May 2012

My most recent Forbes column is entitled, “We All Hate Advertising, But We Can’t Live Without It.” It’s my attempt to briefly (a) defend the role advertising has traditionally played in sustaining news, entertainment, and online service, and (b) discuss some possible alternatives to advertising that could be tapped if advertising starts failing us a media cross-subsidy.

What got me thinking about this issue again was the controversy over satellite video operator DISH Network offering its customers a new “Auto Hop” capability for its Hopper whole-home HD DVR system. Auto Hop will give viewers the ability to automatically skip over commercials for most recorded prime time programs shown on ABC, CBS, FOX and NBC when viewed the day after airing. It makes the viewing experience feel like the ultimate free lunch. Alas, something still must pay the bills. As innovative as that technology is, we can be certain that it will not make content consumption cost-free. We’ll just pay the price in some other way. The same is true for online services since it’s never been easier to use technology to block ads.

So, what is going to pay the bills for content as ad-skipping becomes increasingly automated and effortless? Stated differently, what are the other possible methods of picking up the tab for content creation? Here’s a rough taxonomy: Continue reading →

Writing over at the conservative Big Government blog (part of the network of blogs), someone who goes by the pseudonym “Capitol Connection” has posted an editorial about the debate over retransmission consent reform that is full of misinformation and misguided policy prescriptions, at least if you believe is truly limited government. The piece is entitled, “Big Cable Would Prefer if You Paid Their Bills,” and the problems are almost immediately evident from that headline alone.  First, what is a supposedly small government-oriented blog doing using a silly label like “Big Cable” to describe a vigorously competitive sector of our capitalist economy? Using terms like “Big Cable” is a silly lefty tactic. Second, no one in the cable industry is proposing anyone “pay their bills” except for the customers who enjoy their services. Isn’t a fee for service part of capitalism?

Anyway, that’s just the problem with the title of the essay. Sadly, the rest of the piece is filled with even more erroneous information and arguments about the retransmission consent regulatory process as well as the bill that aims to reform that process, “The Next Generation Television Marketplace Act” (H.R. 3675 and S. 2008). That bill, which is sponsored by Senator Jim DeMint (R-SC) and Rep. Steve Scalise (R-LA), represents a comprehensive attempt to deregulate America’s heavily regulated video marketplace. In a recent Forbes oped, I argued that the DeMint-Scalise effort would take us “Toward a True Free Market in Television Programming” by eliminating a litany of archaic media regulations that should have never been on the books to begin with. The measure would:

  • eliminate: “retransmission consent” regulations (rules governing contractual negotiations for content);
  • end “must carry” mandates (the requirement that video distributors carry broadcast signals even if they don’t want to);
  • repeal “network non-duplication” and “syndicated exclusivity” regulations (rules that prohibit distributors from striking deals with broadcasters outside their local communities);
  • end various media ownership regulations; and
  • end the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a “duty to deal” upon content owners to the benefit of video distributors.

This represents genuine and much-needed deregulation of a market that has been encumbered with far too much top-down control and micro-management by the FCC over the past several decades. To be clear, none of these rules apply to any other segment of our modern information economy. Every day of the week, deals are cut between content creators and distributors in many other segments of the media industry without these rules encumbering the process. The DeMint-Scalise bill is an attempt to get big government out of the way and let these deals be cut in a truly free market without regulators putting their thumb on the scale in one direction or the other. Continue reading →

Tim Lee responds to my last post on net neutrality by invoking one of my favorite economists, Friedrich Hayek. As a matter of logic, a perfectly price discriminating monopoly can be as efficient as a competitive industry, at least in a static sense, but Tim wonders if any firm can ever know enough to price discriminate well, and whether in a dynamic sense these outcomes can really be equated.

In short, a market involving numerous competing over-the-top video providers will be fundamentally, qualitatively different from a market in which one or two large broadband incumbents decides which video content to provide to consumers. In the long run, the open Internet is likely to offer a radically broader range of video content than any single cable company’s proprietary video service, just as is true for text and audio content today. But Eli’s model can’t accomodate this difference, because it requires us to treat content as homogenous and service providers as omniscient in order to make the math tractable.

