NAPSTERING THE WORLD
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’ mu
sic 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.
PROFITING FROM IDEAS
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.
On the other hand, inventors of drugs would not survive in business without patents. And without the inventors the drugs would not come into being. Granting patents for a limited period seems a reasonable trade-off. The time must be long enough to allow those who invented the drug to recoup their costs and make a profit, but no longer—to ensure that competition with generics will bring its price down and make it broadly accessible across the population.
In the United States, the period of patent protection starts ticking the moment a pharmaceutical company requests it. On average, new drugs have about twelve years of protection left after they finally arrive on pharmacy shelves. Once generics enter the fray prices plunge. They capture about 60 percent of the market by volume within nine years. In twelve years they take 80 percent. By then, the price of drugs has fallen by half.
Patents have been drivers of innovation. They have encouraged inventors to create and have diffused their creations—encouraging owners to license their intellectual property. For instance, a survey of 133 multinationals by a British consulting firm found that 102 had licensed technology from others and 82 had licensed technology to others. The market for technological licenses is worth about $25 billion in North America alone, according to one study. In 2000 approximately 20 percent of IBM’s profit derived from the sale of licenses. And in the United States, new firms and investment groups have appeared in recent years to buy, sell, broker, license, and auction patents, drawing venture capital into the field.
This transfer of ideas would be unlikely to happen if information were free. Chances are nobody would have bothered to think it up. Or inventors would keep their inventions under lock and key until they could figure out how to profit from them.
THE CASE FOR BOOKANEERING
Artists and pharmaceutical companies have a lot in common. However much we like to think of pop stars and other artists as interested only in the deeper meaning of their art, they like to make money too. As Paul McCartney once said, “John and I literally used to sit down and say, ‘Now, let’s write a swimming pool.’ ” If they can’t earn the pool through what they create, most will stop creating.
Yet the ownership of raw ideas—a poem or a melody—was always a more controversial concept than ownership of things made of ideas, like drugs. Books were protected in seventeenth-century Britain through a monopoly over printing granted to the Stationers’ Company, which kept a registry of all titles in a vellum-bound volume in London’s Stationers’ Hall.
But the first copyright law was only passed by the English Parliament in 1709, after the Stationers’ Company lost its 140-year monopoly in 1694, unleashing cutthroat competition in the printing business. After independence, the United States Congress followed the English lead, passing a copyright act in 1790 that granted publishers protection for fourteen years, with the chance of a fourteen-year extension. It had one novel twist, however. It covered only American authors—freeing American printers to copy foreigners’ work at will. Foreign information was free; domestic information was not.
American printers rushed to snatch up and republish English bestsellers, sending their prices tumbling. According to one report, in 1843 Charles Dickens’s A Christmas Carol, which in England cost the equivalent of $2.50, cost merely six cents in the United States. Americans’ refusal to protect foreign works lasted until 1891, by which time a domestic literary scene had emerged and American writers had started to clamor for protection from the cheap imports. Even as Congress extended the protection to foreign works, it threw a bone to domestic pri
nters by limiting copyright only to works from overseas that were typeset in the United States.
This provision remained in place in various forms until 1986, leading to vociferous complaints of American piracy, or “bookaneering,” as some English writers called it. The famed British composer Sir Arthur Sullivan even paid American musicians to sign their names to some of his scores, like that of The Mikado of 1885, and transfer the rights back to him. That way he could gain copyright protection otherwise unavailable to a foreigner.
“The present American copyright regulations tend to keep all English and Continental authors in a state of irritation with something American,” wrote Ezra Pound in 1918. “There is a continuous and needless bother about the prevention of literary piracy, a need for agents, and agents’ vigilance, and the whole matter produces annoyance, and ultimately tends to fester public opinion.”
Many of the arguments articulated by the current crop of Internet rebels were first made many years ago by the pirates of generations past. In the eighteenth century, members of Congress claimed that withholding copyright protection for popular imported works would serve a virtuous purpose: providing cheap books to an increasingly literate population. Complaints by English writers were, by comparison, minor irritants. Today’s warriors of the online revolution argue that file sharing enables an unprecedented access to music, a self-evident good. They hold the music labels and the Hollywood studios in the same sort of disregard as Congress held eighteenth-century British writers.
RADIOHEAD’S EXPERIMENT SUPPORTS an additional point with which contemporary pirates want to clinch the argument. Giving away intellectual property for free would allow its creators to make more money than if they were to keep it under locks. If in the past artists toured to promote their latest album, today the latest album would promote concert tours. A band that gave away songs for free online would allow fans to sample its offerings and persuade them to buy more of its music, T-shirts, key rings, and more.
The Price of Everything Page 15