The FCC has signaled that it may vote to overhaul the Lifeline program this month. Today, Lifeline typically provides a $9.25 subsidy for low-income households to purchase landline or mobile telephone service from eligible providers. While Lifeline has problems–hence the bipartisan push for reform–years ago the FCC structured Lifeline in a way that generally improves access and mitigates abuse (the same cannot be said about the three other major universal service programs).

A direct subsidy plus a menu of options is a good way to expand access to low-income people (assuming there are effective anti-fraud procedures). A direct subsidy is more or less how the US and state governments help lower-income families afford products and services like energy, food, housing, and education. For energy bills there’s LIHEAP. For grocery bills there’s SNAP and WIC. For housing, there’s Section 8 vouchers. For higher education, there’s Pell grants.

Programs structured this way make transfers fairly transparent, which makes them an easy target for criticism but also promotes government accountability, and gives low-income households the ability to consume these services according to their preferences. If you want to attend a small Christian college, not a state university, Pell grants enable that. If you want to purchase rice and tomatoes, not bread and apples, SNAP enables that. The alternative, and far more costly, ways to improve consumer access to various services is to subsidize providers, which is basically how Medicare the rural telephone programs operate, or command-and-control industrial policy, like we have for television and much of agriculture.

Because the FCC is maintaining the consumer subsidy and expanding the menu of Lifeline options to include wired broadband, mobile broadband, and wifi devices, there’s much to commend in the proposed reforms.

Lifeline Broadband Subsidies

Ironically, despite tech activist declarations that 10 Mbps is not “real broadband,” the FCC considers 10 Mbps broadband totally adequate as low-income families’ sole connection to the digital world. If the proposals stand, Lifeline subsidies can be used for 10 Mbps wireline and wireless subscriptions.

The confusion about “real broadband” echoed from tech activists, some tech reporting, and a presidential candidate arises because the FCC has at least three different conceptions of “broadband,” essentially based on whatever definition will increase its regulatory control. For Title II purposes, even a mere 1 Mbps is “broadband” because the FCC wants to be inclusive and regulate all providers. For Section 706, defining “broadband” as high as practical increases the agency’s regulatory powers, so it’s not “real broadband” unless it’s 25 Mbps. For universal service and (apparently) Lifeline subsidies, 10 Mbps is “broadband” because setting it too high would be too restrictive for the consumers and carriers who benefit from a moderate standard.

Wireless Substitution

Expanding Lifeline to mobile broadband suggests an increasing awareness by the FCC that, for many Americans, wireless broadband is a substitute for wireline broadband. This is a little surprising because the FCC decided in January 2016 that “fixed and mobile broadband services are not functional substitutes.” The available data, however, shows that wireless is a substitute for the millions of homes that don’t contain avid Netflix watchers. While popular broadband offerings have monthly limits of 300 GB or more, based on Sandvine data, the typical US home with a wired Internet connection probably uses under 30 GB per month.

Pew surveys also reveal many Americans who substitute wireless for wireline. Of those in the growing number of smartphone-only households, 65% said their smartphones allow them to do everything online they need. Note also that, of those with no home broadband connection–which includes smartphone-only households–only 25% are interested in subscribing. This is why it’s good the FCC doesn’t simply subsidize carriers–most nonadopters simply have no interest in home Internet. Certainly there are some in these groups who don’t realize that their lives would be enriched by a wired broadband connection, but that is mainly a question of digital literacy and education.

Concerns and Reforms

While I support the FCC expanding the menu of Lifeline options and improving the eligibility process, I’m wary of some of the proposed reforms. More details will come out later but Commissioner O’Rielly has pointed out several potential problems with the direction this is going. For one, the eligibility process has always been a mess, in part because it’s based on a patchwork of federal and state programs. The largest problem is the FCC is proposing a major increase in the Lifeline budget, which will increase most Americans’ phone bills. Until the FCC gets its Lifeline house in order, it’s premature to increase the fund so substantially.

Further, I’d like to see satellite broadband on the “menu” of options for Lifeline consumers. Based on the preliminary reports, it’s not clear that satellite broadband will be eligible. Satellite broadband satisfies the speed requirement (10 Mbps) but the FCC plans to require a 150 GB allowance for fixed connections. Satellite is considered a fixed connection. However, satellite broadband providers generally have a low data allowance during daytime hours. On the other hand, they often have unmetered, unlimited data in off-peak hours. Arguably, because data is unmetered every day, satellite broadband should qualify. It would give low-income rural households, who have very low Internet penetration, one more option to be connected.

Finally, one possible reform to ensure the truly needy are benefiting would be to simultaneously increase substantially the $9.25 monthly subsidy but disallow subsidies to households with subscription TV. The most recent data I can find is a 2010 FCC report that 80% of Internet non-adopters have satellite or “cable premium” television. Tightening the requirements means fewer households are eligible but it would increase public support for the program and I think the FCC could then afford to be more generous with the Lifeline subsidy.

Jerry Ellig, senior research fellow at the Mercatus Center at George Mason University, discusses the the FCC’s lifeline assistance benefit funded through the Universal Service Fund (USF). The program, created in 1997, subsidizes phone services for low-income households. The USF is not funded through the federal budget, rather via a fee from monthly phone bills — reaching an all-time high of 17% of telecomm companies’ revenues last year. Ellig discusses the similarities between the USF fee and a tax, how the fee fluctuates, how subsidies to the telecomm industry have boomed in recent years, and how to curb the waste, fraud and abuse that comes as a result of the lifeline assistance benefit.

