There was a time when NBC lived up to its old slogan, “Must See TV.” For most of the 1980s and 1990s, the network dominated television with iconic hits that shaped the culture of the time: Miami Vice, The Cosby Show, Cheers, Seinfeld, Friends, and more. It had The Today Show in the morning, The Tonight Show in the evening, an unbeatable lineup of sitcoms for Thursday night, and Saturday Night Live every weekend. For some of that time it also showed Major League Baseball, NFL football, NBA basketball, and the Olympics.
The network earned its ratings by pushing the boundaries of television: Miami Vice brought MTV visuals to the police drama, Hill Street Blues incorporated gritty realism, and Seinfeld brought self-awareness to sitcoms at a time when most half-hour shows still ended with a hug. These shows made NBC one of the most profitable divisions of General Electric,1 to which the network returned $800 million in profit in 2003.2
In 2010—just seven years later—the network expected to lose more than $100 million.3 When Comcast agreed to acquire 51 percent of NBC Universal, it was mostly interested in the company’s cable channels—Bravo, Syfy, and others.4 The proposed deal assigned the broadcast network an on-paper value of zero.5
As NBC has faltered, other companies that rely on its programming have thrived. In early 2006, more than five million people watched the famous “Lazy Sunday” Saturday Night Live sketch on YouTube, which was bought for $1.65 billion by Google later that year.6 Heroes, one of the network’s recent hits, became one of the most popular shows on file-sharing services.7 And telecom companies built empires selling bandwidth that lets consumers download or stream pirated television shows without commercials.
NBC isn’t the only media institution that has seen its value plummet in the last few years. MGM, with its iconic roaring-lion logo and library of James Bond films, sold for $5 billion in 2004 but drew bids of less than $2 billion in 2010.8 The EMI Group, which owns Capitol Records and the classic Beatles and Frank Sinatra recordings, ended up in the hands of Citigroup after a private equity buyer couldn’t make its debt payments. The Washington Post, which set a high-water mark for U.S. journalism when it published the Pentagon Papers and uncovered the Watergate scandal, has reduced its newsroom staff, closed its national bureaus, and—perhaps most painfully—declared, “We are not a national news organization of record.”9
While each of those companies had its own issues, they all faced the same underlying problem: they weren’t collecting enough of the revenue being generated by their work. The material they put out was certainly popular. But like “Lazy Sunday” and Heroes, that material built other businesses, including the Pirate Bay, Apple’s iTunes Store, and the Huffington Post.
The damage isn’t limited to major media conglomerates. Independent film companies are struggling, and studios have cut divisions devoted to smaller films. Music sales in the United States are worth less than half of what they were in 1999.10 Newspapers have seen ads decline by 43 percent since 2007,11 the Tribune Company entered bankruptcy in 2008, and the Seattle Post-Intelligencer laid off most of its reporters and started publishing only on the Web. It’s time to ask seriously whether the culture business as we know it can survive the digital age.
As recently as 2008, the Electronic Frontier Foundation could say that “the music industry is the only industry that appears to be unable to adjust their business models to take file sharing into account.”12 Even at the time, this wasn’t entirely true: the DVD sales that drove movie studio profits were already falling.13 At this point, with newspapers losing readers to Web sites that summarize their stories, and the television and book businesses threatened by online technology, it’s time to ask whether any significant professional media business can thrive in an environment where information can be taken so easily. When nearly a quarter of global Internet traffic consists of pirated content, according to a study by the Envisional consultancy commissioned by NBC Universal but based on data from other companies, it’s time to ask whether there’s actually much of a new market to adjust to.14
Piracy isn’t new, of course, and it’s hardly the whole problem. But the easy, illegal availability of all kinds of content has undermined the legal market for it, in a way that affects the entire media business. Sites that use pirated material to draw an audience drag down the price of online advertising to the point where companies that produce new material have trouble competing. Media companies that sell products online have to lower prices in order to compete with pirated versions of those same products sold by companies that bear none of the production costs. By making it essentially optional to pay for content, piracy has set the price of digital goods at zero. The result is a race to the bottom, and the inevitable response of media companies has been cuts—first in staff, then in ambition, and finally in quality.
