FCC Chairman Ajit Pai recently delivered an excellent speech at the Resurgent Conference, Austin, TX. In it, he stressed the importance of adopting a permissionless innovation policy vision to ensure a bright future for technology, economic growth, and consumer welfare. The whole thing is worth your time, but the last two paragraphs make two essential points worth highlighting.

Pai correctly notes that we should reject the sort of knee-jerk hysteria or technopanic mentality that sometimes accompanies new technologies. Instead, we should have some patience and humility in the face of uncertainty and be open to new ideas and technologies creations.

“Here’s the bottom line,” Pai concludes:

Whenever a technological innovation creates uncertainty, some will always have the knee-jerk reaction to presume it’s bad. They’ll demand that we do whatever’s necessary to maintain the status quo. Strangle it with a study. Call for a commission. Bemoan those supposedly left behind. Stipulate absolute certainty. Regulate new services with the paradigms of old. But we should resist that temptation. “Guilty until proven innocent” is not a recipe for innovation, and it doesn’t make consumers better off. History tells us that it is not preemptive regulation, but permissionless innovation made possible by competitive free markets that best guarantees consumer welfare. A future enabled by the next generation of technology can be bright, if only we choose to let the light in.

Read the whole thing here. Good stuff. I also appreciate him citing my work on the topic, which you can find in my last book and other publications.

Wallach’s latest book is entitled, A Dangerous Master: How to Keep Technology from Slipping beyond Our Control. And, as I’ve noted here recently, the greatly expanded second edition of my latest book, Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, has just been released.

Of all the books of technological criticism or skepticism that I’ve read in recent years—and I have read stacks of them!— A Dangerous Master is by far the most thoughtful and interesting. I have grown accustomed to major works of technological criticism being caustic, angry affairs. Most of them are just dripping with dystopian dread and a sense of utter exasperation and outright disgust at the pace of modern technological change.

Although he is certainly concerned about a wide variety of modern technologies—drones, robotics, nanotech, and more—Wallach isn’t a purveyor of the politics of panic. There are some moments in the book when he resorts to some hyperbolic rhetoric, such as when he frets about an impending “techstorm” and the potential, as the book’s title suggests, for technology to become a “dangerous master” of humanity. For the most part, however, his approach is deeper and more dispassionate than what is found in the leading tracts of other modern techno-critics.

Many Questions, Few Clear Answers

Wallach does a particularly good job framing the major questions about emerging technologies and their effect on society. “Navigating the future of technological possibilities is a hazardous venture,” he observes. “It begins with learning to ask the right questions—questions that reveal the pitfalls of inaction, and more importantly, the passageways available for plotting a course to a safe harbor.” (p. 7) Wallach then embarks on a 260+ page inquiry that bombards the reader with an astonishing litany of questions about the wisdom of various forms of technological innovation—both large and small. While I wasn’t about to start an exact count, I would say that the number of questions Wallach poses in the book runs well into the hundreds. In fact, many paragraphs of the book are nothing but an endless string of questions.

Thus, if there is a primary weakness with A Dangerous Master, it’s that Wallach spends so much time formulating such a long list of smart and nuanced questions that some readers may come away disappointed when they do not find equally satisfying answers. On the other hand, the lack of clear answers is also completely understandable because, as Wallach notes, there really are no simple answers to most of these questions.

Just Slow Down!

Moving on to substance, let me make clear where Wallach and I generally see eye-to-eye and where we part ways.

Generally speaking, we agree about the need to come up with better “soft governance” systems for emerging technologies, which might include multistakeholder process, developer codes of conduct, sectoral self-regulation, sensible liability rules, and so on. (More on those strategies in a moment.)

But while we both believe it is wise to consider how we might “bake-in” better ethics and norms into the process of technological development, Wallach seems much more inclined than me to expect that we will be able to pre-ordain (or potentially require?) all this happens before much of this experimentation and innovation actually moves forward. Wallach opens by asking:

Determining when to bow to the judgment of experts and whether to intervene in the deployment of a new technology is certainly not easy. How can government leaders or informed citizens effectively discern which fields of research are truly promising and which pose serious risks? Do we have the intelligence and means to mitigate the serious risks that can be anticipated? How should we prepare for unanticipated risks? (p. 6)

Again, many good questions here! But this really gets to the primary difference between Wallach’s preferred approach and my own: I tend to believe that many of these things can only be worked out through ongoing trial and error, the constant reformulation of the various norms that govern the process of innovation, and the development of sensible ex post solutions to some of the most difficult problems posed by turbulent technological change.

By contrast, Wallach’s generally attitude toward technological evolution is probably best summarized by the phrases: “Slow down!” and, “Let’s have a conversation about it first!” As he puts it in his own words: “Slowing down the accelerating adoption of technology should be done as a responsible means to ensure basic human safety and to support broadly shared values.” (p. 13)

But I tend to believe that it’s not always possible to preemptively determine which innovations to slow down, or even how to determine what those “shared values” are that will help us make this determination. More importantly, I worry that there are very serious potential risks and unintended consequences associated with slowing down many forms of technological innovation, which could improve human welfare in important ways. There can be no prosperity, after all, without a certain degree of risk-taking and disruption.

Getting Out Ahead of the Pacing Problem

Yet, what concerns Wallach most is the much-discussed issue from the field of the philosophy of technology, the so-called “pacing problem.” Wallach concisely defines the pacing problem as “the gap between the introduction of a new technology and the establishment of laws, regulations, and oversight mechanisms for shaping its safe development.” (p. 251) “There has always been a pacing problem,” he notes, but he is concerned that technological innovation—especially highly disruptive and potentially uncontrollable forms of innovation—is now accelerating at an absolutely unprecedented pace.

(Just as an aside for all the philosophy nerds out there…  Such a rigid belief in the “pacing problem” represents a techno-deterministic viewpoint that is, ironically, sometimes shared by technological skeptics like Wallach as well as technological optimists like Larry Downes and even many in the middle of this debate, like Vivek Wadhwa. See, for example, The Laws of Disruption by Downes and “Laws and Ethics Can’t Keep Pace with Technology” by Wadhwa. Although these scholars approach technology ethics and politics quite differently, they all seem to believe that the pace of modern technological change is so relentless as to almost be an unstoppable force of nature. I guess the moral of the story is that, to some extent, we’re all technological determinists now!)

Despite his repeated assertions that modern technologies are accelerating at such a potentially uncontrollable pace, Wallach nonetheless hopes we can achieve some semblance of control over emerging technologies before they reach a critical “inflection point.” In the study of history and science, an inflection point generally represents a moment when a situation and trend suddenly changes in a significant way and things begin moving rapidly in a new direction. These inflections points can sometimes develop quite abruptly, ushering in major changes by creating new social, economic, or political paradigms. As it relates to technology in particular, inflection points can refer to the moment with a particular technology achieves critical mass in terms of adoption or, more generally, to the time when that technology begins to profoundly transform the way individuals and institutions act.

Another related concept that Wallach discusses is the so-called “Collingridge dilemma,” which refers to the notion that it is difficult to put the genie back in the bottle once a given technology has reached a critical mass of public adoption or acceptance. The concept is named after David Collingridge, who wrote about this in his 1980 book, The Social Control of Technology. “The social consequences of a technology cannot be predicated early in the life of the technology,” Collingridge argued. “By the time undesirable consequences are discovered, however, the technology is often so much part of the whole economics and social fabric that its control is extremely difficult.”

On “Having a Discussion” & Coming Up with “a Broad Plan”

These related concepts of inflection points and the Collingridge dilemma constitute the operational baseline of Wallach’s worldview. “In weighing speedy development against long-term risks, speedy development wins,” he worries. “This is particularly true when the risks are uncertain and the perceived benefits great.” (p. 85)

Consequently, throughout his book, Wallach pleads with us to take what I will call Technological Time Outs. He says we need to pause at times so that we can have “a full public discussion” (p. 13) and make sure there is a “broad plan in place to manage our deployment of new technologies” (p. 19) to make sure that innovation happens only at “a humanly manageable pace” (p. 261) “to fortify the safety of people affected by unpredictable disruptions.” (p. 262) Wallach’s call for Technological Time Outs is rooted in his belief that “the accelerating pace [of modern technological innovation] undermines the quality of each of our lives.” (p. 263)

That is Wallach’s weakest assertion in the book and he doesn’t really offer much evidence to prove that the velocity of modern technological is hurting us rather than helping us, as many of us believe. Rather, he treats it as a widely accepted truism that necessitates some sort of collective effort to slow things down if the proverbial genie is about to exit the bottle, or to make sure those genies don’t get out of their bottles without a lot of preemptive planning regarding how they are to be released into the world. In the following passage on pg. 72, Wallach very succinctly summarizes his approach recommended throughout A Dangerous Master:

this book will champion the need for more upstream governance: more control over the way that potentially harmful technologies are developed or introduced into the larger society. Upstream management is certainly better than introducing regulations downstream, after a technology is deeply entrenched or something major has already gone wrong. Yet, even when we can access risks, there remain difficulties in recognizing when or determining how much control should be introduced. When does being precautionary make sense, and when is precaution an over-reaction to the risks? (p. 72)

Those who have read my Permissionless Innovation book will recall that I open by framing innovation policy debates in almost exactly the same way as Wallach suggests in that last line above. I argue in the first lines of my book that:

The central fault line in innovation policy debates today can be thought of as ‘the permission question.’  The permission question asks: Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations? How that question is answered depends on the disposition one adopts toward new inventions and risk-taking, more generally.  Two conflicting attitudes are evident. One disposition is known as the ‘precautionary principle.’ Generally speaking, it refers to the belief that new innovations should be curtailed or disallowed until their developers can prove that they will not cause any harm to individuals, groups, specific entities, cultural norms, or various existing laws, norms, or traditions. The other vision can be labeled ‘permissionless innovation.’ It refers to the notion that experimentation with new technologies and business models should generally be permitted by default. Unless a compelling case can be made that a new invention will bring serious harm to society, innovation should be allowed to continue unabated and problems, if any develop, can be addressed later.

So, by contrasting these passages, you can see what I am setting up here is a clash of visions between what appears to be Wallach’s precautionary principle-based approach versus my own permissionless innovation-focused worldview.

How Much Formal Precaution?

But that would be a tad bit too simplistic because just a few paragraphs after Wallach makes the statement just above about “upstream management” being superior to ex post solutions formulated “after a technology is deeply entrenched,” Wallach begins slowly backing away from an overly-rigid approach to precautionary principle-based governance of technological processes and systems.

He admits, for example, that “precautionary measures in the form of regulations and governmental oversight can slow the development of research whose overall society impact will be beneficial,” (p. 26) and that can “be costly” and “slow innovation.” For countries, Wallach admits, this can have real consequences because “Countries with more stringent precautionary policies are at a competitive disadvantage to being the first to introduce a new tool or process.” (p. 74)

So, he’s willing to admit that what we might call a hard precautionary principle usually won’t be sensible or effective in practice, but he is far more open to soft precaution. But this is where real problems begin to develop with Wallach’s approach, and it presents us with a chance to turn the tables on him a bit and begin posing some serious questions about his vision for governing technology.

Much of what follows below are my miscellaneous ramblings about the current state of the intellectual dialogue about tech ethics and technological control efforts. I have discussed these issues at greater length in my new book as well as a series of essays here in past years, most notably: “On the Line between Technology Ethics vs. Technology Policy; “What Does It Mean to “Have a Conversation” about a New Technology?”; and, “Making Sure the “Trolley Problem” Doesn’t Derail Life-Saving Innovation.”

As I’ve argued in those and other essays, my biggest problem with modern technological criticism is that specifics are in scandalously short supply in this field! Indeed, I often find the lack of details in this arena to be utterly exasperating. Most modern technological criticism follows a simple formula:

TECHNOLOGY –>> POTENTIAL PROBLEMS –>> DO SOMETHING!

But almost all the details come in the discussion about the nature of the technology in question and the apparent many problems associated with it. Far, far less thought goes into the “DO SOMETHING!” part of the critics’ work. One reason for that is probably self-evident: There are no easy solutions. Wallach admits as much at many junctures throughout the book. But that doesn’t excuse the need for the critics to give us a more concrete blueprint for identifying and then potentially rectifying the supposed problems.

Of course, the other reason that many critics are short of specifics is because what they really mean when they quip how much we need to “have a conversation” about a new disruptive technology is that we need to have a conversation about stopping that technology.

Where Shall We Draw the Line between Hard and Soft Law?

But this is what I found most peculiar about Wallach’s book: He never really gives us a good standard by which to determine when we should look to hard governance (traditional top-down regulation) versus soft governance (more informal, bottom-up and non-regulatory approaches).

On one hand, he very much wants society to exercise greatly restraint and precaution when it comes to many of the technologies he and others worry about today. Again, he’s particularly concerned about the potential runaway development and use of drones, genetic editing, nanotech, robotics, and artificial intelligence. For at least one class of robotics—autonomous military robots—Wallach does call for immediate policy action in the form of an Executive Order to ban “killer” autonomous systems. (Incidentally, there’s also a major effort underway called the “Campaign to Stop Killer Robots” that aims to make such a ban part of international law through a multinational treaty.)

But Wallach also acknowledges the many trade-offs associated with efforts to preemptively controls on robotics and other technology. Perhaps for that reason, Wallach doesn’t develop a clear test for when the Precautionary Principle should be applied to new forms of innovation.

Clearly there are times when it is appropriate, although I believe it is only in an extremely narrow subset of cases. In the 2 ^nd Edition of my Permissionless Innovation book, I tried to offer a rough framework for when formal precautionary regulation (i.e., highly-restrictive policy defaults are necessary, such as operational restrictions, licensing requirements, research limitations, or even formal bans) might be necessary. I do not want to interrupt the flow of this review of Wallach’s book too much, so I have decided to just cut-and-paste that portion of Chapter 3 of my book (“When Does Precaution Make Sense?”) down below as an appendix to this essay.

The key takeaway of that passage from my book is that all of us who study innovation policy and the philosophy of technology—Wallach, myself, the whole darn movement—have done a remarkably poor job being specific about precisely when formal policy precaution is warranted. What is the test? All too often, we get lazy and apply what we might call an “I-Know-It-When-I-See-It” standard. Consider the possession of bazookas, tanks, and uranium. Almost all of us would agree that citizens should not be allowed to possess or use such things. Why? Well, it seems obvious, right? They just shouldn’t! But what is the exact standard we use to make that determination.

In coming years, I plan on spending a lot more time articulating a better test by which Precautionary Principle-based policies could be reasonably applied. Those who know me may be taken aback by what I just said. After all, I’ve spend many years explaining why Precautionary Principle-based thinking threatens human prosperity and should be rejected in the vast majority of cases. But that doesn’t excuse the lack of a serious and detailed exploration of the exact standard by which we determine when we should impose some limits on technological innovation.

Generally speaking, while I strongly believe that “permissionless innovation” should remain the policy default for most technologies, there certainly exists some scenarios where the threat of harm associated with a new innovation might be highly probable, tangible, immediate, irreversible, and catastrophic in nature. If so, that could qualify it for at least a light version of the Precautionary Principle. In a future paper or book chapter I’m just now starting to research, I hope to fuller develop those qualifiers and formulate a more robust test around them.

I would have very much liked to see Wallach articulate and defend a test of his own for when formal precaution would make sense. And, by extension, when should we default to soft precaution, or soft law and informal governance mechanisms for emerging technologies.

We turn to that issue next.

Toward Soft Governance & the Engineering of Better Technological Ethics

Even though Wallach doesn’t provide us with a test for determining when precaution makes sense or when we should instead default to soft governance, he does a much better job explaining the various models of soft law or informal governance that might help us deal with the potential negative ramifications of highly disruptive forms of technological change.

