Valuing ‘Free’ Media Across Countries in GDP By Leonard Nakamura (FRB of Philadelphia) and Rachel Soloveichik (BEA)* These represent our views and not those of the Philadelphia Federal Reserve, the Federal Reserve System, or the Bureau of Economic Analysis.

Overview ▪ How to evaluate “free” media and its impact on personal consumption expenditures (PCE)?  What is the value of TV or Facebook or Google in GDP or PCE? ▪ Some researchers estimate that ‘free’ media in the US provided $2 trillion of consumer surplus (Brynjolfsson and Oh 2012)  Their estimate is based on time use data for TV and Internet. ▪ For the same year, we estimate the ‘free’ media added only $76 billion to GDP in the United States.  Our methodology is tied to payments to content providers ▪ Important for GDP to be tied closely to expenditures  Our experimental methodology is in the tradition of valuing products at cost even when the consumption is not purchased (e.g., government) or unpriced (owner occupied housing or financial intermediation services)  We calculate prices and real values by measuring input costs such as actor salaries, software costs, server costs and consumer media costs like TV sets. 2

Global ‘Free’ Media vs. Global GDP (Nominal) ▪ From 1980 on, ‘free’ media hovered around 0.4% of global GDP  Including ‘free’ media in GDP doesn’t change nominal GDP growth  We will show that real GDP growth does rise slightly – but the change is very small and sensitive to the price indexes used. 3

Current SNA Treatment of Free Media and Our Experimental Treatment ▪ In the SNA and the US NIPA, free media is simply an intermediate cost of the firms whose products are advertised  A soap opera is a free byproduct of the sale of soap  The utility gain to consumers is completely uncounted. ▪ Our Experimental Treatment:  Measure the cost of the consumers’ desired content (soap opera) that is subsidized by advertising (the sale of soap)  The content is consumption, valued at the cost of producing the soap opera  The advertiser and the consumer engage in a barter transaction in which the consumer agrees to buy the TV content (computer, radio, newspaper) and watch (listen to, read) the advertisement in exchange  There is a balancing whereby the income paid to the consumer is exactly equal to the consumption of the advertising (as in any barter transaction)  Thus the consumption of the soap opera doesn’t come out of nowhere ▪ We explore implications across nations for this methodology 4

Advantage of Experimental Treatment ▪ Under the current SNA and NIPA treatment, when content goes from a paid format to “free” media, consumption declines  For example, when TV came to the US in the 1950s, real consumption of recreational services declined, although real incomes rose strongly  When Jerry Seinfeld or Tina Fey write books, that contributes to PCE, but their broadcast TV programs do not.  Internet firms like Facebook do not show up in PCE ▪ With the experimental treatment  Can make comparisons across countries, based on rates of adoption of media  Public vs. Private TV broadcasts are now on equal footing  We can begin to explore how to measure the technological progress in content provision and in media  We can study future technological progress in media platforms, distribution, reception and content. 5

Historical Research on “Free” Media ▪ Borden (1935) was an early exploration of the proportion of advertising devoted to subsidizing content provision ▪ Extensive discussion of measuring “free” media in national accounts in the 1970s  Ruggles and Ruggles (1970), Okun (1971), Jaszi (1971), Eisner (1978). Kendrick (1979) ▪ Cremeans (1980) proposed a barter mechanism for measuring free media similar to the one we propose and estimated it ▪ Vanoli (2000) discussed the issue in a review of the history of national accounting ▪ Nakamura (2005) modeled the consumption gains from an expenditure model ▪ Soloveichik (2014) revived this approach for US GDP 6

Empirical Analysis ▪ The World Advertising Research Council (WARC) provided our main dataset  WARC reports advertising expenditure by country, media type and year from 1980 onwards.  WARC’s data is better for recent years, larger countries and wealthier countries.  When calculating global totals, we impute missing country data. ▪ Other Datasets Used  We took our data on public broadcasting from the European Audiovisual Observatory Yearbooks and other sources.  The World Bank provides background information on national GDP, government quality, health, etc. ▪ This paper documents correlations, not causality.  We focus on cross-country comparisons because most of the variables studied remain very stable across time.