This devaluation could also hurt the Internet, since professional media provides much of the value in a broadband subscription. A 2010 study by the Pew Research Center’s Project for Excellence in Journalism found that more than 99 percent of blog links to news stories went to mainstream media outlets like newspapers and networks.15 File-sharing services are filled with copyrighted music.16 Seven of the ten most popular clips in YouTube history are major-label music videos.17 Amid the Internet’s astonishing array of choices, statistics show that most consumers continue to engage with the same kind of culture they did before—only in a way that’s not sustainable for those who make it.
So far, the conflict over the future of online media has been framed as one that pits media conglomerates against a demanding new generation of consumers who want music and movies their way—available online, at any time, in every format, and at no additional cost. This may not be much of a business. But like most ideological arguments about the Internet, the idea that consumers want free media has an economic agenda behind it.
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. For the past few years, helping consumers access content has been one of the best businesses on earth: Apple’s iTunes Store made it the most valuable technology company in the country,18 Netflix’s stock rose nearly 219 percent over the course of 2010, and YouTube dominates online video. But these companies depend on a ready supply of content that consumers want, and the lack of a functioning market online has already endangered this. Like TV, the Internet is only as good as what’s on.
The one thing everyone can tell you about the Internet is that “information wants to be free.” This memorable phrase, coined at a 1984 hacker convention by the influential technology thinker Stewart Brand, evolved into a media business mantra that shaped the online world as we know it. This is why newspapers gave away Web content, why Hulu doesn’t charge users, and why music fans expect albums to be free for the taking.
Unfortunately, we’ve forgotten the rest of Brand’s quotation:
On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.
Brand’s own information wanted to be expensive, and he made a small fortune in the publishing business. A bohemian intellectual who befriended both Buckminster Fuller and Ken Kesey, Brand appeared as a character in Tom Wolfe’s Electric Kool-Aid Acid Test and campaigned for NASA to release a picture of Earth from space. As living off the land became part of the post-hippie zeitgeist, he created the Whole Earth Catalog, an influential compendium of advice that Steve Jobs once referred to as “sort of like Google in paperback form.”19 He started out peddling an early version from the back of his truck and went on to sell more than a million copies of a later edition. In 1983, a year before Brand said that information wanted to be free, he got a $1.3 million advance to create the Whole Earth Software Catalog.20
From the perspective of the technology world, information wants to be free “because the cost of getting it out is getting lower and lower all the time.” The idea that online media will inevitably be free comes from the theory that the price of any good should fall to its marginal cost. Since digital distribution gets cheaper every year, the marginal cost of media keeps approaching zero. That’s why Wired’s editor Chris Anderson, in his book Free: The Future of a Radical Price, argued that “free is not just an option, it’s the inevitable endpoint.”21
There are two main problems with this argument. First, it’s only a theory—and one economists normally apply to commodity goods. Second, and more important, if the price of culture fell to its marginal cost, movie studios would have no way to cover their production expenses. They’d have three choices: close up shop, turn films into advertising for other products, or sell the first copy of every movie for $150 million and make online downloads free after that. If none of these ideas sound like promising strategies, it’s because pricing media at its marginal cost just doesn’t work in the real world.
Much of the enthusiasm for free media comes from mistaking the packaging for the product. If you believe people once paid $15 for silver plastic discs, it’s only natural to think online distribution will revolutionize the recording business. But if you realize people were paying for the music on those discs, it’s obvious that someone still has to make it—and that someone probably wants to get paid.