It’s a fair point that a basic price discrimination model like a simple graph with demand and marginal cost is not going to capture the texture of economic change over time. Nevertheless, I think Tim’s criticism is misplaced, and in fact it’s in a dynamic sense that laissez-faire really shines. Here are a few reasons:

Continue reading →

More this week on the efforts of Reed Hastings of Netflix to reignite the perennial debate over network access regulation, courtesy of the New York Times.  Hastings is seeking a free ride on Comcast’s multi-billion-dollar investment in broadband Internet access.

Times columnist Eduardo Porter apparently believes that he has seen the future and thinks it works: The French government forced France Télécom to lease capacity on its wires to rivals for a regulated price, he reports, and now competitor Iliad offers packages that include free international calls to 70 countries and a download speed of 100 megabits per second for less than $40.

It should be noted at the outset that the percentage of French households with broadband in 2009 (57%) was less than the percentage of U.S. households (63%)   according to statistics cited by the Federal Communications Commission.

There is a much stronger argument for unbundling in France – which lacks a fully-developed cable TV industry – than in the U.S.  As the Berkman Center paper to which Porter’s column links notes on pages 266-68, DSL subscriptions – most of which ride France Télécom’s network – make up 95% of all broadband connections in France.  Cable constitutes approximately only 5% of the overall broadband market.  Competition among DSL providers has produced lower prices for consumers, but at the expense of private investment in fiber networks.

Continue reading →

Via Twitter, Andrew Grossman brought to my attention this terrifically interesting interview with a Kuwaiti censor that appeared in the Kuwait Times (“Read No Evil – Senior Censor Defends Work, Denies Playing Big Brother“). In the interview, the censor, Dalal Al-Mutairi, head of the Foreign Books Department at the Ministry of Information, speaks in a remarkably candid fashion and casual tone about the job she and other Kuwaiti censors do every day. My favorite line comes when Dalal tells the reporter how working as a censor is so very interesting and enlightening: “I like this work. It gives us experience, information and we always learn something new.”  I bet!  But what a shame that others in her society will be denied the same pleasure of always learning something new. Of course, like all censors, Dalal probably believes that she is doing a great public service by screening all culture and content to make sure the masses do not consume offensive, objectionable, or harmful content.

But here’s where the reporter missed a golden opportunity to ask Dalal the one question that you must always ask a censor if you get to meet one: If the content you are censoring is so destructive to the human soul or psyche, how then is it that you are such a well-adjusted person?  And Dalal certainly seems like a well-adjusted person. Although the reporter doesn’t tell us much about her personal life or circumstances, Dalal volunteers this much about herself and her fellow censors: “Many people consider the censor to be a fanatic and uneducated person, but this isn’t true. We are the most literate people as we have read much, almost every day. We receive a lot of information from different fields. We read books for children, religious books, political, philosophical, scientific ones and many others.” Well of course you do… because you are lucky enough to have access to all that content! But you are also taking steps to make sure the rest of your society doesn’t consume it on the theory that it would harm them or harm public morals in some fashion.  But, again, how is it that you have not been utterly corrupted by it all, Ms. Dalal? After all, you get to consume all that impure, sacrilegious, and salacious stuff! Shouldn’t you be some kind of monster by now?

How can this inconsistency be explained? The answer to this riddle can be found in the “Third-Person Effect Hypothesis.” Continue reading →

I wanted to follow up on Eli Dourado’s excellent previous post (“Real Talk on Net Neutrality“) to reiterate the importance of a few points he made and add some additional thoughts about the issues raised in that New York Times article on Net neutrality and forced access regulation that lots of people are talking about today.

What Eli’s post makes clear is that there are those of us who think about Net neutrality and infrastructure regulation in economic terms (a rapidly shrinking group, unfortunately) and those who think it about in quasi-religious terms. The problem with the latter ideology of neutrality uber alles, however, is that at some point it must confront real-world economics. This is Eli’s core point: Something must pay the bills. In this case, something must cover the significant fixed costs associated with broadband investments if you hope to sustain those networks. Unless you are ready to make the plunge and suggest that the government should cover those costs through massive infrastructure expenditures and even potential nationalization or municipalization of broadband networks — and some clearly would be — then you have to get serious about how those costs will be covered by private operators.

Thus, we come back to the importance of business model experimentation and pricing flexibility to this debate. I have been harping on this point for a long time now, going all the way back to this 2005 essay, “The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation.” And there’s a litany of other things I’ve penned on the same point, many of which I have cited at the end of this essay.

