The Knockoff Economy (30 page)

The Arclight, and theaters like it around the nation, are far from the norm. Yet they have successfully capitalized on the experiential nature
of film. Rather than a product, film becomes a performance. By making the experience one that is very costly to replicate at home, the central good being consumed—the film—becomes just one part of an overall package.
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And in turn, that means that copies of the film are copies of but one facet of the overall experience, and therefore are no longer perfect copies, but instead imperfect—and, to many, much less attractive.

The same dynamic helps explain how in the music industry, the record labels can be imploding while the business of live performance is thriving. Live performance cannot be copied in the way that recorded music can. It is true that tribute bands exist, and so in a sense there is a market, albeit very small and quirky, for “copies” of live performance. And there are videos and films of live acts. But no one is going to mistake Mandonna (an all-male Madonna tribute band) for Madonna,
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and no video can substitute for the energy or sound of a live concert. Listening to a CD or MP3 is not at all the same thing as going to an actual show. Again, energy, experience, environment—these all are central to performance and cannot be bottled and sold (or digitized and copied) the way a simple song can.

In short, as perfect digital copies proliferate there is a countervailing trend in favor of the unique experience of live performance. In the motion picture industry, reinforcing the desirability of the “live” theater performance feeds Hollywood’s box office revenues—which, despite rising worries about copying, reached their all-time high in both 2009 and 2010, in the middle of a major recession, of approximately $10.5 billion in revenues in the United States alone.
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In the music world, the major record labels do not have much of a stake in the live performance business. As a result, they cannot (at least yet) recover lost revenues from recorded music via the healthy live performance segment of the industry.

That is unfortunate for the record labels. But the music industry as a whole is not dying; it is changing. Unlike the recording industry, which is shrinking fast, the live music business is growing. Millions of people every
year attend concerts, and between 1999 and 2009, even as the record labels’ revenues were plummeting, concert ticket sales in the United States more than tripled in value, from $1.5 billion to $4.6 billion. Total revenues from live shows grew from $7.3 billion in 2006 to $10.3 billion in 2011.
¹⁹

The importance of concert revenues to music is nothing new; for most of history the live show was the musician’s main source of support. That point was made with terrific clarity by Mick Jagger in a recent
New York Times
interview:

There was a window in the 120 years of the record business where performers made loads and loads of money out of records,” Jagger says. “But it was a very small window—say, 15 years between 1975 and 1990.”
²⁰

As the
Times
article noted, touring is now the most lucrative part of the Rolling Stones’ business. (The “Bigger Bang” tour, from 2005 to 2007, raked in $558 million, making it the highest-grossing tour of all time.) The band has also been forward thinking about other pieces of the business, including recruiting sponsors, selling song rights, and flogging merchandise. And this strategy has made it very rich. “The Stones carry no Wood-stockesque, antibusiness baggage,” a
Fortune
magazine profile noted approvingly back in 2002.
²¹

Performance is of course no guarantee of riches. Revenues from touring can be erratic, and most of the biggest grossing tours feature well-established acts. For these acts, however, recordings are but a tiny fraction of their earnings; economist Alan Krueger found for 35 top-earning acts in 2002, live concert revenues exceeded recording revenues by a factor of almost 8 to 1.
²²
Figures for acts in the middle of the pack are harder to come by, but there is at least some reason to think that concert revenues are larger than recording revenues for these performers as well.
²³

Growing the live music business is an obvious way to make the industry as a whole less vulnerable to piracy while remaining profitable. There is no good way (yet) to “pirate” a live show.
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The importance of touring to the industry’s post-Internet fate is illustrated by a recent comment
David Bowie made in an interview with the
New York Times:
“Music itself is going to be like running water or electricity. You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left.”
²⁴

The important point is that concerts are far less vulnerable to copying. And copying plays a very different role in a world in which the primary product is performance. As Sasha Frere-Jones, music critic for
The New Yorker,
has noted, increasingly “recordings have become advertisements for shows.”
²⁵
This spurs some artists to give away recordings, and makes the impact of illegal copies very different: an illegal copy or a free giveway can be equally powerful ads for the real product—the performance. And like any ad, the more widely it is heard or seen, the more effective it is.

This is not just true of music, dance, or other obviously performative arts. The more a given creation can be transformed from commodity to experience, from product to performance, the more innovators can effectively ignore imitators. Think back to the Kogi taco truck story that we told in the Introduction. Kogi was an innovator in several respects: it fused Korean and Mexican food, upscaled the lowly food truck, and used Twitter and face-book effectively as marketing tools.

But Kogi’s fundamental product was the Korean taco, and that was soon knocked off—legally—by a rash of imitators. What made Kogi remain a formidable competitor was not just that it was the first, and most famous, Korean taco slinger. It was also that (at least initially) finding the Kogi truck and joining the crowd in line was an experience as much as a meal. A stylized picture on Kogi’s Web site evokes the late night party vibe that made Kogi such a hit:

FIGURE 5.1 Kogi website image

Kogi’s legion of copycats may make a decent short rib taco, but they have never been able to quite match the Kogi experience.

