Giving it all away

By Richard Adams (THE GUARDIAN, 02/09/06):

Next week London will enjoy an old-fashioned newspaper war, a throwback to the golden age of print when Joseph Pulitzer and William Randolph Hearst battled over the streets of New York. Dirty tricks, turf battles, spoilers and a sprint to be number one, it has it all – except for something that would baffle Hearst and Pulitzer. Both the new evening papers – Associated Newspapers’ London Lite and News International’s The London Paper – will be given away for free.

Free newspapers in themselves are nothing new. People in Newcastle, Leeds and Cardiff, as well as London and other big UK cities, are used to getting them every day. But the trend towards free doesn’t stop at newspapers. It’s hard to move these days without being offered free broadband services by a telephone or satellite operator. Google this week announced free books were available through its special search feature, allowing users to download complete copies of out-of-copyright titles “to read at your own pace”, in Google’s words. Even charities these days rarely ask for money without enclosing a free pen.

The attraction of having something for nothing is as strong as it ever was, and perhaps even stronger. It is a cliche of the advertising industry that two words in particular have real power to connect with consumers: “new” and “free”. While that remains true, consumer access to digital technology has opened up whole vistas and opportunities for goods and services to be made free.

The advent of the internet allows the contents of newspapers to be distributed for nothing – which is the main reason why London will be having its free newspaper war next week. No one in their right mind in Britain would launch a paid-for paper aimed at a general readership, not only because competition from freely distributed news sources over the web is too fierce but also because the web will increasingly soak up advertising. The decision of the Rothermeres and Murdochs of this world to give their product away represents an attempt to join rather than beat that trend.

There is, though, something in human nature that derives particular pleasure, and even some guilt, at the idea of a free, unearned benefit. That impulse is so powerful it will often overcome our everyday morality. The desire to have something for free, if given the opportunity, will assert itself in surprising ways and produce surprising results.

Thus it is disturbing to think that the least trustworthy group of people in society may be older people who go to church every week. In most cases, the elderly and churchgoers would intuitively be regarded as among the most trustworthy of citizens. But that is not what researchers at the University of Innsbruck found. In a recent study, they discovered that men aged over 50 and regular church attendees were the most likely to steal if the opportunity presented itself.

Austria’s retailing laws are such that selling newspapers on a Sunday is difficult in some regions, so publishers instead put stacks of their papers in the street along with an honesty box for payment. Anyone can take a newspaper for free, with zero possibility of punishment. The researchers secretly monitored who took newspapers and how much they paid, and later interviewed the “buyer” on entirely unrelated subjects to gather demographic data.

What their survey discovered was that, overall, nearly 40% take the Sunday paper for free, while 61% paid something – although only 19% paid at least the cover price of 60 cents, or 40p. The average payment was 22 cents. The detailed breakdown showed that men, those aged over 50 and, most clearly of all, regular church attendees, were the most likely to help themselves – together with a less surprising category of those who said they were willing to cheat on paying taxes.

Yet personal income had no impact on whether a reader was prepared to steal the newspaper, and neither did the subject’s level of education or willingness to donate to charity, suggesting that our desire to have things for free cuts across financial and social boundaries. (Smokers, for some reason, were among the least likely to steal a newspaper.)

A different version of the desire for free could be seen in the great DVD movie giveaway that has seized British newspapers in recent years. More movies were given away in the past year than were rented. Newspaper sales did go up, but as Rupert Murdoch said: “I hate this DVD craze. The sales go up for a day. And are right back to where they were the following day.” Even worse, he thought, was the way the practice actually degraded perceptions of the product it was meant to support: “People grab the paper, tear the DVD off and throw away the paper,” in the magnate’s words.

Not only did buyers devalue the newspaper, but anecdotal evidence suggests that many of those giveaway DVDs still sit, unwatched, in homes around the country. Customers might be prompted to buy a copy of a newspaper because of a “free” DVD but end up valuing neither the newspaper they have paid for, nor the movie they have got for nothing.

Part of this issue of degradation lies in our perceptions of what is free and what it means, and how we value what is given away. The most intriguing free offer this week, other than Google’s free book downloads, was a new music download service named SpiralFrog.com, backed by Vivendi Universal and likely to include music from some of the world’s most popular artists, including Eminem and Kaiser Chiefs. The unique selling proposition of SpiralFrog is that it doesn’t sell anything: it will offer free music downloads over the internet in return for users sitting through advertisements on the site.

In essence, SpiralFrog is no different to the free newspaper or mainstream commercial television model. You may think you watch Coronation Street for free – although you do need a television set, an aerial, electricity and a TV licence, at a minimum – but of course you get it in return for allowing advertisers to attempt to influence you, a tax of sorts and one that may also be paid for through higher prices for advertised products and services.