What Wallach proposes, in essence, is that we bake a dose of precautionary directly into the innovation process through a wide variety of informal governance/oversight mechanisms. “By embedding shared values in the very design of new tools and techniques, engineers improve the prospect of a positive outcome,” he claims. “The upstream embedding of shared values during the design process can ease the need for major course adjustments when it’s often too late.” (p. 261)

Wallach’s favored instrument of soft governance is what he refers to as “Governance Coordinating Committees” (GCCs). These Committees would coordinate “the separate initiatives by the various government agencies, advocacy groups, and representatives of industry” who would serve as “issue managers for the comprehensive oversight of each field of research.” (p. 250) He elaborates and details the function of GCCs as follows:

These committees, led by accomplished elders who have already achieved wide respect, are meant to work together with all the interested stakeholders to monitor technological development and formulate solutions to perceived problems. Rather than overlap with or function as a regulatory body, the committee would work together with existing institutions. (p. 250-51)

Wallach discussed the GCC idea in much greater detail in a 2013 book chapter he penned with Gary E. Marchant for a collected volume of essays on Innovative Governance Models for Emerging Technologies. (I highly recommend you pick up that book if you can afford it! Many terrific essays in that book on these issues.) In their chapter, Marchant and Wallach specify some of the soft law mechanisms we might use to instill a bit of precaution preemptively. These mechanisms include: “codes of conduct, statements of principles, partnership programs, voluntary programs and standards, certification programs and private industry initiatives.”

If done properly, GCCs could provide exactly the sort of wise counsel and smart recommendations that Wallach desires. In my book and many law review articles on various disruptive technologies, I have endorsed many of the ideas and strategies Wallach identifies. I’ve also stressed the importance of many other mechanisms, such as education and empowerment-based strategies that could help the public learn to cope with new innovations or use them appropriately. In addition, I’ve highlighted the many flexible, adaptive ex post remedies that can help when things go wrong. Those mechanisms include common law remedies such as product defects law, various torts, contract law, property law, and even class action lawsuits. Finally, I have written extensively about the very active role played by the Federal Trade Commission (FTC) and other consumer protection agencies, which have broad discretion to police “unfair and deceptive practices” by innovators.

Moreover, we already have a quasi-GCC model developing today with the so-called “multistakeholder governance” model that is often used in both informal and formal ways to handle many emerging technology policy issues.  The Department of Commerce (the National Telecommunications and Information Administration in particular) and the FTC have already developed many industry codes of conduct and best practices for technologies such as biometrics, big data, the Internet of Things, online advertising, and much more. Those agencies and others (such as the FDA and FAA) are continuing to investigate other codes or guidelines for things like advanced medical devices and drones, respectively. Meanwhile, I’ve heard other policymakers and academics float the idea of “digital ombudsmen,” “data ethicists,” and “private IRBs” (institutional review boards) as other potential soft law solutions that technology companies might consider. Perhaps going forward, many tech firms will have Chief Ethical Officers just as many of them today have Chief Privacy Officers or Chief Security Officers.

In other words, there’s already a lot of “soft law” activities going on in this space. And I haven’t even begun an inventory of the many other bodies or groups that already exist in each sector today that has set forth their own industry self-regulatory codes, but they exist in almost every field that Wallach worries about.

So, I’m not sure how much his GCC idea will add to this existing mix, but I would not be opposed to them playing the sort of coordinating “issue manager” role he describes. But I still have many questions about GCC’s, including:

• How many of them are needed and how we will know which one is the definitive GCC for each sector or technology?
• If they are overly formal in character and dominated by the most vociferous opponents of any particular technology, a real danger exists that a GCC could end up granting a small cabal a “heckler’s veto” over particular forms of innovation.
• Alternatively, the possibility of “regulatory capture” could be a problem for some GCCs if incumbent companies come to dominate their membership.
• Even if everything went fairly smoothly and the GCCs produced balanced reports and recommendations, future developers might wonder if and why they are to be bound by older guidelines.
• And if those future developers choose not to play by the same set of guidelines, what’s the penalty for non-compliance?
• And how are such guidelines enforced in a world where what I’ve called “global innovation arbitrage” is an increasing reality?

Challenging Questions for Both Hard and Soft Law

To summarize, whether we are speaking of “hard” or “soft” law approaches to technological governance, I am just not nearly as optimistic as Wallach seems to be that we will be able to find consensus on these three things:

(1) what constitutes “harm” in many of these circumstances;

(2) which “shared values” should prevail when “society” debates the shaping of ethics or guiding norms for emerging technologies but has highly contradictory opinions about those values (consider online privacy as a good example, where many people enjoy hyper-sharing while other demand hyper-privacy); and,

(3) that we can create a legitimate “governing body” (or bodies) that will be responsible for formulating these guidelines in a fair way without completely derailing the benefits of innovation in new fields and also remaining relevant for very long.

Nonetheless, as he and others have suggested, the benefit of adopting a soft law/informal governance approach to these issues is that it at least seeks to address these questions in more flexible and adaptive fashion. As I noted in my book, traditional regulatory systems “tend to be overly rigid, bureaucratic, inflexible, and slow to adapt to new realities. They focus on preemptive remedies that aim to predict the future, and future hypothetical problems that may not ever come about. Worse yet, administrative regulation generally preempts or prohibits the beneficial experiments that yield new and better ways of doing things.” ( Permissionless Innovation, p. 120)

So, despite the questions I have raised here, I welcome the more flexible soft law approach that Wallach sets forth in his book. I think it represents a far more constructive way forward when compared to the opposite “top-down” or “command-and-control” regulatory systems of the past. But I very much want to make sure that even these new and more flexible soft law approaches leave plenty of breathing room for ongoing trial-and-error experimentation with new technologies and systems.

Conclusion

In closing, I want to reiterate that not only did I appreciate the excellent questions raised by Wendell Wallach in A Dangerous Master, but I take them very seriously. When I sat down to revise and expand my Permissionless Innovation book last year, I decided to include this warning from Wallach in my revised preface: “The promoters of new technologies need to speak directly to the disquiet over the trajectory of emerging fields of research. They should not ignore, avoid, or superficially dampen criticism to protect scientific research.” (p. 28–9)

As I noted, in response to Wallach: “I take this charge seriously, as should others who herald the benefits of permissionless innovation as the optimal default for technology policy. We must be willing to take on the hard questions raised by critics and then also offer constructive strategies for dealing with a world of turbulent technological change.”

Serious questions deserve serious answers. Of course, sometimes those posing those questions fail to provide many answers of their own! Perhaps it is because they believe the questions answer themselves. Other times, it’s because they are willing to admit that easy answers to these questions typically prove quite elusive. In Wallach’s case, I believe it’s more the latter.

To wrap up, I’ll just reiterated that both Wallach and I share a common desire to find solutions to the hard questions about technological innovation. But the crucial question that probably separates his worldview and my own is this: Whether we are talking about hard or soft governance, how much faith should we place in preemptive planning vs. ongoing trial and error experimentation to solve technological challenges? Wallach is more inclined to believe we can divine these things with the sagacious foresight of “accomplished elders” and technocratic “issue managers,” who will help us slow things down until we figure out how to properly ease a new technology into society (if at all). But I believe that the only way we will find many of the answers we are searching for is by allowing still more experimentation with the very technologies that he and others seek to control the development of. We humans are outstanding problem-solvers and have the uncanny ability among all mammals to adapt to changing circumstances. We roll with the punches, learn from them, and become more resilient in the process. As I noted in my 2014 essay, “Muddling Through: How We Learn to Cope with Technological Change”:

we modern pragmatic optimists must continuously point to the unappreciated but unambiguous benefits of technological innovation and dynamic change. But we should also continue to remind the skeptics of the amazing adaptability of the human species in the face of adversity. [. . .] Humans have consistently responded to technological change in creative, and sometimes completely unexpected ways. There’s no reason to think we can’t get through modern technological disruptions using similar coping and adaptation strategies.

Will the technologies that Wallach fears bring about a “techstorm” that overwhelms our culture, our economy, and even our very humanity? It’s certainly possible, and we should continue to seriously discuss the issues that he and other skeptics raise about our expanding technological capabilities and the potential for many of them to do great harm. Because some of them truly could.

But it is equally plausible—in fact, some of us would say, highly probable—that instead of overwhelming us, we learn how to bend these new technological capabilities to our will and make them work for our collective benefit. Instead of technology becoming “a dangerous master,” we will instead make it our helpful servant, just as we have so many times before.

APPENDIX: When Does Precaution Make Sense?

[excerpt from chapter 3 of Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom. Footnotes omitted. See book for all references.]

But aren’t there times when a certain degree of precautionary policymaking makes good sense? Indeed, there are, and it is important to not dismiss every argument in favor of precautionary principle–based policymaking, even though it should not be the default policy rule in debates over technological innovation.

The challenge of determining when precautionary policies make sense comes down to weighing the (often limited) evidence about any given technology and its impact and then deciding whether the potential downsides of unrestricted use are so potentially catastrophic that trial-and-error experimentation simply cannot be allowed to continue. There certainly are some circumstances when such a precautionary rule might make sense. Governments restrict the possession of uranium and bazookas, to name just two obvious examples.

Generally speaking, permissionless innovation should remain the norm in the vast majority of cases, but there will be some scenarios where the threat of tangible, immediate, irreversible, catastrophic harm associated with new innovations could require at least a light version of the precautionary principle to be applied.  In these cases, we might be better suited to think about when an “anti-catastrophe principle” is needed, which narrows the scope of the precautionary principle and focuses it more appropriately on the most unambiguously worst-case scenarios that meet those criteria.

But most cases don’t fall into this category. Instead, we generally allow innovators and consumers to freely experiment with technologies, and even engage in risky behaviors, unless a compelling case can be made that precautionary regulation is absolutely necessary.  How is the determination made regarding when precaution makes sense? This is where the role of benefit-cost analysis (BCA) and regulatory impact analysis is essential to getting policy right.  BCA represents an effort to formally identify the tradeoffs associated with regulatory proposals and, to the maximum extent feasible, quantify those benefits and costs.  BCA generally cautions against preemptive, precautionary regulation unless all other options have been exhausted—thus allowing trial-and-error experimentation and “learning by doing” to continue. (The mechanics of BCA are discussed in more detail in section VII.)

This is not the end of the evaluation, however. Policymakers also need to consider the complexities associated with traditional regulatory remedies in a world where technological control is increasingly challenging and quite costly. It is not feasible to throw unlimited resources at every problem, because society’s resources are finite.  We must balance risk probabilities and carefully weigh the likelihood that any given intervention has a chance of creating positive change in a cost-effective fashion.  And it is also essential to take into account the potential unintended consequences and long-term costs of any given solution because, as Harvard law professor Cass Sunstein notes, “it makes no sense to take steps to avert catastrophe if those very steps would create catastrophic risks of their own.”  “The precautionary principle rests upon an illusion that actions have no consequences beyond their intended ends,” observes Frank B. Cross of the University of Texas. But “there is no such thing as a risk-free lunch. Efforts to eliminate any given risk will create some new risks,” he says.

Oftentimes, after working through all these considerations about whether to regulate new technologies or technological processes, the best solution will be to do nothing because, as noted throughout this book, we should never underestimate the amazing ingenuity and resiliency of humans to find creative solutions to the problems posed by technological change.  (Section V discusses the importance of individual and social adaptation and resiliency in greater detail.) Other times we might find that, while some solutions are needed to address the potential risks associated with new technologies, nonregulatory alternatives are also available and should be given a chance before top-down precautionary regulations are imposed. (Section VII considers those alternative solutions in more detail.)

Finally, it is again essential to reiterate that we are talking here about the dangers of precautionary thinking as a public policy prerogative—that is, precautionary regulations that are mandated and enforced by government officials. By contrast, precautionary steps may be far more wise when undertaken in a more decentralized manner by individuals, families, businesses, groups, and other organizations. In other words, as I have noted elsewhere in much longer articles on the topic, “there is a different choice architecture at work when risk is managed in a localized manner as opposed to a society-wide fashion,” and risk-mitigation strategies that might make a great deal of sense for individuals, households, or organizations, might not be nearly as effective if imposed on the entire population as a legal or regulatory directive.

Finally, at times, more morally significant issues may exist that demand an even more exhaustive exploration of the impact of technological change on humanity. Perhaps the most notable examples arise in the field of advance medical treatments and biotechnology. Genetic experimentation and human cloning, for example, raise profound questions about altering human nature or abilities as well as the relationship between generations.

The case for policy prudence in these matters is easier to make because we are quite literally talking about the future of what it means to be human.  Controversies have raged for decades over the question of when life begins and how it should end. But these debates will be greatly magnified and extended in coming years to include equally thorny philosophical questions.  Should parents be allowed to use advanced genetic technologies to select the specific attributes they desire in their children? Or should parents at least be able to take advantage of genetic screening and genome modification technologies that ensure their children won’t suffer from specific diseases or ailments once born?

Outside the realm of technologically enhanced procreation, profound questions are already being raised about the sort of technological enhancements adults might make to their own bodies. How much of the human body can be replaced with robotic or bionic technologies before we cease to be human and become cyborgs?  As another example, “biohacking”—efforts by average citizens working together to enhance various human capabilities, typically by experimenting on their own bodies —could become more prevalent in coming years.  Collaborative forums, such as Biohack.Me, already exist where individuals can share information and collaborate on various projects of this sort.  Advocates of such amateur biohacking sometimes refer to themselves as “grinders,” which Ben Popper of the Verge defines as “homebrew biohackers [who are] obsessed with the idea of human enhancement [and] who are looking for new ways to put machines into their bodies.”

These technologies and capabilities will raise thorny ethical and legal issues as they advance. Ethically, they will raise questions of what it means to be human and the limits of what people should be allowed to do to their own bodies. In the field of law, they will challenge existing health and safety regulations imposed by the FDA and other government bodies.

Again, most innovation policy debates—including most of the technologies discussed throughout this book—do not involve such morally weighty questions. In the abstract, of course, philosophers might argue that every debate about technological innovation has an impact on the future of humanity and “what it means to be human.” But few have much of a direct influence on that question, and even fewer involve the sort of potentially immediate, irreversible, or catastrophic outcomes that should concern policymakers.

In most cases, therefore, we should let trial-and-error experimentation continue because “experimentation is part and parcel of innovation” and the key to social learning and economic prosperity.  If we froze all forms of technological innovation in place while we sorted through every possible outcome, no progress would ever occur. “Experimentation matters,” notes Harvard Business School professor Stefan H. Thomke, “because it fuels the discovery and creation of knowledge and thereby leads to the development and improvement of products, processes, systems, and organizations.”

Of course, ongoing experimentation with new technologies always entails certain risks and potential downsides, but the central argument of this book is that (a) the upsides of technological innovation almost always outweigh those downsides and that (b) humans have proven remarkably resilient in the face of uncertain, ever-changing futures.

In sum, when it comes to managing or coping with the risks associated with technological change, flexibility and patience is essential. One size most certainly does not fit all. And one-size-fits-all approaches to regulating technological risk are particularly misguided when the benefits associated with technological change are so profound. Indeed, “[t]echnology is widely considered the main source of economic progress”; therefore, nothing could be more important for raising long-term living standards than creating a policy environment conducive to ongoing technological change and the freedom to innovate.

Along with colleagues at the Mercatus Center at George Mason University, I am releasing two major new reports today dealing with the regulation of the sharing economy. The first report is a 20-page filing to the Federal Trade Commission that we are submitting to the agency for its upcoming June 9th workshop on “The “Sharing” Economy: Issues Facing Platforms, Participants, and Regulators.” We have been invited to participate in that event and I will be speaking on the fourth panel of the workshop. The filing I am submitting today for that workshop was co-authored with my Mercatus colleagues Christopher Koopman and Matt Mitchell.

The second report we are releasing today is a new 47-page working paper entitled, “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem.'” This study was co-authored with my Mercatus colleagues Christopher Koopman, Anne Hobson, and Chris Kuiper.

I will summarize each report briefly here.

In our new filing to the FTC, we address the five questions the Commission set forth in its workshop annoucement. Those five questions are as follows:

• How can state and local regulators meet legitimate regulatory goals (such as protecting consumers, and promoting public health and safety) in connection with their oversight of sharing economy platforms and business models, without also restraining competition or hindering innovation?
• How have sharing economy platforms affected competition, innovation, consumer choice, and platform participants in the sectors in which they operate? How might they in the future?
• What consumer protection issues—including privacy and data security, online reviews and disclosures, and claims about earnings and costs—do these platforms raise, and who is responsible for addressing these issues?
• What particular concerns or issues do sharing economy transactions raise regarding the protection of platform participants? What responsibility does a sharing economy platform bear for consumer injury arising from transactions undertaken through the platform?
• How effective are reputation systems and other trust mechanisms, such as the vetting of sellers, insurance coverage, or complaint procedures, in encouraging consumers and suppliers to do business on sharing economy platforms?