Download

Related Links

• Jerry Ellig’s Biography Mercatus Center
• Benefits, Costs and other Important Stuff-Demystifying Regulatory Analysis Ellig, Mercatus Center
• The Future of Regulation Ellig, Pepperdine University School of Public Policy

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “A History of Cronyism and Capture in the Information Technology Sector.” In this 73-page working paper, which we hope to place in a law review or political science journal shortly, we document the evolution of government-granted privileges, or “cronyism,” in the information and communications technology marketplace and in the media-producing sectors. Specifically, we offer detailed histories of rent-seeking and regulatory capture in: the early history of the telephony and spectrum licensing in the United States; local cable TV franchising; the universal service system; the digital TV transition in the 1990s; and modern video marketplace regulation (i.e., must-carry and retransmission consent rules, among others.

Our paper also shows how cronyism is slowly creeping into new high-technology sectors.We document how Internet companies and other high-tech giants are among the fastest-growing lobbying shops in Washington these days. According to the Center for Responsive Politics, lobbying spending by information technology sectors has almost doubled since the turn of the century, from roughly $200 million in 2000 to $390 million in 2012.  The computing and Internet sector has been responsible for most of that growth in recent years. Worse yet, we document how many of these high-tech firms are increasingly seeking and receiving government favors, mostly in the form of targeted tax breaks or incentives.

We argue that the creeping cronyism could have two major negative ramifications. First, it could dull entrepreneurialism and competition in this highly innovative sector since time and resources spent on influencing politicians and capturing regulators cannot be spent competing and innovating in the marketplace. Cronyism will also negatively impact consumer welfare by denying consumers more and better products and services. Additionally, consumers might end up paying higher prices or higher taxes due to government privileges for industry.

Second, cronyism also raises the specter of greater government control of the Internet and of the digital economy. When policymakers dispense favors, they usually expect something in return. They also become accustomed to having greater informal powers over the sector receiving favors, and contribute to DC’s infamous “revolving door” problem.

High-tech America’s recent embrace of Washington could take it down the familiar path followed by the agriculture, telecommunications, and automotive sectors (among many others), with government becoming both protector and punisher of industry. Today’s dynamic tech industries will increasingly come under the “Mother, may I?” permission-based regulatory regime that encumbered the older information technology sectors.

Finally, this paper offers strategies for stalling and diminishing the cronyism already taking root in the high-tech sector. We suggest several targeted reforms to limit or undo cronyism. Generally speaking, however, we note that, as economist David R. Henderson argued in an earlier Mercatus Center report, “There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power.”

The paper can be downloaded from the Mercatus website, SSRN, or Scribd. The Scribd version is embedded down below. (Also, here’s some coverage of the paper over at the Washington Post’s “Wonkblog” from our old colleague Tim Lee. Here’s more coverage from Bloomberg Businessweek and the San Francisco Chronicle. And here’s a U.S. News oped that Brent and I wrote condensing our paper into just 600 words. Finally, a short 3-minute video of me discussing the problem of tech cronyism is also embedded below.)

A History of Cronyism and Capture in the Information Technology Sector [Thierer and Skorup – July 2013] by Adam Thierer

In July 2012, the D.C. Council approved the Social E-Commerce Job Creation Tax Incentive Act of 2012. The deal provided LivingSocial, a popular online coupon service, with corporate and property tax exemptions in Washington, D.C. worth approximately $32.5 million over five years beginning in 2015. Legislators feared that LivingSocial would relocate to areas with a lower tax rate. In exchange for the $32.5 million, LivingSocial said it would attempt to add 1,000 employees to its payroll (roughly doubling its number of employees in the District), although no contractual guarantee for job creation exists and even though the firm had never been profitable. Some of the few contractual obligations required for LivingSocial to receive these tax exemptions are that it must establish a program to mentor D.C. high school students, provide internships for D.C. students, and stay located in the District. LivingSocial must also ensure 50% of newly hired employees live in the District in order to receive the Act’s full $32.5 million in exemptions.

Just a few months after the deal was struck it had already become apparent just how risky of a bet the DC government has made with taxpayer dollars. In late November 2012, LivingSocial announced a net loss of $566 million for the third quarter and that hundreds of employees would be laid off. The promise to roughly doubling the size of its DC-based workforce seems fairly unlikely and some analysts doubt the company will survive much longer.

This serves as another case study for just how foolish it is for governments to make risky, taxpayer-backed bets on information tech companies. Sadly, it’s not the only case study in this regard. In a forthcoming white paper, Brent Skorup and I will be documenting the troubling rise of high-tech cronyism across America. Motorola, Apple, Facebook, Twitter, Groupon, film studios, video game makers, and many other information technology companies are lining up with hat in hand and asking for handouts or special favors from state and local governments. Tax credits and other tax code-based inducements (such as tax rebates) are being tapped increasingly by state and local lawmakers who hope to encourage investment by these companies.

This cronyist activity is troubling for many reasons. As Brent and I will argue, tax credits and other benefits for digital technology companies are particularly misguided since (a) the most successful companies certainly don’t need them; and (b) the smaller companies or startups that might benefit from them today probably present a very risky investment for taxpayers. Many of these companies may be here today but gone tomorrow. That appears it could be the case for LivingSocial.

Tax credits can also become a time-consuming morass for innovators and distract them from the entrepreneurial activities they should be focused on. A recent Wall Street Journal report noted that “many companies are saying ‘no, thanks’ and are likely paying more taxes than legally required,” because “the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself.”

Policymakers should leave such risky investments to venture capitalists and others so that taxpayers are not on the hook when things go off the rails, just as they already have in DC with LivingSocial. Generally speaking, the best industrial recruitment / retention efforts are simple rules, low taxes, and light-touch regulation. That’s how to attract and retain a base of serious high-tech innovators without putting taxpayers at risk when things go wrong as they so often will in this sector.

