Don’t Know Much about E-co-no-my

I have read many studies, articles, books, etc., about how digital technology affects copyright, and I’ve come to a conclusion: the writer’s opinion about the subject is heavily dependent on who he or she is.

This may sound extremely simple-minded, and at the first level, it is.  A musician who wants to quit her day job will care much more about strong copyright than a tenured professor.  A think tank report commissioned by the RIAA will espouse a hugely different position than one from Public Knowledge.

But there are deeper levels to this seemingly inane assertion.  The National Academies’ Impact of Copyright Policy on Innovation in the Digital Era project group was really onto something when it asserted that in order to make progress on digital copyright, emotions and philosophies need to be removed from debate.  As a corollary, those writers who deal as much as possible in hard facts and the real world are more likely to be right than those who deal in abstract principles.

To be specific, I’ve found that economists have the firmest grasp on reality in the digital copyright debate, and they deserve more attention than they are getting.  (Bear in mind that this “insight” comes from someone who took only one economics class in college and did very poorly indeed.)  For example, the academic researcher at the National Academies’ workshop last October who struck me as the most knowledgeable about real-world digital copyright developments was not a legal scholar but the lone economist at the event, Mark MacCarthy of Georgetown University.

The latest example of this is a new book: The Price of Everything: Solving the Mystery of Why We Pay What We Do, by Eduardo Porter, an economics writer for and editorial board member of The New York Times.  This fascinating and meticulously researched book takes a cold, hard look at the economics behind healthcare (what is the value of a healthy human body?), religion (what is the value of believing?), climate change, and other unwieldy topics.

One of his chapters, “The Price of Free,” considers the momentum towards free content on the Internet.  He cites the famous 2007 “pay what you wish” experiment by the rock band Radiohead — and while his immediate observations are somewhat off base, he gets it right by the end of the book.

As an economic thinker, Porter believes in homo economicus, i.e., that people make economically rational decisions.  This leads him to incredulity that 38% of the people who downloaded Radiohead’s In Rainbows album from Radiohead’s site paid more than zero for it.

The Radiohead In Rainbows experiment has become a sort of Rorschach Test for those interested in digital copyright.  Those on the “free culture” side claim that it was a huge success, while those on the “strong copyright” side claim that it was proof that the free content model doesn’t work.  To sum up arguments on both sides, here is a variation of a chart I made for a conference talk last year:

“Free Culture”: It Was a Success! “Strong Copyright”: It Was a Failure!
  • Almost 40% paid something!
  • Over 60% didn’t pay, plus 2 million downloaded it for free illegally in the first month
  • The $2.26 average price paid is about as much as they would have netted from their label anyway
  • This only proves that prices gravitate towards marginal cost of goods sold, i.e. zero
  • And some of these people ended up buying the CD, including the £40 deluxe edition
  • Radiohead could only do this because they were already famous in the first place
  • This raised interest in their other albums and got people to their concerts
  • Plus, they got a ton of free publicity because they were the first to do this
  • They found a way around the big evil record labels and paved the way for future bands
  • So if it was such a success, why did they stop abruptly after only 2 months and refuse to publish sales figures?

Porter ends up deciding that Radiohead could only get away with this because they were already famous — a position similar to that of Jaron Lanier in his book You Are Not a Gadget last year.  To back up this point, Porter finds another case that the free culture types don’t like to talk about: Trent Reznor (Nine Inch Nails) tried a similar experiment, which achieved more or less the same results as Radiohead.  But when he got his friend, the far-less-famous Saul Williams (a/k/a Niggy Tardust), to try the same thing, the results were dismal.

The same could be said of the thousands of unknown indie bands who give their content away on MySpace every day.  Because these artists are unknown, and MySpace gives them “some” exposure as opposed to “none,” Porter finds that giving away content is worthwhile to indie bands.  Yet later in the chapter, Porter predicts that content will ultimately suffer from the move towards free because there will be no way to pay for the cost of its production.

Unfortunately, Porter fails to connect the dots between these two ideas.  Indie bands on MySpace also have to pay to produce their music, though admittedly orders of magnitude less than the cost of a Hollywood movie.  So, just as it is with the free software movement, if you look at it on strict economic terms, indie music on MySpace is subsidized by indie musicians’ day jobs.

So why did 38% of visitors to Radiohead’s website pay more than zero for music they knew they could get legally for free?  The answer is perceived value of content, which has been ingrained in people’s minds (in industrialized societies, at least) over a very long time.  Strong copyright advocates are gravely concerned that such value will erode as the price of music online floats downwards towards zero.  Porter doesn’t cover this at all.

Yet elsewhere in The Price of Everything, Porter deftly analyzes another major area where people pay for intangibles: religion.  People pay for their faiths with money, time, and restrictions on their behavior.  He makes a solid case that religions succeed to the extent that they impose such demands in a cogent way, and moreover that if they relax the demands, they lose adherents.

If one applies this logic to music and other forms of artistic output, the conclusion is inescapable: it must have a perceived value in order to survive.  Content producers do themselves no favors in the long run by allowing that perceived value to erode.  Although Eduardo Porter looks at this argument purely in terms of justifying the monetary cost of producing content in the first place, the overall arguments he makes in The Price of Everything bolster this conclusion.

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