BOOKS

PRICED TO SELL
Is free the future?
by Malcolm Gladwell
JULY 6, 2009

“In the digital realm you can try to keep Free at bay,” Chris Anderson writes, “but eventually the force of
economic gravity will win.”

A t a hearing on Capitol Hill in May, James Moroney, the publisher of the Dallas Morning News, told Congress
about negotiations he’d just had with the online retailer Amazon. The idea was to license his newspaper’s
content to the Kindle, Amazon’s new electronic reader. “They want seventy per cent of the subscription revenue,”
Moroney testified. “I get thirty per cent, they get seventy per cent. On top of that, they have said we get the right to
republish your intellectual property to any portable device.” The idea was that if a Kindle subscription to the Dallas
Morning News cost ten dollars a month, seven dollars of that belonged to Amazon, the provider of the gadget on
which the news was read, and just three dollars belonged to the newspaper, the provider of an expensive and
ever-changing variety of editorial content. The people at Amazon valued the newspaper’s contribution so little, in
fact, that they felt they ought then to be able to license it to anyone else they wanted. Another witness at the hearing,
Arianna Huffington, of the Huffington Post, said that she thought the Kindle could provide a business model to save
the beleaguered newspaper industry. Moroney disagreed. “I get thirty per cent and they get the right to license my
content to any portable device—not just ones made by Amazon?” He was incredulous. “That, to me, is not a model.”

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 Had James Moroney read Chris Anderson’s new book, “Free: The Future of a Radical Price” (Hyperion; $26.99),
Amazon’s offer might not have seemed quite so surprising. Anderson is the editor of Wired and the author of the
2006 best-seller “The Long Tail,” and “Free” is essentially an extended elaboration of Stewart Brand’s famous
declaration that “information wants to be free.” The digital age, Anderson argues, is exerting an inexorable
downward pressure on the prices of all things “made of ideas.” Anderson does not consider this a passing trend.
Rather, he seems to think of it as an iron law: “In the digital realm you can try to keep Free at bay with laws and
locks, but eventually the force of economic gravity will win.” To musicians who believe that their music is being
pirated, Anderson is blunt. They should stop complaining, and capitalize on the added exposure that piracy provides
by making money through touring, merchandise sales, and “yes, the sale of some of [their] music to people who still
want CDs or prefer to buy their music online.” To the Dallas Morning News, he would say the same thing.
Newspapers need to accept that content is never again going to be worth what they want it to be worth, and reinvent
their business. “Out of the bloodbath will come a new role for professional journalists,” he predicts, and he goes on:

There may be more of them, not fewer, as the ability to participate in journalism extends beyond the credentialed halls of traditional
media. But they may be paid far less, and for many it won’t be a full time job at all. Journalism as a profession will share the stage with
journalism as an avocation. Meanwhile, others may use their skills to teach and organize amateurs to do a better job covering their own
communities, becoming more editor/coach than writer. If so, leveraging the Free—paying people to get other people to write for
non-monetary rewards—may not be the enemy of professional journalists. Instead, it may be their salvation.

Anderson is very good at paragraphs like this—with its reassuring arc from “bloodbath” to “salvation.” His
advice is pithy, his tone uncompromising, and his subject matter perfectly timed for a moment when old-line content
providers are desperate for answers. That said, it is not entirely clear what distinction is being marked between
“paying people to get other people to write” and paying people to write. If you can afford to pay someone to get
other people to write, why can’t you pay people to write? It would be nice to know, as well, just how a business goes
about reorganizing itself around getting people to work for “non-monetary rewards.” Does he mean that the New
York Times should be staffed by volunteers, like Meals on Wheels? Anderson’s reference to people who “prefer to
buy their music online” carries the faint suggestion that refraining from theft should be considered a mere
preference. And then there is his insistence that the relentless downward pressure on prices represents an iron law of
the digital economy. Why is it a law? Free is just another price, and prices are set by individual actors, in accordance
with the aggregated particulars of marketplace power. “Information wants to be free,” Anderson tells us, “in the
same way that life wants to spread and water wants to run downhill.” But information can’t actually want anything,
can it? Amazon wants the information in the Dallas paper to be free, because that way Amazon makes more money.
Why are the self-interested motives of powerful companies being elevated to a philosophical principle? But we are
getting ahead of ourselves.

A nderson’s argument begins with a technological trend. The cost of the building blocks of all electronic activity
—storage, processing, and bandwidth—has fallen so far that it is now approaching zero. In 1961, Anderson
says, a single transistor was ten dollars. In 1963, it was five dollars. By 1968, it was one dollar. Today, Intel will sell
you two billion transistors for eleven hundred dollars—meaning that the cost of a single transistor is now about
.000055 cents.
Anderson’s second point is that when prices hit zero extraordinary things happen. Anderson describes an
experiment conducted by the M.I.T. behavioral economist Dan Ariely, the author of “Predictably Irrational.” Ariely
offered a group of subjects a choice between two kinds of chocolate—Hershey’s Kisses, for one cent, and Lindt
truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing
the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was
reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was
exactly the same, but that magic word “free” has the power to create a consumer stampede. Amazon has had the
same experience with its offer of free shipping for orders over twenty-five dollars. The idea is to induce you to buy a
second book, if your first book comes in at less than the twenty-five-dollar threshold. And that’s exactly what it
does. In France, however, the offer was mistakenly set at the equivalent of twenty cents—and consumers didn’t buy

