The Price of Everything (22 page)

Technology brought us to the edge of free. The price of computers fell 99 percent between 1980 and 2009, after accounting for inflation. A computer in 1980 cost seventy-nine times what it does today. As the price of storing, copying, and transmitting information in digital form fell, the producers of songs, movies, and other digital media lost their ability to stop consumers from copying their products endlessly and distributing them as widely as they wanted. In June of 1999, Shawn Fanning, a teenager from Brockton, Massachusetts, known to his friends as the Napster, launched a system that allowed people to share over the Internet the music files stored on their hard drives. By July of the following year, one in four adults who used the Internet said they had downloaded music for free.

Stewart Brand, a countercultural prankster of the acid-laced sixties who evolved into a revolutionary futurist, told the nation’s first hackers’ conference near San Francisco a quarter of a century ago that “information wants to be free.” In the 1990s, Apple advertised its new iMacs equipped with a writable CD drive as the tool to “Rip. Mix. Burn.” Today, creators have lost control of their creations. The minute they become a digital file they “belong” to everybody, so nobody owns them.

In
Free: The Future of a Radical Price,
Chris Anderson, the editor of
Wired
, argued that people can no longer own things made out of ideas because anybody can get them for nothing. Since most of what advanced economies produce is made of information, this could mean that much of the product of modern economic activity would inevitably become gratis.

The dictum seems to be true. Retail sales of music in the United States—from CDs to ring tones—declined by about a fifth in 2008 to $8.5 billion, as consumers stopped buying music and turned to peer-to-peer networks, where it is available for free. Globally, wholesale shipments of recorded music fell by nearly a tenth, to $18.4 billion. This changed the very meaning of success. The biggest album of 2008, Lil Wayne’s
Tha Carter III
, sold 2.87 million copies in the United States, according to Nielsen SoundScan. Nine years earlier the top album was
Millennium
by the Backstreet Boys. It sold 9.45 million copies.

 

 

IT IS HARDLY
surprising that whoever owned the rights to these songs and movies would resist their liberation. Record labels and Hollywood studios deployed battalions of lawyers to turn back the tide of free. They devised so-called Digital Rights Management technologies—known as DRM—to bar users from copying their products.

In 2000, A&M Records and other labels sued Napster, forcing it to shut down the following year. In April 2009, a Swedish court convicted the three founders and the financial backer of The Pirate Bay, one of the largest file-sharing services in the world, for breach of copyright law, sentencing each to a year in jail plus fines totaling some $3.6 million. In August of that year, a jury in Boston decided that Joel Tenenbaum, a twenty-five-year-old graduate student of physics at Boston College, was guilty of illegally downloading and sharing thirty songs—which could have been bought for less than $30 from iTunes—and fined him $675,000. The amount was cut to $67,500 on appeal.

Yet the music industry’s victories so far have been pyrrhic. Napster lost. But file sharing exploded. In May of 2010, a New York judge ordered Mark Gorton, the founder of the LimeWire, a file-sharing service that allowed people to share their songs and movies online, to pay up to $450 million to record labels for copyright infringement. Still, that same month the LimeWire software was among the top ten computer programs downloaded from
download.com
.

In 2008, a survey by the Pew Project on the Internet and American Life found that 15 percent of adults who regularly went online admitted to downloading or sharing files. The International Federation of the Phonographic Industry estimated 40 billion illicit downloads in that year alone, accounting for 95 percent of total music downloads worldwide. And the decision against The Pirate Bay so angered young Swedes that they elected a member of the Pirate Party to the European Parliament in Strasbourg, giving it 7.1 percent of the votes in the election of June 2009.

The record labels seem ready to change strategy. After some thirty-five thousand lawsuits in the United States over five years, in 2009 the Recording Industry Association of America abandoned its campaign of taking alleged file sharers to court. In early 2009, Apple chairman Steve Jobs made a deal with the labels to strip away the DRM locks on songs sold through its iTunes online music store, which would allow users to copy the songs and listen to them on as many devices as they wanted.

 

 

FREE IS SPREADING
to other industries of the information era. Within days of its publication, more than 100,000 copies of Dan Brown’s bestseller
The Lost Symbol
had been downloaded from file-sharing sites in e-book or audiobook format, according to file-sharing tracker
TorrentFreak.com
. Movie studios seem to be going the way of record labels as well. In 2005, a report commissioned by the Motion Picture Association of America found that piracy cost the movie industry worldwide $18.2 billion a year and online theft accounted for 39 percent of the total. These days, more people copy movies than go see them in theaters. In May of 2008 the French bought 12.2 million tickets to see films but downloaded 13.7 million free copies of movies online through peer-to-peer networks.

In the summer of 2008 Warner Bros. made an impressive display of security to launch the hit Batman movie
The Dark Knight
, using technology that allowed it to track each and every copy of the film. A few months later I sat in Bryant Park, behind the New York Public Library with a lanky, twenty-four-year-old philosophy major from the State University of New York. He opened his Mac iBook and took me to a Web site where at the click of the mouse, he could download a high-definition copy of
The Dark Knight
for free. According to the tracking service BigChampagne, by the end of the year 7 million copies of the movie had been downloaded illegally around the world.