Update: Shortly after I posted this piece I was contacted by representatives of the D.C. Mayor’s office asking me to clarify for readers that LivingSocial cannot claim any of these tax benefits unless it has 1,000 employees in city and unless it creates a 200,000 sq. ft. headquarters inside the District. They also asked me to again stress (as I noted in the opening paragraph) that these benefits will not begin until 2015-16. The exact terms of the deal can be found in the first link provided above (click the bill name).

In theory, such strings and stipulations could help the DC government escape this mess before it becomes an embarrassing fiasco for the city, but I would argue that they should not be putting taxpayers at risk like this to begin with. Moreover, while more strings might seem to provide greater accountability, added requirements and red tape also create more hassle and costs for firms. As I noted in my essay, that can affect future innovation and entrepreneurialism. Special deals for risky tech ventures remains unwise public policy.

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

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

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

I.     CHARGES

A.     Direct Fees (Periodic billing / Pay-per-view)

B.    Indirect Charges (Tiers / Bundles / Package pricing)

II.     ADVERTISING

A.    General / Mass market ads (Billboards / Banner ads / Pop-up online ads)

B.     Targeted ads (Directed pitch)

C.     Integrated (Product placement / Payola)

D.     Sponsorship / Underwriting

III.     PHILANTHROPIC

A.     Individual  (ex: Arts & opera funding)

B.     Foundational (ex: Knight Foundation)

C.     Governmental  (ex: CPB / BBC model)

IV.     INTERNAL CROSS-SUBSIDY  (Profitable division subsidizes unprofitable / “loss leader” strategies)

There are probably other ways of subsidizing content creation, but those are the primary methods. I have no idea what combination of strategies will sustain content going forward, but I think advertising is likely to play a diminished role in the mix as it becomes increasingly easy for us to filter it out of the mix. But the content creators will just shift costs elsewhere and raise the prices for programming through direct and indirect pricing techniques. Do you like HBO’s pricing model? Pay-per-view? Paywalls? Well, it doesn’t make a difference whether you do or not because you’ll likely be seeing a lot more of those models in your life in coming years if advertising fades as a subsidization method.

Alternatively, as I also note in my Forbes piece, “we could see a lot more Texaco Star Theaters in our future, with major companies essentially owning specific shows or networks.” Such program sponsorship and content underwriting has always been with it, but it could really explode as a cross-subsidy method if traditional advertising starts failing. “But it will be challenging for every show or website to find its own corporate benefactor, and it will also raise issues about undue influence and bias,” I note in my essay.

I hope no one seriously believes that philanthropic models can fill the gaps. Even if we saw a significant uptick in voluntary charitable giving or even taxpayer support for the arts and media, there’s no way in hell it will possibly begin to cover the the bill for what advertising support covers today.

In the end, I can’t help but think how great we’ve had it when it comes to advertising. As I also noted in my essay, advertising has been “the great subsidizer of the press, entertainment, and online services” historically and benefited us tremendously even if we haven’t appreciated that fact. “It’s possible that no single industry — not newspapers nor search engines nor anything else — has done as much to advance the storehouse of accessible human knowledge in the 20th century as advertisers,” argues Washington Post columnist Ezra Klein. Klein is exactly right, yet it doesn’t really make a difference how important advertising has been to us if we fail to appreciate that fact and increasingly take steps to exclude it from our lives.

As that becomes easier and easier to accomplish, we shouldn’t bitch and whine when the bills (literally) come due for the content we all desire. As always, there is no free lunch. We’ll pay the price one way or another.

Additional Reading:

• my recent Charleston Law Review article on “Advertising, Commercial Speech & First Amendment Parity”
• Ezra Klein on the Importance of Advertising to Media
• The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers
• There is No Free Lunch! No Advertising, No Media
• PFF’s Mega-Filing in the FCC’s “Future of Media” Proceeding

It was my pleasure today to debate the future of public media funding on Warren Olney’s NPR program, “To The Point“.  I was 1 of 5 guests and I wasn’t brought into the show until about 29 minutes into the program, but I tried to reiterate some of the key points I made in my essay last week on “‘Non-Commercial Media’ = Fine; ‘Public Media’ = Not So Much.”  I won’t reiterate everything I said before since you can just go back and read it, but to briefly summarize what I said there as well as on today’s show: (1) taxpayers shouldn’t be forced to subsidize speech or media content they find potentially objectionable; and (2) public broadcasters are currently perfectly positioned to turn this federal funding “crisis” into a golden opportunity by asking its well-heeled and highly-diversified base of supporters to step up to the plate and fill the gap left by the end of taxpayer subsidies.

Just a word more on that last point. As I pointed out on the show today, it’s an uncomfortable fact of life for NPR that their average listener is old, rich, highly-educated, and mostly white.  Specifically, here are some numbers that NPR itself has compiled about its audience demographics:

• The median age of the NPR listener is 50.
• The median household income of an NPR News listener is about $86,000, compared to the national average of about $55,000.
• NPR’s audience is extraordinarily well-educated.  Nearly 65% of all listeners have a bachelor’s degree, compared to only a quarter of the U.S. population.  Also, they are three times more likely than the average American to have completed graduate school.
• The majority of the NPR audience (86%) identifies itself as white.

