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Yesterday was a big day for any business, nonprofit organization, or fundraiser that relies on affiliate advertising that depend upon Internet advertising for important revenue and fundraising efforts: Governor Schwarzenegger vetoed the nexus tax and calls up Overstock.com to invite to reinstate their affiliates in California.

As we’ve written previously, all sorts of organizations depend on Internet advertising. Online companies are experimenting with new ways to deliver products, services, and content, and business of all kinds are going online to reach consumers and advertise to receptive audiences. The Gov’s veto sends a strong message that this growing business model is welcome in California.

It is important to note that the proposed budget legislation was indeed a tax increase. Contrary to the statements of nexus tax proponents, in no event would new money flow into California. Any incremental sales tax collected from online sellers just moves from the California purchaser to the state treasury, at a time when households are being squeezed by a struggling economy. The result: fewer advertising dollars would flow to California publishers and websites who employ and serve California’s residents today.

And this is one tax increase that would have serious unintended consequences. An affiliate advertising tax would harm California businesses, nonprofit organizations, and even public schools that depend upon Internet advertising for important revenue and fundraising efforts.

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My friend Megan McArdle has a sharp post on the causes of the newspaper’s imminent demise:

Journalism is not being brought low by excess supply of content; it’s being steadily eroded by insufficient demand for advertising pages. For most of history, most publications lost money, or at best broke even, on their subscription base, which just about paid for the cost of printing and distributing the papers. Advertising was what paid the bills. To be sure, some of that advertising is migrating to blogs and similar new media. But most of it is simply being siphoned out of journalism altogether. Craigslist ate the classified ads. eHarmony stole the personals. Google took those tiny ads for weird products. And Macy’s can email its own damn customers to announce a sale…

We’re not witnessing the breakup of a monopoly, in which more players make more modest incomes providing more stuff, and everyone flourishes (except the monopolist). We’re witnessing the death of a business model. And no one has figured out how to pay for hard news. Hard news stories take a great deal of time to write–more time than most amateurs can afford, which is why blogs tend to do opinion rather than journalism. Moreover, they are at least greatly improved when their authors are not worried about losing their jobs if what they write pisses off a local power broker.

I think there’s a lot to this: a key part of the newspaper’s business model was that economies of scale made them one of the very few efficient ways of distributing small pieces of printed information to a lot of people. So lots of different kinds of content—classified ads, personal ads, display ads, and various kinds of news reporting—got bundled together and sold as one package. The Internet makes it cheap to distribute information of all kinds, and so the newspaper is getting disaggregated. And so some of the cross-subsidies that supported the traditional newspaper are going away.

So the death of the classified is one important cause of newspapers’ worsening business model. But it’s also true that newspapers are “being brought low by excess supply of content.” The websites of mainstream media outlets run display ads, and these ads generate revenues. They don’t generate enough revenue to cover the costs of producing content, but that’s simply a function of supply and demand: if there were fewer online news sources, the ones that were left would be able to command higher rates. This is easy to see with the following thought experiment: imagine if the government granted the New York Times a monopoly in the news reporting business, so that no other media outlet were permitted to provide news online. Under those circumstances, the Times would be insanely profitable. They’d have tens of millions of daily readers and be able to charge outrageous amounts of money for their display ads.

Each traditional outlet that goes out of business makes the others a little more profitable. Eventually, the market will reach an equilibrium–if necessary, with dramatically fewer news outlets and higher revenues for each one. But there’s no “death of a business model” here. The newspapers have always given away content in order to sell ads. The news websites of the future will do the same thing. There just may be fewer of them than there were in the past.

The part I think Megan is ignoring is that the while it’s often true that hard news stories take a “great deal of time to write,” the Internet has made the process much easier for many types of news. Most obviously, the laborious process of editing and typesetting stories on strict deadlines is being replaced by much more flexible editing using web-based content management systems. Many primary sources (court decisions, regulatory filings, government data) that once required a physical trip to obtain can now be downloaded off the web. Reporters also have access to a vast new universe of primary sources from user-generated media that simply didn’t exist in the past.

It’s possible that the absolute number of reporters doing “hard news” in the future will be lower than it was in the past. And certainly the next decade will be a tough one for print journalists. But there’s nothing fundamentally broken about the “give away content, sell ads” business model. And we’re not heading toward a dystopian future in which no one produces hard news.

