Business May 2010

The Freeloaders

How a generation of file-sharers is ruining the future of entertainment
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Jeremy Traum

It’s official: 2009 was the worst year for the record labels in a decade. So was 2008, and before that 2007 and 2006. In fact, industry revenues have been declining for the past 10 years. Digital sales are growing, but not as fast as traditional sales are falling.

Maybe that’s because illegal downloads are so easy. People have been pirating intellectual property for centuries, but it used to be a time-consuming way to generate markedly inferior copies. These days, high-quality copies are effortless. According to the Pew Internet project, people use file-sharing software more often than they do iTunes and other legal shops.

I’d like to believe, as many of my friends seem to, that this practice won’t do much harm. But even as I’ve heard over the past decade that things weren’t that bad, that the music industry was moving to a new, better business model, each year’s numbers have been worse. Maybe it’s time to admit that we may never find a way to reconcile consumers who want free entertainment with creators who want to get paid.

Reflecting on this problem, the computational neuroscientist Anders Sandberg recently noted that although we have strong instinctive feelings about ownership, intellectual property doesn’t always fit into that framework. The harm done by individual acts of piracy is too small and too abstract. “The nature of intellectual property,” he wrote, “makes it hard to maintain the social and empathic constraints that keep us from taking each other’s things.”

In other words, we kept to our rules about IP as long as it was attached to a physical object: a book, a CD, a videotape. Now that it consists of endlessly replicable electrons, we are ethically unmoored. Younger generations expect music and now video to be free—and when it isn’t, they feel entitled to take it anyway. College students see no problem with downloading music without paying for it—an attitude even more prevalent among younger students. Pew’s surveys indicate that 75 percent of respondents aged 12 to 17 agree that “file-sharing is so easy to do, it’s unrealistic to expect people not to do it.” They are Generation Free, and they just might kill the goose that lays the golden egg.

Optimists argue that the music industry has coped before with disruptive new technology. Until recordings came along, songs, not singers, were Big Business. So while copyright law allocated royalties for performances, it said nothing about what happened when you recorded those performances and sold thousands of copies of the recording. Only after protracted legal maneuvering did we work out an arrangement that allowed both businesses to thrive.

Can we do it again? Can the market evolve fast enough to keep up with the expectations, and predations, of Generation Free? Even if the music industry manages, what about all the other businesses that depend on intellectual property—including (gulp) my own?

In 2007, Radiohead famously allowed their extremely loyal fan base to download their new album, In Rainbows, on a pay-what-you-like scheme. Sixty-two percent of those who did so liked to pay nothing. The rest paid an average of just $6 apiece. And more fans downloaded the album from file-sharing services than from the band’s Web site.

Pish-tosh, say the optimists; Radiohead made money, didn’t they? The optimists offer alternative explications for the sorry state of the recording business: it’s a cyclical downturn, plus all the music from the big labels just happens to suck right now, and anyway MP3s are becoming loss leaders for concerts.

True, collectors switching from cassette and vinyl to CD swelled the music industry’s coffers in the 1980s and ’90s, so the eventual softening of sales is hardly surprising. The concert industry is indeed booming despite the downturn. And people who admit to downloading music illegally may actually spend more money on recorded music than people who don’t. One assumes they plump up concert revenues as well.

Yet even if die-hard music buffs spend more on albums than the guy who buys one box set a year, they’re still buying less than they used to. Moreover, spending less on recorded music doesn’t necessarily mean you spend more on shows; the savings could just as easily go toward beer. And even avid music lovers in urban areas can see only a few shows a week. To raise revenue, you have to get new customers in the door or raise ticket prices.

Concert-promotion mogul Michael Rapino has said that just 2 percent of Americans attend more than a couple of concerts a year, which leaves plenty of room to increase attendance, but also suggests that most people don’t particularly care for live music. It’s far from clear that free MP3s increase the number of concertgoers, instead of just changing the mix of shows they attend.

Higher ticket prices are already a fact—but not necessarily for the ordinary bands that grind their way through small and medium-size venues. In 1990, when I first started going to see live music, you paid $5 for a new act, $10 for solid performers, and $15 to $20 for hot favorites. Adjusted for inflation, that’s about what I still pay.

Tickets to major shows can cost hundreds. But that doesn’t promise much for the future of music. Here are the top 10 touring acts of 2009, according to Pollstar: U2, Bruce Springsteen, Elton John and Billy Joel, Britney Spears, AC/DC, Kenny Chesney, the Jonas Brothers, the Dave Matthews Band, Fleetwood Mac, and Metallica. For most of the demographic that attends these shows, sex, drugs, and rock and roll now means putting on a Beatles album and popping some Viagra—or asking Mom for permission to see an R-rated movie. All that these blockbuster concert revenues really tell us is that Baby Boomers have credit cards and their children have access to them.

To be sure, today’s 20-something file-sharer may someday pay $200 to watch Vampire Weekend rock the Astrodome. Or maybe not; the Internet tends to fragment audiences. Generation X, of which I am a member, was probably the last to grow up with the Top 40 and only a few TV stations—and the kind of common taste that this structure instilled. The bounty of the World Wide Web encourages niche interests. If you look at the Recording Industry Association of America’s top albums, only two of the acts who debuted this decade have sold 10 million albums, and one of them was Norah Jones, who has deep fogy appeal.

This fragmentation has been good news for performers like Jonathan Coulton, who makes a decent living selling quirky songs and related merchandise on his Web site. But the broader music industry, like other entertainment fields, has always worked on a tournament model: a lot of starving artists hoping to be among the few who make it big. What happens to the supply of willing musicians when the prize is an endless slog through medium-size concerts at $25 a head?

Moreover, whatever the sins of the big labels, they invest heavily in finding, promoting, and recording new music. Thom Yorke, Radiohead’s lead singer, has said that their experiment wouldn’t have worked as well as it did if they hadn’t already been through “the whole mill” of the old system. People tend to underestimate the extent to which the old industry supports things like … concert attendance.

These problems will even more deeply afflict the other industries that depend on IP. A smaller, more amateur music business is possible, if not optimal. But I doubt that YouTube can substitute for Hollywood in a world where “cheap” indie films can cost millions. Children’s films might be made at a loss to sell action figures—but how do you finance The Godfather? With a co-branded line of frozen cannoli?

As for the publishing industry, a year is a long stretch to spend typing without some prospect of financial return. Time was when authors could make money from sidelines such as public speaking; Mark Twain pulled himself out of bankruptcy by going on the lecture circuit. But Twain wasn’t competing with home-theater systems. Some journalists manage to make big money from corporate speaking fees, but that’s not an option for novelists or poets.

We have yet to figure out how to make IP work in the new era. Even if we don’t, people will still make pictures, sing songs, and write stories—just not as frequently, or as lavishly. But even if we do, file-sharing will probably alter the form of the works we do create. The popular arts may come to look more like the rest of the Internet: many labors of love produced quickly and cheaply in spare moments, and a few high-end productions that can be monetized.

Forms are already changing. The movie industry is moving into 3-D, which is harder to reproduce at home. Studios are also relying more on blockbuster movies that maximize the theater experience—and the revenues they earn from toys and comic books.

When the printing press was invented, many monks mourned the decline of vellum and the loss of the illuminator’s art. They were right, of course—but they were even more wrong. Maybe something better is coming, even as the transition racks the nerves of writers and artists. As the old joke goes, we may be losing something on every unit—but perhaps we’ll make it up in volume.

Megan McArdle is The Atlantic’s business and economics editor, and the editor of the business channel at theatlantic.com.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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