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 the second book. “From the consumer’s perspective, there is a huge difference between cheap and free,” Anderson
writes. “Give a product away, and it can go viral. Charge a single cent for it and you’re in an entirely different
business. . . . The truth is that zero is one market and any other price is another.”
Since the falling costs of digital technology let you make as much stuff as you want, Anderson argues, and the
magic of the word “free” creates instant demand among consumers, then Free (Anderson honors it with a capital)
represents an enormous business opportunity. Companies ought to be able to make huge amounts of money “around”
the thing being given away—as Google gives away its search and e-mail and makes its money on advertising.
Anderson cautions that this philosophy of embracing the Free involves moving from a “scarcity” mind-set to an
“abundance” mind-set. Giving something away means that a lot of it will be wasted. But because it costs almost
nothing to make things, digitally, we can afford to be wasteful. The elaborate mechanisms we set up to monitor and
judge the quality of content are, Anderson thinks, artifacts of an era of scarcity: we had to worry about how to
allocate scarce resources like newsprint and shelf space and broadcast time. Not anymore. Look at YouTube, he says,
the free video archive owned by Google. YouTube lets anyone post a video to its site free, and lets anyone watch a
video on its site free, and it doesn’t have to pass judgment on the quality of the videos it archives. “Nobody is
deciding whether a video is good enough to justify the scarce channel space it takes, because there is no scarce
channel space,” he writes, and goes on:

Distribution is now close enough to free to round down. Today, it costs about $0.25 to stream one hour of video to one person. Next
year, it will be $0.15. A year later it will be less than a dime. Which is why YouTube’s founders decided to give it away. . . . The result is
both messy and runs counter to every instinct of a television professional, but this is what abundance both requires and demands.

There are four strands of argument here: a technological claim (digital infrastructure is effectively Free), a
psychological claim (consumers love Free), a procedural claim (Free means never having to make a judgment), and a
commercial claim (the market created by the technological Free and the psychological Free can make you a lot of
money). 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.
So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is
that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated
content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube
has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put
the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For Anderson, YouTube
illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that
“crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs
that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free
because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free,
and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that
YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds.

A nderson begins the second part of his book by quoting Lewis Strauss, the former head of the Atomic Energy
Commission, who famously predicted in the mid-nineteen-fifties that “our children will enjoy in their homes
electrical energy too cheap to meter.”

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 “What if Strauss had been right?” Anderson wonders, and then diligently sorts through the implications: as much
fresh water as you could want, no reliance on fossil fuels, no global warming, abundant agricultural production.
Anderson wants to take “too cheap to meter” seriously, because he believes that we are on the cusp of our own “too
cheap to meter” revolution with computer processing, storage, and bandwidth. But here is the second and broader
problem with Anderson’s argument: he is asking the wrong question. It is pointless to wonder what would have
happened if Strauss’s prediction had come true while rushing past the reasons that it could not have come true.
Strauss’s optimism was driven by the fuel cost of nuclear energy—which was so low compared with its
fossil-fuel counterparts that he considered it (to borrow Anderson’s phrase) close enough to free to round down.
Generating and distributing electricity, however, requires a vast and expensive infrastructure of transmission lines
and power plants—and it is this infrastructure that accounts for most of the cost of electricity. Fuel prices are only a
small part of that. As Gordon Dean, Strauss’s predecessor at the A.E.C., wrote, “Even if coal were mined and
distributed free to electric generating plants today, the reduction in your monthly electricity bill would amount to but
twenty per cent, so great is the cost of the plant itself and the distribution system.”
This is the kind of error that technological utopians make. They assume that their particular scientific revolution
will wipe away all traces of its predecessors—that if you change the fuel you change the whole system. Strauss went
on to forecast “an age of peace,” jumping from atoms to human hearts. “As the world of chips and glass fibers and
wireless waves goes, so goes the rest of the world,” Kevin Kelly, another Wired visionary, proclaimed at the start of
his 1998 digital manifesto, “New Rules for the New Economy,” offering up the same non sequitur. And now comes
Anderson. “The more products are made of ideas, rather than stuff, the faster they can get cheap,” he writes, and we
know what’s coming next: “However, this is not limited to digital products.” Just look at the pharmaceutical
industry, he says. Genetic engineering means that drug development is poised to follow the same learning curve of
the digital world, to “accelerate in performance while it drops in price.”
But, like Strauss, he’s forgotten about the plants and the power lines. The expensive part of making drugs has
never been what happens in the laboratory. It’s what happens after the laboratory, like the clinical testing, which can
take years and cost hundreds of millions of dollars. In the pharmaceutical world, what’s more, companies have
chosen to use the potential of new technology to do something very different from their counterparts in Silicon
Valley. They’ve been trying to find a way to serve smaller and smaller markets—to create medicines tailored to very
specific subpopulations and strains of diseases—and smaller markets often mean higher prices. The biotechnology
company Genzyme spent five hundred million dollars developing the drug Myozyme, which is intended for a
condition, Pompe disease, that afflicts fewer than ten thousand people worldwide. That’s the quintessential modern
drug: a high-tech, targeted remedy that took a very long and costly path to market. Myozyme is priced at three
hundred thousand dollars a year. Genzyme isn’t a mining company: its real assets are intellectual property
—information, not stuff. But, in this case, information does not want to be free. It wants to be really, really
expensive.
And there’s plenty of other information out there that has chosen to run in the opposite direction from Free. The
Times gives away its content on its Web site. But the Wall Street Journal has found that more than a million
subscribers are quite happy to pay for the privilege of reading online. Broadcast television—the original practitioner
of Free—is struggling. But premium cable, with its stiff monthly charges for specialty content, is doing just fine.
Apple may soon make more money selling iPhone downloads (ideas) than it does from the iPhone itself (stuff). The
company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone
sales; or it could continue to do what it does now, and charge for both. Who knows? 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. ♦

ILLUSTRATION: RICHARD MCGUIRE

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