Finally, a smart person who is widely considered cool calls B.S. on Chris Anderson's popular argument that everything should be free.
Here's an excerpt from Malcom's New Yorker piece pointing out the flaws in Chris's argument. Malcolm was paid to write the piece, of course. Handsomely. As was Chris for writing his bestseller:
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.
That's the first problem with the "free" argument: Cost of Goods Sold. When you're a few guys in a band who can record a song for $10,000, you can afford to give the song away for free and live off the t-shirt sales. When you have to fork over hundreds of millions of dollars in bandwidth and licensing costs, however, it's a different story. Ditto for a cable provider that has to build and maintain a coax network to deliver all that "free" TV content to your house. Or, for that matter, all that high-speed bandwidth.
Malcolm also targets another problem with the "information wants to be free" argument: It doesn't work when applied to small, high-value market opportunities.
Huffington Post works as a "free" business because it produces low-cost content of interest to a vast number of people. An obscure academic journal, in contrast -- one that publishes detailed, sophisticated information of interest to a few hundred experts -- would never be able to sustain itself by going free. The same goes for other information-based products, such as targeted pharmaceuticals:
"The more products are made of ideas, rather than stuff, the faster they can get cheap," [Anderson] 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...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.
So, yes, some information that you used to have to pay for will become free. And some companies that used to make a big, fat living charging you for that information are now headed for extinction. But you'll keep paying through the nose for some of the stuff you really want or need.
Read Malcolm's whole argument here.