We provide detailed answers to each of these questions as well as one additional major question that was not posed by the Commission in its workshop notice but which is, no doubt, on the minds of many at the agency and outside it: What should the FTC do about state and local barriers to entry and innovation that might be thwarting the growth of the sharing economy? (I blogged about that issue here a couple of weeks ago and our filing includes that discussion.)

Please take a look at our filing for detailed answers to each of these questions. (Incidentally, our filing is an extension of an earlier working paper that Koopman, Mitchell, and I released late last year on “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change.”) But, to briefly highlight the thrust of our argument, here’s a passage from our new filing:

As the debate surrounding the sharing economy moves forward, policymakers must keep in mind that merely because regulations were once justified on the grounds of consumer protection does not mean they accomplished those goals or that they are still needed today. Even well-intentioned policies must be judged against real-world evidence. Unfortunately, the evidence shows that many traditional consumer protection regulations hurt consumers; in the words of New York Attorney General Eric Schneiderman, they are often “cumbersome, and some are just plain protectionist.” Markets, competition, reputational systems, and ongoing innovation often solve problems better than regulation when they are given a chance to do so. There are two reasons for this. First, market imperfections create powerful profit opportunities for entrepreneurs who are able to find ways to correct them. Second, regulatory solutions too often undermine competition and lock in inefficient business models.

We continue on to explain exactly why that is the case, while also offering some constructive solutions to other issues that are on the minds of regulators.

Meanwhile, the new working paper we are releasing today provides much greater detail on the fifth of the five questions the FTC posed in its workshop notice regarding reputation systems and other trust mechanisms. Here is the abstract from the paper:

This paper argues that the sharing economy—through the use of the Internet and real time reputational feedback mechanisms—is providing a solution to the lemons problem that many regulators have spent decades attempting to overcome. Section I provides an overview of the sharing economy and traces its rapid growth. Section II revisits the lemons theory as well as the various regulatory solutions proposed to deal with the problem of asymmetric information. Section III discusses the relationship between reputation and trust and analyzes how reputational incentives affect commercial interactions. Section IV discusses how information asymmetries were addressed in the pre-Internet era. It also discusses how the evolution of both the Internet and information systems (especially the reputational feedback mechanisms of the sharing economy) addresses the lemons problem. Section V explains how these new realities affect public policy and concludes that asymmetric information is not a legitimate rationale for policy intervention in light of technological changes. We also argue that continued use of this rationale to regulate in the name of consumer protection might, in fact, make consumers worse off. This has ramifications for the current debate over regulation of the sharing economy.

We believe that our research makes it clear “how the sharing economy relies upon—and has helped spur the growth of—sophisticated reputational feedback mechanisms that facilitate online trust and commerce, overcoming many of the information asymmetries that seemed intractable… just a generation ago. In combination with online review services and other information-sharing technologies enabled by the Internet,” we conclude, “these reputational tools can help create more effective, and largely self-regulating, markets that provide more information to more individuals than ever before.”

We look forward to continuing engagement with officials at the FTC and other policymakers at the federal, state, and even international level on these issues. We hope our research will help legislators and regulators find sensible ways to adjust policy for the sharing economy so as not to derail the sort of “permissionless innovation” that has thus far powered this exciting sector and produced the many pro-consumer benefits flowing from it. Check out our filing and new paper for more details.

The sharing economy is growing faster than ever and becoming a hot policy topic these days. I’ve been fielding a lot of media calls lately about the nature of the sharing economy and how it should be regulated. (See latest clip below from the Stossel show on Fox Business Network.) Thus, I sketched out some general thoughts about the issue and thought I would share them here, along with some helpful additional reading I have come across while researching the issue. I’d welcome comments on this outline as well as suggestions for additional reading. (Note: I’ve also embedded some useful images from Jeremiah Owyang of Crowd Companies.)

1) Just because policymakers claim that regulation is meant to protect consumers does not mean it actually does so.

1. Cronyism/ Rent-seeking: Regulation is often “captured” by powerful and politically well-connected incumbents and used to their own benefit. (+ Lobbying activity creates deadweight losses for society.)
2. Innovation-killing: Regulations become a formidable barrier to new innovation, entry, and entrepreneurism.
3. Unintended consequences: Instead of resulting in lower prices & better service, the opposite often happens: Higher prices & lower quality service. (Example: Painting all cabs same color destroying branding & ability to differentiate).

2) The Internet and information technology alleviates the need for top-down regulation & actually does a better job of serving consumers.

1. Ease of entry/innovation in online world means that new entrants can come in to provide better options and solve problems previously thought to be unsolvable in the absence of regulation.
2. Informational empowerment: The Internet and information technology solves old problem of lack of consumer access to information about products and services. This gives them monitoring tools to find more and better choices. (i.e., it lowers both search costs & transaction costs). (“To the extent that consumer protection regulation is based on the claim that consumers lack adequate information, the case for government intervention is weakened by the Internet’s powerful and unprecedented ability to provide timely and pointed consumer information.” – John C. Moorhouse)
3. Feedback mechanisms (product & service rating / review systems) create powerful reputational incentives for all parties involved in transactions to perform better.
4. Self-regulating markets: The combination of these three factors results in a powerful check on market power or abusive behavior. The result is reasonably well-functioning and self-regulating markets. Bad actors get weeded out.
5. Law should evolve: When circumstances change dramatically, regulation should as well. If traditional rationales for regulation evaporate, or new technology or competition alleviates need for it, then the law should adapt.

3) Sharing economy has demonstrably improved consumer welfare. It provides:

1. more choices / competition
2. more service innovation / differentiation
3. better prices
4. higher quality services  (safety & cleanliness /convenience / peace of mind)
5. Better options & conditions for workers

4) If we need to “level the (regulatory) playing field,” best way to do so is by “deregulating down” to put everyone on equal footing; not by “regulating up” to achieve parity.

1. Regulatory asymmetry is real: Incumbents are right that they are at disadvantage relative to new sharing economy start-ups.
2. Don’t punish new innovations for it: But solution is not to just roll the old regulatory regime onto the new innovators.
3. Parity through liberalization: Instead, policymakers should “deregulate down” to achieve regulatory parity. Loosen old rules on incumbents as new entrants challenge status quo.
4. “Permissionless innovation” should trump “precautionary principle” regulation: Preemptive, precautionary regulation does not improve consumer welfare. Competition and choice do better. Thus, our default position toward the sharing economy should be “innovation allowed” or permissionless innovation.
5. Alternative remedies exist: Accidents will always happen, of course. But insurance, contracts, product liability, and other legal remedies exist when things go wrong. The difference is that ex post remedies don’t discourage innovation and competition like ex ante regulation does. By trying to head off every hypothetical worst-case scenario, preemptive regulations actually discourage many best-case scenarios from ever coming about.

5) Bottom line = Good intentions only get you so far in this world.

1. Just because a law was put on the books for noble purposes, it does not mean it really accomplished those goals, or still does so today.
2. Markets, competition, and ongoing innovation typically solve problems better than law when we give them a chance to do so.

[P.S. On 9/30, my Mercatus Center colleague Matt Mitchell posted this excellent follow-up essay building on my outline and improving it greatly.]

Additional Reading

• Randolph J. May & Michael J. Horney, “The Sharing Economy: A Positive Shared Vision for the Future,” Free State Foundation, Perspectives from FSF Scholars, Vol. 9, No. 26, July 30, 2014.
• R.J. Lehmann, “The Sharing Economy Will Thrive Only If Government Doesn’t Strangle It,” Reason, August 2, 2014.
• Andrew Moylan and R.J. Lehmann, “Five Principles for Regulating the Sharing Economy,” R Street, Policy Study No. 26, July 2014.
• Eli Lehrer & Andrew Moylan, “Embracing the Peer-Production Economy,” National Affairs, 2014, p. 51-63.
• Arun Sundararajan, “Why the Government Doesn’t Need to Regulate the Sharing Economy,” Wired, October 22, 2012.
• Matthew Mitchell and Michael Farren, “If you Like Uber, You Would’ve Loved the Jitney,” LA Times, July 12, 2014.
• Daniel M. Rothschild, “How Uber and Airbnb Resurrect ‘Dead Capital,’” The Umlaut, April 9, 2014.
• Daniel M. Rothschild, “Renters and Rent-Seeking in San Francisco,” Technology Liberation Front, April 15, 2014.
• [podcast] Michael Munger on the Sharing Economy, EconTalk, July 7, 2014.
• video of Michael Munger talk on the Sharing Economy, September 25, 2014.
• John C. Moorhouse, “Consumer Protection Regulation and Information on the Internet,” in Fred E. Foldvary & Daniel B. Klein (eds), The Half-Life of Policy Rationales: How New Technology Affects Old Policy Issues (Cato Institute, 2003).
• Rachel Bostman, What’s Mine is Yours: The Rise of Collaborative Consumption (2010).
• Jeremiah Owyang, A Glossary of Emerging Terms in the Collaborative Economy, August 29, 2014

Give us our drone-delivered beer!

That’s how the conversation got started between John Stossel and me on his show this week. I appeared on Stossel’s Fox Business TV show to discuss the many beneficial uses of private drones. The problem is that drones — which are more appropriately called unmanned aircraft systems — have an image problem. When we think about drones today, they often conjure up images of nefarious military machines dealing death and destruction from above in a far-off land. And certainly plenty of that happens today (far, far too much in my personal opinion, but that’s a rant best left for another day!).

But any technology can be put to both good and bad uses, and drones are merely the latest in a long list of “dual-use technologies,” which have both military uses and peaceful private uses. Other examples of dual-use technologies include: automobiles, airplanes, ships, rockets and propulsion systems, chemicals, computers and electronic systems, lasers, sensors, and so on. Put simply, almost any technology that can be used to wage war can also be used to wage peace and commerce. And that’s equally true for drones, which come in many sizes and have many peaceful, non-military uses. Thus, it would be wrong to judge them based upon their early military history or how they are currently perceived. (After all, let’s not forget that the Internet’s early origins were militaristic in character, too!)

Some of the other beneficial uses and applications of unmanned aircraft systems include: agricultural (crop inspection & management, surveying); environmental (geological, forest management, tornado & hurricane research); industrial (site & service inspection, surveying); infrastructure management (traffic and accident monitoring); public safety (search & rescue, post-natural disaster services, other law enforcement); and delivery services (goods & parcels, food & beverages, flowers, medicines, etc.), just to name a few.

This is why it is troubling that the Federal Aviation Administration (FAA) continues to threaten private drone operators with cease-and-desist letters and discourage the many beneficial uses of these technologies, even as other countries rush ahead and green-light private drone services. As I noted on the Stossel show, while the FAA is well-intentioned in its efforts to keep the nation’s skies safe, the agency is allowing hypothetical worst-case scenarios get in the way of beneficial innovation. A lot of this fear is driven by privacy concerns, too. But as Brookings Institution senior fellow John Villasenor has explained, we need to be careful about rushing to preemptively control new technologies based on hypothetical privacy fears:

If, in 1995, comprehensive legislation to protect Internet privacy had been enacted, it would have utterly failed to anticipate the complexities that arose after the turn of the century with the growth of social networking and location-based wireless services. The Internet has proven useful and valuable in ways that were difficult to imagine over a decade and a half ago, and it has created privacy challenges that were equally difficult to imagine. Legislative initiatives in the mid-1990s to heavily regulate the Internet in the name of privacy would likely have impeded its growth while also failing to address the more complex privacy issues that arose years later.

This is a key theme discussed throughout my new book, “Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.” The central lesson of the booklet is that living in constant fear of hypothetical worst-case scenarios — and premising public policy upon them — means that best-case scenarios will never come about. We shouldn’t let our initial (and often irrational) fears of new technologies dictate the future course of innovation.We can and will find constructive solutions to the hard problems posed by new technologies because we creative and resilient creatures. And, yes, some regulation will be necessary. But how and when we regulate matters profoundly. Preemptive, precautionary-based proposals are almost never the best way to start.

Finally, as I also noted during the interview with Stossel, it’s always important to consider trade-offs and opportunity costs when discussing the disruptive impact of new technologies. For example, while some fear the safety implications of private drones, we should not forget that over 30,000 people die in automobile-related accidents every year in the United States. While the number of vehicle-related deaths has been declining in recent years, that remains an astonishing number of deaths. What if a new technology existed that could help prevent a significant number of these fatalities? Certainly, “smart car” technology and fully autonomous “driverless cars” should help bring down that number significantly. But how might drones help?

Consider some of the mundane tasks that automobiles are used for today. Cars are used to go grab dinner or have someone else deliver it, to pick up medicine at a local pharmacy, to have newspapers or flowers delivered, and so on. Every time a human gets behind the wheel of an automobile to do these things the chance for injury or even death exists, even close to home. In fact, a large percentage of all accidents happen with just a few miles of the car owner’s home. A significant number of those accidents could be avoided if we were able to rely on drone-delivery of things we today use cars and trucks for.

These are just some of the things to consider as the debate over unmanned aircraft systems continues. Drones have gotten a very bad name thus far, but we should remain open-minded about their many beneficial, peaceful, and pro-consumer uses.

(For more on this issue, read this April 2013 filing to the FAA I wrote along with my Mercatus colleagues Eli Dourado and Jerry Brito.)

According to a report today from SAI Business Insider, “The Federal Trade Commission is actively investigating Twitter and the way it deals with the companies building applications and services for its platform.”  Apparently the agency has reached out to some competing application / platform providers to ask questions about Twitter’s recent efforts to exert more control over the uses of its API by third parties. [The Wall Street Journal confirms the FTC’s interest in Twitter.]

It remains to be seen whether this leads to any serious regulatory action against Twitter by the FTC, but such a move wouldn’t necessarily be surprising considering the more activist tilt of the agency recently. It’s even less surprising considering that Columbia University law professor and prolific cyberlaw scholar Tim Wu was appointed as a senior advisor to the FTC earlier this year. When the announcement of Wu’s appointment was made, the Wall Street Journal kicked off an article with the warning, “Silicon Valley has a new fear factor.”  It seems the Journal may have been on to something!

It’s impossible to know how much of an influence Tim Wu is having on the agency, but as I have noted here before, Prof. Wu is man with a healthy appetite for regulatory activism. [See all my essays about Wu’s work here.] Moreover, he’s a man who has already determined that Twitter is a “monopolist” in his November 13, 2010 Wall Street Journal op-ed, “In the Grip of the New Monopolists.”

That essay prompted a fiery response from me [“Tim Wu Redefines Monopoly“] as well as a far more reasoned essay by antitrust gurus Geoff Manne and Josh Wright [“What’s An Internet Monopolist? A Reply to Professor Wu.”] Prof. Wu was kind enough to swing by the TLF and respond to my criticisms in an essay “On the Definition of Monopoly,” which he said served as a “corrective” to my earlier essay [even though I continue to believe that what I said fairly reflected the last four decades of economic wisdom on competition policy and that it is Wu who is well off the reservation with his expansionist views of antitrust enforcement].

Regardless of what one thinks about that exchange, if the FTC is moving forward with a case against Twitter, three practical questions need to be considered: (1) What’s the relevant market? (2) Where’s the harm? and (3) What’s the remedy?

I’ll briefly discuss each question below but should also mention that I already explored many of these issues in my essay,  “A Vision of (Regulatory) Things to Come for Twitter,” so I apologize in advance for the repetition.  I will then discuss all this in the context of Tim Wu’s latest law review article on “Agency Threats” and what he approvingly refers to as regulatory “threat regimes.”

On Market Definition

As I noted in my previous essays, it’s very much unclear how to define the contours of the market Twitter serves. After all, Twitter is only a few years old and it competes with many other forms of communication and information dissemination. For me, Twitter is a partial substitute for blogging, IMs, email, phone calls, RSS feeds, and even radio and television news. Yet, like most others, I continue to use all those other technologies and those technologies continue to pressure Twitter to innovate.