The news media, the industry that employs me, has been eviscerated. Rather than raise the drawbridge as movie studios and record labels tried to do, the news embraced the Internet as the most promising new proposition in a generation. After all, most of the news media’s money came from advertising. Consumers only paid a small fraction of the cost it took to produce the news. Newspapers thought the Internet represented a godsend—a cheap and effective platform to distribute the news more widely and reap vast new sources of advertising online.

Imagine their surprise when instead the Web became the most cutthroat competitor they had ever encountered. As the cost of serving information to the public approached zero, the flood of news online destroyed media companies’ centuries-old monopoly over people’s attention, which had been protected by the high costs of producing and distributing physical newspapers. Newspapers and magazines hemorrhaged print subscribers, who chose to read them online instead. And print advertising went up in smoke.

When Michael Jackson died on June 25 of 2009, his page on Wikipedia received 1.8 million visits. According to a study by the Associated Press, Google News and Wikipedia became the most popular sources of information about the pop star, respectively capturing 7.1 percent and 6.8 percent of all “Michael Jackson” searches in the four weeks to July 4. YouTube followed in third place. The only traditional media company that made the top ten was the Web site for CNN, in tenth place.

To compound the pain, the tide of online advertising that media companies had hoped for when they put themselves up on the Web for free turned out to be a trickle. Traditional media companies lost ad dollars to aggregators and, most important, search engines, which made billions selling ads alongside pages of search results that amounted to a list of links to articles in the traditional news media.

The information revolution didn’t make information free. What it did was transfer the money from the producers of information to the owners of the technologies that deliver it to their audience. The Pirate Bay, one of the world’s largest file-sharing Web sites, makes its money through advertisements. By forcing record labels to accept the low price of ninety-nine cents a song on its iTunes music store, Apple transferred much of listeners’ music budget from buying music to buying Apple iPods. And Google has absorbed a large share of advertising budgets that used to be dedicated to newspapers and magazines. In 2009, the total advertising revenue of the entire American newspaper industry added up to $27.6 billion, the lowest level in twenty-three years, 44 percent down from its peak in 2005. Google’s advertising revenues, meanwhile, jumped almost fourfold over four years, hitting $22.9 billion in 2009.

Ever since people first turned ideas into profit, they have clamored for protection from those who would copy these ideas without paying for them. In 1421, the Florentine architect Filippo Brunelleschi told the town notables in the Signoria that he had designed an enormous barge with hoisting gear that could carry marble up the Arno River.
Il Badalone
, as it was called, could satisfy Florence’s hunger for raw materials to build the Renaissance. But Brunelleschi only agreed to build it after the Signoria agreed to some conditions:

“No person alive, wherever born and of whatever status, dignity, quality, and grade, shall dare or presume, within three years next following from the day when the present provision has been approved in the Council of Florence, to commit any of the following acts on the river Arno, any other river, stagnant water, swamp, or water running or existing in the territory of Florence: to have, hold, or use in any manner, be it newly invented or made new in form, a machine or ship or other instrument designed to import or ship or transport on water any merchandise or any things or goods.” Any such new or newly shaped machine “shall be burned.”

Patents today are not quite as generous to inventors. An inventor who wants one needs to provide somewhat more detailed information about the invention. Well-designed patents aim to protect only the inventor’s specific new contribution—not bar others from making anything that might serve a similar purpose. But the logic of patents is not unlike that inspiring Brunelleschi six hundred years ago. They are meant to ensure that an inventor can reap the rewards from his invention so he will have an incentive to invent. They do this by awarding inventors monopoly rights to exploit their creations.

Patents are decidedly a second-best solution. In economists’ utopia, access to a good or service should be available to every person whose marginal benefit from using it exceeded its marginal cost of production. By granting inventors a monopoly, patents allow them to sell their inventions at a price way above their marginal cost—keeping them beyond the reach of many consumers. They are nonetheless necessary. The marginal cost of an invention—the cost of producing one more cholesterol management pill—will never capture the cost of inventing it. If the price were no more than the marginal cost, it would be impossible for the producer to recoup its investments.

Prescription drugs embody the good and the bad of the patent system. The research and development that goes into developing a new drug and shepherding it successfully through the regulatory process in the United States costs the pharmaceutical industry ten to twelve years and about $1.27 billion. Yet after all that is done, the cost of making the pills often falls to a few pennies apiece. So new drugs are granted twenty-year patents—from the day they are registered—to stop generics’ makers from selling cheap knockoffs and undercutting their creators.

But patents have a dark side. By keeping drug prices high, they bar many sick people from access to potentially lifesaving medicines—setting the interests of inventors against the public-health imperative of saving lives. Brazil, Argentina, India, and other developing countries that were not in the business of inventing drugs refused until recently to grant patent protection for pharmaceuticals. India’s patent law of 1970 made it easy for domestic generic manufacturers to get around multinational companies’ patents on medicines. This fostered the growth of a large generic drug industry—which could sell pills for much less than the pharmaceutical companies that invented them.

Fifteen years ago, many developing countries accepted granting drugs twenty-year patents as part of global negotiations that led to the creation of the World Trade Organization in 1995. Since then, however, many poor countries battling the scourge of AIDS—like Zimbabwe, Indonesia, and Brazil—have taken advantage of escape clauses in the agreement to break patents in order to get needed drugs for less. In 2008 the Brazilian health ministry estimated that Indian generics manufacturers could supply the antiretroviral drug tenofovir for $170 per patient per year, a small fraction of the $1,387 charged by Gilead, who owned the patent.