The Internet Is Not the Answer (19 page)

Back in 1989, I would often come to Soho, not only to buy and sell music but also to meet with friends who were founding record labels, running clubs, spotting talent, or managing young artists. Like so many other people in my generation, my ambition was to get into the music business. Jaron Lanier describes the future as a theater. But twenty-five years ago, the future looked to me like a concert hall. And I wanted a seat in its front row.

Twenty-five years ago, the future of the recorded music industry appeared as richly abundant as Soho’s cultural economy. “Perfect Sound Forever,” Philips and Sony boasted about their new CD format. And this digital audio technology had indeed triggered a golden age of new labels, genres, artists, and audiences. Technology, it seemed, was a force both for the creative and economic good. Everyone was replacing their vinyl records with the more convenient and cleaner-sounding CDs and the eighties were extremely profitable years for the recorded music industry, creating many thousands of new jobs and investment opportunities. HMV had even invested in the largest music store in the world on Oxford Street, a three-story, 60,000-square-foot building that had been opened by Bob Geldof in a October 1986 ceremony that not only attracted “tens of thousands of people” but also shut down Europe’s major shopping street.
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Back then, the economic promise of the music business certainly offered a vivid contrast to the sad fate of my family’s fashion fabric business. It had gone bankrupt in the mideighties, a victim of rapidly changing technology and fashion. An off-the-rack dress shop had replaced Falbers Fabrics on Oxford Street. Women, it appeared, no longer had the time or interest to make their own clothes—especially given the wide availability of cheap, ready-to-wear clothing now flooding the market. My mom, who never really recovered from the loss of her grandfather’s business, went to work as a lowly sales assistant in a department store. And my dad became a cabdriver, before finding clerical work with a family friend.

In 1989, the writing was on the wall. Both for the music and fashion industries. Or so it seemed back then, anyway.

Business 0.02

My Internet career began in the summer of 1996. It was about a year after the Netscape IPO. I was living in San Francisco and had a job as an advertising salesman at a publication called
Fi: The Magazine of Music and Sound
. Founded and published by Larry Kay, a wealthy music lover and the former chairman of IHOP (the International House of Pancakes restaurant chain),
Fi
had hired illustrious music writers like Gary Giddins, Allan Kozinn, Fred Kaplan, and Robert Christgau to build what Kay hoped would become the
New Yorker
of music commentary.

But when Kay called me into his office one afternoon in the summer of 1996, it wasn’t to talk about music. He was an old-fashioned corporate type, a suit-and-tie kind of businessman, who today would be persona non grata in the Battery. Back then, Kay barely knew how to use a computer, let alone Netscape’s Web browser. He even had his secretary type up his emails when he wanted to communicate electronically with
Fi
’s hip writers. But that didn’t mean he couldn’t talk about the Internet, as everyone in San Francisco was doing by mid-1996.

Kay waved a newspaper article at me. Titled “Business 2.0,” it was one of those breathlessly evangelical,
new-rules-for-the-new-economy-
style midnineties pieces that presented the Internet as a magical place, a promised land in which the old economic rules of buying, selling, and trading no longer applied. With its infinite storage space, infinite opening hours, and infinite global reach, the Web offered
infinite
potential to change everything, the article claimed. By borrowing the same “2.0”-style language that software developers used to describe their products, this article presented economics as if it were software. It imagined that business was akin to an online app and could thus be understood as a cycle of perpetual upgrades, new versions, and fresh releases.

But this interpretation of digital progress was foreign to a seasoned businessman like Larry Kay. “Business 2.0,” he said, shaking his old head wearily at me. “What the
hell
does that mean?”

In the summer of 1996, everybody in San Francisco—with the exception of a few “Business 1.0” dinosaurs like Larry Kay—believed in the future of a networked economy. None of us really understood what evangelical terms like “Business 2.0” meant, but we were all seduced by their seemingly infinite promise. Especially me. So, in answer to Kay’s question, I pitched him all the standard clichés of the time about the economic potential of the Web. I explained how it was an “interactive” and “frictionless” medium for distributing content in which large media companies would be “distintermediated” by agile Web startups. Quoting Web idealists like John Perry Barlow, I promised the magazine publisher that “information wants to be free,” although I had no evidence that information had volition and could demand its own emancipation. Most of all, I presented the Web as a virtual Soho. The Web would create an “abundant” cultural economy, I promised, a cornucopia of music, photographs, writing, and movies where everyone would eventually be able to see, watch, and read anything they chose.

The pitch launched my Internet career. Larry Kay put me in charge of establishing a Web strategy for
Fi
. A few days later, he called me back into his office. Kay had made his fortune selling scrambled eggs and buttermilk pancakes to hungry Americans, so he remained perplexed by the Web’s slippery economics.

“This Business 2.0 thing,” he asked, looking at me quizzically, as if there was something blatantly obvious that he’d somehow missed. “How do we make money out of it?”

By now, I’d become an expert on the economics of the Internet. At least in theory. “Advertising,” I explained, forgetting the
buy, sell, trade
principles I’d learned in Soho. “All the revenue, Larry, is in advertising.”

It wasn’t hard to be an Internet expert back then. Especially in theory. In the first Web gold rush of the midnineties, nobody—except Amazon—was selling anything online. Even advertising. The traditional
buy, sell, trade
principles of conventional business had been replaced by a “giveaway” economy. The point was to get your content online and give people everything that they wanted. “Eyeballs,” as everyone described audience, were the holy grail; the more eyeballs, everyone assumed, the more revenue. It was taken for granted, treated as a matter of faith, like believing in Santa Claus or Webvan, that the advertising revenue would eventually flow from eyeballs. And we were all doing our best imitations of Santa Claus back then. Every website—from Netscape and the
New York Times
to Yahoo—was giving away its online product to “consumers” for free. It was a gift economy—all gift and no economics. As if every day were Christmas.

