My friend Alex Singleton points me to this essay on the “free lunch economy.” Madsen Pirie uses the clever example of matches to illustrate the trend of more and more things being made available to consumers at zero cost:

When George Orwell was Down and Out in Paris and London, he observed that homeless people, then called “tramps,” would pick cigarettes from the gutter and sometimes roll their own from the residual tobacco (there were few filter tips in his day). The problem was matches; these were a valuable commodity among the destitute community, for few would spend the few coppers a box cost, even if they had the money. Now, of course, free matches are widely available, and not as many people buy them. They use free boxes which carry advertising, or they use cheap disposable lighters at a tiny fraction of what a lighter used to cost.

This is obviously a genuine trend, especially online. We’ve come to expect search engines, web browsers, blogs, phone calls, and many other digital products to be available to us for free. The marginal cost of such products has become so low that many firms have found that they can sustain their business models with just a trickle of advertising.

Some people have also come to expect music and movies for free:

Record companies made money by selling at several pounds each pieces of plastic which cost pennies to produce. The value lay in the intellectual property. The physical object that changed hands in the form of a vinyl disc, a tape, or a CD, was the way value was exchanged. The rise of the personal tape recorder caused some concern, because teenagers didn’t regard it as stealing to copy a friend’s music. Record companies began insisting that DJs talk over the opening of the records they played so that listeners could not record a “clean” copy.

The rise of the internet and of file sharing caused a major change in the dynamics of that market. Purchasers, many of them young people anxious to stretch their pounds, found they could share files with each other, and that advancing technology gave them top-quality copies. Music sales went into decline, and there were fears for the industry itself. The solution has been paid-for downloads such as those bought through Apple’s iTunes. Purchasers have been found to be ready to pay a small sum to download legally, with increased numbers of them making up the lower price they pay. The music industry is breathing more easily, but no one doubts that it was the free product which forced the change.

Unfortunately, the author doesn’t seem to notice that this is a fundamentally different phenomenon. Google gives its search engine for free on purpose, and they have a business model that allows them to profit from doing so. One reason they do so is because other search engines are also offering their own product for free. Market competition keeps the price at zero.

The music example is quite different. In that case, what’s driving the price down isn’t competitors offering their products at a lower price, but consumers simply taking the products without paying. Whatever the ethics of the situation (I tend to think taking music you haven’t paid for is wrong) what’s clear is that the economic dynamics of this situation are rather different. The reduced price doesn’t necessarily reflect reduced costs on the part of the music industry, and so there’s no reason to think that the resulting revenues will be sufficient to support continued music creation. We might end up in a situation where there are so many free-riders that the music industry is forced to dramatically cut back its activities.

I happen to think that in the long run, the market price for most music will be zero. That’s because music is rapidly getting less expensive to produce, and there are probably thousands of people who would gladly produce music gratis if only they could get a substantial audience, just as there are millions of bloggers who give away their blog posts for free. But that doesn’t mean that musicians shouldn’t be free to charge for their music if they want to. And I don’t think the increasing tendency of people to take music without paying for it is anything to celebrate. It’s certainly not “market competition” as we ordinarily understand the term.

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Mike from TechDirt has done a thorough write-up of last week’s copyright conference at the Cato Institute. It’s a fair assessment of things, but naturally skewing toward his perspective, which was a welcome contribution to the event. One can’t help but suspect that the length of his assessment is due to the fact that he had a whole bunch of time on a plane returning to California, when he could have been networking.

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Here’s David Levine’s response to the King Kong question:

The short response is pretty simple: until they lost the VHS tape case, the only source of revenue for movies was for theatrical releases. Even if DVDs can be freely copied and given away for free, the revenue from theatrical releases can still sustain large scale productions. The key point is that it is wrong to focus on the copies to which copyright applies as the sole source of revenue to pay for creative efforts. Open source software works because the complementary good produced – “expertise” – in the process of producing software, is scarce and so commands a premium in the market. So even if copies generate little revenue, as long as something else complementary is scarce, there is still a revenue source to pay for creation. In the case of movies the obvious candidate is theatrical sales.

I don’t think this works because the scarcity of theater viewings is based on the fact that most movie theaters still rely on primitive 20th century technologies to play movies. Canisters with photographic film in them are bulky, expensive, hard to steal, and difficult to duplicate if you don’t have the master. So it’s reasonable to expect that you can protect all (or virtually all) the film copies of a movie from piracy, and thereby ensure that only authorized theaters can offer customers the big-screen experience.

But this is changing fast. As projector technologies improve and bandwidth costs fall, theaters will increasingly move to all-digital distribution technologies. A theater will download a (probably encrypted) copy of a movie from the studio and play it on a high-end LCD projector. Once that happens, the task of preventing leakage without the benefit of copyright would become all but impossible.

Here’s how I imagine the theater industry would work in a copyright-free world: There would be large chains of pirate movie theaters, who specialize in showing bootleg copies of movies. They offer large cash payments to anyone who can slip them a pristine, illicit copy of the copyrighted movie. Once they get the copy, they redistribute it to all the theaters in their chain, and begin showing the movies for free (they can make the money up on popcorn).

Now, the relevant question is how quickly the pirate theaters could get their hands on the movie? In the status quo, the peer-to-peer networks generally have copies of movies (albeit far from perfect) before the theatrical opening, leaked by studio insiders or people who went to previews. Clearly, the studios would tighten up their operations, but on the other hand there would also be a much stronger financial incentive to pirate, since the illicit copy would be so valuable. So it’s hard to predict with any precision whether leaks would become more or less common.

But the important point, I think, is that a lot of big-budget movies would leak within weeks, if not days, of their release. That would mean two things. First, the window of opportunity for charging full freight on them would be rather short. For the majority of movies, opening weekend would probably be the only weekend in which authorized theaters would have exclusivity. Secondly–and more devastatingly–consumers would know that if they waited a week or two, they would be able to see the movie for free. So even if you did have a monopoly for a week or two, you’d only get the consumers who were aching to see your particular movie. Most consumers would simply wait the extra week or two when it would be available for free.

So I don’t think I buy it. In the absence of copyright, I think it’s unlikely there would be any movies with 9-figure budgets. We can debate whether that’s a bad thing (I think it would be for reasons I hope to lay out in a future post) but I think that’s definitely what would happen.

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Wednesday’s Cato conference Copyright Controversies: Freedom, Property, Content Creation, and the DMCA has been posted on the Web in various formats for your viewing and listening pleasure. Interesting ideas and moments abound.

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