Whatever market it serves, however, Tim Wu is apparently willing to write off that market as already “in the grip” of Twitter. But does Wu really believe that nothing better will come along to compete against Twitter or even replace it entirely?  It reminds me of all the hand-wringing we heard about AOL a decade ago when people predicted its “walled gardens” would someday rule the Internet and IM.  And we all know how that turned out.

If you ask me, this episode again reflects the short-term, static snapshot thinking we all too often see at work in debates over media and technology policy. That is, many cyber-worrywarts are prone to taking snapshots of market activity and suggesting that temporary patterns are permanent disasters requiring immediate correction. Of course, a more dynamic view of progress and competition holds that “market failures” and “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up responses than by coercive, top-down approaches. [More on that conflict of visions in my book chapter on “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters.”]

Regardless, I just don’t see how Wu or the FTC can claim Twitter has monopolized a market that is still so young that we can’t even define it.

On Harm

Even if one accepted Wu’s premise that Twitter was a monopolist, where is the harm? At least in theory, antitrust law is supposed to be about protecting consumer welfare, not competitors. If this whole thing is about UberMedia losing out in some bidding wars for alternative Twitter platforms, well, that’s just pathetic. UberMedia is free to develop or bid on alternative Twitter applications or work with others to develop entirely new services. It’s not like there’s a shortage of them out there.

If the theory is that consumers are being harmed by Twitter exerting more control over its API, I would just remind everyone that (a) we don’t pay a cent for the service that Twitter provides and (b) Twitter is still scrambling to find a way to monetize its service for the long-haul. There are also some legitimate security issues in play here that cut against the claim that what Twitter is doing is anti-consumer.

In sum, it is hard to understand where the harm lies in Twitter taking greater control of its API, and there’s certainly nothing stopping rival innovators from tying to offer a competing service.  140-character text messages aren’t exactly the stuff of traditional “information empires,” as Wu would call them.

On Remedies

Finally, we come to the thorny issue of remedies. I suppose the easiest remedy would be a prohibition on Twitter acquiring any third-party applications provider that currently relies on Twitter’s API. In other words, downstream vertical integration would be forbidden. But there’s about 40 years of antitrust literature explaining why such integration is generally pro-innovation and pro-consumer and shouldn’t be made illegal by antitrust law. Tim Wu may not buy that–and if you’ve read his recent book The Master Switch, you know he absolutely rejects it–but it is standard thinking in the field of industrial organization and antitrust economics today. Most of the economists at the FTC and DOJ could tell him as much.

Another alternative remedy might be Jonathan Zittrain’s “API neutrality” idea, proposed in his 2008 book, The Future of the Internet and How to Stop It. Zittrain suggested that API neutrality–essentially a variant of Net neutrality but for application protocols–might be needed to ensure fair access to certain services or platforms to guarantee that digital “generativity” was not imperiled. On pg. 181 of the book, Zittrain argued that:

“If there is a present worldwide threat to neutrality in the movement of bits, it comes not from restrictions on traditional Internet access that can be evaded using generative PCs, but from enhancements to traditional and emerging appliancized services that are not open to third-party tinkering.”

After engaging in some hand-wringing about “walled gardens” and “mediated experiences,” Zittrain went on to ask: “So when should we consider network neutrality-style mandates for appliancized systems?” He responds to his own question as follows:

“The answer lies in that subset of appliancized systems that seeks to gain the benefits of third-party contributions while reserving the right to exclude it later. … Those who offer open APIs on the Net in an attempt to harness the generative cycle ought to remain application-neutral after their efforts have succeeded, so all those who built on top of their interface can continue to do so on equal terms.” (p. 184)

This might be a fine generic principle, but Zittrain implies that this should be a legal standard to which online providers are held. At one point, he even alludes to the possibility of applying the common law principle of adverse possession more broadly in these contexts. He notes that adverse possession “dictates that people who openly occupy another’s private property without the owner’s explicit objection (or, for that matter, permission) can, after a lengthy period of time, come to legitimately acquire it.” But he doesn’t make it clear when it would be triggered as it pertains to digital platforms or APIs.

Nonetheless, one could imagine it would be one remedy antitrust officials might look to when considering what to do about Twitter exerting greater control over its API. Essentially, Twitter would become the equivalent of a public utility that all would have access to on regulated terms.

As I noted in the first of my many reviews of Zittrain’s book, there are many problems with the logic of API neutrality or the application of adverse possession in these contexts. Here’s my critique of the “API neutrality” notion (again, this is from 2008 so it now sounds a bit dated):

First, most developers who offer open APIs aren’t likely to close them later precisely because they don’t want to incur the wrath of “those who built on top of their interface.” But, second, for the sake of argument, let’s say they did want to abandoned previously open APIs and move to some sort of walled garden. So what? Isn’t that called marketplace experimentation? Are we really going to make that illegal? Finally, if they were so foolish as to engage in such games, it might be the best thing that ever happened to the market and consumers since it could encourage more entry and innovation as people seek out more open, pro-generative alternatives. Consider this example: Now that Apple has opened to door to third-party iPhone development a bit with the SDK, does that mean that under Jonathan’s proposed paradigm we should treat the iPhone as the equivalent of commoditized common carriage device? That seems incredibly misguided to me. If Steve Jobs opens the development door just a little bit only to slam it shut a short time later, he will pay dearly for that mistake in the marketplace. For God’s sake, just spend a few minutes over on the Howard Forums or the PPC Geeks forum if you want to get a taste for the insane amount of tinkering going on out there in the mobile world right now on other systems. If Apple tries to roll back the clock, Microsoft and others will be all too happy to take their business by offering a wealth of devices that allow you to tinker to your heart’s content. We should let such experiments continue and let the future of the Internet be determined by market choices, not regulatory choices such as forced API neutrality.

I think the same critique would apply to efforts to impose API neutrality on Twitter.  Regardless, would such a remedy be imposed through targeted regulatory action, an antitrust consent decree, or perhaps through what Tim Wu calls “agency threats”?

Wu’s “Threat Regime” Model of Internet Governance

Prof. Wu recently published a law review article on “Agency Threats” and what he approvingly refers to as “threat regimes.” The paper is a “defense of regulatory threats in particular contexts.”  Here’s a portion of the abstract:

The use of threats instead of law can be a useful choice — not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and are best justified when the industry is undergoing rapid change — under conditions of “high uncertainty.” Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known.

I’m extremely troubled by this reasoning and can think of a couple of alternative labels for such behavior by government agencies: unaccountable, above-the-law, unconstitutional, anti-democratic, thuggery, regulatory blackmail, and so on.

But what’s even more troubling about Wu’s thinking about “threat regimes” is that he assumes this arbitrary mode of governing-by-intimidation makes even more sense in fast-moving high-tech industries. That seems counter-intuitive. If a given sector finds itself in a state of “high uncertainty” as Wu calls it, doesn’t that mean, by definition, it is dynamic and subject to forces that might bring about beneficial change? And shouldn’t we assume that those are the last sectors we would want regulators monkeying with since bureaucrats lack the requisite knowledge of how to best guide the evolution of complex information technologies?

Wu seems to believe that regulators possess a crystal ball and a set of magical dials that can guide the evolution of technology markets to a better equilibrium through the use of constant Sunstein-ian “nudges” (or perhaps shoves).  I think that’s poppycock.

Regardless, once we realize that this is the way Tim Wu thinks, an FTC investigation into Twitter’s current business practices starts to make a lot more sense. It’s about creating a “threat regime” that intimidates Twitter into to playing by the arbitrary rules of Washington bureaucrats instead of responding to marketplace demands and developments in a natural, evolutionary way. In fact, in his “threats” essay, Wu explicitly rejects that model:

The second option—“wait and see”—may sound attractive because it allows the industry to develop in what might be called a natural way. This approach, however, makes a great sacrifice: the public’s interest may be entirely unrepresented during the industry’s formative period. The risk is that the industry’s norms and business models will, effectively, be set without any public input. Waiting for the industry to settle down may result in undesirable practices that prove extremely hard to reverse or influence with rules issued later. To state the matter more colloquially, the industry may be “baked” by the time there is any real oversight or public input.

In essence, Wu desires a “mixed economy” model for high-tech sectors in which decision are guided at every juncture by the supposed wisdom of techno-cratic philosopher kings like himself. We must trust that he and his fellow regulators will guide us and our economy down an more enlightened path. And we must accept that some “threats” may be necessary to get the job done.

I find this mode of thinking disturbing in the extreme because of the rank hubris at the center of it. Regardless, Twitter appears to be well on its way to becoming a test case for Wu’s “threat” model of Internet governance.

PFF today released the fifth installment in our ongoing series on “The Wrong Way to Reinvent Media.” This series of papers explores various tax and regulatory proposals that would have government play an expanded role in supporting the press, journalism, or other media content. In the latest essay, Berin Szoka, Ken Ferree, and I discuss proposals for direct subsidies for failing media outlets and out-of-work journalists.

We argue taxpayer support for failing outlets and unemployed journalists implicates significant First Amendment concerns. On the whole, subsidies can make “journalists and media operators more dependent upon the State; compromise press independence and diminish public trust in the free press; and result in government discrimination in the politically inescapable dilemma of determining eligibility for subsidies.” Such an agenda would also entail huge cost to taxpayers—initially about $35 billion per year according to advocates—and would represent “a massive wealth transfer from one class of speakers to another…”

We warn that calls for seemingly beneficent bailouts “to save” the media and journalism may actually be driven by those who have something more nefarious in mind: a “post-corporate” world shorn of media capitalists, and “such radicalism must be rejected if we hope to sustain a truly free press and uphold America’s proud tradition of keeping a high and tight wall of separation between Press and State.”

The ideas within these and other essays in the series will be worked into a major PFF filing in the Federal Communications Commission’s (FCC) proceeding on the “Future of Media” on May 7. The paper may be viewed online here and I’ve attached it down below in a Scribd reader.

Wrong Way to Reinvent Media Part 5 – Media Bailouts [Thierer Szoka Ferree – PFF] http://d1.scribdassets.com/ScribdViewer.swf

As I’ve mentioned here previously, PFF has been rolling out a new series of essays examining proposals that would have the government play a greater role in sustaining struggling media enterprises, “saving journalism,” or promoting more “public interest” content. We’re releasing these as we get ready to submit a big filing in the FCC’s “Future of Media” proceeding (deadline is May 7^th).  Here’s a podcast Berin Szoka and I did providing an overview of the series and what the FCC is doing.

In the first installment of the series, Berin and I critiqued an old idea that’s suddenly gained new currency: taxing media devices or distribution systems to fund media content. In the second installment, I took a hard look at proposals to impose fees on broadcast spectrum licenses and channeling the proceeds to a “public square channel” or some other type of public media or “public interest” content.

In our latest essay, “The Wrong Way to Reinvent Media, Part 3: Media Vouchers,” Berin and I consider whether it is possible to steer citizens toward so-called “hard news” and get them to financially support it through the use of “news vouchers” or “public interest vouchers”?  We argue that using the tax code to “nudge” people to support media — while less problematic than direct subsidies for the press — will likely raise serious issues regarding eligibility and be prone to political meddling.  Moreover, it’s unlikely the scheme will actually encourage people to direct more resources to hard news but instead just become a method of subsidizing other content they already consume.

I’ve attached the entire essay down below.

The Wrong Way to Reinvent Media, Part 3: Media Vouchers

by Adam Thierer & Berin Szoka*

PFF Progress on Point 17.4 [PDF]

Should the government play a greater role in the media sector in the name of sustaining struggling media enterprises, “saving journalism,” or promoting public media?  In this ongoing series of essays, we’ve been analyzing proposals that would have public policymakers use taxes, subsidies, or regulations to accomplish those objectives.

Part 1 of this series examined proposals to fund media content via a tax on consumer electronics, broadband service, or cell phone bills.^[1] Part 2 critiqued proposals to impose fees on broadcast spectrum licenses and channeling the proceeds to a “public square channel” or some other type of public media or “public interest” content.^[2] Other essays in this series will address proposals to tax private advertising revenues to support public media; expand postal subsidies; directly subsidize out-of-work journalists; and to prop up or bail out failing media entities.  A wrap-up essay will then focus on some potentially constructive policy reforms that could assist media enterprises without a massive infusion of state support or regulation of the press.

In this installment, we will consider whether it is possible to steer citizens toward so-called “hard news” (“serious” journalism)—and get them to financially support it—through the use of “news vouchers” or “public interest vouchers”?  We will argue that using the tax code to nudge people to support media—while less problematic than direct subsidies for the press—will likely raise serious issues regarding eligibility and be prone to political meddling.  Moreover, it’s unlikely the scheme will actually encourage people to direct more resources to hard news but instead just become a method of subsidizing other content they already consume.

Funding Hard News is Hard

Funding “hard news” has always been challenging.  Financing a team of dedicated local beat reporters, investigative journalists, national desks, foreign bureaus, and all the associated production facilities and support staff is an extremely expensive undertaking.[3] And, for all that trouble and expense, hard news rarely turns a healthy profit.  Often it has been considered a “loss leader” for media companies and has been cross-subsidized by other types of content or services.[4] This is why “bundling” has been such a popular model for many media operations such as newspapers, magazines, and cable television.  By tying news production to other types of content or services, media operators have been able to sustain the production of hard news, despite its general unprofitability on its own.

It’s worth recalling that a business model to sustain hard news production and dissemination on a mass scale really only developed mid-way through our Republic.  The early history of media in this country was characterized by the “partisan press” due to the heavy reliance on a patronage model and direct association with political parties and figures. This changed with the rise of large daily newspapers in the mid-1800s and then broadcast radio and television in the early half of the 20 ^th century.[5] Media providers were able to cross-subsidize news production independent of private or political patronage thanks to three things: (1) high-speed printing presses or broadcast facilities, (2) geographic-based market and pricing power, and (3) the widespread advertising base that was made possible by (1) and (2).

Over just the past 15-20 years, we’ve seen this traditional model upended.  Increased competition and technological/platform proliferation are placing an enormous strain on traditional media operations and business models. Schumpeterian “creative destruction” is at work in a serious, and for many, painful, way.

This is what is keeping the Federal Communications Commission,[6] the Federal Trade Commission,[7] some in Congress,[8] and many media worrywarts up at night: the fear that, as traditional financing mechanisms falter (advertising, classifieds, subscription revenues, etc.), many traditional news-gathering efforts and institutions will disappear.  And that’s leading to calls for government intervention or assistance of some sort to prop up struggling entities or directly subsidize the hard news that many of them have traditionally provided but may not be able to for much for longer.

Can Vouchers “Nudge” Citizens to Support Hard News?

One much-discussed proposal would create a “public interest voucher” or what Robert W. McChesney & John Nichols, authors of the new book The Death and Life of American Journalism, call a “Citizenship News Voucher.”^[9] This is a variant on the “artistic freedom voucher,” an idea first put forward in 2003 by economist Dean Baker as an alternative to copyright law as a means of incentivizing artistic creation.[10] The regulatory activist group Free Press, which McChesney founded, has also endorsed a news voucher scheme.[11]

The idea is fairly straightforward: give every American a voucher (McChesney and Nichols propose $200) to support the non-profit news entities of their choice by listing those entities on their tax return.  (If half of all adult Americans actually used their voucher, that would cost at least $20 billion/year.[12])  They assume this would be an efficient way of channeling money to hard news providers while avoiding the serious concerns that arise when government officials or agencies are the ones providing or steering the subsidies.  McChesney and Nichols go so far as to call their tax-and-redistribute proposal “a libertarian’s dream,” since “people can support whatever political viewpoint they prefer or do nothing at all.”[13]

McChesney and Nichols seem to be building on the approach popularized by Richard Thaler and Cass Sunstein in their highly influential 2008 book Nudge: Improving Decisions about Health, Wealth, and Happiness.^[14] Based on behavioral economics studies, Thaler and Sunstein argue that both government and private actors must inevitably make decisions about “choice architecture” and that, by setting defaults, incentives and rules smartly, “choice architects” can and should improve private decision-making—but only where they can do so without blocking, fencing-off or significantly burdening choices.^[15] While their proposal might not qualify as a nudge in the strict sense defined by Thaler and Sunstein, the essential similarity between the concepts lies in trying to restructure the choices Americans make about media consumption by changing how they spend money on media—with the declared goal of “improving” both media consumption and the media itself (by “freeing it” of supposedly evil corporate influences).

