The Internet Is Not the Answer

by Andrew Keen

  “Advertising,” I promised all my investors, when asked about the source of future revenue. Ironically, having escaped my print advertising salesman job at Fi, I was now back to being an online advertising salesman as the CEO of an Internet startup. The only difference was that it was much more challenging to sell online than in print. Rather than Business 2.0, the Internet of the late nineties was actually Business 0.02. As Jeff Zucker, then CEO of NBC Universal, said, selling online advertising was like “trading analog dollars for digital pennies.”4

  And that was on a good day, when pennies could be extracted from advertisers still unconvinced of the value of the new medium.

  The Catastrophe of Abundance

  One afternoon in the fall of 1999, I got a phone call from a journalist at a new magazine called, appropriately enough, Business 2.0. “What do you know about Napster?” she asked. “Is it a game changer?”

  More than a “game changer,” Napster was a game breaker. It represented the logical conclusion to the Web’s Santa Claus economics, the Internet’s original sin, where “consumers” were treated as spoiled children and indulged with an infinite supply of free goodies in what the New York Times’ media columnist David Carr calls the “Something for Nothing” economy.5 Founded by Shawn Fanning and Sean Parker in 1999, Napster enabled what is euphemistically known as the peer-to-peer sharing of music. Fanning and Parker took Chris Anderson’s advice about the radical value of “free” to its most ridiculous conclusion. Not merely content to give their own stuff away for nothing, Napster gave away everybody else’s as well. Along with other peer-to-peer networks like Travis Kalanick’s Scour and later pirate businesses such as Megaupload, Rapidshare, and Pirate Bay, Napster created a networked kleptocracy, masquerading as the “sharing economy,” in which the only real abundance was the ubiquitous availability of online stolen content, particularly recorded music.

  Over the last fifteen years, online piracy has become an epidemic. In a 2011 report sponsored by the U.S. Chamber of Commerce, it was estimated that piracy sites attracted 53 billion visits each year.6 In January 2013 alone, the analyst firm NetNames estimated that 432 million unique Web users actively searched for content that infringes copyright.7 A 2010 Nielsen report estimated that 25% of all European Internet users visit pirate sites each month,8 while a 2012 study funded by the United Kingdom’s Intellectual Property Office found that 1 in 6 of all British Web users regularly accessed illegally streamed or downloaded content.9

  Such “abundance” has had a particularly catastrophic economic impact on the music industry. Back in the late nineties, just before Fanning and Parker created Napster, the global revenue from the sale of music CDs, records, and tapes reached $38 billion, with US sales being almost $15 billion. Today, in spite of the appearance of legal online sales networks like iTunes and streaming services like Spotify, the music industry’s global revenues have more than halved, to just over $16 billion, with American sales shriveling to around $6 billion.10 Digital sales have made little difference to this decline. In fact, even digital sales fell by 6% in 2013.11

  No wonder that 75% of the record stores on Berwick Street’s Vinyl Mile have closed since 1990. Or that the world’s largest music store, HMV’s retail outlet on London’s Oxford Street, finally shut its doors in 2014, giving us one more reason not to celebrate the twenty-fifth anniversary of the Web.12

  But it’s not just the music industry that is mortally threatened by piracy. Two thousand fourteen saw the launch of Popcorn Time, a Napster for movies that offers a decentralized peer-to-peer service for illegal streaming. Cloned to appear like Netflix, Popcorn Time has already been translated into thirty-two languages and offers what one analyst described as a “nightmare scenario” for the movie industry.13 The Buenos Aires–based makers of Popcorn Time claim to have invented the service for the convenience of consumers. But the more subscribers Popcorn Time steals from Hulu and Netflix, the fewer resources moviemakers will have to invest in their products. And, of course, the more we use peer-to-peer technologies like Popcorn Time, the emptier movie theaters will become. In 2013, there was a 21% drop in the number of what Variety calls the “all important” 18–24 age group buying tickets to watch movies.14 With the popularity of products like Popcorn Time, expect that number to plummet even more dramatically in the future.