Despite the well-established business model Spiralfrog relies on, it doesn’t take a business genius to predict the site will fail to be a commercial success. Why? In the first place, the dotcom boom of the late 1990s saw a number of companies attempt to use the same idea without success: there were internet service providers that even gave away personal computers in return for customers signing long-term connection contracts, and other ISPs that offered free internet access in return for viewing ads. None succeeded.

But the real reason why SpiralFrog stands to lose is that the public are already getting their music for free, using both legal and plainly illegal means. The paradox here is that SpiralFrog’s backers think offering free downloads is an antidote to the rampant piracy and copying in pop music. Its executives were last week quoting statistics that 70% of 16- to 24-year-olds now downloaded music online, but that, incredibly, only one in 40 tracks was legally paid for.

However, if that ratio, of one track bought for every 39 pirated, is accurate, then even SpiralFrog doesn’t stand a chance. Why bother sitting through 30-second advertisements when it is so easy to get the same thing entirely for free elsewhere? The reason the music industry is continuing to struggle – despite the recent popularity of the iPod and Apple’s associated, paid-for iTunes music library – with the issue of free music is that it made some terrible mistakes at the dawn of the dotcom era. In the 1990s, its key customers, those 16- to 24-year-olds, were way ahead of the industry in their use of the internet and computers. They saw and adopted the music-sharing possibilities of the Napster website – which allowed users to share music on members’ computers – far more quickly than music industry managements. So slow-witted was the mainstream business that the first authorities to take any action against Napster were US universities, forced to choke off access to the site because of the huge strain it was putting on their campus computer networks.

By the time the industry reacted effectively, shutting down Napster through legal means and starting downloading services of their own, it was too late: a generation had been raised on unlimited free music. Now they expect music to be freely available, and so are not troubled by any moral taboos. Still less are they impressed by the industry’s inaccurate mantra that copying music is theft.

Underneath the industry’s fears about free music, there is the irony that the great Napster giveaway years also coincided with rising sales of CD albums. Legal action shut the website down in the middle of 2000, followed by crackdowns against other file-sharing services. Yet it was not until 2003 that album sales were falling steeply. The most likely explanation is that Napster actually allowed people to listen to a far wider range of music than they otherwise would have been exposed to. Rather than devalue the experience, as the DVD giveaways appear to have done, many music downloaders appear to have gone out and bought the back catalogue on CD of artists they particularly liked.

The music industry’s great fear is the same as that of a bus company or railway operator. Illegal downloaders don’t pay any copyright fees or royalties. In economics, those who prefer to take what others choose or are forced to pay for are known as “free riders”. The free-rider problem is that, as rational agents, individuals are expected to prefer a free ride to one that they pay for. If too many customers or actors are allowed to have a free ride, however, then the service being provided will fail to pay for itself or make a profit, and will eventually be halted as uneconomic. The Nobel laureate Amartya Sen describes these free riders as “rational fools”, because their egotism will eventually make everyone worse off.

The burden of free riding is one of the explanations for the old saying, used by the economist Milton Friedman as the title of one of his books, that there is no such thing as a free lunch. Surely this spells disaster for newspaper publishers, record companies, book publishers – the content providers who are being pushed by the combination of new technology and commercial pressures to give away what once they sold?

Not necessarily. For even when there is the literal possibility of a free lunch, human nature’s better instincts can shine through in a way that suggests people are able to recognise the potentially destructive implications of free riding. The economist Steven Levitt’s research, popularised in his book Freakonomics, includes the case of the Washington bagel distributor. Similar to the Austrian newspaper, the bagels were distributed to offices in the US capital with an honesty box payment system. Each morning the “bagel guy” would deliver fresh bagels and collect the takings from a cash box. He could not monitor payment and only had the threat of withdrawing the bagels to enforce it.

The bagel man kept meticulous records over the years about theft, and noted a decline in honesty to the point in the middle of 2001 where 13% of bagels were stolen each day. His figures showed no difference in offices where employees had government security clearance, and a higher rate of theft the higher up the executive ladder the offices were, and more theft in bigger offices, where employees are more anonymous, than small ones. But things changed on September 11, 2001: honesty rates shot up by 15% and have stayed higher ever since.

The Innsbruck university researchers found a similar effect in Austria. They experimented with different signs to see what effect it would have on newspaper sales. One bluntly stated “Stealing a newspaper is illegal”, while the other was more gentle, saying: “Thank you for being honest”. The number of newspapers stolen remained the same using both signs (and a control with no sign). But what did change is that the “Thank you for being honest” sign saw a larger payment from those who did pay: the average more than doubled from about 16 cents to 38 cents.

The bagel and the newspaper examples suggest that appeals to better nature do make significant differences to our perceptions of not just what we can get away with but how we value things. There will always be a certain percentage of the population that wants free DVDs, newspapers, music downloads and bagels, and there isn’t much to be done to affect them. But the majority can be persuaded otherwise, and this implies that CD sales and paid-for newspapers still have a future. Rather than simply give away newspapers on the streets of Britain, their owners would be better off pretending people should pay for them.