The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
The article is here [UPDATE: link fixed]; here is the Introduction:
It is usually a mistake to suppose that a company is the best judge of how its business works. Or that an industry is the best judge of how the industry works. AT&T is a good example. When the Justice Department sat down with management in 1981 to negotiate a breakup of what was then a monopoly provider of telephone service, government lawyers asked which part of the company management wanted to keep after the breakup—the long-distance operations or the regional networks. The long-distance operations had long been the company's most profitable, so management asked for those.
It was a mistake. The long-distance operations had been profitable only because AT&T had owned the regional networks and could use them to deny access to competing long-distance companies seeking to complete calls. Once AT&T had spun off the regional networks, the company could no longer do that. Competitors flooded the long-distance market, driving down AT&T's profits. But the regional networks remained protected from competition thanks to the prohibitive cost of running new wires to individual homes. They flourished. Management had failed to grasp that the real source of AT&T's power was its regional-network monopolies, not its long-distance operations. Two decades later, AT&T was forced to sell itself—to one of the regional networks.
If management sometimes has trouble understanding the value proposition of the single company that it runs, we can forgive newspapers for not understanding the value proposition of the entire industry that they constitute.
Over the past decade, the newspaper industry has been trying to stave off collapse brought on by the very low cost of Internet communication. That low cost has all but eliminated barriers to entry into both the news industry and the broader market for reader attention. That has forced newspapers to engage in ruinous competition for a shrinking share of overall public engagement. In local news markets, the result has been bankruptcy as newspapers' declining share of reader attention has reduced the value of newspapers' main product—advertising distribution—to advertisers. In national newspaper markets, which still attract enough attention to sustain the market, the result has been fragmentation and quality destruction. Newspapers have replaced fact-reporting with opinion-reporting to differentiate themselves in a more viewpoint saturated national conversation and cut costs.
The newspaper industry's response has betrayed a lack of comprehension regarding the source of its misfortune. The industry has responded to the overall decline in its share of reader attention by calling for antitrust action against the Tech Giants—particularly Google and Facebook—which are principally responsible for the decline. But Google and Facebook have prospered because social media is more engaging than newspapers, not because the Tech Giants are monopolies. Whether there is one social media company or hundreds, readers are not going to start substituting more newspaper time for the time they spend on social media. In a fit of blind egomania, the industry has also responded by trying to negotiate payments from the Tech Giants as compensation for their use of links to newspaper articles—part of a broader project of obtaining intellectual-property protection for news articles. But social media has captured the public's attention for reasons other than the opportunity it provides to share news. Accordingly, the Tech Giants are not willing to pay much for the privilege of linking, whether newspaper articles are protected by intellectual-property rights or not. They would do just fine without linking to news. Finally, the industry has experimented with a microjournalism model of subscriptions for independent journalists and niche reporting. But while microjournalism may prevent the total demise of journalism at the local level and stem losses at the national level, high-quality fact production requires scale in newsgathering that is fundamentally incompatible with such decentralization.
To save newspapers, other approaches are needed. Ruinous competition may be addressed by attacking the root of the problem: the low cost of communication. Policymakers could raise the cost of communication by taxing Internet post views at levels just high enough to discourage excessive entry into national news markets and thereby to enable national newspapers to maintain the scale and profitability they need to invest in the production of high-quality investigative journalism. Organizations that cannot pay the tax required to reach a broad audience will be driven from the market. The resulting reduction in competition will alleviate the pressure on newspapers to differentiate themselves through opinion-reporting. It will also drive up revenues, creating both the means and the incentive for newspapers to invest more in fact-reporting. The federal government, in the form of the U.S. Postal Service, already has the tools to impose such a tax by reinterpreting its "letter-box monopoly" to include electronic letter-boxes, allowing the postal service to charge postage for the receipt of electronic communications of any kind.
Internet postage would solve the problem of excessive competition within the newspaper industry but not the problem of competition for reader attention from the Tech Giants that has hit local newspapers particularly hard. Internet postage should not be set so high as to discourage social media use as a general matter, but only high enough to limit the number of users having large numbers of post views. Social media is, overall, a good thing. Taxing it out of existence would therefore destroy value.
To solve the problem of Tech Giant competition, government could adopt a second policy, complementary to the policy of charging Internet postage, that would channel advertising revenues back to the newspaper industry. That policy would be to cap the number of ad impressions that social media companies are permitted to sell per year. Because advertising is ultimately a race to the bottom—firms are compelled to do it to counteract the advertising of competitors—advertisers would respond by shifting their advertising dollars back to newspapers, despite the inferiority of newspaper advertising, in order to keep up with each other. For the same reason, modern militaries would purchase bows and arrows if prevented from purchasing more sophisticated equipment. This race-to-the-bottom characteristic of advertising would, incidentally, allow the government to place a cap on all advertising without reducing the amount of revenue generated by advertising distributors. Because advertising distorts preferences and therefore leads to misallocation of resources, such a cap would improve economic efficiency—and could be piggybacked on policies targeting Tech Giant advertising.
Neither Internet postage nor advertising caps would violate the First Amendment. The Supreme Court long ago ruled that the U.S. Postal Service's letter-box monopoly does not violate the First Amendment because people are free to use alternative means of communication such as placing phone calls, slipping paper under front doors, or making in-person appointments. And advertising caps must pass constitutional muster because, in the information age, advertising's information function is obsolete. Consumers can get all the product information they want from a quick Google search, which they can also use to educate themselves about products that they do not yet know to seek out. Advertising's only remaining function is to manipulate consumers into buying products that they do not prefer. But the Supreme Court has extended First Amendment protection only to advertising that enhances consumers' ability to make independent choices about which products they wish to buy.