July 2005

We all know how governments enjoy levying “sin taxes” on alcohol and tobacco, so it shouldn’t be at all surprisingly that someone is now proposing to impose one on online porn viewing. Sen. Blanche Lincoln, (D-Ark.) is apparently going to drop a bill next week that would impose a federal excise tax on transactions with for-profit adult Web sites.

I am not about to pen a defense for those people who spend endless hours looking at dirty pictures online, but I really do believe this bill has got to be the silliest idea to come out of Congress in a long time. Specifically, it once again proves that most members of Congress have absolutely no appreciation for what sort of enforcement difficulties they are up against in terms of regulating the Net and online content.

After all, just because a website is for-profit, it doesn’t mean it will be easy to impose such a tax scheme. The tax evasion possibilities here are endless, especially considering how much activity originates overseas. How will the tax be reported? What kind of enforcement regime will be necessary to even collect a small percentage of these taxes? In a world of anonymous electronic transactions, I just can’t see how enforcement would work. I guess Congress could force credit card companies to somehow become their deputized policemen and make them figure out when people are viewing online porn. Of course, there are some serious privacy issues at stake there and there’s still little chance that even the financial intermediaries will be able to track everybody down. Moreover, why should financial intermediaries be forced to become the henchmen of the State in terms of enforcing morality?

Of course, I’m just focusing on the enforcement problems with this measure. I haven’t said a word about the many ways in which this is likely unconstitutional as well. The courts have struck down just about every other effort to regulate online content, so I have a difficult time believing that they’ll allow this one to stand for very long. Taxes on speech have been found to be every bit as unconstitutional as direct speech controls. So this bill is doomed in my opinion.

(By the way, time for a shameless plug… This issue was the subject of my fourth book, Who Rules the Net? Internet Governance and Jurisdiction. Make sure to check our Robert Corn-Revere’s chapter in this book if you are interested in learning more about this subject: “Caught in the Seamless Web: Does the Internet’s Global Reach Justify Less Freedom of Speech?” Here’s another version of it online.)

A La Carte Nonsense

by on July 26, 2005 · 6 comments

I’m not too surprised to see populist interest groups on the right and left jump on an intellectually incoherent but crowd-pleasing proposal like “a la carte” cable, but Matt Yglesias should know better.

What everyone seems to miss in this debate is that a cable channel isn’t like a banana. If every grocery store somehow forced you to buy a banana with every orange, the banana-orange bundle would be more expensive than a banana or an orange alone, and a lot of bananas and oranges would end up in the garbage.

But a cable channel is a non-rivalrous good. The marginal cost of providing it to another consumer is zero. The goal of the cable company is to recover it’s rather large fixed costs in equipment, programming, etc. It will price its products so that it is able to recover those costs along with a profit margin.

To simplify things, let’s imagine that a cable company has only two channels, Spike TV and Women’s Entertainment, and only two kinds of customers, men and women. Men value STV at $10 and WE at $4. Women value WE at $10 and STV at $4. The cable company might bundle the channels together and charge $12 for the bundle. Each consumer would be getting $14 of TV for $12.

Now, people like Yglesias seem to assume that in an a la carte world make each channel would cost, say, $6. In that case, men would buy only STV, women would buy only WE, and consumers would save a bunch of money.

But that’s absurd. The cable company would lose half of its revenue in that scenario, and would be unlikely to even be covering its fixed costs. More likely, it would set the price for each channel at $10. The cable company would still be losing a lot of revenue, but that might be enough to keep it in business.

But notice that both the consumer and the cable company loses in this scenario. Before, the cable company was getting $12/subscriber, now it’s getting $10. The male consumer, meanwhile, went from getting $14 of TV for $12 to getting $10 of TV for $10. There might be a show he likes on WE, but not that he likes enough to pay twice as much for his cable bill.

Bundling increases consumer welfare by distributing low-marginal-cost goods to wider audiences. A la carte cable wouldn’t save consumers money. It would simply reduce the number of channels on their TVs. Buying twice as many cable channels isn’t like buying twice as many bananas.

It might be objected that the cable company does pay a per-viewer fee to the studio for those channels. But that’s just the same phenomenon one step removed. How do the studios price their channels when selling them to the cable company? Their marginal costs are also close to zero, so the same bundling argument above applies to them. If they gave their customers the option of buying channels a la carte, they’d have to dramatically raise their per-subscriber rates to cover their fixed costs. Consumers would be the loser–paying about the same for a much smaller variety of channels.

