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Open Data's Business Value Isn't That Important

by

opendata

The recent Open Government Partnership meetings in London have provided a good opportunity to assess the direction of our community. The latest comes from Jonathan Gray, and the title -- Open government should be about accountability and social justice, not the digital economy -- more or less speaks for itself:

[Prime Minister David] Cameron’s speech typified a broader pivot in open government discourse in recent years from political accountability and social justice towards economic growth and digital innovation, from holding power to account to supporting startups. In recent years senior officials from the US and the UK have started alluding to a trinity of “open governments, open societies, and open economies” in high level transparency talks, as well as to the potential of digital technologies and digital information for innovative new businesses and growth. In addition to the kinds of panels you might expect at a transparency summit, there were also sessions on public-private partnerships, entrepreneurs in civic innovation, and smart cities. Web inventor Sir Tim Berners-Lee remarked in his closing talk, "for me always the most exciting piece of it at the end of the day is economic value".

[...]

While sometimes it may be more more comfortable for governments to highlight their plans to ‘go digital’ or to enable new businesses by opening up official data, transparency advocates should not be distracted from [their] mission to enable citizens to hold power to account and to fight for social and environmental justice.

I agree with Jonathan's diagnosis of distinct strains within the open government data community. But I don't think they have to be in tension. I've argued before that a big tent is beneficial to us all -- that blurring the lines between open data for accountability and open data for economic development can serve both constituencies' needs. After all, the great thing about open information is that its supply is limitless.

But even if we don't need to choose between these rationales, it is worth evaluating their relative importance. And through that lens, Jonathan's point is well taken: the business rationale for opening data is receiving a tremendous amount of attention -- arguably more than it merits, given that this business rationale represents a relatively small share of open data's potential benefits.

The latest evidence for this arrived just last week in the form of a new McKinsey report on the economic value of open data. The resulting headlines and powerpoint slides are likely to focus on the three trillion dollar estimate that leads the report. I'll be the first to admit that this enormous number from a respected consulting firm will be a useful tool for advocates.

But it's worth digging in to exactly what the report says and what it means. I suspect we can all agree that open data is meaningful for our countries' economies. But we need to ask not only how much but how. From the report:

Much of this value will lead to greater consumer surplus from improved transparency into price and product information. Market share shifts could also occur across the industry, as companies gain competitive advantage by incorporating open data into their analytics.
Emphasis mine. "Improved price transparency and product information" means consumers driving a harder bargain. That means thinner profit margins and more value landing with consumers rather than producers. The report goes on:
Consumers stand to gain the most. Consumers are already beginning to benefit from open data through price transparency (for example, by using online shopping sites that offer price comparisons). Other information about products and services could be made available through open data (e.g., whether trains are running on time or the labor and environmental practices of manufacturers) and could be used by consumers to select the products and services that best match their preferences. Opening [personalized datasets] gives consumers better visibility into their own consumption, often revealing information that can lead to changes in behavior. Open data also gives individuals (as consumers and citizens) new channels to provide input to improve the quality of goods and services (including public services) and the quality of data. Together, more than 50 percent of the value potential we estimated is in consumer and customer surplus.
This is an incredibly important point: most of the benefits of open data will accrue to consumers and citizens, not to investors and firms.

That's not to say that open data startups aren't important or potentially lucrative. But the wealth they generate directly is likely to be relatively small compared to the more diffuse benefits that open data can confer: better governance, more efficient markets, and smarter business decisions.

I've argued before that there are structural reasons to expect that business can only capture a small portion of open data's value. And I'll repeat: this in no way invalidates the importance of those businesses or the usefulness of the services they will deliver to citizens, government and industry.

But it does help to set our priorities. Open data's value will manifest relatively rarely in the form of dividends or paychecks. Often, its benefits will be difficult to quantify.

Consider the now-classic pro-transparency case of restaurant inspection scores. Studies have found that posting these scores reduces food-borne illness hospitalizations between 13 and 20 percent. That's a real benefit to diners and to our health-care system. But it will, if anything, show up as a decrease in business activity. The cost of implementing the program is probably small; diners will probably still pay the same amount for their (now slightly-safer) meals; hospitals will be billing less. This is boring econ 101 stuff, but it's important to understand that these benefits are real even if they are difficult to measure in dollars.

It's also important to understand the political economy implications of this example. There might be no natural constituency that demands health inspection data. The restaurants and hospitals have little incentive to push for disclosure. The benefit to diners is real but too diffuse to mobilize many. It might not be practical to expect a popular outcry to spur reform.

That's where our community comes in -- the nonprofits, activists, foundations, political organizers, policy experts and civic hackers. Better services, more value, greater accountability: that's where most of open data's promise lies, and where the most important work remains to be done if we are to ensure that it is realized.

This is doubly true thanks to the magic of the profit motive. If there's money to be made, smart entrepeneurs will find ways to unlock it. I hope and expect that they will -- that's the beauty of capitalism. But this calls into question the rationale for government and philanthropic efforts to emphasize and explicitly subsidize the economic development of open data relative to other uses.

As I've said, I don't think we have to choose between those uses. I truly believe that a big tent benefits us all. But I'm with Jonathan: better businesses will be great to have, but better societies are even more exciting.