Why do these numbers matter? Simply stated: These people can certainly step up to the plate and pay more to cover the estimated $1.39 that taxpayers currently contribute to the public media in the U.S.  But wait, there’s more! There are plenty of other existing corporate and foundational supporters out there who already make sizable contributions to NPR. Down below, I have attached a list that appeared in the NPR’s 2008 annual donor list of just the corporations who currently support NPR and it includes only those companies who support at a level greater than a half million per year. There are many others who offer annual support for less than that and then there are the hundreds of foundations and wealthy families who give major gifts of varying amounts.

Again, these individual benefactors could all probably be prodded to give a bit more, and plenty of others out there would likely step up to the plate to meet the challenge of filling the small gap left by ending taxpayer support.  For God’s sake, just look at that list of current top-dollar corporate supporters for NPR down below!  It reads like a “Who’s Who” of the Fortune 500 giants and it must leave all of NPR’s competitors stinging with jealous about how smart it was for non-commercial media to diversify its base of philanthropic support so long ago.

Thus, there’s no reason that public media operators can’t take the next step and find alternative means of support to fill the 16% of their budgets that currently comes from taxpayers.  In these tight fiscal times, it’s only fair.

$1 Million + Supporters of NPR in 2008

• Angie’s List
• CITGO Petroleum
• Corporation CSX Corporation
• Feeding America
• Fox Searchlight Pictures
• General Motors Corporation
• Institute for Supply Management
• Insurance Company
• Intel Corporation
• Johnson Controls
• Kashi Company
• Lindamood-Bell Learning Systems
• Lumber Liquidators
• MasterCard
• MGM
• National Association of Realtors
• Netflix
• Northwestern Mutual Foundation
• Novo Nordisk
• Overture Films
• Pabst Brewing Company
• Paramount Home Entertainment
• Paramount Pictures
• Prudential Financial
• PBS Raymond James Financial Services
• Philips Healthcare
• POM Wonderful REI
• Progressive Casualty Insurance
• Scotts Miracle-Gro Company
• State Farm Mutual Automobile
• Travel Guard
• U.S. Bank Vestas
• Universal Pictures
• Visa Warner Home Video
• Walden University Yahoo!
• Wind Systems

$500,000-$999,999 Supporters of NPR in 2008

• Cargill
• Citibank
• Constant Contant
• Constellation Energy
• Focus Features
• iShares
• Leanding Tree
• Lenovo
• Lionsgate
• Entertainment
• CNetApp
• Pajamagram Company
• Saturn
• Sit4Less.com
• Subaru
• T. Rowe Price
• UPS
• Vanguard Group

[Read rest of the list of this impressive list of NPR corporate and foundational supporters here.  Has there ever been a more well-diversified base of support for any media operation in American history?  I think not. As Jill Lawrence points out on Politics Daily, public media’s extremely loyal — and rich — fan base are not about let NPR and PBS die.]

So, I’m sitting here at today’s Federal Trade Commission (FTC) workshop, “Will Journalism Survive the Internet Age?” and several panelists have argued that private “professional” media is toast, not just because of the rise of the Net and digital media, but also because the inherent cross-subsidy that advertising has traditionally provided is drying up.  It very well could be the case that both statements are true and that private media operators are in some trouble because of it. But what nobody seems to be acknowledging is that our government is currently on the regulatory warpath against advertising and that this could have profound impact on the outcome of this debate.

As Berin Szoka and I noted in a recent paper, “The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers,” the FTC, the FCC, the FDA, and Congress are all considering, or already imposing, a host of new rules that will seriously affect advertising markets.  This article in AdAge today confirms this:

The advertising industry is heading for a “tsunami” of regulation and is at a “tipping point” of greatly increased scrutiny, warned a panel on social media and privacy at the American Advertising Federation conference here [in Orlando].

The reason this is so important for the ongoing debate about the future of media and journalism is because, as Berin and I argued in our paper:

an attack on advertising is tantamount to an attack on media itself, and media is at a critical point of technological change. As we have pointed out repeatedly, the vast majority of media and content in this country is supported by commercial advertising in one way or another–particularly in the era of “free” content and service.

So, before policymakers give up on the commercial media that have been supported by advertising in America for generations (or centuries!), they might want to pause for just a moment as they skip down the Yellow Brick Road to a “post-corporate,” taxpayer-supported media Oz to ask just how much damage increased regulation is doing to advertising revenues for private media companies and the journalists and editors they employ.  Anyone who believes the Wizard behind the curtain (politicians and unelected bureaucrats) won’t call the shots in that Oz fantasyland is just kidding themselves. So perhaps if policymakers stopped strangling advertising, it could continue to fund reporting, creativity and innovation.

As mentioned here before, 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 up to.

In the first installment of the series, Berin Szoka 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. The third installment dealt with proposals to steer citizens toward “hard news” and get them to financially support it through the use of “news vouchers” or “public interest vouchers.”

In our latest essay, “The Wrong Way to Reinvent Media, Part 4: Expanding Postal Subsidies,” Berin and I argue that expanding postal subsidies won’t likely do much to help failing media enterprises, will raise the risk of greater meddling by politicians with the press, and can’t be absorbed by the Postal Service without a significant increase in cost for ratepayers or taxpayers.  The entire essay is attached down below.

The Wrong Way to Reinvent Media, Part 4: Expanding Postal Subsidies

by Adam Thierer & Berin Szoka

PFF Progress on Point 17.5 [PDF]

In this ongoing series, we‘ve been exploring various tax and regulatory proposals that would have public policymakers play a greater role in propping up the press in some way. Some academics, advocacy groups, and government officials have suggested that steps need to be taken to assist struggling media enterprises, support news-gathering efforts, or expand public media options. In Parts 1 and 2 of this series, we expressed concern about proposals to impose taxes on devices, networks, or broadcast spectrum licenses to funnel money to public media projects or other “public interest” content or objectives.^[1] In Part 3, we questioned the wisdom of government officials creating “news vouchers” or “public interest vouchers.”[2] Other essays will deal with taxes on advertising as a method of funding public media, and the wisdom of welfare for journalists and bailouts for media operators.

