’d have paid in a quid pro quo transaction for the same information.

The increased complexity of the business models and supply chains introduces more intermediaries and more overhead between the information creator and the customer. As a result, “free” information is, in fact, more expensive than paid information.

Let’s consider concrete examples to illustrate how the cost of free information is higher than a simple quid pro quo payment under each of the three models above.

1. Payment in kind
Imagine that you are considering a particular stock as a prospective investment. Ten years back, you would have looked up the stock’s previous day opening and closing prices in the financial section of your local newspaper. The newspaper paid the stock exchange for the information and you, in turn, paid the newspaper, perhaps through a distributor. The information supply chain was simple and the transaction overhead minimal.

Fast forward to 2011. Today you’d go to an online source—say, an information portal like Yahoo!—for the same information. Your “in kind” payment could involve glancing at a flashing banner ad for a brand of footwear (let’s call them Aspen shoes). Now, that does not seem all that onerous, as you can quickly scroll over the ad and get to the information you are looking for. So it all feels free as you see neither a quid pro quo nor a significant “in kind” burden for the information you want. It’s a free lunch after all, isn’t it?

No, not really. Much like a local newspaper, an online site pays the stock exchange for the ticker information, but with several twists. Since online access data is not as clear cut as newspaper circulation data, and because banner ads can be easily ignored, more effort and more people—all of whom need a fair profit to survive—are involved in auditing the viewer information, pricing the data, placing the ads on online pages, pricing the ads and so forth.

All these costs somehow must be passed on to the consumers. Since Yahoo! does not charge you for the information, it has to pass this cost—and the additional overheads—on to its advertisers. Continuing with our example, the cost of providing you with the information about that stock you were interested in would be paid by the Aspen shoe company, which, in turn, passes on the cost to you when you buy a pair of its shoes.

What if you don’t buy Aspen shoes? In that case, it’s a free lunch for you, right? Again, not really. Let’s say you don’t buy Aspen, the brand you saw advertised. Instead, you buy a different brand—let’s call them Vail shoes. While the information you consume is being subsidized by Aspen and eventually paid for by its customers, you will actually be paying Vail, which may well be advertising on webpages that provide “free” information to Aspen customers.

A typical objection to the above argument is that online advertising—as opposed to TV, magazine and billboard advertising—can be considerably more efficient because it can be targeted at specific individuals. With user profiling and target marketing, Aspen would not be subsidizing Vail’s customers’ access to information, and vice versa.

The problem with this counterargument is that a significant portion of any advertising budget is aimed at the customers of competitors, with the hope that they will switch brands. Therefore, Aspen (and hence its customers) will continue to pay to target and subsidize Vail’s customers, and vice versa.

A more sophisticated objection is that targeted online advertising can pinpoint those customers most likely to switch brands, so no company will be wasting its advertising dollars on consumers who are loyal to a competitor. This argument has some merit but confuses the efficiency of advertising with the efficiency of the market.

If targeted advertising can get so sophisticated, so can targeted retention programs—that is, programs to identify customers who are most likely to switch to a competitor, making them candidates to shower with gifts, discounts and other subsidies. Furthermore, brands would continually poach one another’s customers, leading to more customer churn; that, in turn, would require bigger advertising budgets and more complex processes for targeting and retention—additional costs that would eventually be passed on to customers.

2. Loss leaders
Let’s now turn our attention to the example of offering free music from a band looking to build a loyal fan base “listentele,” with the hope that later, more people would pay up to attend its live performances and buy its T-shirts.

If the band did not give away music, fewer people would know about it, and therefore its live performances would not be so well attended. But by giving away its music, the band would become better known and gain a following, and those people would regularly attend its performances.

Now, consider two concerts by two different bands—one had few attendees, the other was sold out. Which had the steeper ticket price? The first one, because no one showed up due to the pricey tickets—right? Wrong. Unlike manufactured products, music and entertainment do not become cheaper with scale; they actually become more expensive! And the better known the band, the more likely consumers are to buy its branded gear, regardless of the price of concert tickets.

It’s important to acknowledge that music distributed for free online has helped more musicians and bands to become known and has given us more choices in what we listen to. But the very fact that an obscure musician has become better known by giving some of his or her music away actually increases the price you will pay for that artist’s music in the future.

3. Too busy to make money
How about free information from providers who do not yet have any tangible economic model for monetizing their information? Isn’t that information essentially free?

It may indeed be free today, with no strings attached. But let’s look at these “free today, profits tomorrow” companies from a macroeconomic perspective. These companies—and their investors—are essentially operating under the assumption that what the company doles out today for free increases its net present value faster (by positioning it for future profits) than if it just charges for the information today.

If their assumption is wrong, then they won’t be in business for long, so your source of free information will soon dry up. If they are right and the net present value of the free information is, in fact, less than the net present value of their future profits, then, by definition, what you are getting for free today is worth less than what you’ll end up paying for something else in the future.

I’ll leave you with a free tip, though: Free something will always be more expensive than paid something.

About the author
Kishore S. Swaminathan is Accenture's chief scientist and the global director of Accenture Technology Labs' systems integration research. He is responsible for defining the company's vision for the future of technology and setting its research and development agenda. Based in Beijing, Dr. Swaminathan has spent his Accenture career researching cutting-edge technologies. Winner of the 2000 Computerworld Smithsonian award for the best application of IT, Dr. Swaminathan has worked on more than a dozen research projects and has as many patents to his credit.

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What Price Information? | Accenture Outlook 
The unit price of information is actually increasing, not decreasing—and definitely not trending toward free.
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