By Jim McCarthy Jun 30, 2009 0 comments

The Freeconomy: Believe it or Not?

About a year and a half ago, Chris Anderson (who also wrote “The Long Tail”) published an article in Wired called “Free.” Just as with “The Long Tail,” the article got a lot of people thinking and talking, and, just as with “The Long Tail,” it’s being turned into a book.

To summarize the premise of “Free,” we live in a world where the marginal cost of producing one more of many products is zero or very close to it.  For example, for Google to provide you with the results of a search  or for YouTube to show you a single video costs pretty close to nothing, so they don’t need to make much money on that search to be able to provide it.  This effects the way businesses and society as a whole run, and companies and organizations had better get comfortable with that because it’s the way things are going.

Ok, that was my unofficial synopsis of the premise of “Free” and I promise, it’s a more compelling and nuanced argument than that if you read the whole thing.

In the upcoming issue of The New Yorker, Malcolm Gladwell (of “Tipping Point,” and “Blink,” and “Outliers” fame) takes on the premise of “Free,” and with interesting results.  Gladwell takes issue with Anderson’s view that the cost of delivering a product “made of ideas” is zero and therefore can be delivered at zero cost.  Here’s the key tidbit:

“The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.”

Why is that? Because of the very principles of Free that Anderson so energetically celebrates. When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That’s the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be three hundred and sixty million dollars. In the case of YouTube, the effects of technological Free and psychological Free work against each other.”

This whole argument has special relevance for two industries: newspaper (and all of print media, really) and recorded music.

Both industries are under pressure because the marginal cost of delivering their products (both, ultimately, just information) are damn near zero.  Maybe they’re not zero, and that’s Gladwell’s point, but they’re probably closer to zero than YouTube’s because it’s actually quite expensive to provide the kind of intense bandwidth to deliver video compared to text, images, or even sound.

And in the case of papers, there’s actually an enormous and potentially highly-valuable news gathering and writing apparatus that provides the information.  Citizen journalism is fine, but a newspaper at its best is going to add a lot of value that an army of volunteers probably won’t and maybe even can’t.

But with recorded music, the problem is that record companies are not necessarily in a position to add any value any more.  They’re not really needed to provide high quality recording.  That can be done by skilled amateurs.  They’re not providing special resources to help the artist get better.  Often times, they are antagonistic to the artists’ long term interest.

No, the problem is that they got where they are because they once had a choke hold on distribution:  only they could produce the music and get it played and distributed.  That kind of brute force power worked on a P&L while it lasted, but it leaves them with no bulwark against the “Free” phenomenon.  In other words, they’re worse off than the newspapers, who, believe it or not, may have hope of finding a new way of creating and harvesting value in the marketplace.

In our business, though, paying for recorded music is nearly at an end, or it’s going to transform in such a way that people pay a tiny fraction of what they used to pay and less than they do now, while the value of live performance continues to grow.

Gladwell concludes with what I think is a credible, if not super useful, point about the “Free” debate:

“The only iron law here is the one too obvious to write a book about, which is that the digital age has so transformed the ways in which things are made and sold that there are no iron laws. “

Look for Malcom’s upcoming book on this topic “No Iron Laws!”  Just kidding.  I hope.

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