Problems with the News Voucher Proposal

While nudges might be less objectionable in circumstances where it’s objectively evident what’s really “good” for us, the same can hardly be said for media consumption.  “Nudging” consumers towards better media choices isn’t based on clear science about, say, eating better or getting more exercise, but on highly subjective decisions about what kind of information consumption is really good for individuals, communities, and polities.  For policymakers to imagine that they can steer the public’s tastes or behavior in more desirable directions through law (including media subsidy schemes) is a profoundly elitist enterprise.^[16] In the case of “news vouchers,” the hope is that the public can be encouraged to at least channel some additional support to news-gathering activities and institutions.  The problem, however, is that some people just don’t much like being “nudged” by officials from afar and they’ll often take steps to evade such paternalism—however ostensibly “libertarian” it might be.  And it could lead to a host of unintended consequences, discussed further below.[17]

As a general matter, it simply isn’t possible to make consumers choose the “right” media in an age of information abundance.^[18] With so many voices competing for our attention, it’s impossible make people watch, listen, or read if they don’t want to.  That’s especially true with hard news, which has never netted major ratings.  As Ellen P. Goodman of the Rutgers-Camden School of Law has noted: “Given the proliferation of consumer filtering and choice, these kinds of interventions are of questionable efficacy.  Consumers equipped with digital selection and filtering tools are likely to avoid content they do not demand no matter what the regulatory efforts to force exposure.”[19] As Goodman rightly argues, “regulation cannot, in a liberal democracy, force viewers to consume media products they do not think they want in the name of the public interest.”[20] There’s no reason to believe this situation has ever been different or will ever change:  Writing in 1922, famed journalist Walter Lippmann noted that, “it is possible to make a rough estimate only of the amount of attention people give each day to informing themselves about public affairs,” but “the time each day is small when any of us is directly exposed to information from our unseen environment.”[21]

McChesney and Nichols’ effort to sell this scheme as “a libertarian’s dream” is a huge stretch.  There aren’t too many libertarians—or anyone else for that matter—who favor sending more money to the federal government only to win back the right to spend it on “qualifying media entities.”  And regarding their claim that “people can support whatever political viewpoint they prefer or do nothing at all,” well, people are already free to do whatever they want with their money when it comes to media products!  Why do we need to send money to Washington first and then have policymakers tell us how we can spend it?  This seems like a needless nudge—and one that would likely result in government bureaucracy taking a cut of the money or meddling in media markets.

Analogies to educational vouchers don’t work because we long ago decided to treat education as a public good and force everyone to pay for it.  “Voucherization” may make sense as a more efficient and “libertarian” way to fund such traditional public goods, when we absolutely have to force people to spend money on certain goods or services.  While McChesney and Nichols claim that the time has come for the government to fund media as such a public good, most people probably wouldn’t agree, since the private provision of media services has worked quite well for some time—being funded by a mix of advertising and subscription revenues for centuries.  They repeatedly claim that era is over (with little substantiation) but, in reality, it is their policies that would end private, for-profit media by taxing and regulating it to death.[22]

Second, what counts as a “qualifying media entity,” and how will the IRS make that call?  Can just any outlet that purports to gather and report “news” draw support from this new federal program?  McChesney and Nichols aren’t clear: They want the IRS to “determine eligibility—according to universal standards that err on the side of expanding rather than constraining the number of serious sources covering and commenting on issues of the day.”[23] They specify only that the entity must be a non-profit (though not necessarily a federally-recognized 501(c)(3)); not accept advertising; “do exclusively media content”; “cannot be part of a larger organization or have any non-media operations”; and that everything the medium produces must be made available immediately upon publication on the Internet and made available for free to all.”[24] But, anticipating objections about the dangers of political meddling, they also insist that “the government will not evaluate the content to see that the money is going toward journalism.  Our assumption is that these criteria will effectively produce that result, and if there is some slippage so be it.”[25] The only mechanism they can suggest for reducing fraud and ensuring “seriousness” is that, “for a medium to receive funds it would have to get commitments for at least $20,000 worth of vouchers” (100 full donations of the $200 voucher).[26]

But will policymakers really let citizens redeem their vouchers on The National Inquirer or People magazine?  How about the satirical The Onion or Jon Stewart’s Daily Show?  “This is a risk we are more than willing to take,” McChesney and Nichols say since they are “operating on a gut instinct that people will use their vouchers to fund serious media while reaching into their pockets to pay for copies of The National Inquirer at the supermarket checkout.”^[27] Of course, it’s always easier to take such risks when you are playing with other people’s money!  (Nearly half of all Americans don’t pay any Federal income taxes,[28] so their $200 news voucher is definitely coming out of someone else’s tax bill.)

But it’s naïve to believe this idea is going to change the face of journalism in any serious way.  Most people will spend their vouchers on whatever media outlets and content they are currently consuming, which probably isn’t what McChesney and Nichols (or most policymakers) would prefer.  “The program may not develop exactly the type of journalism our greatest thinkers believe is necessary,” McChesney and Nichols admit.[29] But the real question is: What sort of demands will policymakers begin making if the voucher program ends up channeling money into media entities that don’t measure up to their standards or desires?  Qualification criteria would inevitably become the tool of political meddling.

The Inevitable Strings & the Political/Constitutional Paradox

This raises a fourth concern: How long will it be before government starts attaching more strings to the vouchers?  To borrow a recent headline from The Wall Street Journal, how long will it be before the “Economic Policy ‘Nudge’ Gives Way to a Shove?”^[30] Although, in theory, the news voucher idea lets consumers figure out how to steer the funds, it’s unlikely much of those funds would go toward hard news, civic-minded or “high brow” content if consumers were actually free to choose.  How do we know this?  Because we already know what consumers choose today—and those “poor” choices are part of the supposed “problem” to be solved by media vouchers.  Once people start redirecting taxpayer dollars to content that the elites and policymakers don’t like, the nudge will become a shove and more interventions will follow in the form of “voucher guidance and compliance” hearings, rules, etc.

But the pressure for strings won’t just come from the top down because, as Thomas Jefferson famously put it in the 1786 Virginia Act for Establishing Religious Freedom, “to compel a man to furnish contributions of money for the propagation of opinions which he disbelieves, is sinful and tyrannical.”[31] That is, we naturally—and rightly—resent subsidizing speech that is antithetical to our own values.  McChesney and Nichols dismiss this natural (presumably bourgeois?) indignation by saying, “people will have to accept that some of the vouchers are going to go to media that they detest.”^[32] In one sense, they are dead wrong: People won’t just accept that.  They may accept subtle, indirect subsidies, but the more clear it becomes that they are being forced to pay for media they detest—and that could scarcely be more clear than with a refundable tax credit “voucher”—they will protest and demand that certain viewpoints, or at least kinds of content, be deemed out of bounds.

But in another sense, McChesney and Nichols are probably correct: For such a scheme to work, it probably can’t come with any content strings, because this is probably what the First Amendment would require.  Yet they don’t actually explain that point, stopping only to say that we all just have to become more tolerant of “dissent”— i.e., subsidize those who disagree with us!  In this sense, news vouchers therefore would likely fall prey to a common paradox faced by proposals for the government to subsidize speech: What’s politically feasible is unconstitutional and what’s constitutional is politically impossible.  Specifically, the kinds of eligibility restrictions necessary to push a voucher scheme through Congress would probably cause the courts to strike down the whole scheme.  Even if the courts were willing to strike down only the eligibility provisions as “severable” from the rest of the scheme, the whole scheme would likely die in the very next federal budget if the courts require the funding of “offensive” or “frivolous” content.  Understanding why this is the case requires a brief overview of key First Amendment case law.

In general, “when the Government appropriates public funds to establish a program it is entitled to define the limits of that program.”^[33] Thus, in its 1991 Rust v. Sullivan decision, the Supreme Court upheld a law forbidding federal funding for family planning services to go to abortion counseling.^[34] But the Supreme Court later clarified that such viewpoint discrimination is permissible only “[w]hen the government disburses public funds to private entities to convey a governmental message.”^[35] By contrast, where subsidies are “designed to facilitate private speech,” government may not discriminate against viewpoints it does not like.^[36] Thus, the government may not fund legal services but bar funding for defendants trying to amend or otherwise challenge existing welfare law.^[37]

The First Amendment prohibits not only such viewpoint discrimination but content discrimination as well.  In 2003, the Supreme Court held that the University of Virginia could not exclude religious groups from drawing on the University’s Student Activity Fund, even though the Fund’s eligibility requirements did not discriminate against any particular religion.^[38] Yet in 1995, the Court had upheld another content restriction: a requirement that the National Endowment for the Arts (NEA) “take into consideration general standards of decency and respect for the diverse beliefs and values of the American public” when making grants to “help create and sustain not only a climate encouraging freedom of thought, imagination, and inquiry but also the material conditions facilitating the release of . . . creative talent.”^[39] The Court concluded, in an 8-1 majority, that the “’decency and respect’ criteria do not silence speakers by expressly threaten[ing] censorship of ideas.”^[40] This decision rested largely on the fact that “Educational programs are central to the NEA’s mission” and “it is well established that ‘decency’ is a permissible factor where ‘educational suitability’ motivates its consideration.”^[41] The Court left the door open to future First Amendment challenges to the statute “as applied,” such as “[i]f the NEA were to leverage its power to award subsidies on the basis of subjective criteria into a penalty on disfavored viewpoints.”^[42]

What explains these starkly different outcomes is that the Court decided that the University of Virginia’s Student Activity Fund constituted a “limited public forum”^[43] intended to “encourage a diversity of views from private speakers,” but the NEA did not.  The University had funded all speech except “religious editorial viewpoints” from its Student Activities Fund, into which every student paid a $14 mandatory fee each semester.  By contrast, the NEA made only a limited number of grants through a “competitive process” according to principles of inherently content-based principles of “excellence” as well as “geographic, ethnic, and esthetic diversity.”  Thus, it was permissible, in principle, for the NEA to exclude “indecent” content.

The Supreme Court’s decision in U.S. v. American Library Association, Inc. (2003) also suggests that content restrictions regarding Citizen News Vouchers would be struck down.  The Court held that the First Amendment did not bar Congress from requiring in the Children’s Internet Protection Act (CIPA) that “a public library may not receive federal assistance to provide Internet access unless it installs software to block images that constitute obscenity or child pornography, and to prevent minors from obtaining access to material that is harmful to them.”^[44] Critically, the Court held that libraries were not public fora:

A public library does not acquire Internet terminals in order to create a public forum for Web publishers to express themselves, any more than it collects books in order to provide a public forum for the authors of books to speak. It provides Internet access, not to “encourage a diversity of views from private speakers” … but for the same reasons it offers other library resources: to facilitate research, learning, and recreational pursuits by furnishing materials of requisite and appropriate quality.^[45]

But what is the purpose of the news voucher scheme if not to “encourage a diversity of views from private speakers?”  Indeed, this is precisely how McChesney and Nichols attempt to sell their scheme—as a “libertarian’s dream.”  But, paradoxically, the more “libertarian” and broader subsidies for speech are, the more likely the political/constitutional paradox mentioned above is to arise.

The Citizenship News Voucher Fund proposed by McChesney and Nichols strongly resembles the University of Virginia’s Student Activity Fund:  In both cases, consumers are taxed to finance a fund that is, in theory, available to any entity that meets certain basic eligibility criteria.  No attempt is made in either case to ensure the quality of content or activities being funded.  Indeed, McChesney and Nichols explicitly reject such oversight of voucher spending and insist that taxpayers must accept that much of the fund will simply be wasted on media that falls well short of the “hard” or “serious” news they’re trying to save.  (By contrast, the Corporation for Public Broadcasting, whose budget McChesney and Nichols propose increasing nine-fold to fund more public media,[46] more closely resembles the NEA as a selective grant-maker.)

Also distinguishing the Court’s decision upholding CIPA’s content-based restrictions is the fact that both Justice Kennedy in his concurrence and Justice Souter in his dissent (joined by Justice Ginsburg) agreed that First Amendment problems could be solved to the extent that adults could opt-out of filtering.^[47] But with news vouchers, the government either restricts the eligibility of certain publications to receive vouchers depending on their eligibility or it does not.

Furthermore, unlike with CIPA or the NEA, the Citizenship News Voucher wouldn’t be related to educational settings, so it’s not even clear a “decency” requirement like that Congress imposed on the NEA’s grant-making could be imposed on voucher eligibility.[48] Magazines like Playboy offer a mix of pornography and thoughtful commentary on the news, proving that there is a market for such combination of journalism and controversial entertainment and photography.  Going even further, “Naked News” is a daily show whose buxom anchors strip while delivering the news.^[49] Why wouldn’t millions of Americans, especially younger men, use their voucher for such content?  Who’s going to draw the line between porn-spiced news and “serious” content?

The typical taxpayer will be outraged by having to subsidize some media outlet, whether because of its objectionable viewpoint or indecent or unserious content.  He will fiercely resist being compelled “to furnish contributions of money for the propagation of opinions which he disbelieves and abhors,” as Jefferson put it.  Good luck getting even the most “tolerant” gay voters, for example, to accept being taxed to pay for fundamentalist Christian perspectives on the news—or vice versa!  McChesney and Nichols don’t actually say anything about the First Amendment, but do recognize that, for their program to be accepted, the American people will have to swallow the “hard pill” of accepting that “some of the vouchers are going to go to media that they detest” and “embrace dissent in reality and not just rhetoric.”^[50] They seem to think this “hard pill” is a benefit of their scheme because it would teach us all to be more tolerant of “dissent.”  That’s easy for an endowed professor at a taxpayer-funded university and avowed neo-Marxist like Robert McChesney to say, but it’s not likely to fly with most Americans.  Disputes over “qualifying entity” eligibility will only add new rancor to the Culture Wars (over sex, abortion, religion, politics, etc.).

Realistically, it would likely take years for a news voucher bill to make its way through Congress, and if it ever did pass, it would likely be tied up in the courts for years, requiring at least one visit to the Supreme Court.  If any content strings are included, the law could well lead to the same kind of ordeal as with the 1998 Child Online Protection Act, which spent nearly 9 years in litigation and went up to the Supreme Court twice.^[51] Yet somehow McChesney and Nichols imagine their proposal will save media today at this critical moment of technological transition.

Down with Copyright, Down with Capitalism?

There’s another problematic caveat to the McChesney-Nichols variant of the news voucher idea: They would disallow any copyright protection or advertising support for an entity who receives voucher funds.  That’s an effort by the authors to steer even more media activity away from the commercial sphere and toward what might be thought of as a “public option” for the press—what McChesney and Nichols euphemistically (and repeatedly) call “post-corporate” media.

Let’s not forget that McChesney has argued (during an interview on the Canadian-based “Socialist Project”) that “the ultimate goal is to get rid of the media capitalists,” and that, “unless you make significant changes in the media, it will be vastly more difficult to have a revolution.”  So, it’s important to keep his true intentions in mind when he starts claiming to have found “a libertarian’s dream” of a solution to what ails America’s media sector.^[52] It sounds more like a central planner’s dream.  The true “libertarian’s dream” would be to leave Americans free to make their own choices about media without additional meddling from the State, and to look to innovation to fund media through a combination of advertising, sponsorship, subscriptions and micropayments.

Related PFF Publications

• The Wrong Way to Reinvent Media, Part 2: Broadcast Spectrum Taxes to Subsidize Public Media , Adam Thierer, Progress on Point 17.2, March 2010.
• The Wrong Way to Reinvent Media, Part 1: Taxes on Consumer Electronics, Mobile Phones & Broadband, Adam Thierer & Berin Szoka, PFF Progress on Point 17.1, March 2010.
• Testimony at FCC’s Hearing on “Serving the Public Interest in the Digital Era”, Adam Thierer, March 2010.
• Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 2010.
• Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News, Adam Thierer & Berin Szoka, Progress Snapshot 6.1, Jan. 13, 2010.
• Socializing Media in Order to Save It, Adam Thierer, City Journal, March 2009.
• A Manifesto for Media Freedom, Adam Thierer and Brian Anderson, 2008.
• Media Ownership Proceedings, W. Kenneth Ferree, Testimony before the Federal Communications Commission, Nov. 3, 2009.
• Media Myths: Making Sense of the Debate over Media Ownership, Adam Thierer, June 2005.