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. These essays will then be cobbled together and submitted as part of PFF’s filing to the Federal Communications Commission (FCC) as part of its “Future of Media” proceeding (filings are due May 7^th).

In this essay we discuss an idea favored by a number of media scholars and advocacy groups: expanded postal subsidies as a method of assisting struggling media enterprises.^[3] The revisionist histories penned by some of these scholars would have us believe the Founding Fathers were practically media Marxists, enthralled with public subsidization of the press.  Of course, in reality, nothing could be further from the truth.  Just because they provided a modest postal subsidy for press materials doesn’t mean the Founders believed that government should be micromanaging or massively subsiding this sector. The “Congress shall make no law” language found in the First Amendment confirms that.

Can We Afford It?

Practically speaking, the idea of expanding postal subsidies at this time seems like a non-starter. The U.S. Postal Service simply can’t absorb the losses associated with expanded postal subsidies. The Washington Post recently noted that, “The Postal Service is on course to lose more than $7 billion this year, despite substantial recent cost-cutting, and it could lose more than $238 billion by 2020. Approaching the limits of its federal credit line, the USPS must change drastically or go bust.”^[4] The U.S. Postal Service itself has noted that, “even if its plan [to cut losses and increase revenues] was to succeed in every action that present legislation allows, the Postal Service would still face unsustainable losses of at least $115 billion by 2020.”^[5] Yet the Postal Service acknowledges it has “an unsustainable business model” as volume and revenues continue to plummet with no end in sight.^[6] Similarly, in a recent report to Congress, the U.S. Government Accountability Office (GAO) found that the Postal Service’s business model “is not viable due to [its] inability to reduce costs sufficiently in response to continuing mail volume and revenue declines.”^[7]

One cost-saving method that the Postal Service has floated is an increase in “preferred-class pricing” (subsidized rates for media products):

Addressing the pricing of preferred mail—such as non-profit mail, Media Mail, Library Mail, and Periodicals—would ensure that these products get to a point where they cover costs while contributing reasonably to overhead costs. An alternative would be appropriations funding to cover the gap.^[8]

Thus, it seems clear that the Postal Service itself believes even existing postal subsidies place too great of a strain on an already failing system. And the GAO notes:

Historically, some types of mail were designed to channel broad public goals, such as furthering the dissemination of information, the distribution of merchandise, and the advancement of nonprofit organizations.  For example, Periodicals (mainly, mailed magazines and newspapers) have historically been given favorable rates, consistent with the view that they help bind the nation together, but this class has not covered its costs for the past 13 fiscal years.… These escalating losses have provoked growing concern and controversy.[9]

The report notes annual losses for the various categories of subsidized mail service and the mounting costs of subsidies, as illustrated in the adjoining exhibit.[10]

As the cost of existing postal subsidies mount, it seems likely the public wouldn’t take kindly to the idea of being forced to foot the bill for vastly increased subsidies. According to a new Washington Post-ABC News poll, more Americans would rather give up some daily service than pay more to the Postal Service to cover the massive losses the Postal Service is expected to incur in coming years:  71% of those polled said they favored ending Saturday deliveries while just 44% said they favored raising stamp prices or providing additional federal funding.^[11] For these reasons, a significant expansion of media subsidies seems both unwise and untenable.

More Subsidies, More Meddling

Importantly, as is the case with many of the other proposals discussed in our ongoing series, a significant expansion in government involvement raises the specter of increased meddling by policymakers with the media.  Proponents of expanding postal subsidies often gloss over the rather horrifying history of censorship by the Postal Service in the past.

Most notably, Nichols claims that “postal subsidies… helped to foster the abolitionist press,” and claims that this proves that “we can have a dissident, challenging—anti-government press, operating within a system of subsidies.”[12] But, again, there’s a bit of revisionist history at work here.  David Walker Howe, author of the magisterial history, What Hath God Wrought: The Transformation of America, 1815-1848, details the history of the Postal Service in the early Republic and its central importance (until the invention of the telegraph) as the country’s primary information distribution system.  Howe notes that the newspapers (and other printed matter) constituted the “overwhelming bulk of the mail” and his account suggests that subsidies undoubtedly played an important role in increasing readership of, and competition among, newspapers—including abolitionist newspapers.[13] But he also notes that the U.S. Postal Service effectively censored these publications in the South from the mid-1830s until secession a quarter-century later.[14] Howe notes that “The refusal of the Post Office to deliver abolitionist mail to the South may well represent the largest peacetime violation of civil liberty in U.S. history.”[15] He also suggests that censorship may have accelerated the radicalization of North against South, and accelerated the coming of war: “Deprived of access to communication with the South [by postal censorship], the abolitionists would henceforth concentrate on wining over the North.”[16]

Sadly, this kind of censorship became a distinctly illiberal American tradition.  In 1865, Congress banned sending obscene materials through the mails, apparently out of concern about adult novels being mailed to Federal troops at the front.[17] In the late 1800s, for example, Anthony Comstock, founder of the New York Society for the Suppression of Vice, used the mail system as the primary mechanism of his censorship crusades.  After successfully pushing Congress to pass an expanded obscenity law through Congress in 1873 that censored, among many other things, information about abortion and conception, Comstock was promptly appointed as a Post Office special agent and given the power “to seize publications and devices he considered immoral and to prosecute their senders.”^[18] Later, in 1914, the Post Office began an ongoing crackdown on James Joyce’s Ulysses and any publication that had the temerity to even publish passages from the work.^[19]