The lead sentence of an editorial in this week’s Economist includes five words not normally found in a news magazine (they are *****, *******, ***, *******, and *****) A desperate ploy for circulation? No, the magazine is merely quoting from an FCC decision on what can and can not be said over U.S. airwaves. The article, which argues for scrapping–rather than extending–FCC indecency rules, is worthwhile reading (as is a related analysis). The conclusion:

There is one strong argument against scrapping indecency regulation for television. Kids not lucky enough to have responsible parents might end up being exposed to more adult sex and profanity. But people should weigh the risk of that outcome against the harm of allowing each incoming administration to decide what everyone can and cannot watch. The current government has shown that it can easily broaden the country’s definition of what is indecent. Under pressure from Congress, the FCC has cracked down and has overruled its own precedents. What might future governments do? Technology has offered the chance to scale back censorship and America, long a champion of free speech, should seize it.

Well said.

At the Congressional Internet Caucus Advisory Committee panel discussion on Tuesday, most people seemed to agree on one point about the Grokster decision – we don’t need new copyright legislation (at least not yet).

This general consensus concurs with my recent article on Grokster. It’s just too early to tell how the courts will apply the court’s active inducement test. And I’ve heard it said somewhere that it takes three years to feel the effects of a Supreme Court decision (not including grants of habeas corpus petitions of course).

Yet some groups want action now. According to EFF’s Fred von Lohmann, “the Supreme Court left too many unanswered questions, von Lohmann said, adding, “I don’t believe that uncertainty is balance. We need clear, bright-line rules so that technology companies can know in advance what they are and are not allowed to build.”

According to the CNET article in which he was quoted, von Lohmann suggested two possible ways to legislate:

First, Congress should implement a “collective licensing” system for peer-to-peer file sharing, wherein users would pay a “reasonable fee,” which would in turn be passed on to the copyright holders. Second, lawmakers should scrap the idea of statutory damages–that is, money awarded to copyright owners because of provisions in the law–but leave open the option of awarding actual damages and injunctions through the court action.

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One of the most common arguments in favor of government censorship of media–whether it’s TV, radio, movies, or video games–is that parents are simply powerless to stop the onslaught of objectionable content that their children might be able to access. As a parent, there are times when I can sympathize with those who feel this way, but I always point out that this is never a good excuse to call in Uncle Sam to dumb down all media to that which is only fit for a child. Let us as parents make choices for our own families.

Luckily, many new tools and technologies are available to help parents make decisions about what their children see, hear and play. But until today, I had not found a single resource that collected all these self-help tools in one spot. Well, I finally found it! It’s called “Pause-Parent-Play” (PauseParentPlay.org) and it formally launches today with a kick-off event on Capitol Hill in Washington.

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In an interview with The Wall Street Journal today (p. A4), FCC Chairman Kevin Martin said he might consider “a la carte” mandates on cable and satellite operators as a possible way to clean up content on pay TV. He told the Journal, “I saw a quote recently where one person said ‘I can call up and order HBO, I don’t understand why I can’t call up and cancel any of my cable… programming.’ I think that there could be additional control over that.”

Well, before the Chairman rushes to impose a sweeping new regulatory regime on cable based on what he heard one guy say in the papers, I would hope he would consider what more rigorous research has revealed regarding the potential pitfalls of a la carte mandates. He might start by re-reading the report his own agency issued on the subject just 8 months ago. He should also take a second look at an important report issued by the General Accountability Office in October 2004.

These government reports, like the vast majority of serious academic reports penned on this topic, came to the conclusion that a la carte regulation would be devastating for the industry and consumers alike. (I should point out that I filed comments in the FCC proceeding as did my colleagues Randy May and Tom Lenard.)

Here’s why a la carte mandates, while sounding so good on the surface, would really be a disaster for consumers in the end:

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I disagree with James on cell phone bans. First of all, as one of his commenters point out, cell phones are not the only distracting thing in the car. They’re probably not even the most distracting. People eat, yell at their kids, change the station on the radio, apply make-up, and do all manner of other distracting things in the car. It’s not at all clear to me why we should single out cell phones for special treatment.

