Could using the Internet actually end up costing us more than it’s worth? A new study from a major insurance company and a respected think tank say it may have already.
The report, produced by the Atlantic Council and Zurich Insurance Co., says that in North America and Europe, the high cost of data breaches and the huge amounts spent by businesses and governments to protect themselves outweigh the economic benefits produced by our networked computers and mobile devices.
“It staggered us,” said Jason Healey, senior research scholar at Columbia University’s School of International and Public Affairs and senior fellow at the Atlantic Council.
But don’t put Healey down as a cyberpessimist — far from it. The study also found that while the costs of using networked devices exceed benefits on an annual basis, those benefits compound over time, while costs are generally one-offs, like the need to purchase a new encryption system. As a result, the benefits of networked computer systems grow dramatically over time. Ultimately, they far outstrip the costs of security upgrades or lost data. “It’s like the car dealer who loses a little bit on every car, but makes it up in volume,” Healey said.
The study tries to measure the total benefits that digital technology confers upon a nation, then compare that to total costs. In the United States for instance, benefits would include the direct contributions of companies like Apple, Microsoft, and Google to the nation’s gross domestic product. Also included is an estimate of the benefits gained by all other sectors of the economy as a result of using these technologies and an estimate of the benefits received by consumers who use them.
The costs include direct losses from network security breaches, like the theft of credit card information from retailer TJX Corp. in 2007; the billions spent on systems designed to fend off such criminal activities; and opportunity costs — for instance, the profits that a company misses out on because it’s investing in security systems instead of faster computers.
The report’s big finding is that today in advanced countries like the United States and the nations of western Europe, the annual costs of using digital networks outweigh the annual benefits to businesses and consumers. Since these societies are already pretty well saturated with digital networks, further increases in the use of such technologies won’t add so much to these nations’ wealth. At the same time, the economic damage from hacking attacks keeps on growing.
But poorer, less-developed countries are still building out their digital networks and are seeing much bigger economic returns in the process. In these countries, the annual economic benefits of such networks are far ahead of their annual costs. But the study calculates that as developing countries catch up, they too will find that using digital networks ican be a losers’ game.
Or so it seems, when viewed on an annual basis. But Healey and his team also found that over time, the benefits of networked technology far outweigh their costs. The report estimates that the cumulative benefits between 2010 and 2030 will amount to $180 trillion worldwide, compared with cumulative costs of $23 trillion, or a net global benefit of $157 trillion.
How can that be? “It’s because the costs tend to be operating costs and one-off expenses,” said Healey. “The benefits tend to be investments.”
Imagine a business that installs a new online retailing system that generates $100,000 a year in additional sales. The year it’s installed, the company also loses $100,000 in a hacking attack. The loss happens just once, but the extra $100,000 in revenue just keeps coming, year after year. Each new investment in technology is like a gift that keeps on giving, with cumulative effects that outweigh the baleful impact of cybercrime.
Still, Healey’s report warns that a great deal of potential wealth could be lost unless businesses and governments do better at fighting such crimes. He lays out one worst-case scenario in which terrorists and Internet criminals could cost the world $90 trillion in lost income by 2030.
Healey’s research seems plausible to Ben Edelman, a professor at the Harvard Business School. “I’m not prepared to contradict the numbers,” Edelman said. Even so, he noted that mastery of a new technology often comes at a high price. “The first half-century of commercial aviation was filled with crashes and many thousands of lives lost,” said Edelman. “Early automobiles were no models of safety either. I’m glad we didn’t give up on either technology.”