Illustration by David Reinfurt
Fifteen years ago — before Google or Wikipedia or blogging or Craigslist or podcasts or YouTube — the technology investor and pundit Esther Dyson wrote an article analyzing the business of “creative content” in a future where the Internet made distribution essentially free. “Creators will have to fight to attract attention and get paid,” she predicted. Enforcing copyrights won’t be enough, because creators “will operate in an increasingly competitive marketplace where much of the intellectual property is distributed free and suppliers explode in number. . . . The problem for owners of content is that they will be competing with free or almost-free content.”
That future is today, and it is the subject of “Free: The Future of a Radical Price,” by Chris Anderson, the editor in chief of Wired and the author of “The Long Tail.” Despite its subtitle, the book is less about the future than the present and recent past, which Anderson surveys in a cheerful, can-do voice. “People are making lots of money charging nothing,” he writes. “Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00.”
Driving the trend are the steeply declining prices of three essential technologies: computing power, digital storage and transmission capacity. Reproducing and delivering digital content — words, music, software, pictures, video — has now fulfilled the prophecy once made about electricity. It has become too cheap to meter. “Whatever it costs YouTube to stream a video today will cost half as much in a year,” Anderson writes. “The trend lines that determine the cost of doing business online all point the same way: to zero. No wonder the prices online all go the same way.”
More precisely, the marginal cost of digital products, or the cost of delivering one additional copy, is approaching zero. The fixed cost of producing the first copy, however, may be as high as ever. All those servers and transmission lines, as cheap as they may be per gigabyte, require large initial investments. The articles still have to be written, the songs recorded, the movies made. The crucial business question, then, is how you cover those fixed costs. As many an airline bankruptcy demonstrates, it can be extremely hard to survive in a business with high fixed costs, low marginal costs and relatively easy entry. As long as serving one new customer costs next to nothing, the competition to attract as many customers as possible will drive prices toward zero. And zero doesn’t pay the bills.
The answer, Anderson argues, lies in cross-subsidies: “shifting money around from product to product, person to person, between now and later, or into nonmonetary markets and back out again.” Most obviously, online advertisers can subsidize content by paying for eyeballs or, in some cases, for detailed information on potential consumers. Less familiar is the “freemium” strategy, in which a site like Flickr offers one package of services free but charges for an ad-free package with more features, allowing a small fraction of users to subsidize the rest.
Often, however, the cross-subsidy is a way to sell one product by giving away another. Monty Python created a YouTube channel with their most popular skits in hopes of enticing fans to buy their DVDs. Their shows and movies soon hit Amazon’s best-seller list, with increased sales of 23,000 percent. “Free worked, and worked brilliantly,” Anderson writes.
This technique is as old as the supermarket loss leader or TVs in sports bars. Unlike cartons of milk or six-packs of soda, however, once digital content exists, it costs nothing to hand out to a near-infinite number of customers — no limit of one per household. The Internet, meanwhile, is one huge sports bar, with Google selling most of the beer by collecting infinitesimal amounts (via advertising) across billions and billions of searches and page views. Obscured by the breezy tone of “Free” is a sobering message. “Everybody can use a Free business model,” Anderson admits, “but all too typically only the No. 1 company can get really rich with it.”Unlike tangible commodities like T-shirts or plastics, most digital content doesn’t generate much new demand as its price falls toward zero. Even with no admission fee, videos, blog posts and online games soak up users’ time, and time has a hard limit. So as the supply of cheap content expands, it can’t simply fill ever-growing closets (or garbage dumps). Instead, the competition for time and attention becomes ever fiercer, and the market ever more fragmented. Any given producer will find profits elusive, especially since it’s so easy for amateurs to enter the market.
Faced with collapsing business models, today’s journalists-in-denial rail against Anderson’s message. Free content cannot be the future, they say, because content is valuable. Fixed costs must be covered. We have bills to pay. The problem, they argue, is that we’re giving our work away.