Secondly, context matters. If I’m zipping along in the left lane of an almost-empty freeway, being on my cell phone poses pretty minimal risk of accident. Likewise, if I’m in a residential area cruising along at 5 MPH (say, I’m almost to a friend’s house and calling the friend for directions) my chances of getting in an accident are likewise pretty low. And anyway, the damage will be minimal if I hit something at 5 MPH. So no, you shouldn’t be on the phone while changing lanes in rush hour traffic. But not all cell phone use in cars is bad.

Thirdly, is that really the best use of police resources? Even if the study is right, and cell phone use is killing people, it’s not at all clear that a ban would do much to deter cell phone use. It’s not very easy to tell who’s using a cell phone from outside, and there aren’t nearly enough police officers to enforce a ban effectively. A lot of people will just ignore the ban, on the (reasonable) assumption that they’re unlikely to be caught. I mean, really, has mandatory seat belt laws increased seatbelt use?

Finally, the study found that handsfree phones are just as distracting as normal phones. I don’t find this surprising at all. DC has a cell phone ban, and so I tried to use my hands free kit as often as possible. When my phone rings, I have to fish my phone out of my pocket, fish the handsfree kit out of the ash tray, plug the receiver into the phone, put the reciever into my ear (sometimes it falls out and I have to do it again) and then find a place to set the phone for the duration of the call. Since my cell phone calls are usually quite short, I think I’m a lot less dangerous having a phone to my ear for 30 seconds than spending 15 second fiddling around with things on my lap while the phone is ringing.

Bottom line: the police have better things to worry about.

Cell phones are not nearly as dangerous as people think. There’s no evidence they cause cancer. They do not cause gas pumps to explode. And they are not unsafe on airplanes. (See Adam’s excellent piece on that below). Time and again, wireless telephony, like other new technologies, has been the victim of an overactive culture of fear. Yet, there’s one area where the critics seem to have it right: cellphones and driving don’t mix. New evidence for this came out in an Insurance Institute for Highway Safety study published in the British Medical Journal this week.

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Well, for once I find myself in perfect agreement with Democratic FCC Commissioner Jonathan Adelstein about something. In a Wall Street Journal (pg. B4) story today about FCC prohibitions on cell phone use during airline flights, Adelstein argues that, “Our job is to determine if it’s technologically feasible and safe. Our job is not to decide etiquette. We’re not Emily Post.”

Amen brother! It’s one thing for the FCC to determine the technical standards for spectrum uses and users, and then even adjudicate interference disputes among those uses. It is quite another matter for the agency to go a step further and determine whether a certain use of the spectrum is socially acceptable.

Now don’t get me wrong, I detest the idea of cell phone chatter on long airline flights as much as the next person. The idea of a gabby jerk in the seat next to me screaming into their cell phone to talk above the already noisy jet engines, just makes me cringe.

But that doesn’t mean this should be a matter of federal concern. Indeed, self-regulatory experiments by private carriers would make a lot of sense here. Understanding the frustration (perhaps even violence) that cell phone gabbing in the cabin could induce, most airlines will put policies in place to limit cell phone use.

For example, certainly flights could be designated as “cell phone free” or “cell phone limited.” I can imagine that in an effort to appeal to many business travelers on high-volume routes (like NYC to DC or Chicago to Atlanta), some airlines would offer a few morning and evening flights that allowed unlimited cell phone use, while prohibiting calls on most other flights.

Alternatively, on larger aircraft, we might see the return of an in-flight lounge area (although probably much smaller than the ones of the past). Perhaps these cell phone lounges would be no bigger than current airplane bathrooms (perhaps they would be the bathrooms!) Regardless, these are just a few options that carriers could explore. They are certainly preferable to a federal etiquette regulatory regime for cell phone usage.

Senator Hillary Clinton (D-NY) proposed new legislation on Thursday that would make it a federal offense for retailers to sell a minor a video game that includes violent or sexual themes. Her bill would impose a $5000 fine on any retailer that sold a youngster a game that was classified as mature or violent under the video game industry’s voluntary ratings system.

The Clinton bill might best be thought of as a “hanging the industry with its own rope” regulatory scheme. That is, her bill would hijack the industry’s voluntary ratings system and then use it against them (and retailers) should someone choose to sell a game with mature or violent themes to someone under the age of 18.

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