Follow the Money: Part 1

You may have arrived at this page via a search engine - certainly you used a computer to get here. We often think of these things as being free - computers are like phones, they are just there; search engines don't require me to input my credit card information before I can see the search results. However, if you look a little closer things start to seem different.

Let's start with the computer - we are all vaguely aware that it is costing us money. Firstly, we had to buy the machine. Secondly, we have to pay for internet service. Most importantly, however, we have to pay for the electricity to run it. But how much does that cost? Eric Shufro, who writes at OverClockers.com, has an interesting article that address just that question: How much does it cost to run your PC? His scenario is for 24 hour up time (not your typical use) and comes out at around $50 per month. So per hour, this is about $0.07.

So how about the search engine? It is interesting to look at two sides of the equation here. Firstly, let's take Google. In 2007, it cost $11B (yes, 11 billion dollars) to run Google. This is the total costs and expenses line item from their 10-K filing with the SEC. Google served about 7 billion searches in December 2007. If we assume all of 2007 was the same (which, of course it wasn't) then that would give us 82 billion searches coming to 13 cents per search.

Ok - so that describes the cost to Google of providing a single search, but what does it cost you? One way to look at this is to consider what funds Google. As Chris Anderson points out in this interview, one can consider advertising budget as the cost to the consumer of an ad supported model. Chris makes the point (in reverse) about Craig's list, suggesting that the money that this service has taken away from classified ads in news papers makes everything a little bit cheaper. This is similar to the comment I made in an earlier post about the concept of 'free'. To summarize: 2007's internet advertising is estimated to be around $20 Billion. That amounts to more than $50 per capita for the US (in other words, over the course of the year, $50 of what you pay for stuff is used to attempt to persuade others to buy it as well).

As I get time, I'm hope to cover some other examples like this, as well as drill down on the ethics of the idea of invisible costs as well as externalities.

Comments

[Kyle]

It would be interesting to also factor in the point that the 11 Billion it cost to run Google isn't just for search. Having youtube and their many other services taken out of that running cost would make their cost per search even less.

[Cherry]

In my opinion your calculation is wrong. I don't want to start thinking about what led you to post something like this. However to follow the illogicalness of your example:
Revenues for 2007: 16,000,000,000
Searches in 2007: 82,000,000,000
=> 19 cent revenue per search. How nice.

[Miguel]

Google expenses maintain a worldwide structure, so why do you consider only USA population?

[Michael]

I too disagree with Chris Anderson's notion of the free economy but I don't think your argument is on the right track. His argument, that the distribution cost per bit of data is approaching zero, is pretty tight. We can say that the cost is still greater than zero, but its hard to argue against the general direction.

However you can argue on two other points:
1) Even though the cost per computation is decreasing, we are increasing our consumption of computation at a faster rate than which the cost is decreasing. As the number of services on the web proliferate, I don't think it's be hard to make this argument.

2) Even assuming distribution costs go to zero, he doesn't really explain how the "product" gets created. His argument that advertisements can pay the entire cost of creating movies, newspapers, magazines, music, bread, and butter is unconvincing. Surely advertising can provide additional money, but its not clear how much more.

He also constantly contradicts himself, but thats another story.

[Anonymous Coward]

Isn't it 'buy'? "Firstly, we had to by the machine"

[Anonymous]

That's kind of a fun way to break down the numbers. Google makes $.19 per search in advertising revenue and it costs them $.13 per search to serve the search results.

It does appear that about 1/3 of Google's revenue comes from the AdSense network, though, so some of this breaks down in the details.

[apotheon]

Sadly, I must take issue with the calculations with regard to the cost of running a computer. In fact, the $50/mo. number is patently absurd.

In my household, we have three computers running 24/7 (two servers and a desktop system). There are also two laptops which probably average at least 16 hours per day. Our entire last electricity bill was only about $35.

There's also a router and switch in the setup here. Considering we also use lights, an electric stove, a washer and dryer, amplifiers for a guitar and bass, an electric shaver, two alarm clocks, a television, a CD/DVD player, two cellphones that need recharging regularly, a DVR, a cheapo stereo tuner/amp, a refrigerator, a microwave, and probably a dozen other things at least, I'd be surprised if the computers even amounted to $10 -- all five of them put together.

At first I was thinking about the possibility of that $50 assuming a CRT being on and active the whole time, but there are two problems with that:

1. I recall reading about power consumption for CRTs years ago and discovering, to my surprise, that a single hour of television use tended to roughly match power consumption for eight to twelve hours of CRT use. If a CRT accounted for, say, $40 in 24 hours, that would mean that the 2003 average TV-watching habits of US citizens (145 hours a month) would mean the average US citizen would be throwing about $65 at the television every month. Can you imagine $65 of your electricity bill being eaten by the TV every month?

2. The Overclockers page to which you linked with the power consumption estimates specifically excludes monitors from the calculations.

Of course, we're not running any Crays or Thinking Machines here, so maybe our computers' power consumption costs are not as significant for that reason. I guess the moral of the story is that spending $6k on your game computer then leaving it on 24/7 with high frame rate 3D video graphics running full time will cost you $50 per month -- but the rest of us are doing just fine, with several computers running 24/7 for under $10 per month, even if all these computers add up to about $8k worth of gear.