Many very intelligent people seem to have a hard time understanding that making music is harder than distributing discs. In Ken Auletta’s Googled: The End of the World as We Know It, Google’s cofounder Sergey Brin tells Auletta that more people would read his book if he put it online for free. Auletta points out that this would make it difficult to pay for reporting, editing, and a marketing campaign to ensure his work reached readers. “The usually voluble Brin grew quiet,” Auletta writes, “ready to change the subject.”22
To Google, Auletta’s book is just a series of ones and zeros—and not very many of them, compared with a movie. To Auletta, those ones and zeros were exceptionally expensive to create—at least in terms of time—since the technology that has revolutionized the cost of distributing text hasn’t dramatically changed the nature of writing it. Reporters can access online databases and interview sources by Skype, but they still have to read documents and ask the right questions. In cases like this, “information wants to be expensive.”
Therein lies the conflict. Most online companies that have built businesses based on giving away information or entertainment aren’t funding the content they’re distributing. In some cases, like blogs that summarize newspaper stories, this is legal; in others, it’s not. But the idea is the same: in Silicon Valley, the information that wants to be free is almost always the information that belongs to someone else.
In economic terms, these businesses are getting a “free ride,” 23 profiting from the work of others. The fact that video can be distributed practically free on YouTube hasn’t really changed the amount of money it takes to make a television show. If shows are distributed for free, in a medium where advertising isn’t worth much, the companies that produce them won’t be able to make money. Eventually, they’ll stop paying people to create them.
The term “parasite” comes from the Greek word parasitos, used to refer to someone who ate at someone else’s table without providing anything in return. It’s a useful way to think of news aggregators like the Huffington Post or search engines that specialize in finding illegal downloads of copyrighted content. The standard response is that they’re providing “exposure.” But they’re also providing competition, by selling advertising that used to go to creators. As the old Catskills joke goes, “You could die of exposure!”
Right now, that’s what’s happening to the culture business.
It wasn’t supposed to be this way.
The Internet was supposed to empower creators, corporate and independent alike. As it became easier to distribute entertainment and information—important U.S. exports, as well as valuable parts of our lives—technology would generate jobs. Art and commerce would benefit together.
It’s time to acknowledge that this isn’t happening—and that it won’t until we turn the online free-for-all into a free market. Instead, the Internet as it exists now has empowered a new group of middlemen, like YouTube, that benefit from distribution without investing in artists. And while online technology has built some impressive empires, many of them don’t generate that many middle-class jobs, since they either get the benefit of professional content without paying for it or depend on user-generated content—the digital-age equivalent of Tom Sawyer convincing his friends that painting the fence will be a blast. The Reuters product manager Anthony DeRosa described the dominant online business model as “Digital Feudalism”: we think we’re using YouTube when YouTube is really using us.24
I’m not a Luddite who doesn’t “get” the Internet. My first job out of graduate school was at the Wired Web project HotWired, where I started a few months after it sold the world’s first clickable banner ad. I’ve spent most of my career covering technology, media, and the intersection between them, and I spend as much time reading original blogs as I do with a daily paper. I love the way the Internet makes so much of the world’s culture accessible—from European newsweekly Web sites to Afrobeat albums on iTunes—and I think it has helped some important new voices find an audience. This isn’t a book about why online technology isn’t important; it’s one about how we can make it more valuable.
Most Internet companies aren’t getting a free ride, of course. For every file-sharing service, there are dozens of emerging artists, independent labels, and established companies using online technology to create interesting work. Inexpensive video cameras allow people to document news as it happens, garage bands upload cool songs to Myspace, and sites like the Daily Kos use mass collaboration to compete with newspapers on important stories. Much of the best reporting on technology and the media business can be found on sites like GigaOM and TorrentFreak. This explosion of creativity has enriched our culture immensely. But many bloggers face some of the same problems as newspapers: it’s hard to make money if half the people who read your stories do so on another site.