Chris Anderson later wrote a book in support of this “economy.”
Free: The Future of a Radical Price
,
it was called, even though Anderson’s publisher did have the good sense to charge $26.99 for
the book. And, it almost goes without saying, Anderson himself was well compensated for writing this seductive nonsense—getting a reputed $500,000 advance on future sales of a book that advised fellow writers they could build their “brands” by giving away their creative work for nothing on the Internet.

After a few months, I caught the full startup virus and left
Fi
to launch my own Internet company, AudioCafe. It was an easy virus to catch, especially given all the investment money suddenly sloshing around San Francisco. Back then, it really did seem as if the Internet was the answer. The Web “changed everything” about the music industry, I promised my investors. It created a global distribution platform for music, it empowered bands to record and distribute their own creative work, and it revolutionized the physics of merchandizing, I explained. Above all, by turning atoms into bits, the Web did away with scarcity and made music infinite, limitless, and abundant. Whereas those music stores on Berwick Street were physically constrained in how many CDs or vinyl records they could carry, a website could, in theory, carry all the music in the world. And so AudioCafe was designed as an online combination of a Soho club and store, a place to read reviews, listen to music, and interact with musicians. We hardly had any revenue. But we did have eyeballs.

“Advertising,” I promised all my investors, when asked about the source of future revenue. Ironically, having escaped my print advertising salesman job at
Fi
, I was now back to being an online advertising salesman as the CEO of an Internet startup. The only difference was that it was much more challenging to sell online than in print. Rather than Business 2.0, the Internet of the late nineties was actually Business 0.02. As Jeff Zucker, then CEO of NBC Universal, said, selling online advertising was like “trading analog dollars for digital pennies.”
⁴

And that was on a good day, when pennies could be extracted from advertisers still unconvinced of the value of the new medium.

The Catastrophe of Abundance

One afternoon in the fall of 1999, I got a phone call from a journalist at
a new magazine called, appropriately enough,
Business 2.0.
“What do you know about Napster?” she asked. “Is it a game changer?”

More than a “game changer,” Napster was a game breaker. It represented the logical conclusion to the Web’s Santa Claus economics, the Internet’s original sin, where “consumers” were treated as spoiled children and indulged with an infinite supply of free goodies in what the
New York Times
’ media columnist David Carr calls the “Something for Nothing” economy.
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Founded by Shawn Fanning and Sean Parker in 1999, Napster enabled what is euphemistically known as the peer-to-peer sharing of music. Fanning and Parker took Chris Anderson’s advice about the
radical
value of “free” to its most ridiculous conclusion. Not merely content to give their own stuff away for nothing, Napster gave away everybody else’s as well. Along with other peer-to-peer networks like Travis Kalanick’s Scour and later pirate businesses such as Megaupload, Rapidshare, and Pirate Bay, Napster created a networked kleptocracy, masquerading as the “sharing economy,” in which the only real abundance was the ubiquitous availability of online stolen content, particularly recorded music.

Over the last fifteen years, online piracy has become an epidemic. In a 2011 report sponsored by the U.S. Chamber of Commerce, it was estimated that piracy sites attracted 53 billion visits each year.
⁶
In January 2013 alone, the analyst firm NetNames estimated that 432 million unique Web users actively searched for content that infringes copyright.
⁷
A 2010 Nielsen report estimated that 25% of all European Internet users visit pirate sites each month,
⁸
while a 2012 study funded by the United Kingdom’s Intellectual Property Office found that 1 in 6 of all British Web users regularly accessed illegally streamed or downloaded content.
⁹

Such “abundance” has had a particularly catastrophic economic impact on the music industry. Back in the late nineties, just before Fanning and Parker created Napster, the global revenue from the sale of music CDs, records, and tapes reached $38 billion, with US sales being almost $15 billion. Today, in spite of the appearance of legal online sales networks like iTunes and streaming services like Spotify, the music industry’s global revenues have more than halved, to just over $16 billion, with American sales shriveling to around $6 billion.
¹⁰
Digital sales have made little difference to this decline. In fact, even digital sales fell by 6% in 2013.
¹¹

No wonder that 75% of the record stores on Berwick Street’s Vinyl Mile have closed since 1990. Or that the world’s largest music store, HMV’s retail outlet on London’s Oxford Street, finally shut its doors in 2014, giving us one more reason not to celebrate the twenty-fifth anniversary of the Web.
¹²

But it’s not just the music industry that is mortally threatened by piracy. Two thousand fourteen saw the launch of Popcorn Time, a Napster for movies that offers a decentralized peer-to-peer service for illegal streaming. Cloned to appear like Netflix, Popcorn Time has already been translated into thirty-two languages and offers what one analyst described as a “nightmare scenario” for the movie industry.
¹³
The Buenos Aires–based makers of Popcorn Time claim to have invented the service for the convenience of consumers. But the more subscribers Popcorn Time steals from Hulu and Netflix, the fewer resources moviemakers will have to invest in their products. And, of course, the more we use peer-to-peer technologies like Popcorn Time, the emptier movie theaters will become. In 2013, there was a 21% drop in the number of what
Variety
calls the “all important” 18–24 age group buying tickets to watch movies.
¹⁴
With the popularity of products like Popcorn Time, expect that number to plummet even more dramatically in the future.