[1] Adam Thierer & Berin Szoka, The Progress & Freedom Foundation, The Wrong Way to Reinvent Media, Part 1: Taxes on Consumer Electronics, Mobile Phones & Broadband, PFF Progress on Point 17.1, March 2010, www.pff.org/issues-pubs/pops/2010/pop17.1-the_wrong_way_to_reinvent_media.pdf.

[2] Adam Thierer, The Progress & Freedom Foundation, The Wrong Way to Reinvent Media, Part 2: Broadcast Spectrum Taxes to Subsidize Public Media, Progress on Point 17.2, March 2010, www.pff.org/issues-pubs/pops/2010/pop17.2-wrong_way_part_2.pdf

[3] “Until now, the iron core of news has been somewhat sheltered by an economic model that was able to provide extra resources beyond what readers—and advertisers—would financially support. This kind of news is expensive to produce, especially investigative reporting.” Alex S. Jones, Losing the News: The Future of the News that Feeds Democracy (2009) at 4.

[4] “For a long time, publishers have used news as a ‘loss leader,’ a product sold below costs to create other sales.” The Media Consortium, The Big Thaw: Charting a New Future for Journalism, July 2009, at 36, www.themediaconsortium.org/thebigthaw.

[5] James T. Hamilton notes that, “nonpartisan reporting emerged as a commercial product in American newspaper markets in the 1870s.  Before that time, many papers openly proclaimed association with a particular political party.”  James T. Hamilton, All the News That’s Fit to Sell (2004), at 3.

[6] The Federal Communications Commission (FCC) recently kicked off a new “Future of Media” effort with a workshop on “Serving the Public Interest in the Digital Era.” See Federal Communications Commission, FCC Launches Examination of the Future of Media and Information Needs of Communities in a Digital Age, FCC Public Notice, GN Docket No. 10-25, Jan. 21, 2010, at 2, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-10-100A1.pdf

[7] The Federal Trade Commission (FTC) has hosted two workshops asking “How Will Journalism Survive the Internet Age?” www.ftc.gov/opp/workshops/news/index.shtml

[8] Both the Senate and House of Representatives have held hearings about “the future of journalism,” and Senator Benjamin L. Cardin (D-MD) recently introduced the “Newspaper Revitalization Act,” which would allow newspapers to become nonprofit organizations in an effort to help them stay afloat—but also curtail their political editorializing.  See http://cardin.senate.gov/news/record.cfm?id=310392.

[9] Robert W. McChesney & John Nichols, The Death and Life of American Journalism (2010) at 201-206. McChesney discussed this idea in more detail when he spoke at the recent FTC event on saving journalism.  Robert W. McChesney, Rejuvenating American Journalism: Some Tentative Policy Proposals, Presentation to FTC Workshop on Journalism, March 10, 2010, www.ftc.gov/opp/workshops/news/mar9/docs/mcchesney.pdf

[10] Dean Baker, The Artistic Freedom Voucher: An Internet Age Alternative to Copyrights, Nov. 5, 2003, www.cepr.net/documents/publications/ip_2003_11.pdf.

[11] Free Press, Saving the News: Toward a National Journalism Strategy, May 2009, at 36, www.freepress.net/files/saving_the_news.pdf.

[12] McChesney & Nichols, supra note 9 at 205.

[13] Id. at 204.

[14] Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (2008).

[15] They define choice architecture as follows:  “A structure designed by a choice architect(s) to improve the quality of decisions made by homo sapiens. Often invisible, choice architecture is the specific user-friendly shape of an organization’s policy or physical building when homo sapiens come into contact with it. Examples of choice architecture include a voter ballot, a procedure for handling well-meaning people who forget a deadline, or a skyscraper.”  Nudge Glossary of Terms, www.nudges.org/glossary.cfm.

[16] See Adam Thierer & Berin Szoka, The Progress & Freedom Foundation, What Unites Advocates of Speech Controls & Privacy Regulation?, Progress on Point 16.19, Aug. 11, 2009, www.pff.org/issues-pubs/pops/2009/pop16.19-unites-speech-and-privacy-reg-advocates.pdf.

[17] As Glen Whitman notes in challenging such “nudging”: “the new paternalism carries a serious risk of expansion. Following its policy recommendations places us on a slippery slope from soft paternalism to hard. This would be true even if policymakers — including legislators, judges, bureaucrats, and voters — were completely rational. But the danger is especially great if policymakers exhibit the same cognitive biases attributed to the people they’re trying to help.”  Glen Whitman, The Rise of the New Paternalism, Cato Unbound, April 5, 2010, www.cato-unbound.org/2010/04/05/glen-whitman/the-rise-of-the-new-paternalism.

[18] Adam Thierer, The Progress & Freedom Foundation, Why Expansion of the FCC’s Public Interest Regulatory Regime is Unwise, Unneeded, Unconstitutional, and Unenforceable, Testimony Before the Federal Communications Commission Hearing on “Serving the Public Interest in the Digital Era,” March 4, 2010, www.pff.org/issues-pubs/testimony/2010/2010-03-04-Thierer_Remarks_at_FCC_Hearing.pdf.

[19] Ellen P. Goodman, “Proactive Media Policy in an Age of Content Abundance,” in Philip M. Napoli, ed., Media Diversity and Localism: Meaning and Metrics (2007) at 370, 374.

[20] Id.

[21] Walter Lippmann, Public Opinion (1922), at 53, 57.

[22] For example, among other things, McChesney and Nichols call for a 5% tax on consumer electronics, a 3% tax on monthly ISP & cell phone bills, a 2% sales tax on advertising, and a 7% tax on broadcasters.  See McChesney & Nichols, supra note 9 at 209-11.

[23] Id. at 202.

[24] Id.

[25] Id.

[26] Id.

[27] Id. at 205.

[28] http://www.taxpolicycenter.org/UploadedPDF/1001289_who_pays.pdf

[29] McChesney & Nichols, supra note 9 at 205.

[30] Jonathan Weisman, Economic Policy ‘Nudge’ Gives Way to a Shove, Wall Street Journal, March 8, 2010, http://online.wsj.com/article/SB10001424052748704869304575103980232739138.html.

[31] http://religiousfreedom.lib.virginia.edu/sacred/vaact.html

[32] McChesney & Nichols, supra note 9 at 205.

[33] Rust v. Sullivan, 500 U.S. 173, 194 (1991).

[34] Id. (emphasis added).

[35] Rosenberger v. Rector and Visitors of Univ. of Va., 515 U.S. 819, 833 (1995) (emphasis added).

[36] Legal Services Corp. v. Velazquez, 531 US 533, 542 (2001).  The Court in Rosenberger noted:

even in the provision of subsidies, the Government may not “ai[m] at the suppression of dangerous ideas,” Regan v. Taxation with Representation of Wash., 461 U.S. 540, 550 (1983), and if a subsidy were “manipulated” to have a “coercive effect,” then relief could be appropriate. See Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221, 237 (1987) (Scalia, J., dissenting); see also Leathers v. Medlock, 499 U.S. 439, 447 (1991) (“[D]ifferential taxation of First Amendment speakers is constitutionally suspect when it threatens to suppress the expression of particular ideas or viewpoints”). In addition…, a more pressing constitutional question would arise if Government funding resulted in the imposition of a disproportionate burden calculated to drive “certain ideas or viewpoints from the marketplace.” Simon & Schuster, Inc. v. Members of N. Y. State Crime Victims Bd., 502 U.S. 105, 116 (1991).

Id. at 587.

[37] 531 U.S. at 542.

[38] Rosenberger v. Rector and Visitors of Univ. of Va., 515 U.S. 819, 833 (1995).  The University’s rule prohibited funding of any group that “primarily promotes or manifests a particular belie[f] in or about a deity or an ultimate reality.”

[39] National Endowment for the Arts v. Finley, 524 U.S. 569, 574 (1998).

[40] 524 U.S. at 583 (quoting R. A. V. v. St. Paul, 505 U.S. 377 (1992) (internal quotations omitted).

[41] Id. at 584 (citing  Board of Ed., Island Trees Union Free School Dist. No. 26 v. Pico, 457 U.S. 853, 871 (1982); see also Bethel School Dist. No. 403 v. Fraser, 478 U.S. 675, 683 (1986)).

[42] Id. at 587.

[43] 515 U.S. 819 (1995).

[44] U.S. v. American Library Association, Inc., 539 U.S. 194 (2003).  See generally Robert Corn-Revere, United States v. American Library Association: A Missed Opportunity for the Supreme Court to Clarify Application of First Amendment Law to Publicly Funded Expressive Institutions, Cato Supreme Court Rev. 105, 2003, www.cato.org/pubs/scr2003/publiclyfunded.pdf.

[45] Id. at 207 (quoting Rosenberger, 515 U.S. at 834).

[46] McChesney & Nichols, supra note 9 at 192, 199.

[47] “If, on the request of an adult user, a librarian will unblock filtered material or disable the Internet software filter without significant delay, there is little to this case.” American Library Association, 539 U.S. at 214 (Kennedy, J. concurring).  Justice Souter agreed that it would ‘‘tak[e] the curse off the statute for all practical purposes’’ if adult patrons could obtain an unblocked Internet terminal ‘‘simply for the asking,’’ but doubted this would actually happen in practice.  Id. at 232.

[48] Cf. Rosenberger, 515 U.S. at 584 (“Educational programs are central to the NEA’s mission.… And it is well established that ‘decency’ is a permissible factor where ‘educational suitability’ motivates its consideration.”).

[49] See www.nakednews.com.

[50] Id. at 205.

[51] See Adam Thierer, Closing the Book on COPA?, Technology Liberation Front, Jan. 21, 2009, http://techliberation.com/2009/01/21/closing-the-book-on-copa/.

[52] Adam Thierer, The Progress & Freedom Foundation, Free Press, Robert McChesney & the “Struggle” for Media, Aug. 10, 2009, http://blog.pff.org/archives/2009/08/free_press_robert_mcchesney_the_struggle_for_media.html

Wrong Way to Reinvent Media Part 3 – Media Vouchers [Thierer & Szoka – PFF] http://d1.scribdassets.com/ScribdViewer.swf

By Adam Thierer & Berin Szoka

In a series of upcoming essays, we will be examining proposals being put forward today that would have the government play a greater role in sustaining struggling media enterprises, “saving journalism,” or promoting more “public interest” content. The reason we’re working up this multi-part series is because, with many traditional media operators struggling, and questions being raised about how journalism in particular will be supported in the future, Washington policymakers are currently considering what role government can and should play in helping media providers reinvent themselves in the face of tumultuous technological change wrought by the Digital Revolution.

For example, the Federal Communications Commission (FCC) recently kicked off a new “Future of Media” effort with a workshop on “Serving the Public Interest in the Digital Era.” (The  filing deadline for the FCC’s “Future of Media” proceeding is May 7^th).  Likewise, the Federal Trade Commission (FTC) has hosted two workshops asking “How Will Journalism Survive the Internet Age?”  Meanwhile, the Senate has already held hearings about “the future of journalism,” and Senator Benjamin L. Cardin (D-MD) recently introduced the “Newspaper Revitalization Act,” which would allow newspapers to become tax-exempt non-profits in an effort to help them stay afloat.

Thus, in light of Washington’s sudden interest in the future of media and journalism, we will be taking a hard look at several issues and proposals that are being floated today, including:

• Taxes on media devices, mobile phones, or broadband bills to channel money to media enterprises / content;
• Taxes / fees on broadcasters to funnel support to their public sector competitors or to public interest programs;
• “News vouchers” or “public interest vouchers” that would encourage citizens to channel support to media providers;
• Taxes on private advertising to subsidize non-commercial / public media content;
• Expanded postal subsidies for media mail; and
• Targeted welfare programs for out-of-work journalists or corporate welfare in the form of bailouts for failing media enterprises.

You won’t be surprised to hear that we are generally quite skeptical of most of these ideas, but we promise to give each one serious consideration.  We’ll kick things off tomorrow with our essay on why taxing media devices or distribution systems to fund media content is not a particularly good idea.

by Adam Thierer & Berin Szoka, Progress Snaphot 6.1

Stephanie Clifford of the  New York Times posted a very interesting article this week summarizing a recent “on-the-record chat” the Times staff had with Federal Trade Commission (FTC) chairman Jon Leibowitz and FTC Bureau of Consumer Protection chief David Vladeck.  The interview [discussed by Braden here] is profoundly important in that it reveals an alarming disconnect regarding the relationship between “privacy” regulation and the future of media, which were the subjects of their discussion with Times staff.  Namely, Leibowitz and Vladeck apparently fail to appreciate how the delicate balance between commercial advertising and journalism is at risk precisely because of the sort of regulations they apparently are ready to adopt.  Because the value of online advertising depends on data about its effectiveness and consumers’ likely interests, and because advertising is indispensable to funding media, what’s ultimately at stake here is nothing short of the future of press freedom.

The “Day of Reckoning” Is Upon Us

Leibowitz and Vladeck spend the first half of The Times interview wringing their hands about “privacy policies,” the declarations made by websites and advertising networks about their data collection and use practices (for which the FTC can and must hold them accountable).  But the two feel that privacy policies don’t adequately inform consumers.  Chairman Leibowitz claims that online companies “haven’t given consumers effective notice, so they can make effective choices.”  And Mr. Vladeck states that advise-and-consent models “depended on the fiction that people were meaningfully giving consent.” But he and the FTC seem ready to abandon the notice and choice model because the “literature is clear” that few people read privacy policies, Vladeck told the Times.  He and Leibowitz continue:

“Philosophically, we wonder if we’re moving to a post-disclosure era and what that would look like,” Mr. Vladeck said. “What’s the substitute for it?” He said the commission was still looking into the issue, but it hoped to have an answer by June or July, when it plans to publish a report on the subject. Mr. Leibowitz gave a hint as to what might be included: “I have a sense, and it’s still amorphous, that we might head toward opt-in,” Mr. Leibowitz said.

This clearly foreshadows the regulatory endgame we have long suspected was coming.  When the FTC released its “Self-Regulatory Principles for Online Behavioral Advertising” eleven months ago, we asked: “What’s the Harm & Where Are We Heading?”  Their answers to both questions have become clearer with each new calculated comment—all apparently intended to slowly “turn up the heat” on the advertising industry so that the proverbial frog will stay in the pot until the water finally boils.  Leibowitz’s FTC has simply dodged the “harm” question with a four-part strategy:

1. Cobble together a “record” full of sympathy-evoking anecdotes submitted by advocates of regulation in comments and the FTC’s ongoing “Exploring Privacy” Roundtables;
2. Let the most extreme Chicken Littles fulminate about the grand conspiracy of “neuromarketing manipulation” and the like (and sometimes even shout down FTC staff in panel discussions) in order to redefine the “reasonable center” of the debate;
3. Define-down “harm” as purely a matter of “consumer expectations” or consumers’ “dignity interests” (whatever that vague and infinitely elastic term means); and
4. Attack the effectiveness of “consent” itself by suggesting that consumers cannot be trusted to understand privacy policies or be expected to make any effort to protect their own privacy.

Conveniently, this strategy leads right back to the “day of reckoning” Chairman Leibowitz threatened was coming last February: We are heading precisely where he told us we would be—to full-on, opt-in regulation.  The writing on the wall becomes more apparent every day: Leibowitz set out to bring online advertising to heel even before becoming Chairman, and his Commission is reprising almost precisely the same approach that led to the passage of the Children’s Online Privacy Protection Act (COPPA) of 1998: building a case for new authority, dismissing industry self-regulation as ineffective, and finally presenting a report to Congress intended to produce a rapid legislative response.  After the FTC presented its report on the need for regulation in congressional testimony in June 1998, it took Congress just four months to pass COPPA—and much of that time was consumed by the summer recess.  In short, Leibowitz is mounting a carefully choreographed campaign for increased regulation.