In his brilliant 2009 book
Drive,
Daniel Pink offers a fascinating thought experiment. Pink asks us to travel back to the last millennium—to 1995, to be exact—and to imagine a conversation about, of all things, the future of encyclopedias. He starts the conversation by describing two new encyclopedias that are about to hit the market:

The first encyclopedia comes from Microsoft. As you know, Microsoft is already a large and profitable company. And with this year’s introduction of Windows 95, it’s about to become an era-defining colossus. Microsoft will fund this encyclopedia. It will pay professional writers and editors to craft articles on thousands of topics. Well-compensated managers will oversee the project to ensure it’s completed on budget and on time. Then Microsoft will sell the encyclopedia on CD-ROMs and later online.

The second encyclopedia won’t come from a company. It will be created by tens of thousands of people who write and edit articles for fun. These hobbyists won’t need any special qualifications to participate. And nobody will be paid a dollar or a euro or a yen to write or edit articles. Participants will have to contribute their labor—sometimes twenty and thirty hours per week—for free. The encyclopedia itself, which will exist online, will also be free—no charge for anyone who wants to use it.
²⁶

And then Pink says that in 15 years—that is, in 2010—one of these two will be the biggest and most widely used encyclopedia in the world, and the other will no longer exist. Which is which?

You already know the answer. Microsoft shuttered its proprietary encyclopedia, Encarta, in 2009. The all-volunteer, open-source Wikipedia, on the other hand, has grown like kudzu. At its peak, Encarta had entries on approximately 62,000 subjects. Wikipedia currently has nearly
20 million
entries, all of them written and edited collaboratively by more than 90,000 volunteer contributors around the world. It is estimated that Wikipedia receives almost 3 billion page views monthly from the United States alone. It is not just the world’s leading encyclopedia. It is, for anyone under 30, practically the only reference source they have ever used.
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In 1995, of course, virtually no one would have predicted the stunning success of Wikipedia. Most people would have assumed that Microsoft’s encyclopedia, backed by millions of dollars of investment from one of the world’s largest companies and protected by copyright (facts are outside copyright’s domain, but copyright does protect the particular way in which an encyclopedia entry is written), would win out over a start-up enterprise that seemed pretty flaky and even vaguely communist.

Wikipedia doesn’t charge for access, doesn’t pay contributors, and doesn’t take advertising. It relies on voluntary contributions. And Wikipedia
invites
people to copy and to edit the content that their volunteers create—the Wikimedia Foundation licenses, free of charge, all Wikipedia content to whoever wants it. In exchange, users must agree to give Wikipedia credit if they publish that content, and to allow others to share whatever they take, including any content they’ve adapted, according to the same conditions. Yet Wikipedia beat one of the world’s most successful firms, Microsoft, at a game Microsoft was determined to win.

Wikipedia is just one example of a much larger method of innovation: what is usually known as
open source.
Open source is most famously associated with computer software, that is, software developed mostly by volunteer programmers who work without prospect either of salary or—importantly—legal rights in the code they create. (Yochai Benkler and others have written in detail on the stunning success of open-source software.)
²⁷
Open-source software is usually licensed in a way that allows users to tweak it, but bans any attempts to monopolize the code through copyright law. These licenses turn copyright on its head, encouraging copying and blocking ownership.

Open source is important to this book for two reasons. First, it is another very important area in which creative people engage in significant, persistent innovation despite the fact that their work may be copied. Indeed, they
want
it to be copied. But second, open source represents a broad method of creation—open, collaborative, intrinsically focused on sharing—that we find present in some unusual places, such as top restaurant kitchens.

Let’s step back and look at the story of open-source software a bit more closely. After a quarter century of enormous growth, there’s no longer a serious question that the open-source model works. Mozilla Firefox, the world’s second largest browser with over 150 million users, is open source. So is the Linux operating system, which is running on about 25% of all corporate servers. Over half of corporate servers run Apache, the open-source
Web server software. And these are just a few of the many thousands of open-source projects.

What makes software “open source”? The best way to explain it is to distinguish between software that your computer can understand, versus software that
you
can understand. When you purchase a piece of commercial software (say, Microsoft Office) you get the
object code
—the strings of 1s and 0s that your computer understands but you do not. In contrast, when you download open-source software, you get both the object code and the
source code
—that is, human-readable computer code that underlies the object code. Reading source code is a bit harder than reading this book (we hope). You need to understand the computer programming language in which the source code is written. But millions of people do.

Open-source software distributors reveal the source code deliberately. They want you to understand the software, and crucially,
they want you to improve it, extend it, and tweak it.
That’s the point of open source—to keep software code
open,
which really means free of restrictions on copying and improving. Open-source proponents believe—with much justification—that copying and modification can spur, not just retard, creativity. Openness leads to more innovation and better software.

How is open-source software better? For one, it’s usually free. One consultancy has estimated that open source has saved consumers about $60 billion.
²⁸
But the cost savings, even though substantial, are not the principal benefit. More important is open-source software’s transparency and quality. Since everyone can see the source code, anyone can improve the software. And many people do. In other words, open source is an example of how, to use the phrases we employed in the last chapter, tweaking can be as important as pioneering. Pioneers come up with big ideas. But very often pioneering inventions require extensive refinement—tweaking—to actually reach the marketplace, and even more refinement to become truly effective and successful.