Here are the core points I have tried to get across in those earlier essays: Continue reading →

A lot of people are talking about this New York Times article on net neutrality, which highlights the effect on Netflix of Comcast launching its own video platform on the Xbox that is exempt from Comcast’s bandwidth limitations. While this policy may indeed result in more customers for Comcast’s video services and fewer for Netflix’s in the short run, I don’t think that critics are seriously thinking through the economics of Internet service before they speak.

The economics of running a large ISP is one of fixed costs. When you introduce large fixed costs, a lot of consumers’ ordinary economic intuition becomes worse than useless. If Comcast incurs a lot of fixed costs from building a network, someone has to pay for it. Suppose that the fixed cost is currently divided between TV subscription and advertising revenue and Internet service revenue. If Comcast’s TV revenues collapse because everyone is switching to Netflix, where will Comcast get the revenue to pay its high fixed costs? You guessed it, they will have to raise the price of Internet service.

Continue reading →

On the podcast this week, Jim Harper, director of information policy studies at the Cato Institute, and Ryan Radia, associate director of technology studies at the Competitive Enterprise Institute, discuss Congress’s recent interest in cybersecurity. Harper and Radia begin by discussing why Congress wants to legislate cybersecurity and the potential threats that have Congress frightened. Harper and Radia then discuss the types of bills before Congress, which include aspects of information sharing that would promote cybersecurity intelligence but may have privacy implications, and mandates for a security infrastructure. The discussion then turns to the role of government in cybersecurity and whether the protection of online information and assets should be left to markets. The discussion ends with Harper and Radia predicting the future of the proposed bills.

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This seems like a logical follow-up to Berin Szoka’s previous post about technology, social activism, and government power. ReasonTV has produced this important short clip on “Cops Vs. Cameras: The Killing of Kelly Thomas & The Power of New Media.” It documents how the combined power of citizen journalism, social media, and surveillance video can ensure that our police authorities are held accountable for their actions. In this particular case, it can hopefully win some justice for Kelly Thomas, the homeless Fullerton, California man who was brutally beaten to death by police officers on the night of July 5, 2011.

There is live video from the horrific beating here, but I caution you it is not for the faint of heart. Watching the last moments of man’s life slip away from repeated blows to the head while he begs for his life and calls out for his father is, well, stomach-turning. But imagine if this video and the other citizen videos that were taking that night had not existed. As the ReasonTV clip notes, the Fullerton police department basically ignored requests for more information about the case until Kelly’s father (who was former police officer himself) took cell photos of his son’s beaten face in the hospital and released them to the public. Then the citizen videos of the beating were posted on YouTube and went viral. And then, finally, mainstream media started paying attention. And now the surveillance video from a nearby street camera has been released after citizens and activists demanded it. Continue reading →

In the lead essay for the “Cato Unbound” symposium this month, I analyze recent political movements that have been aided by Internet-based communication by positing a set of questions,

Activists played important roles in bringing down dictators in the Arab world, stopping the Stop Online Piracy Act (SOPA) in Congress and electing Barack Obama—just to name a few examples. But how much did the Internet matter in making these watershed events possible? How effective is it likely to be in the future? And how would we measure whether activism “works” for society—not just the activists?

I respond to the concerns raised by Evgeny Morozov in his iconoclastic 2010 book, The Net Delusion: The Dark Side of Internet Freedom (summarized in his short essay in TechFreedom’s free ebook The Next Digital Decade: Essays on the Future of the Internet).  In general, I suggest that we simply do not yet understand the Internet’s effect on activism well enough to make strong normative judgments about it.  But applying Public Choice theory can help us understand how developments in communication technologies are changing the relationship between an individual and the group in social movements. A few highlights:

  • Social media lower organizational costs, especially of recruiting members, but also noticeability: “members’ ability to notice each other’s actions.” Even in 2003, there was little way to tell whether your friends actually followed through when you asked them to help join a cause. But today, it’s easy to encourage them to re-share material on Facebook or Twitter—and to “notice” whether they’ve done so.
  • Social media allows members of large groups—think Twitter followers—to be continuously bombarded with propaganda about the worthiness of the cause creating social pressures not entirely unlike those that can be generated in a face-to face group.
  • The Internet empowers large, dispersed groups (like dedicated Internet users) to organize against small but concentrated interests. As anyone who works in technology policy in Washington can attest, SOPA’s implosion made Congress more cautious—at least about Internet regulation, where fear of a digital activist backlash is greatest. Continue reading →