  The real cost, both in terms of jobs and economic growth, of online piracy is astonishingly high. According to a 2011 report by the London-based International Federation of the Phonographic Industry (IFPI), an estimated 1.2 million European jobs would be destroyed by 2015 in the Continent’s recorded music, movie, publishing, and photography industries because of online piracy, adding up to $240 billion in lost revenues between 2008 and 2015.15 Less open to speculation is the number of jobs already lost due to this mass larceny. In its study of the impact of piracy on the European creative economy in 2008, for example, the French research group TERA Consultants found that it destroyed 185,000 jobs and caused a loss in sales revenue of 10 billion euros.16 And that’s just for Europe. Just in 2008. And things haven’t improved since then. Between 2002 and 2012, for example, the US Bureau of Labor Statistics reported a 45% drop in the number of professional working musicians—falling from over 50,000 to around 30,000.17

  One of the most misleading myths about online piracy is that it’s a bit of harmless fun—an online rave organized by delusional idealists, like Electronic Frontier Foundation founder John Perry Barlow, who just want information to be free. But nothing could be further from the truth.18 Today, online piracy is the big business of peer-to-peer and BitTorrent portals that profit, mostly in advertising revenue, from the availability of stolen content. A report, for example, by the Digital Citizen Alliance, which closely examined the “business models” of over five hundred illegal sites peddling stolen intellectual goods, found that these websites brought in $227 million in ad revenues in 2013, with the average annual advertising sales of the largest thirty of these sites being $4.4 million.19

  The most obvious beneficiaries of this economic rape of the creative community are the criminals themselves—thieves like the New Zealand–based Kim Dotcom, the mastermind behind Megaupload, which, at its height, had 180 million registered users and accounted for 4% of all Internet traffic. Emancipating other people’s information has made Dotcom a rich man. “I’m not a pirate, I’m an innovator,” the six-foot-seven, 280-pound Dotcom claimed in 2014, without ever explaining how his “free” Megaupload platform, which enabled the sharing of stolen property, generated the legal revenue to enable him to buy his £15 million Downton Abbey–style mansion in the New Zealand countryside.20

  But while uberpirates like Kim Dotcom hold much of the responsibility for the decimation of the recorded music industry, not everything can be blamed on these criminals. The problem is the Internet remains a gift economy in which content remains either free or so cheap that it is destroying the livelihood of more and more of today’s musicians, writers, photographers, and filmmakers. As Robert Levine, Billboard’s former executive editor and author of the meticulously researched 2011 book Free Ride, argues, “The real conflict online is between the media companies that fund much of the entertainment we read, see and hear and the technology firms that want to distribute their content—legally or otherwise.”21 And it’s this struggle between an entertainment industry that, to survive, needs to be paid for its expensive content and an Internet built around the utopian idea that “information wants to be free,” Levine argues, that is “breaking” the Internet.22

  Many of today’s multibillion-dollar Internet companies are complicit in the piracy epidemic. “Free” social networks like Facebook, Twitter, Tumblr, and Instagram, for example, have spurred the growth of the distribution of unlicensed content. What is left of the photography industry is particularly vulnerable to this kind of “sharing” economy. Because much of the content on these social networks isn’t accessible to the general public and instead is shared only between individuals, photographe
rs find it nearly impossible to stop this form of unlicensed content use or even to accurately measure the extent of the illegal activity. As the American Society of Media Photographers notes, this problem has been compounded because networks like Instagram, Tumblr, and Facebook make very little effort to warn their members against the illegal sharing of images.23