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Image Courtesy of Flickr User Pieter Baert

I’ve been reading many critiques of Wired editor Chris Anderson’s new book, Free, after first reading Malcolm Gladwell’s review in The New Yorker.  Gladwell’s piece is fantastic as it illuminates just how wrong Anderson’s central claim really is.  Anderson writes that:

In the digital realm you can try to keep Free at bay with laws and locks, but eventually the force of economic gravity will win.

Gladwell quickly dismisses this by pointing out that YouTube, one of Anderson’s case studies, is set to lose $500 million next year.  As Gladwell puts it ” If [YouTube] were a bank, it would be eligible for TARP funds.”

But Anderson’s wrong-headedness goes beyond this one case.  Gladwell likens Anderson’s naivete about online distribution to that of Lewis Strauss, the former head of the Atomic Energy Commission, who Anderson himself quotes in Free.  Straus famously—and as Gladwell points out, quite inaccurately—predicted that “our children will enjoy in their homes electrical energy too cheap to meter.”  Gladwell points out that just as Strauss failed to realize that fuel was just one of many inputs to the distribution of power, Anderson fails to realize that while the price of transistors may be plummeting at logarithmic rates, other costs associated with digital distribution remain fixed or are increasing.

Anderson’s responds to this critique in a post on Wired.com that fails to answer nearly any of Gladwell’s points, but instead asked why Gladwell felt “threatened” by Anderson.  I doubt he does.

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Check out today’s Wall Street Journal editorial on the affiliate nexus tax that North Carolina is considering — aptly titled Tarheels vs. the Internet. This comes on the heels (pun intended) of news that Amazon will terminate its affiliates in North Carolina.  It also talks about the tickets tax, which is blatantly in violation of the Internet Tax Freedom Act because it only applies to the Internet resale of tickets.

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I received a mailing (see poorly taken iPhone photo) from Comcast a few days ago and I thought it was worth talking about from a libertarian perspective.

I’m all for companies taking advantage of the digital changeover to make a little extra scratch, so long as they’re honest in doing so.  This mailer never explicitly lies, but it’s not exactly forthcoming about what the digital conversion really means and it certainly didn’t mention the possibility of buying a converter box to continue getting broadcast TV for free.

Instead, the octagenarians who occupy most of the other units in my building were met with this sort of language: Continue reading →

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A new coalition, NoChokePoints, has been formed to lobby Congress and the Federal Communications Commission to further regulate the prices that incumbent telephone companies (Regional Bell Operating Companies or Incumbent Local Exchange Carriers) can charge for special access services purchased by businesses and institutions.  Special access circuits are dedicated, private lines.  For example, Sprint purchases special access circuits to connect its cell towers to its backbone.

According to a coalition spokeswoman,

Huge companies like Verizon and AT&T control the broadband lines of almost every business in the United States. The virtually unchallenged, exclusive control of these lines costs businesses and consumers more than $10 billion annually and generates a profit margin of more than 100 percent for the controlling phone companies, according to their own data provided to the FCC. This hidden broadband tax results in enormous losses for consumers and the economy, and this country cannot afford it; especially now.

An analysis prepared by Peter Bluhm with Dr. Robert Loube under contract with the National Association of Regulatory Commissioners (NARUC) disputes this conclusion.
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Small cellphone operators want Congress or the Federal Communications Commission to prohibit larger carriers from becoming exclusive providers of popular handsets, like the Apple iPhone (AT&T), Blackberry Storm (Verizon Wireless), Palm Pre (Sprint) and Samsung Behold (T-Mobile).

John E. Rooney, President and CEO of United States Cellular Corp., testified at a recent Senate Commerce Committee hearing:

These arrangements harm consumers in rural areas and decrease competition nationwide and do not enhance innovation.

Let’s examine these arguments.

Rural Consumers

Rooney bemoans the fact that

many rural residents of Alaska, Arizona, Colorado, Idaho, Kansas, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Utah, West Virginia and Wyoming are not served by AT&T network facilities

while Victor H. “Hu” Meena, President and CEO if Cellular South, Inc.,  claims that

Vast portions of America – including all or part of Alaska, Arizona, California, Idaho, Kansas, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire New Mexico, Oregon, Vermont, Washington, West Virginia and Wisconsin – are not served by any of the largest carriers, so Americans in these areas are prohibited from acquiring the newest and most innovative devices.

There are advantages and disadvantages no matter where one chooses to live.  The fact that someplace is without a particular amenity traditionally hasn’t justified limiting the ability of private entities to exercise their own judgment as to parties with whom they will deal.  While I am fortunate to have the opportunity to own an iPhone, I don’t get to live in a pristine rural setting with a wide open outdoors, low housing costs, etc.

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