‘Free’ Media vs. GDP Per Capita in 2010 ▪ ‘Free’ media accounts for a higher GDP share in wealthy countries  Including ‘free’ media in GDP raises nominal inequality across countries. 8

Advertising-Supported Media by Language ▪ This correlation remains significant if we remove the US. ▪ The correlation isn’t explained by GDP per capita, government spending, press freedom or anything else we could find. 9

Public Broadcasting Funding vs. Advertising-Supported Television and Radio ▪ These results are consistent with the ‘crowd-out’ literature.  However, we can’t determine the direction of causality. 10

Public Broadcasting Funding vs. Advertising-Supported Print and Internet Media ▪ In countries with public broadcasting, advertisers appear to substitute from broadcast to print or online.  The net correlation between public broadcasting and advertising is small. 11

Advertising-Supported Media vs. Personal Consumption ▪ This correlation isn’t affected by including country-fixed effects  Very few ads discuss government spending or investment goods, so it’s not surprising that advertising is higher when consumer spending is higher 12

Measuring Media Prices Over Time ▪ Advertising-Supported Entertainment is hard to price.  Consumer preferences differ across people and over time.  The media experience depends on not only the media program itself, but also consumer inputs like plasma TV’s. ▪ We use a two-step process to measure media prices.  First, we estimate costs in the United States for each media type from 1980 to  In the United States, we combine input costs and output prices for similar products to construct of price indexes  Second, we estimate relative prices across countries.  By construction, average global media prices track US prices.

US Prices for Online Media ▪ Software is the main input, so online media prices track it.  Internet companies also require a few computers to run their software and a few customer service people to deal with miscellaneous issues. 14

US Prices for Newspapers and Magazines ▪ We use book prices a proxy for newspaper writing costs.  Newspapers (typically) require more outside research than books, so we include telephone service and online media costs in our index. 15

US Prices for Television and Radio Broadcasts ▪ In a separate project on entertainment, BEA estimated the cost of nonsports programs. We use that price index  Consumer television prices also influence the watching experience. 16

Measuring Media Prices Across Countries ▪ We divide media into two categories: global and local  Global media is equally valuable in every country and culture.  Local media isn’t useful unless it’s customized. ▪ The Olympics is an example of global media  The Olympics has a huge fixed cost to produce, but the marginal cost of licensing rights is nearly zero.  National content prices may not track local production costs. ▪ Newspapers are an example of local media  Each city typically has its own newspaper, and almost nobody reads global newspapers.  Newspaper prices will depend on local production costs. ▪ Assumed local/global mix for each media type:  Newspapers are 100% local; magazines are 95% local; radio is 95% local, television is 50% local and online is 25% local.

Olympic Fees vs. Total Broadcast Advertising ▪ We assume global media prices track total advertising spending. ▪ Small countries could increase consumer welfare with price controls for imported media. 18

Newspaper Prices vs. Purchasing Power Parity ▪ Wealthy countries generally have higher costs on both variables. ▪ Controlling for wealth, there’s no relationship between newspaper advertising prices and advertising market size. 19

Global Quantity Indexes for ‘Free’ Media ▪ We estimate that real ‘free’ media grew 6.7% per year, about 4% faster than overall real GDP.  Including ‘free’ media in GDP raises growth rates only 0.02% per year 20

Conclusion ▪ We present an experimental methodology for including “free” media in personal consumption expenditures ▪ This would allow the Internet and TV, which consumers use a lot as part of leisure, to enter personal consumption expenditures ▪ As media content transitions back and forth between pay and free venues, this allows a more even-handed treatment ▪ Measuring media prices is challenging; we introduce a two-step process that separates local from global media ▪ Having measured media, we can then explore its evolution across countries and over time  Public TV crowds advertising out of TV and into print in cross-section  Internet gains as print declines over time 21