The Price of Everything - Eduardo Porter [63]
The information revolution has even undermined the old economy’s paragon of free media: broadcast TV. An hour-long show on most television networks typically involves forty-two minutes’ worth of programming and eighteen minutes of ads, which are supposed to pay for the show. In 2009, for instance, advertisers reportedly paid about $230,000 for a thirty-second spot on ABC’s Desperate Housewives. At that rate, each of the 10.6 million households watching Desperate Housewives was worth about seventy-nine cents to the network.
Digital video recorders like TiVo that allow viewers to skip commercials threaten to deprive the networks of this money and allow fans to watch shows at no cost in money or time. “Your contract with the network when you get the show is you’re going to watch the spots. Otherwise you couldn’t get the show on an ad-supported basis,” said a frustrated Jamie Kellner, chairman and chief executive of Turner Broadcasting, in a 2002 interview. “Any time you skip a commercial or watch the button you’re actually stealing the programming.” Viewers, of course, have no legal obligation to watch anything. Still, Mr. Kellner accurately articulated the implicit economic trade-off that has sustained broadcast TV. If that falls apart, it will need to fund itself another way.
THE ALLURE OF THE FREE
We can’t have a functioning economy based on free stuff. It would violate an ironclad law of the universe known as “There’s No Such Thing as a Free Lunch.” The term apparently originated in the United States of the mid-twentieth century, when some perspicacious observer noted that the free food offered to patrons at bars and saloons was not really free, but incorporated into the price of drinks. It has found a place in astrophysics, where it means that in a closed universe, as most believe ours to be, you can’t conjure up new matter or energy out of nothing. But it is most important to economics, distilling the very essence of the discipline. The saying means that in a world of scarcity all decisions entail a trade-off. You usually can’t get something without giving up something in return. You might not always recognize the price, but even hidden prices can be high.
Free is precisely the kind of concept that can make us part with our money without noticing that we are doing so. Businesses have long used the device to lure customers to spend. Tricks include the standard “buy one, get one free” and the typical late-night cable-TV pitch, which asks viewers to “call now and get” some free knickknack on top of the advertised product.
Receiving something gratis conjures a sense of indebtedness and incites deep-seated feelings of reciprocity that can be stroked for profit. Sales representatives of the direct sales giant Amway have been known to leave potential clients with a free sample basket of toiletries and other household goodies and return a few days later to make the sale, harnessing the customer’s feeling of obligation. In the 1970s, members of the Hare Krishna Society would give a flower or a small trinket to passersby before hitting them for money. It worked so well that airports where Hare Krishnas operated posted signs and made public announcements to forewarn people about what they were up to with their “gifts.”
Getting something for free adds to its intrinsic value. In an experiment at the Massachusetts Institute of Technology, two thirds of students who were offered a ten-dollar Amazon gift card for one dollar or a twenty-dollar card for eight dollars chose the latter because it provided them with a higher profit. But when the prices of both cards were dropped by one dollar, everybody switched to take the ten-dollar card because they would get it for free, even if choosing the alternative would have netted them thirteen dollars.
The mirage of free is so tempting that governments spend a lot of effort protecting us from its allure. In 1925 the Federal Trade Commission tried and failed to stop the John C. Winston Co. from providing “free” encyclopedias that