Postal system censorship was also ramped up during World War I after Congress passed the Espionage Act of 1917, which included provisions giving the Postmaster General power to impound publications he deemed seditious.  According to media historians Michael and Edwin Emery, authors of The Press and America: An Interpretive History of Mass Media, “some forty-four papers lost their mailing privileges during the first year of the Espionage Act and another thirty retained them only by agreeing to print nothing more concerning the war.”^[20] They note that: “The axe fell most heavily on Socialist organs and German-language newspapers; a few other pacifist or anti-Ally publications also lost their mail privileges.  The American Socialist was banned from the mails immediately and was soon followed by Solidarity, the journal of the left-wing Industrial Workers of the World.”^[21] It wasn’t until 1946 that the Supreme Court finally began to constrain the Post Office’s censorial ways after it denied second-class mailing privileges to Esquire because it supposedly featured “morally improper” content.^[22]

Of course, the worst of the Postal Service’s censorial days are likely well behind us—especially since courts today probably wouldn’t tolerate such blatant violations of the First Amendment.   Nonetheless, a significant ramping-up of postal subsidies for the press creates new potential pressure points for policymakers to exploit, even if in marginal, indirect ways.  Policymakers, in turn, will likely feel increased pressure from vocal constituents because, the more substantial the subsidy becomes, the more obvious it will be to taxpayers that they are paying for the cost of supporting media they may find objectionable, either because of its particular viewpoint or its content. 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.”^[23] That is, we naturally—and rightly—resent subsidizing speech that is antithetical to our own values.[24]

Why Subsidize the Distribution System of the Past?

Finally, why we would want to subsidize this old form of distribution anyway?  Electronic media is clearly the way of the future.  There’s a reason science fiction movies never show someone going out to pick up the morning newspaper in the year 2200.  In addition to subsidizing newspaper delivery in the early days of the Post Office, between 1785 and 1845 the postal system was used to subsidize stagecoach travel and routes, even though it was more expensive and less efficient than using single riders to deliver the mail.  The hope was to encourage the development of stage lines and to thereby ease interstate travel for regular citizens.  Perhaps there was something to be said for that idea then, or for using postal contracts to promote the development of canals or railroads or aviation, at least these subsidies were intended to accelerate the development and adoption of emerging technologies, not waning ones.  We would laugh today if someone told us the Postal Service should be subsidizing stagecoach travel—or any other form of transportation, for that matter.  So why isn’t it considered just as laughable to say that the Post Office should be subsidizing media printed on dead trees that need to be physically shuttled around the country and then disposed of?  Why incur the additional “carbon footprint” of all that unnecessary rearranging and moving of atoms when we can just deal with bits?

This is 2010, not 1910.  It’s time to begin letting go of our old, inefficient physical systems for distributing information, and recognize that, in the Digital Era, communications and transportation have finally separated.  Even U.S. Postmaster General John Potter has noted that his organization’s business model is as outdated as the newspaper industry’s:

“Twenty years ago we would laugh at the notion that a newspaper would ever embrace the idea that maybe the channel of the future is electronic and that you may have to change your business model,” Potter told a group of reporters at a breakfast sponsored by the Christian Science Monitor.  He added, “Likewise, the postal service is in a situation where the behavior of America is changing and we have to fix and change our business model to adapt to it.”[25]

At some point in the future, news papers will probably gradually die out, but the news companies that print them and their emerging competitors will continue to produce journalism.  The only difference is that they will distribute their information products over the Internet to screens (and speakers and headphones) on a wide variety of devices yet to be invented.  Increasing postal subsidies merely—and quite literally—“paper over” the fundamental problem faced by traditional print media of dealing with this technological transition.

[2] Adam Thierer & Berin Szoka, The Progress & Freedom Foundation, The Wrong Way to Reinvent Media, Part 3: Media Vouchers, PFF Progress on Point 17.4, April 2010, www.pff.org/issues-pubs/pops/2010/pop17.4-media_vouchers.pdf.

[3] See Robert W. McChesney & John Nichols, The Death and Life of American Journalism (2010) at 168-9; Geoffrey Cowan & David Westphal, Public Policy and Funding the News, USC Annenberg School for Communications & Journalism, Research Series, 2010, at 9, http://fundingthenews.org; Free Press, Saving the News: Toward a National Journalism Strategy, at 36-7, 2009, www.freepress.net/files/saving_the_news.pdf.

[4] Congress is Running Out of Time to Save the Postal Service, The Washington Post, March 10, 2010, www.washingtonpost.com/wp-dyn/content/article/2010/03/09/AR2010030903337.html

[5] United States Postal Service, Ensuring a Viable Postal Service for America, 2010, at 1, www.usps.com/strategicplanning/_pdf/Ensuring_Viable_USPS_paper.pdf

[6] Id. at 3.

[7] United States Government Accountability Office, U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial Viability, GAO-10-455, April 2010, at 6, www.gao.gov/new.items/d10455.pdf.

[8] Id. at 14.

[9] Id. at 46 (emphasis added).

[10] Id. at 47.

[11] Ed O’Keefe & Jon Cohen, Poll Says Most Americans Back Halting Saturday Mail But Not Closing Post Offices, The Washington Post, March 30, 2010, www.washingtonpost.com/wp-dyn/content/article/2010/03/29/AR2010032903823.html.

[12] Transcript: Saving American Journalism, Now on PBS, Jan. 15, 2010, www.pbs.org/now/shows/603/transcript.html.