When Napster went online in 1999, I thought the kind of mass piracy it enabled was a transitional step before digital technology helped musicians connect directly with fans who would be happy to pay for their work. I thought more online publications would follow the path of Slate and Ars Technica and invest in original reporting and writing. I thought the Internet would become a place where creators and companies with any level of popularity could figure out ways to sell information without worrying that someone else had made it available for free a mouse click away.
Gradually, I became a skeptic. A decade after Napster, technology start-ups like Grooveshark and Hotfile are still building businesses on the same model: users share content illegally while the company that allows them to do so profits. This doesn’t only hurt creators whose work is taken without payment; it harms the entire online economy. Who wants to build a legitimate music business when it’s easier to start an illegal one? Why would anyone invest in a staff of reporters and editors when it’s so much cheaper to aggregate the work of others? How can any company compete with a rival that offers its products but bears none of the expenses? The free ride has become a road to riches.
I’m not exactly neutral on this issue: I write for a living, and that puts me firmly in the creators’ camp. But this book is based less on experience than on extensive reporting that shows how giving away content online rarely adds up to a business for creators. (Although I’ve written for some of the publications mentioned in this book, I point out when that’s the case.) And the technology companies that suggest there’s money in giving away content aren’t exactly unbiased, either. Google has as much interest in free online media as General Motors does in cheap gasoline. That’s why the company spends millions of dollars lobbying to weaken copyright.25
Executives on both sides of this debate tend to see paying for content as a moral issue. Media companies bemoan a new generation of consumers who don’t know why they need to pay for content, while technology pundits talk about a “right” to access information that doesn’t have much legal support. While it’s silly to argue that lending a DVD to a friend is some kind of a moral failing, it’s even more ridiculous to suggest there’s an inalienable right to see Iron Man 2. Especially when many of those who push the idea of that right get their funding from companies that want to distribute movies for free.
The real issue is how to establish a functioning market for content online, whether that involves selling it or supporting it with advertising. The core copyright businesses—music, film, television, and computer software—account for about 6.5 percent of U.S. GDP, according to a report by the economist Stephen E. Siwek.26 More important, given the current economic climate, they generate jobs and a trade surplus.
Technology executives like to suggest that media companies are selling buggy whips in the age of the automobile, but that doesn’t hold up. As a means of distribution, the Internet is replacing plastic and paper, which represents a leap in efficiency. But that’s the medium, not the message. So far, content generated by online businesses can’t compete with that from traditional media companies. If Heroes had lost its audience to a show about individuals with superpowers that was funded by a file-sharing service, that would have been competition. So far at least, that’s not what we’re seeing. Traditional media companies aren’t in trouble because they’re not giving consumers what they want; they’re in trouble because they can’t collect money for it. It’s the natural outcome of an online economy that transfers wealth from “each according to his ability” to “each according to what he can get away with.”
It’s tempting to believe that the devaluation of creativity we’ve seen over the last decade was somehow inevitable, that technology makes information so easy to distribute that any attempt to regulate it is futile. But it’s important to remember that the Internet didn’t spring full-blown from the brow of Zeus—or even the mind of Al Gore. The U.S. government developed much of the basic technology, offered favorable tax policies to encourage the development of online commerce, and passed laws that turned out to give Web sites significant advantages over their off-line counterparts.
Some of these decisions put the media business at a substantial disadvantage. While television channels would be subject to massive liability if they broadcast shows they don’t have rights to, YouTube can do so with impunity as long as a user posted it. In the physical world, it would be difficult for a pirate operation based in Russia to ship hundreds of DVDs to the United States, not so much because of logistics as because of legalities. Online, digital media zooms across borders without anyone looking to see if it should be taxed, let alone whether it’s legal. It’s reasonable to argue whether or not this is a good thing, but it was a choice of design, not a requirement of technology.
Laws created the Internet as much as technology did, and the ones we have aren’t working. I’ll start my story with the Digital Millennium Copyright Act, a 1998 law that media companies first championed and technology companies managed to manipulate into a compromise that undermined the market for media online from the very beginning. It was intended to free Internet service providers from liability if copyrighted works were transmitted over their networks. But it enabled a culture in which online companies like YouTube can benefit from uploaded music or video, as long as they remove it when asked.
