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How Google saves the world $65 billion a year

Google’s chief economist says search saves us 3.75 minutes a day – but compared to what?

Hal Varian, Google’s chief economist, calculates that searches conducted on Google save citizens of planet Earth a collective $65 billion a year. Varian, one of the keynote speakers at the Web 2.0 Expo going on in San Francisco, laid out his logic in a slide that read:

Per Person

• Average hourly earnings [of an employed user of Google] = $22

• [Web searches] Save 3.75 minutes per day = $1.37 / day

[When compared to non-web searches for information]

• 365 days in a year = $500

• How many users?

• 130M people employed

• 130M x 500 = $65 [billion]

• 300M [total users of Google]

• 300M x 500 = $150 [billion]

(h/t to Patrick C. Price for capturing the original slide)

Varian is an accomplished economist, so we can assume that he based these numbers on the best available data. If his calculations reflect reality, they raise a number of interesting questions:

1. Would you pay $1 a day to access Google?

The New York Times is putting up a paywall, and even the snarklords at Gawker seem to be in favor of it. The difference is that Google doesn’t need your money. But let’s say the company’s next CEO gets greedy. Are you really ready to subsist on nothing but Bing and water?

Let’s say just a third of Google’s current users (100 million) paid a dollar a day for the privilege. It would be worth $36.5 billion a year to the company – that’s more than its current total revenue, which in 2010 was $29.3 billion.

But would a third of Google’s users really pay a dollar a day to use it when there are free alternatives? A Google that charged would be a much diminished entity on the web, and there’s a good chance the company couldn’t make as much as it does now via ad revenue alone. Which just goes to show the brilliance of the advertising auctions that drive Adsense/Adwords – the same market Varian helped to construct.

2. How does Google know what percentage of its users are employed and that their average wage is $22 / hour?

Demographic data is extremely valuable to advertisers. In fact, without it, it’s impossible to sell advertising on a media property. Its acquisition tends to be anything but scientific: For magazines, reader surveys are conducted without apparent regard for niceties like selection bias (nobody ever confused marketers with scientists, I guess).

So what is Google using? The company has fairly precise location data for every one of its users, of course, but one can’t help but wonder if the company is also measuring the frequency with which we search for luxury goods, new cars or, say, bankruptcy lawyers.

3. Where on earth did the figure 3.75 minutes / day come from?

Some portion must be the time we would have otherwise spent using a phone book or some other paper directory. But this leads directly to question #5…

4. How can anyone justify the assertion that Google saves us time?

Economists who study energy efficiency talk about something called the ‘rebound effect,’ which says that when you make an appliance or process more efficient, people tend to use more of it. (Scientist Stan Cox has said it’s “like putting energy on sale.”

Similarly, in Varian’s keynote he said: “When getting answers was expensive we asked few questions. Now that answers are cheap we ask lots of questions.”

If Google has made it easier to search, how can it claim to save us time? Hasn’t the ease of search simply multiplied the number of searches we do, allowing us to search not only for things we need but also things we want. Hasn’t search become as essential to leisure as it is to business?

Surely there must be some amount of rebound effect in the greater time efficiency that Google has afforded us. How else can we explain the time poverty that so many web workers feel?

Follow Mims on Twitter or contact him via email.

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