  Then there’s the Google problem. It’s no coincidence that the beginning of the piracy epidemic coincides with the emergence of Google as the Internet’s dominant search and advertising company. Nor is there any doubt that Google generates untold millions, even billions of dollars annually from piracy—either directly, by Google’s running ads on infringing sites, or indirectly, by its placing pirated content high in its search results. In the United States, for example, a 2013 study sponsored by the Motion Picture Association of America found that Google was responsible for 82% of all search requests for infringing content24—a number even outweighing the 67.5% of the search market that, in March 2014, Google controlled in the United States.25 And in Britain, where Google is a monopolist with control of an astounding 91% of the search market,26 things got so bad in 2011 that the British culture secretary, Jeremy Hunt, warned Google that unless it worked on demoting illegal sites in its search results, the government itself would introduce new laws forcing it to do so.27 But even Google’s 2013 reform of its search algorithm, explicitly designed to downgrade or remove pirate sites, hasn’t made much difference—with both the Recording Industry Association of America and Billboard reporting that these changes have, if anything, made the problem even worse.28

  For all its self-proclaimed promises of doing no evil, the transformation of Google from a 1998 startup to the world’s most powerful company in 2014 has been a catastrophe for most professional creative artists. As the owner of YouTube, Google has been sued by Viacom for “brazen” copyright infringement. It has been investigated by European Commission officials for illegally “scraping” proprietary content from rival search sites. It has been subject to class-action lawsuits by both authors and photographers claiming willful copyright infringement by Google Books.29 Even German chancellor Angela Merkel publicly condemned Google’s attempt to create a massive digital library, saying that the Internet shouldn’t be exempt from copyright laws.30

  Yes, Google has invested in YouTube, the world’s dominant user-generated video platform, which, with Netflix, gobbles up half of US Internet traffic. But YouTube isn’t the answer. Certainly not for the independent musical artists like Adele, Arctic Monkeys, and Jack White, who, in June 2014, were threatened with being thrown off YouTube unless they signed up to the website’s new subscription music service.31 Nor is it the answer for the millions of professional video producers who are “partnering” with the Google-owned company for advertising revenue. The problem is that Google demands 45% of all this “partnership,” making it a struggle for these companies to make any money at all—particularly since YouTube’s advertising rates are going down, dropping, for example, from $9.35 per thousand ad views in 2012 to $7.60 in 2013.32 Meanwhile, YouTube’s privileged partners, the one hundred production companies that, in 2012, were given $1 million apiece to polish up their videos, are rebelling against Google’s greed. One of these partners, the Los Angeles–based media entrepreneur Jason Calacanis, even wrote a blog post titled “I Ain’t Gonna Work on YouTube’s Farm No More,” explaining why what he calls “the absurd 45% YouTube tax” a kind of digital tithe that grants YouTube 45% of all advertising revenue from independently produced content, inevitably leads to the “demise” of independent producers.33

  The “free” Google search engine might be getting rich on the massive taxes it extracts from the Internet, but the online “free” economy simply isn’t working as a viable economic model for independent content companies. “The outbreak of free is being felt all over the economy,” warns the New York Times’ David Carr.34 Jeff Zucker’s trade of print dollars for Web pennies remains the online rule, with even the most popular websites being caught in what the media and advertising pundit Michael Wolff calls “the CPM vice”—the ever-downward spiral of the cost-per-thousand page views afflicting even the most popular sites like Business Insider, Buzzfeed, and Gawker. Wolff notes that more traffic isn’t resulting in equivalent rises in advertising revenue and believes that the “digital conundrum” for prominent online content brands is that “it costs more to get traffic than what you can sell it for.”35 It’s a fatally flawed model, Wolff concludes, and can only be circumvented by websites like the Huffington Post or Forbes that use free user-generated content or by Internet businesses able to subsidize unprofitable online content with offline conferences and subscriptions.

