Politics & Policy

The Problem with Zero

"Free" isn't as attractive as it might initially seem.

Chris Anderson is the editor of Wired, the glossy Condé Nast tech magazine, and the author of an earlier book on the Internet called The Long Tail, so he is an important force in the websphere.

But his new book seems less like a tech book and more like a political book, well suited to the Obamic age. A line is drawn between those who “get it” and those (over 30) who do not. The focus is on people’s entitlements as consumers, not on their need and desire to be proud producers. An advanced economic machine is assumed, but the conditions necessary to maintain one are no responsibility of the author, or of the reader. Also lacking is any awareness that a working society requires concepts of duty and reciprocity, not just entitlements, that paying for what you get is an important form of morality, or that adapting to the digital age involves questions not resolvable by resorting to Condé Nast’s website-proclaimed mission “to ignite and nourish [readers’] passion.” 

In tone, the book is high-tech ADD, suited to those who itch to click a new link every two seconds. Analytic rigor is not a feature.

#ad#In substance, it is a long riff on economists’ observation that, in a competitive market, price tends to drop to marginal cost (that is, the cost of producing one more unit, ignoring all the fixed investment costs). On the Internet, the marginal cost of distributing bits is close to zero. Ergo, the price of anything based on bits drops to zero.

To Anderson, this fact of life renders it impossible to make money by selling bits. So you gotta have a gimmick, such as using a book to gin up speaking engagements, or making free CDs to get people to concerts, or going to “freemium” (giving away a basic product while selling enhancements), or peddling complementary products, or establishing a home for user-generated material and attaching ads. The “sell ads” nostrum runs through the book like a patent medicine; whatever you’ve got, it will cure. 

Anderson thinks everyone better adapt to this state of the world where bits are free, because the under-30s know about marginal cost, and zero is what they will pay. He also brings in evidence about the psychological benefits of free and why payments, even at a micro level, won’t work.

The price-tends-to-marginal-cost equation has always been a serious embarrassment for microeconomic theory, and indeed to devotees of the free market, as has been pointed out by prominent economists from Ronald Coase to William Baumol. Like Anderson, many academic economists, especially those in the antitrust industry, tend to convert this insight from an is to an ought. Prices should equal marginal cost, and if they don’t then something is wrong.

In any real-world economy, especially an advanced one, most production processes are investment-heavy. So if prices go to marginal cost, then the system enters a cycle whereby everyone goes bust except the lowest-cost producer, who then happily charges a monopoly price until someone else enters and the cycle starts again.

For the most part, free markets handle this problem through continuous innovation, upheaval, and differentiation. Competition takes the form of finding some source of market power, or thinking up gimmicks such as those listed in Free, that allows the producer to escape marginal-cost hell. If businesses cannot find a path out of the inferno, the result is usually government regulation, as happened with railroads, utilities, and agriculture, each of which wound up regulated for the survival of producers more than for the benefit of consumers.

The Internet is posing the dilemma in pure form. If price equals marginal cost, and marginal cost is zero, then sooner or later production must decline, especially because production costs for quality content are very high: Think of all the time spent by skilled people producing works that don’t make it. The freesters argue, rightly, that amateurs will always produce something, and the strategies Anderson identifies will create some opportunities, but paid professionalism producing high-quality material will stagnate. Try to imagine a movie industry supported solely by T-shirt sales and ad tie-ins.

The “sell ads” panacea ignores two important facts. First, advertising itself is not scarce in the digital age, so it can barely support its own costs, let alone those needed to cross-subsidize content creation. Second, it’s much more difficult to succeed by selling eyeballs to advertisers than by selling content to consumers, and there is no reason to think it will satisfy the desires of enough consumers, except with content that appeals to the lowest common denominator. If 100,000 people are willing to pay $10 each to see a serious play, its production may be a commercially viable proposition. If the producer can collect only 10 cents for each pair of eyeballs — good luck. Free will increase the audience to some extent, but not to 10 million.

#page#

Which brings us to perhaps the greatest misfortune of the give-away-the-CD-and-make-money-on-tour-and-T-shirts model. The Internet could create a cornucopia of content by letting artists create worldwide fan bases. If one can sell product directly to consumers, a band or an author need not have enough fans in a single place to sell out a stadium or a lecture hall, as long as it has enough in toto. The potential for creativity is incredible, because an artist needs such a small portion of the world’s 6 billion souls. Anderson’s model would sacrifice this possibility. Those with the hype of Wired behind them do well; the rest flip burgers and write for fun.

The basic problems created when price actually equals marginal cost have been masked by the incredible quantity and quality of material already in existence, ready to be digitized. Anderson talks repeatedly of Google, the paladin of free in all its forms, and Google does indeed give away the valuable service of search, making money by attaching advertising. But Google does not pay to create the material it searches, so it offers not just its own services for free, but everyone else’s as well. If and when Google must pay for the content it searches, its economics will look rather different.

#ad#Wikipedia is another common example of the virtues of the world of Free. It exemplifies the combination of free with a reliance on volunteers, which, the argument goes, shows that professionals are unnecessary. However handy it may be, though, Wikipedia requires documentation by citation to existing publications, so it too depends on the existence of a storehouse of intellectual treasure awaiting ransack. The model works now, but without some means to finance new work, a 2050 version of Wikipedia will be about the same as a 2010 one. (For the ironically inclined, some passages in Free came verbatim from Wikipedia, and Anderson has apologized for the error.)

To some extent, Anderson eats his own dog food. While the book retails for $26.99 and no free PDF is available, Free is free on both Kindle and as an iTunes audiobook. But free as a premium with expensive hardware is hardly a new business model, and one (well, this one) itches to yell “information wants to be free” and post the book on the web, largely because I would enjoy the inevitable letter from his publisher on the importance of intellectual property.

The dust jacket has the standard headshot of the author looking serious and wise. Another image might have been better, such as the author as the Pied Piper wearing a feathered hat and parti-colored hose, tootling down the roads of Silicon Valley with packs of techies skipping behind him, probably bound for a cliff somewhere. Any resemblance to the current political scene is purely non-coincidental.

– James V. DeLong is a vice president and senior analyst at the Convergence Law Institute in Washington, D.C.

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