David Pogue and the Economics of Free

[Tim Lee]

When I'm not guest-blogging for Megan, I'm a regular contributor to Techdirt, a blog that focuses on the technology industry. The site's owner, Mike Masnick, has gotten a lot of attention for a post he did on Friday about making money by giving stuff away. It's a response to New York Times columnist David Pogue, who attacked the "Slashdot argument" that "books, music, films, software and so on ought to be freely distributed to anyone who wants them, simply because they can be freely distributed." Pogue helpfully explains that simply giving away copyrighted material free of charge doesn't magically make one rich.

Now, as Mike points out, this is a bit of a straw man. Nobody is arguing that simply giving one's creative works away for free will magically allow one to make a living. Rather, the argument is that giving away information goods (which have zero marginal cost) can expand the market for other goods that can then be sold at a profit. The most obvious example is advertising—lots of sites give away content or applications in order to sell ads. But this isn't the only example by a long shot. Musicians can give away their music to sell more concert tickets. Free software companies like Red Hat, IBM, and MySQL give away software in order to increase demand for their support contracts. In addition to advertisers, successful bloggers give away their blog posts in order to build up their traffic and get speaking fees and book advances.

Most of these business models have become newly viable as the Internet has pushed the cost of transmitting information close to zero. Fifty years ago, you needed expensive equipment to produce information goods like newspapers, television broadcasts, or music albums. And it was therefore necessary to charge for the finished product in order to recoup those costs. Not surprisingly, the businesses that have grown up around those 20th century distribution technologies are not too enthusiastic about business models that involve giving away for free product that used to fetch them a nice fat profit margin.

This kind of discussion invariably turns to "piracy," and especially peer-to-peer file sharing. It is commonly suggested that the real problem is that kids these days don't have enough respect for copyright law, and that all that's needed is to better educate them about the importance of respecting copyright. Now, I have some sympathy for this point of view. I don't participate in illicit file sharing and I don't have much sympathy for folks who do so and get caught. Nevertheless, I think this line of argument misses the point rather badly. Because although the short-term problem facing many content industries may be illegal sharing of their copyrighted materials, the long-term threat is that their prices will be undercut by competitors who share their own intellectual creations free of charge. This has already happened in the news and punditry world, as thousands of bloggers and news sites provide for free the news that newspapers charged for a couple of decades ago. And it's beginning to happen in the music industry. The fundamental challenge facing the incumbent content industries is not "piracy" but dramatically increased competition.

What makes this difficult is that it requires some creativity to figure out which business models will be successful. As Mike points out, "give it away and pray" isn't a viable business model. Figuring out what to give away and how to monetize the resulting attention is a difficult problem that everyone, from Facebook to the Atlantic is struggling to solve. But plenty of businesses have succeeded, with Google as the most important poster child. But businesses that specialize in information—news, music, movies, software—have no choice but to take it seriously, because if they don't their competitors surely will.

Photo courtesy of Jeremy Engleman