The first part of the culture business to get hurt was the music industry, which was destabilized by Napster and devastated by the file-sharing services that followed. In many ways, this set the pattern for what happened to the other culture businesses. An online entrepreneur would find a new way to distribute media, use professional content to build up an audience, and hope someone else would worry about whether it could grow into a sustainable business. Napster never even had a strategy. More than a decade later, no company has made a significant profit distributing music online except maybe Apple—and it makes far more money selling iStuff. This isn’t creative destruction; it’s the destruction of creativity.
When the music business won its court case against Napster, the technology business started fighting back—in Congress as well as in court. Attempts to defend copyright were cast as assaults on free speech, efforts to organize markets were criticized as outmoded, and piracy was confused with creativity. Much of this thinking came from organizations funded by technology companies, and some of them have as much influence in Washington as Hollywood does.
Newspapers were next. Tempted by the possibility of a larger audience and swayed by futurists who have never run businesses, they gave away online what they charged for in the physical world. The idea was that they’d make money on advertising. But the price of ad space, like that of everything else, is based on supply and demand, and the Internet has an infinite amount of it. Online ad rates started out low, fell further when the dot-com bubble burst, and now run about a tenth the price of their print counterparts.27 Newspapers gave a valuable boost to aggregation sites like Google News but didn’t capture any value for themselves. For media companies, getting advice from technology pundits was like letting the fox lead a strategic management retreat in the henhouse.
The other core media businesses—movies, television, and books—have fared better, partly because they’ve had time to adjust. But they’re now facing the same challenges. Television could be devastated by devices like Boxee, which could erase millions of dollars in value without building a business, or even having much of a business plan. Book publishing has already faced off against Amazon’s attempt to set prices for its products, much as iTunes did, with some success. And Hollywood may have the influence in Washington to fight piracy, as well as the flexibility to come up with a business model that makes piracy less attractive.
As it turns out, many of the old-media players having the most success in the new-media world ignored the conventional wisdom. The Wall Street Journal and the Financial Times are outperforming other sophisticated newspapers by charging for content. AC/DC became one of the best-selling acts of the last few years without selling music on iTunes. And AMC has won some negotiating leverage as a must-have cable channel by holding back shows like Mad Men from Hulu.
As the price of advertising falls, charging consumers is becoming more important than ever. Newspapers that once offered free content, including the New York Times, have started charging. Record companies have pulled back from advertising-supported music sites. And Comcast’s interest in NBC Universal was based on cable channels like Syfy, Bravo, and the USA Network, all of which charge for programming. The future of business, it turns out, may depend on the old-fashioned strategy of selling something for more than you paid for it.
There are some reasons to be hopeful. Europe, which has a tradition of supporting its culture businesses—and an accompanying suspicion of Le Google—has started to take a more aggressive stance against piracy. Laws aimed at curtailing online copyright infringement in the U.K. and France have not yet had an effect, but their passage has made an important statement that some kind of order ought to apply in the digital world. And by making technology companies take some responsibility for their actions, these laws could bring them to the negotiating table.
In Europe, thinkers on both sides of this issue have found a more receptive audience for more radical solutions, such as a “blanket license” that would make a certain amount of media free with a single payment, much like a cable subscription. Such a system could grow out of private negotiations, a public mandate, or, more likely, some combination of the two. But nothing will happen as long as technology companies have free rein to distribute first and ask questions later.
The tough decisions about the future of online media don’t involve the development of technology; it’s inevitable that computers, bandwidth, and storage will all get faster, cheaper, and more accessible. What’s not inevitable is how that technology is used. In 2010, technology executives started saying that anyone who wanted to limit piracy was trying to “break the Internet.” But the truth is that it’s breaking already. Now—and perhaps not for too much longer—we have a chance to fix it.