[13] David Walker Howe, What Hath God Wrought: The Transformation of America, 1815-1848 (2007) at 226-27.

[14] Id.  at 427-30.

[15] Id.  at 430.

[16] Id.

[17] Margaret A. Blanchard, Revolutionary Sparks: Freedom of Expression in Modern America (1992) at 16.

[18] Marjorie Heins, Not in Front of the Children: “Indecency,” Censorship, and the Innocence of Youth (2001) at 32.

[19] In 1918, a publication called The Little Review began published excerpts from Ulysses. Marjorie Heins explains what happened next: “The U.S. Post Office confiscated and burned four separate issues of the Review, and in January 1920 told [Review publishers] Heap and Anderson that it would put them out of business if they continued to publish Ulysses.” Id. at 40-41.

[20] Michael Emery & Edwin Emery, The Press and America: An Interpretive History of Mass Media (Prentice Hall, 6^th Ed., 1988) at 297.

[21] Id.

[22] Heins, supra note 18 at 47. The case was Hannegan v. Esquire 327 U.S. 146 (1946).

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

[24] See Thierer & Szoka, supra note 2 at 7 (discussing the inevitability of political pressure for subsidy strings).

[25] Drew Wheatley, Postal Service Chief: Our Business Model as Outdated as the Newspaper Industry’s, The Hill Blog, March 11, 2010, http://thehill.com/blogs/hillicon-valley/technology/86265-postal-service-chief-our-business-model-as-outdated-as-the-newspaper-industrys.

Wrong Way to Reinvent Media Part 4 – Postal Subsidies [Thierer & Szoka – PFF] http://d1.scribdassets.com/ScribdViewer.swf

Our readers may be interested in this excellent WSJ article, Too Risky for Venture Capitalists: Why proposals for a government bailout were roundly rejected.  We should all take heart in the the fact that the venture capital community itself resoundingly opposed the notion of accepting a massive infusion of taxpayer money, especially Tom Friedman’s suggestion:

“You want to spend $20 billion of taxpayer money creating jobs?” Mr. Friedman wrote. “Fine. Call up the top 20 venture capital firms in America” and invest the money with them.

But I see three more reasons why those interested in technology policy should pay attention to this encouraging episode.

First, the groundswell of opposition seems to have been driven largely by the Internet, both as a vehicle for disseminating the bailout proposals and for voicing opposition to them:

Venture capitalists certainly agree that innovators and start-up companies, not bailed-out GMs or Chryslers, will create the new jobs. They rightly brag that almost 20% of U.S. gross domestic product is generated by companies built by venture capital, such as Intel, Apple and Google. Still, they almost universally panned the notion of taxpayer support. Their real-time rejection is an excellent example of how social media — here, the venture community dissecting a proposal online — can now quickly take down bad ideas.

Second, it should almost go without saying that venture capital is the fountainhead of innovation, especially the disruptive innovation that is constantly pushing the envelope of technology policy.  A healthy VC sector is the bedrock of a dynamic, free and innovative economy.  The VCs realize that this requires, more than anything else, avoiding the market distortions caused by government funding:

“The top venture firms don’t want, don’t need and are never going to take government money. The same is true of the top entrepreneurs,” Fred Wilson of New York’s Union Square Ventures wrote on his blog. “The worst firms, on the other hand, will gladly accept government money,” which would go to investors who can’t raise funds privately and to entrepreneurs whose ideas shouldn’t be funded. “It’s a problem of adverse selection….” The idea of direct government funding is also anathema because it would undermine market discipline. Pension funds, endowments and other institutional investors keep a close eye on how their invested money is doing. Venture firms can raise new funds only if their previous performance was good. Several venture capitalists pointed out the irony that government-funded venture capital could mean trading a credit bubble for another technology bubble. Artificially inflating the venture coffers through a government fund could risk repeating the debacle of 1999-2000, when too much money chased too few good ideas, resulting in the sharp deflation of the Internet bubble. 

Third, the VC community’s response should serve as a lesson for other industries, but particularly high-tech industries, about how the government subsidies they find attractive today in a time of intense pressure on their bottom lines could ultimately harm them.  Instead of jumping on bailout bandwagon, perhaps these industries ought to focus their lobbying efforts on some of the eminently sensible suggestions coming from the VC community, such as the following:

If policy makers want to help entrepreneurs and their investors, there’s no mystery about what’s needed. Immigration needs to be reopened. Venture capital is still available, but the U.S. is now a laggard in the other half of the equation, which is making sure the entrepreneur’s sweat, energy and risk-taking can ultimately pay off. Sarbanes-Oxley helped kill the market for public offerings, which had been a lucrative step for successful start-ups. Income taxes are going up, not down. And the U.S. capital gains tax rate of 15% contrasts with the 0% rate in Hong Kong, Singapore and even Germany, where there’s an understanding that these investments are made with income that’s already been taxed once.

I’ve warned about the dangers of subsidies to the high-tech industry, but I do recognize that the unintended consequences of  subsidizing technological innovation may far outstrip those of subsidizing technological infrastructure, which is what the Obama administration seems to be focused on.  Indeed, if one is going to spend taxpayer money on any subsidies in the name of “stimulus,” it’s difficult to think of a better way to spend that money than on promoting broadband deployment and adoption (however much of a myth it is that we are lagging behind the rest of the world in these areas).  

Still, no matter how worthy the objective, all subsidies distort markets. Few do as much damage as those showered on industries particularly based on risk—e.g., venture capital and financial markets.  But whatever these distortions, the Golden Rule still applies: he who has the gold, makes the rules!  With government subsidies, come government controls.