  Certainly online eyes remain much less valuable than offline ones, with average advertising rates of the printed edition of a major newspaper being around ten times its online cost.36 The same is true of the value of offline versus online readers, with the Newspaper Association of America estimating that the average print reader is worth around $539 versus the $26 value of the online reader.37 And free certainly isn’t working as an economic model for online newspapers. Take, for example, the world’s third most frequently visited news website, the London Guardian. In spite of breaking the News of the World phone hacking scandal and the Edward Snowden and WikiLeaks stories, the Guardian has reported operating losses of more than £100 million since 2010, with a stunning £50 million lost just between 2012 and 2013.38 No wonder the Guardian is experimenting with a robot-generated print edition called #Open001, which replaces editors with algorithms to select relevant stories for publication.39

  But robots can’t write the kind of high-quality journalism that distinguishes the Guardian from most of its rivals. So the newspaper’s response to its mounting losses has been to double down on its advertising strategy. In February 2014, the paper announced it was starting a new “branded content and innovation agency” in partnership with Unilever that would, essentially, sell sponsored content to advertisers. As the blogger Andrew Sullivan warned about this “native advertising” strategy, it’s actually a public relations campaign “disguised as journalism in order to promote Unilever’s image as a green company.”40 So the next time you read something complimentary about Unilever on the Guardian website, make sure you check the fine print. The article might have been “supported” by Unilever’s marketing department.

  The carnage of job losses has been particularly bloody in the news industry, with full-time professional reporters’ and writers’ jobs at US newspapers falling from 25,593 to 17,422 between 2003 and 2013, a drop of 31% in newsroom staffing to go alongside the 55% fall in advertising sales, 47% drop in weekday print circulation, 35% fall in aggregate revenue, and 37% drop in pretax profits.41 The same period also saw a drop of 27% in newspaper editorial jobs and a hideous 43% fall in positions for photographers and videographers.42 Things haven’t improved in 2013, with Microsoft’s online network MSN laying off all its editors and Bloomberg and the London Independent canning their entire staffs of cultural writers. Things are equally bad outside the United States and Britain, with 15% of all Australian journalists losing their jobs in 201343 and 25% of Spanish journalists being made redundant since the recession44—making them, according to the Christian Science Monitor, one of the “biggest casualties” of the crisis.45 And the future will be no less depressing for journalists everywhere. The perspicacious New York University media scholar Clay Shirky—who describes today’s threatened loss of journalistic talent as “catastrophic”—predicts that in the short future “many newspapers will go bankrupt” in Kodak style: “gradually and then suddenly.” Shirky entitles his obituary Last Call: “The End of the Printed Newspaper.” 46

  Most of all, however, what the Guardian calls Silicon Valley’s “most striking mantra,” its “culture of failure,” has come to the recorded music business.47 The latest attempts by Silicon Valley to reinvent the industry are legal streamed subscription services like Pandora, Rhapsody, and Silicon Valley’s current
darling, Spotify. Backed not only by Sean Parker but also by Peter Thiel’s Founders Fund, Spotify, which has raised over $500 million and was valued in late 2013 at $4 billion,48 is a virtual Berwick Street. It has aggregated most of the world’s music into a single service, offering more than 20 million songs as either a free advertising-supported service or for a $5 or $10 monthly all-you-can-eat rate. But while Spotify may be Santa Claus 2.0 for its over 40 million mostly nonpaying users, the still unprofitable subscription service (at least in mid-2014)49 is an absolute disaster for musicians.

  As with YouTube, the problem is that Spotify exploits creative talent to spoil consumers with either free or unnaturally low-priced content. The company may have raised more than half a billion dollars and have amassed 10 million paid subscribers, but very little of that cash is going back to artists, with only an average of 0.6 cents per stream being paid to the musician. Former Talking Heads guitarist David Byrne, who believes that Internet companies are sucking all creative content out of the world, notes that for a four-person band to each make the US minimum wage of $15,080, they would need to get a quarter of a trillion plays for their music on Spotify.50 Radiohead star Thom Yorke put it more crudely. “New artists get paid fuck all with this model,” he complained, as his pulled his solo songs and all his Atoms for Peace music from Spotify.51 Byrne and Yorke are far from alone in rejecting the Spotify model. Other notable artists who have openly spoken out against the exploitative streaming service include Aimee Mann, Beck, the Black Keys, Amanda Palmer, will.i.am, Zoe Keating, and Pink Floyd.52