The only real question is whether Leibowitz will somehow try to use the FTC’s existing authority over “unfair or deceptive” trade practices or wait for expanded authority from Congress.  While most observers typically assume that such expanded authority would come in the form of a privacy-specific bill—be it a broad “baseline” privacy bill or one specifically focused on online data collection for advertising purposes—the authority Leibowitz yearns for could just as easily come in the form of increased rulemaking authority as part of a broader bill that allows the FTC to preemptively regulate practices that are not deceptive but merely deemed “unfair.”

This would take the agency “ Back to the Future”—to the late 1970s, when the agency reached the height of its efforts to regulate purely on “unfairness” grounds by trying to ban advertising to children.  The agency’s behavior earned it the moniker “National Nanny” from the Washington Post, hardly a bastion of regulatory skepticism.[1] That outpouring of popular resentment caused a heavily Democratic Congress to cut-off the Democratic-led agency’s regular funding and prohibit it from regulating advertising merely on the grounds of “unfairness.”  In essence, they told the agency to “go back to its knitting” and focus on protecting consumers from demonstrated harms.^[2] Duly chastened (and actually shut down for several days), the FTC formulated a meaningful legal standard for “unfairness,” which Congress codified in 1994: for a practice to be unfair, the injury it causes must be (1) substantial, (2) without offsetting benefits, and (3) one that consumers cannot reasonably avoid.

Under this statutory standard, as FTC Commissioner Thomas Rosch has argued, the commission must carefully consider:

[the] legitimate pro-consumer and pro-competitive benefits that result from [targeted advertising]. Absent hard data weighing these benefits against the limited “invasion of privacy interests” involved, it would seem difficult to conclude that treating that practice as an actionable violation of the “unfairness” prong of Section 5 will pass muster.[3]

So Leibowitz and Vladeck either need to get serious about weighing the costs and benefits of targeted advertising—or, in the absence of such actually measuring these trade-offs, get Congress to give them the authority to regulate.  But one thing is clear from their past statements: they are in a hurry to do  something. As Vladeck told The Times last August, “There is a sense of urgency around here… Consumers, I don’t think are sufficiently protected under the current regime.”  Apparently, the case is closed in their minds.

“Left Hand, Meet Right Hand”

The second half of the  Times interview concerns the future of news. Chairman Leibowitz is not optimistic:

“There are some areas where you clearly see positive creative destruction,” Mr. Leibowitz said, giving the example of travel agents who were replaced by Orbitz and other online-booking systems. The news, he said, was not one of those. “When you’re dealing with something as critical as news is to a democracy, you need to ensure, certainly, that it’s independent, but also that it’s vibrant going forward,” he said. Areas like investigative reporting, foreign and domestic bureaus, and state-house reporting, he said, would likely falter under blog operations because of “economies of scale.”

He said he wasn’t sure what the solution was, but threw out a few ideas discussed at the conference: maybe special tax treatment for newspapers, a Corporation for Public Broadcasting-like fund, or for the newspaper industry to charge fees for the re-use of its content, similar to the model that the American Society of Composers, Authors and Publishers uses. [emphasis added]

Mr. Chairman, with all due respect, haven’t you forgotten about the solution that has powered private media for a few centuries in this country?  You know— advertising!  Indeed, what’s stunning about these comments is the complete disconnect with what Leibowitz and Vladeck said earlier in the interview.  It certainly may be the case that they said more on the subject than what The Times has reported, but given their escalating rhetoric, it seems likely that significantly increased FTC regulation is on the horizon.  And, yet, as Chairman Leibowitz marches us into this brave new world of regulating Internet media through their key funding source, he and Mr. Vladeck seem to have little appreciation of the vital role played by advertising in sustaining a truly free and vibrant press.

An Attack on Advertising Is an Attack on Media Itself

Let’s step back and revisit Media Economics 101.  Almost every serious scholar in the field acknowledges this truism: Advertising cross-subsidizes media platforms and the creation of valuable information—especially news.  “Advertising is the mother’s milk of all the mass media,”  Wall Street Journal technology columnist Walt Mossberg has noted.  Similarly, Harold L. Vogel, author of Entertainment Industry Economics, the leading text in the field, has noted, “Advertising is the key common ingredient in the tactics and strategies of all entertainment and media company business models.  Indeed, it might further be said that advertising has substantively subsidized the production and delivery of news and entertainment throughout the last century.”[4] Mossberg agrees and notes, “Without ads, most editorial products and other programming would be either unavailable or prohibitively expensive.”

The reason for the indispensability of advertising is simple: Information (including news and other forms of “content”) has “public good” characteristics that make it is very difficult (and occasionally impossible) for information-publishers to recoup their investments.  Simply put, they quite literally lack pricing power: Whatever they charge, someone else will charge less for a close substitute, inevitably leading to “free” distribution of the content, even though the content is anything but free to produce.  Advertising is the one business model that has traditionally saved the day by rewarding publishers for attracting the attention of an audience.

Which raises another under-appreciated point: Private advertising promotes press independence.  “Newspapers, magazines, radio, television, and many websites all receive their primary income from advertising,” notes William F. Arens, author of  Contemporary Advertising, another leading textbook in the field. “This facilitates freedom of the press and promotes more complete information” he concludes.[5] Why?  Because, contrary to what some critics claim, advertising and marketing help keep private media providers independent of the need for taxpayer subsidies or private patrons.  This begs an even more profound question: If not advertising, then what else?

A “Public Option” for the Press?

What’s most troubling about Chairman Leibowitz’s comments to the Times is that he has apparently found his alternative to advertising: a “public option” for the press! He mentions special tax treatment for newspapers or a new CPB-like fund (don’t we already have one?) as two possibilities.  That certainly will be music to the ears of radical, pro-regulatory activist groups like the ironically-named “Free Press,” which wants to see a massive “public works” program for the media sector.

Free Press recently filed comments with the FTC in the agency’s recent workshop, “Can Journalism Survive the Internet Age?” and proposed a far-reaching industrial policy for “saving the news.”  They call for over $50 billion in subsidies for the Corporation for Public Broadcasting and other bureaucracies, a “journalism jobs program” for that would be part of AmeriCorps, a variety of new tax incentives for struggling media operations or individuals who support favored institutions, and an assortment of government incentives to encourage local ownership and media divestiture (by handing over control to smaller operators or minority-owned groups).  Ironically, “Free Press” has also floated the concept of “a small tax on advertising” as one way to pay for a press bailout.

The organization’s founder Robert W. McChesney, the prolific neo-Marxist media scholar, penned an essay with John Nichols of The Nation last year, claiming that saving journalism essentially requires that media become an appendage of the State.  Although advertising has supported journalism as a “public good” for centuries, the only way they can conceive to provide a public good is to socialize its means of production.  Thus, journalism, like education and national defense, requires constant government oversight and support: “A moment has arrived at which we must recognize the need to invest tax dollars to create and maintain news gathering, reporting and writing with the purpose of informing all our citizens.”  They ask us to consider the $60 billion in government spending they propose as a “free press ‘infrastructure project,’” which would “keep the press system alive.”

Some in Congress seem willing to listen.  The Senate has already held hearings about the future of journalism.  And Senator Benjamin L. Cardin (D-MD) recently introduced what he has called the “Newspaper Revitalization Act,” which would allow newspapers to become nonprofit organizations in an effort to help them stay afloat.  Importantly, however, the bill would also disallow political endorsements on newspaper editorial pages—which, like campaign finance restrictions, would be a boon for incumbent politicians.  That bill should serve as fair warning to journalists about the sort of strings lawmakers will attach to press-welfare efforts going forward.  What other “golden shackles” might come with media subsidies?

To be clear, Chairman Leibowitz hasn’t called for a complete press takeover along the lines of the Free Press plan.  Yet, he hasn’t answered a key question in this debate: Who pays for news?  He appears ready to endorse a bold new regulatory scheme for the Internet and online media that, in the name of “protecting privacy” would put at risk the one traditionally successful method of supporting private media operations—advertising.  As the Pew Research Center’s Project for Excellence in Journalism noted in its latest State of the News Media report, “The problem facing American journalism is not fundamentally an audience problem or a credibility problem.  It is a revenue problem—the decoupling… of advertising from news.”  There’s probably no way policymakers can stop this process, nor should they try.  But they shouldn’t be creating new obstacles to the survival of traditional media creators, either.

Unfortunately, that’s exactly what Chairman Leibowitz’s new regulatory scheme would do.  The revenue “delta” between “smart” advertising (tailored to consumers’ likely interests and measured for effectiveness in producing clicks, purchases, etc.) and “dumb advertising” (based purely on surrounding keywords or demographics of users presumed to visit the site) is difficult to measure but potentially enormous—even 10 times as great for some sites.[6] The difference between opt-in and opt-out could be nearly as dramatic, because it’s difficult to get consumers to opt-in for anything, especially for small players—which means that opt-in regulation could, perversely, force consolidation in the online advertising and content markets.  If the FTC cares about its statutory responsibility to safeguard competition, they should take this dynamic seriously and be hyper-cautious about heavy-handed mandates that could derail smarter advertising.

Finally, to be fair, in his interview, the Chairman also suggests the newspaper industry might want to find new way “to charge fees for the re-use of its content.”  We’re certainly not opposed to the notion and think that, if it could somehow be made to work (especially by removing antitrust obstacles), it could part of a diverse revenue mix for digital journalism.  But, there’s the rub.  Micropayments inevitably face the problem of “mental transaction costs”  that likely swamp the perceived value of most content and, like pay-walls, have generally worked only in media environments characterized by a scarcity of providers and a uniqueness of a sufficiently valuable product.  These cold, hard economic realities are why advertising remains indispensable.

The Principled Alternative to Regulation

Convinced that privacy policies simply don’t work, Leibowitz and Vladeck are asking what a “post-disclosure era” would look like.  We appreciate the continued sensitivities expressed by certain groups and individuals about online privacy and data use more generally.  But there is another way forward.  We have proposed the following “5-E” layered approach to concerns about online privacy, focusing on restraining government access to data as a clear harm, rather than crippling the private sector uses of data that directly benefit consumers:

1. Erect a higher “Wall of Separation between Web and State” by increasing Americans’ protection from government access to their personal data—thus bringing the Fourth Amendment into the Digital Age.
2. Educate users about privacy risks and data management in general as well as specific practices and policies for safer computing.
3. Empower users to implement their privacy preferences in specific contexts as easily as possible.
4. Enhance self-regulation by industry sectors and companies to integrate with user education and empowerment.
5. Enforce existing laws against unfair and deceptive trade practices as well as state privacy tort laws.

Such a layered approach would not only be a “less restrictive” alternative to top-down, one-size-fits-all government regulation, but also potentially more effective in key respects than government data use/collection mandates.  In an ideal world, adults would be fully empowered to tailor privacy decisions, like speech decisions, to their own values and preferences (“household standards”).  Consumers would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information. Importantly, those tools and methods would give them the ability to block the things they don’t like—annoying ads or the collection of data about them, as well as objectionable content—while also helping them find the information and content they desire.

But of course, the devil’s in the details.  Leibowitz and Vladeck would set the bar so high as to what constitutes “effective” consumer choice that current privacy policies necessarily fail their test—if only because most users don’t care enough to make the “right” privacy choices.  Privacy policies, even if read by relatively few consumers, nonetheless allow privacy advocates, journalists and watchdog-bloggers to scrutinize what companies say they’re doing—promises to which the FTC should hold companies stringently.  That’s clearly not good enough for Leibowitz and Vladeck, who want to give up on “notice and choice” and move on to “opt-in” mandates.  But why not first try to make “notice” more effective?  The advertising industry is currently developing standardized interfaces that could communicate key information about privacy practices in a single icon, label or other easily-digested “consumer touch point.”

More radically, why focus on tinkering with consumer interfaces, when standardized data disclosure formats like the Protocol for Privacy Preferences (P3P) could distill legalistic privacy policies into “machine-readable” code?  Such disclosures could provide a powerful form of “notice” that the ordinary consumer could “use”: simply setting their own privacy preferences in a browser tool that automatically implements those preferences by blocking tracking that users object to.  Such a privacy disclosure format could also allow the FTC to automate enforcement of its existing authority to punish unfair or deceptive trade practices.

Conclusion

And so we return to the question the FTC asked in its recent workshop, “Can Journalism Survive the Internet Age?”  Answer: Not if the FTC kills the golden goose that lays the golden eggs through onerous advertising regulations and data controls in the name of “privacy.”  Chairman Leibowitz and Bureau Chief Vladeck shouldn’t foreclose the possibility that advertising can play a central role in the future of a free press in the Digital Age—just as it has done historically in the United States.  Indeed, they would be wise to remember that advertising has always been with us.  As the Supreme Court noted in its 1996 decision, 44 Liquormart, Inc. v. Rhode Island.

Advertising has been a part of our culture throughout our history. Even in colonial days, the public relied on “commercial speech” for vital information about the market. Early newspapers displayed advertisements for goods and services on their front pages, and town criers called out prices in public squares. Indeed, commercial messages played such a central role in public life prior to the founding that Benjamin Franklin authored his early defense of a free press in support of his decision to print, of all things, an advertisement for voyages to Barbados.[7]

Of course, for advertising to continue to play the role as sustainer of the press, it must be allowed to evolve.  Media operators—large and small alike—must be allowed to craft new strategies, some of which may require data collection and marketing practices that will make some privacy-sensitive users uncomfortable, but will also ensure that the goose keeps on laying golden eggs for them and everyone else.

While Chairman Leibowitz may decry the creative destruction at work in the news sector and information industries today, that shakeup will continue and, no doubt, be painful for incumbent players.  Advertising alone may not “save the day” for media as it has in the past, but it will likely remain essential to sustaining private media platforms and providers going forward— if federal policymakers allow it.  The alternative—massive government intervention into the news and media sectors—is too horrifying to think about.

[1] Washington Post, March 1, 1978.

[2] Congress terminated the FTC’s efforts to prohibit advertising to children, and barred the agency from issuing any advertising regulation predicated solely on unfairness for three years.  FTC Improvements Act, Pub. L. No. 96-252, § 11 (May 1980).  See generally J. Howard Beales, Director of the Bureau of Consumer Protection, Federal Trade Commission, The FTC’s Use of Unfairness Authority: Its Rise, Fall, and Resurrection, www.ftc.gov/speeches/beales/unfair0603.shtm.

[3] Thomas Rosch, Some Reflections on the Future of the Internet: Net Neutrality, Online Behavioral Advertising, and Health Information Technology, Remarks at U.S. Chamber of Commerce Telecommunications & E-Commerce Committee Fall Meeting, October 26, 2009, 13, www.ftc.gov/speeches/rosch/091026chamber.pdf.

[4] Harold L. Vogel, Entertainment Industry Economics (Cambridge, MA: Cambridge University Press, 7th Edition, 2007), at 46.

[5] William F. Arens, Contemporary Advertising (McGraw-Hill Irwin, 10^th Ed., 2006) at 50.

[6] See Berin Szoka & Mark Adams, The Benefits of Online Advertising & Costs of Privacy Regulation, PFF Working Paper, Nov. 8, 2009, www.scribd.com/doc/22445754/Benefits-of-Online-Advertising-Paper.

[7] 517 U.S. 484, 495 (1996), http://www.law.cornell.edu/supct/html/94-1140.ZO.html

______________________________

Related PFF Publications

• Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the Federal Trade Commission “Exploring Privacy” Roundtable, November 10, 2009.
• Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam Thierer, Progress Snapshot 4.19, Sept. 2008.
• Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Berin Szoka & Adam Thierer, Progress on Point 16.2, April 2009.
• Privacy Polls v. Real-World Trade-Offs, Berin Szoka, Progress Snapshot 5.10, Oct. 2009.
• The Benefits of Online Advertising & Costs of Privacy Regulation, Berin Szoka & Mark Adams, PFF Working Paper, Nov. 8, 2009.
• Benefits of Online Advertising, Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard & Jules Polonetsky, PFF Capitol Briefing, July 2009.
• Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 12, 2010.

