The Value of a Search

What is the value of a Google search? Or an e-mail? How do free services pay for themselves? How does a business model come into existence from the anarchic void of the Internet? A coworker and I had an interesting discussion the other day about micropayments and the values of internet services. How invaluable, for example, are the search engine or the e-mail account? And yet these services are widely available absolutely free.

Virtual products or virtual services typically have extremely low marginal costs, and then pricing becomes a bit, well, weird. Let's say you spend $10 million developing a piece of software. Once it's developed, you can make copies with packaging for $1 apiece. What do you charge for it. Traditional economics principles would tell you to set the price low, because your marginal costs are low. But that becomes impractical. If you charged $2 for a unit, then you would need to sell 10 million units for it to become profitable, but if you charge too much, then there is a high likelihood that people will be turned off by the price and you won't sell many at all. Is it even practical to charge $2 for a product that may cost $5 to ship and be subject to a $.30 fee for credit card processing?

Then consider a company like Google, whose marginal costs per search are probably something like a tenth of a cent. Google is set up with an advertising business model, but what if there had been another option? What if it had been possible to charge a penny, or half a penny per search. For most of us, that would be an extremely reasonable. If you did a thousand searches in a month, that would be $5--that would be extremely profitable for Google and, again, quite reasonable for a consumer.

What if it cost a half a penny to send an e-mail? That would not be a particularly huge amount to your typical net-user, but it would cut down on spam and e-mail forwards tremendously. Unfortunately, there is no infrastructure in place to accept payments of 1/2 a cent.

But maybe there will be someday. The internet is still in its infancy (in many ways), and it's worth taking a look at prominent sites 10 years ago and comparing them to even run-of-the-mill sites today and seeing just how far technology has come. How much more will it grow in the next 10 years?