Business May 2010

The Freeloaders

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

Presented by

Megan McArdle is The Atlantic’s business and economics editor, and the editor of the business channel at theatlantic.com.

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