Today, Berin Szoka and I both testified at the first of three Federal Trade Commission workshops on “Exploring Privacy.” Today’s all-day event featured five panel discussions, and remarks by FTC Chairman Jon Leibowitz, Commissioner Pamela Jones Harbour, and David C. Vladeck, Director of the FTC’s Bureau of Consumer Protection. Our TLF co-blogging colleague Jim Harper also testified on the first panel of the day on “Benefits and Risks of Collecting, Using, and Retaining Consumer Data.” I was on the second panel of the day on “Consumer Expectations and Disclosures.” And Berin was on the third panel on “Online Behavioral Advertising.” The fourth panel was on “Information Brokers” and the fifth panel was on “Exploring Existing Regulatory Frameworks.” On my panel, we discussed the usefulness of privacy polls and surveys. I attempted to make a few simple points when asked for my opinions:

1. While privacy polls and surveys may offer us some interesting insights into how some in the public think about advertising and privacy in the abstract, ultimately, they are no substitute for real-world experiments in which people make real choices, in real time, often with real money, and face many real trade-offs. [See this paper.]
2. Moreover, such polls and surveys fail to account for the fact that consumers are empowered with real privacy controls so they can make the privacy choices that are right for them, rather than a one-size-fits-all choice imposed by someone else. [See this ongoing series and this paper.]
3. (1) & (2) are especially the case since privacy is a highly subjective condition. [See this paper by Jim Harper.]
4. It remains unclear what the harms are that we are trying to protect consumers against. [See this paper and this blog post.]
5. Because of (1), (2), (3), and (4) we need to understand that rational ignorance may often be at work here. Many consumers likely won’t feel the need to read privacy policies or take steps to “protect their privacy” online.

In response to arguments heard on the panel that we should mandate “baseline” regulatory standards, I argued that we face a fundamental question about the future of the Internet and online commerce: Are we going to allow ongoing experimentation with disclosures, dashboards, and other privacy tools, or are we going to foreclose such experimentation and impose one-size-fits-all information regulation regimes?

I argued that it would be a serious mistake to foreclose innovation in this space since we cannot know what the future landscape will look like or what the issues might be we need technology to respond to. I used an example from the field of content regulation by contrasting how we went about labeling and rating television content back in the 1990s by mandating the V-Chip whereas we allowed a market for filtering to evolve spontaneously in the online space. As a result, innovation in the TV ratings arena was frozen and everyone was forced to use the V-Chip and the resulting ratings process. The upside of mandating that approach was that it encouraged everyone to flock to the same content labeling system and technological blocking mechanism on a very rapid basis.
But that was also the downside of the scheme. It discouraged the sort of innovation we saw play out in the online space with the rich mosaic of parental control tools and methods that exist today. In other words, we rejected the “silver-bullet” approach for online media and it resulted in a lot more innovation.

Thus, when considering privacy regulatory models, I argued we should “let a thousand flowers bloom” and encourage a variety of models and tools in response to privacy concerns. That is especially the case in light of point #3 above, that privacy is a highly subjective condition and that no two people are households will feel the same way about privacy or online advertising. We need diverse tools and choices for our diverse citizenry.

Finally, I also pointed out that humility is crucial when considering sweeping privacy regulations based on polling questions and results. I asked the crowd to consider all the new online services and platforms that are wildly popular today — especially social networking sites — where we see users voluntarily sharing massive amounts of extremely personal information with their friends and, in some cases, the entire planet. In light of that, I asked the audience to consider how people might have answered a poll question just 5 years ago that read: “Would you feel comfortable sharing personal details about your private life in the form of an online diary that others could view and share?” I suspect that the vast, vast majority of people asked that question 5 years ago would have responded in the negative. And yet, that is exactly what people are doing every second of the day on Facebook, MySpace, LinkedIn, Ning, and a wide variety of other social networking platforms. We need to realize, as I said above, that real-world experiences and behavior often play out differently than artificial polls, surveys, or lab experiments might suggest.

[For more information about these issues, I encourage you to read Berin Szoka’s recent paper, “Privacy Polls v. Real-World Trade-Offs.” It is attached below as a Scribd document.]

Update: Here are some news stories that discuss yesterday’s workshop:

• “Groups Far Apart on Online Privacy Oversight,” NY Times
• “FTC to Consider Stricter Online Privacy Rules,” PC World
• “Chester Pushes For Under-the-Hood Privacy Check-Up,” Broadcasting & Cable
• “FTC Grapples With Privacy At Roundtable With Industry Professionals, Privacy Advocates, Academics,” Media Post
• “Extent, Need for Total Consumer Understanding of Targeted Ads Debated,” Washington Internet Daily [subscription-only]

Privacy Polls v. Real-World Trade-Offs http://d1.scribdassets.com/ScribdViewer.swf?document_id=20761459&access_key=key-2h7pdl5ijp38pjpbm1t8&page=1&version=1&viewMode=list

by Berin Szoka & Adam Thierer

This morning, the House Energy & Commerce Committee will hold a hearing on “Behavioral Advertising: Industry Practices And Consumers’ Expectations.” If nothing else, it promises to be quite entertaining:  With full-time Google bashers Jeff Chester and Scott Cleland on the agenda, the likelihood that top Google officials will be burned in effigy appears high!

Chester, self-appointed spokesman for what one might call the People for the Ethical Treatment of Data (PETD) movement, is sure to rant and rave about the impending techno-apocalypse that will, like all his other Chicken-Little scenarios, befall us all if online advertisers were permitted to better tailor ads to consumers’ liking. After all, can you imagine the nightmare of less annoying ads that might actually convey more useful information to consumers? Isn’t serving up “untargeted” dumb banner ads for Viagra to young women and Victoria’s Secret ads to Catholic school kids the pinnacle of modern online advertising?  Gods forbid we actually make advertising more relevant and interest-based!  (Those Catholic school boys may appreciate the lingerie ads, but few will likely buy bras.)

Anyway, according to National Journal’s Tech Daily Dose, the hearing lineup also includes:

• Charles Curran, Executive Director, Network Advertising Initiative
• Christopher Kelly, Chief Privacy Officer, Facebook
• Edward Felten, Director, Center for IT Policy, Princeton University
• Anne Toth, Chief Privacy Officer & Vice President, Policy, Yahoo!
• Nicole Wong, Deputy General Counsel, Google

That’s an interesting group and we’re sure that they will say interesting things about the issue. Nonetheless, because four of them have a corporate affiliation that fact will inevitably be used by some critics to dismiss what they have to say about the sensibility of more targeted or interest-based forms of online advertising. So, we’d like to offer a few thoughts and pose a few questions to make sure that Committee members understand why, regardless of what it means for any particular online operator, targeting online advertising is very pro-consumer and essential to the future of online content, culture, and competition.  As Wall Street Journal technology columnist Walt Mossberg has noted, “Advertising is the mother’s milk of all the mass media.”  Much of the “free speech” we all cherish isn’t really free, but ad-supported!

Our Approach

We have previously set forth a framework for analyzing advertising policy issues in two PFF reports: “Online Advertising & User Privacy: Principles to Guide the Debate” and “Targeted Online Advertising: What’s the Harm & Where Are We Heading?” At root, our model depends heavily on two common-sense, and inter-related, principles:

1. We live in a world of trade-offs; and
2. There is no free lunch.

Their Approach

We are deeply concerned that too few people are talking about—or even understand the relevance of—those two principles in the debate over targeted online advertising. It seems that too many who wish to retard the further evolution of the advertising marketplace are living a lie based upon the antithesis of our model. Many privacy advocates seem to imagine that regulatory actions don’t have consequences and that Congress can simply mandate new privacy standards for the Internet without having any impact on the free flow of ideas supported by, and direct facilitated through, advertising.

Simply put, the privacy critics often imagine that their values are indicative of everyone’s values. Our blogging colleague Jim Harper of the Cato Institute has referred to this as “preference imposition” but we’ll use a simpler term: Elitism. In essence, privacy advocates seem to believe that:

1. People are too ignorant, busy or just plain stupid, and cannot be trusted to make wise decisions for themselves (or their children); and/or
2. Everyone shares the same values or concerns when it comes to privacy such that a national “baseline” regulatory standard (namely, mandatory “opt-in” regulations for data collection and use) should govern the entire online marketplace.

Let’s be clear: Such a mandate, and the thinking behind it, would greatly impoverish the future Internet economy. Too many people think of the Internet as a magic box that just keeps cranking out free goodies. But something powers that box of goodies: advertising.  More than anything else, it’s advertising that keeps the Internet “Free, Innovative & Open,” to borrow the slogan of our friends at CDT, which seems to flirt with joining the PETD movement, despite their well-earned reputation for pragmatic skepticism of government interference with the Internet.

The regulatory advocates complain that giving consumers the right to opt-out of data collection and use isn’t meaningful because very few consumers will exercise the opt-out.  Again, they presume that this must be because users just don’t know what’s good for them because of course if they really understood what was being done with “their data,” they would never choose to just “give it away” for a few scraps from the advertisers’ table.  It never occurs to them that (i) many, perhaps most, users just don’t care and that (ii) that their “ignorance” about the all specific details of “how the sausage is made” (online data collection and use practices for targeting advertising) may be completely rational.

But just as importantly, would-be privacy regulatory don’t seem to understand—or perhaps simply don’t care—that what’s true of opt-out is also true of opt-in:  in practice, few people will bother doing either.  In a world of perfect information and infinite time, of course, there would be no difference in outcomes with the two different rules.  But in the real world with real constraints on time, knowledge and everything else, mandating opt-in would make all the difference in the world by severely limiting the ability of advertisers to target advertising.

The Ignored Trade-offs

We’ve been assembling evidence on the real-world costs of restricting targeted advertising. Here are just a few data points we’ve seen to give you a sense of what’s at stake:

• Relevance to Users: The best evidence that users prefer seeing more relevant ads is their increased likeliness to actually click on an ad—instead of just ignoring it or trying to block it. The most recent study of this issue concluded that Click-Through Rates (CTR) can be improved by as much as 670% by using basic behavioral targeting as compared to simple contextual targeting—0r even more than 1000% using more sophisticated targeting. Conversion rates (the percentage of clicks that actually result in a sale) also strongly indicate that consumers find ads more interesting, and in one 2005 study, were estimated to increase up to 3000% with behavioral targeting.
• Macro: More Revenue to Fund All Services & Content: eMarketer (in June 2008) estimated that U.S. spending on behavioral targeting would grow from $.775 billion in 2008 to $4.4 billion in 2012—representing fully a quarter of display ad spending.  The total amount of money at stake is huge:  U.S. online ad revenues totaled $23.5 billion in 2008.
• Micro: More Revenue for Individual Publishers: Estimates on the increased profitability of behavioral targeting range as high as 1200% (eMarketer).

While these examples illustrate the broad outlines of the trade-offs ignored by privacy regulatory advocates, the key dilemma to understand is this: If, under an opt-in regime, publishers would be able to target advertising for webpages based on the keywords contained within those pages, and not on other content the user has looked at, the value of most Internet content will depend not on how many eyeballs it attracts but primarily on the economic value of the keywords that are directly associated with it. Pages with keywords related to products and services will fetch a fine price because advertisers will be able to make money off ads on those pages ( e.g., a site for digital camera reviews). But content with little commercial value will generate little revenue. Indeed, this is perhaps the single greatest problem faced by journalism sites. Who wants to advertise on a story about North Korea? How many users are going to be interested in taking a honeymoon in the DMZ?

But if such websites could target advertising to users’ user’s likely interests based on an anonymous profile of their interests created by collecting data about their browsing “behavior,” web content becomes valuable because of the audience it attracts, not just because the content itself serves as a rough proxy for a user’s interests. This democratization of Internet advertising revenue is essential for sustaining the future of journalism in particular, but also for “free” culture more generally.

As we noted in our response to the FTC’s proposed self-regulatory guidelines on data collection for advertising:

Depending on how regulation is structured, therefore, it is possible that new privacy mandates would severely curtail the overall quantity of content and services offered—and greatly limit the ability of new providers to enter the market with innovative offerings. Alternatively, or perhaps additionally, companies would change the character of their offerings and water-down sophisticated services that cater to consumer demand; in other words, the quality of service would deteriorate. Bottom line: Something must give because there is no free lunch. Regulation is a giant game of economic whack-a-mole: Attempting to control one of the primary variables of price, quantity, or quality inevitably results in non-optimal adjustments in the other two variables. The absence of price as a variable in this context means there is one less variable for the government to control in the first place. Simply stated, stifling the evolution of the online advertising marketplace will likely result in fewer free online services and less content, less high-quality online services and content, or some combination of both… We stand at an important crossroads in the debate over the online marketplace and the future of a “free and open” Internet. Many of those who celebrate that goal focus on concepts like “net neutrality” at the distribution layer, but what really keeps the Internet so “free and open” is the economic engine of online advertising at the applications and content layers. If misguided government regulation chokes off the Internet’s growth or evolution, we would be killing the goose that laid the golden eggs…. These observations are even more relevant to the online marketplace, where advertising has been shown to be the only business model with any real staying power. Walled gardens, pay-per-view, micropayments, and subscription-based business models are all languishing. Consequently, the overall health of the Internet economy and the aggregate amount of information and speech that can be supported online are fundamentally tied up with the question of whether we allow the online advertising marketplace to evolve in an efficient, dynamic fashion. Heavy-handed privacy regulation (or co-regulation) could, therefore, become the equivalent of a disastrous industrial policy for the Internet that chokes off the resources needed to fuel e-commerce and online free speech going forward.

Our Challenge to the Advocates of Privacy Regulation

For these reasons, we have repeatedly issued the following three-part challenge in our previous work to those who advocate the regulation of online advertising:

1. Identify the harm or market failure that requires government intervention.
2. Prove that there is no less restrictive alternative to regulation.
3. Explain how the benefits of regulation outweigh its costs.

We’re still waiting…

We’ve also made it clear that there is an alternative to the pre-emptive, one-size-fits-all regulation demanded by the regulatory advocates:  We’ve proposed a “layered approach” based on user education, user empowerment, self-regulation and FTC enforcement of privacy policies.  Our goal is as follows:

The ideal state of affairs would be to create a system of tools and data disclosure practices that would empower each user to implement their personal privacy preferences while also recognizing the freedom of those who rely on advertising revenues to “condition the use of their products and services on disclosure of information”—not to mention the viewing of ads! Self-regulatory efforts can be refined, especially through technological innovation to better satisfy the concerns of policymakers, privacy advocates, and average consumers. For example, if websites and ad networks participating in a self-regulatory framework supplemented their current “natural language” privacy policies with equivalent “machine-readable” code [ e.g., P3p], that data could be “read” by browser tools that would implement pre-specified user preferences by blocking the collection of information depending on whether the privacy policies of certain websites or ad networks met the user’s preferences about data-use. Such robust and granular disclosure, if implemented for behavioral advertising, would exceed the wildest dreams of those who argue that users currently do not read privacy policies—without disrupting the browsing experience or cluttering websites. But this system would only work if users had to make real choices about “pay*ing+ for ‘free’ content and services by disclosing their personal information.”

A Final Word About Advertising

On some level, this debate isn’t about user privacy at all, but about the alleged evils of advertising as inherently manipulative.  Jeff Chester straddles both camps.  His rantings about the use of “neuromarketing” boil down to the same simple idea that the Neo-Marxists have been pushing for decades:  Since people are stupid, ignorant and/or lazy (see above), they’re easy to control and trick with shiny objects, pretty faces, memorable slogans, and catchy jingles. No better response to this argument has ever been made than was offered in this 1959 magazine ad by the ad firm Young & Rubicam (emphasis added for Chester’s benefit):

There is no chestnut more overworked than the critical whinny: “Advertising sells people things they don’t need.” We, as one agency, plead guilty. Advertising does sell people things they don’t need. Things like television sets, automobiles, catsup, mattresses, cosmetics, ranges, refrigerators, and so on and on. People don’t really need these things. People don’t really need art, music, literature, newspapers, historians. wheels, calendars, philosophy, or, for that matter, critics of advertising, either. All people really need is a cave, a piece of meat and, possibly, a fire. The complex thing we call civilization is made up of luxuries. An eminent philosopher of our time has written that great art is superior to lesser art in the degree that it is “life-enhancing.” Perhaps something of the same thing can be claimed for the products that are sold through advertising. They enhance life, to whatever degree they can.