There’s been plenty written about the death spiral that America’s newspaper industry finds itself stuck in — here’s an amazing summary of the recent online debates — and I’ve spent a lot of time writing on this issue here in the past, too.  Ben Compaine, one of America’s sharpest media analysts and the co-author of the classic study Who Owns the Media?, has added his own two cents in his latest essay over at the Rebuilding Media blog. Like everything Ben writes, it is well worth reading:

If newspapers have essentially been able to thrive on the revenue from advertisers alone (again, with cost of printing more or less covered by circulation revenue), why are they having so much trouble today? The answer is not one single factor, but a major contributor is that newspapers – whether print or digital—are just worth less to advertisers than they were 20 years ago. Back then, local advertisers did not have many options for reaching the mass local audience. What was the alternative for auto dealers? For real estate agents? Supermarkets or department stores? For some, direct mail was one possible option. But that was about it. Using pre-prints instead of ROP became attractive for some large display advertisers, leaving the publishers with a piece of the cash flow. Advertisers were hit with regular rate increases. And they pretty much had to pay, The publishers made good money. But then a double whammy. Just about the time the Internet became a real alternative for classified listings—think Craigslist, Monster.com, eBay, Autotrader.com—and for retailers—think DoubleClick, Google, et al—the boys at the cable operators had perfected the insertion of highly local spots into their feeds. Between 1989 and 2007 local cable advertising increased from $500 million to $4.3 billion—or from 0.4% of all advertising to 1.6%. Advertising in newspapers fell from 26% to 15% in this period. Although some of the highly local advertisers going to cable may have taken some of their funds from budgets for radio or other local media, it is probable that a significant share came from the hides of newspapers. I estimate perhaps up to 20% of the decline in local newspaper advertising share can be attributed to local cable spots. The other whammy, the gorilla in the room, is Internet advertising. No need to elaborate. But its impact on newspapers is not just that it has siphoned off dollars per se. Much more importantly is that the Internet has given most advertisers greater market power against newspaper publishers. Many big advertisers—like car dealers, real estate offices and big box retailers—don’t need the newspapers as much.

Ben’s got it exactly right. The decline of newspapers comes down to the death of  “protectable scarcity” (thanks to Canadian media expert Ken Goldstein for that phrase).  There’s just too much other competition out there online already for our eyes and ears.  We’re witnessing substitution effects on a scale never seen in the media world, with disruptive digital technologies and networks splintering our attention spans.  That de-massification of media means that high fixed cost endeavors like daily newspapers are not going to be able to sustain the cross-subsidies they’ve long gotten from advertisers.

If you want to boil the newspaper death spiral down to an equation, it would look something like this:

(1) unprecedented technological change

+

(2) massive inflow of new media competitors / platforms

+

(3) end of geographic “protectable scarcity”

=

(4) inability to capture a guaranteed audience

&

(5) complete loss of advertiser / investor confidence

And the process is viciously self-reinforcing.  Again, a seemingly hopeless death spiral.  So, do papers have any hope?  Compaine considers where papers might turn next in terms of a business model:

I suspect that what we will find in the intermediate future is a mix of models and choices, among them:

• The Detroit model [Detroit Free Press and Detroit News] is one reasonable experiment: An attractive daily digital version, with home delivery of the paper reduced to Thursday, Friday and Sunday.
• An advertising supported all digital model, with the publisher closing down the printing plant, selling off its trucks, laying off the circulation and production departments.
• A voluntary pay model. This may take one of several forms. The “shareware” model for software has proven to work to a point. Users are asked to pay what they can or think the product is worth. Many users will be free riders. But, as we see with public television and radio, millions in their audience make annual contributions. (In 2007 at least one-third of those who downloaded Radiohead’s free “In Rainbow” album made a payment, in some cases higher than what the band would have received from a CD sale.)

The problem with that last model is that it might help some papers remain afloat, but it is highly unlikely such a model could sustain the industry as we know it today.  There’s a reason, after all, that NPR doesn’t have a lot of competitors in the non-profit radio world; only so many benefactors — whether corporate, foundations, or individuals — are willing to spread around their donations when it comes to news.  A non-profit model or charity-based model might work for a couple of big-dog dailies with generous sugar daddies — think the New York Times and Carlos Slim — but that model won’t work for most other papers.

As Ben suggests, the best hope likely lies in some combination of all of the above, with a particular focus on finding a way to monetize the all-digital model (model #2) as quickly and effectively as possible.  But some papers are late to that game, and even those that moved aggressively to get everything online have found that the economics are still challenging in a crowded field.  The advertising cross-subsidy they lost is in the old world has already been captured online by many others. There’s just less ad $$$ to go around with so many other outlets presenting more targeted and affordable platforms than what old newspapers offer.

Regardless, I think it’s time to accept the uncomfortable reality that the newspaper industry as we know it is dead and will never return.  As an old newspaper fanatic and journalism student, this makes me a bit sad.  I still get two dailies on my doorstep every morning and will certainly miss them when they pass from this Earth.  Of course, a lot of that news will be repurposed online. And other news sources and outlets are still out there or will develop in response.  But challenging issues remain about how “long form” investigative journalism gets funded going foward. I don’t believe in the pollyanish fantasies about a world of user-generated content and “We-dia” giving us all the important news of the day.  You can’t reassemble the New York Times one Twitter at a time.

Three passages from Obama’s inaugural address stand out as important for the mix of technology policy issues covered here at the TLF.  On technology policy (a non-trivial 5.4% of the address by word count):

For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act – not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories…. All this we can do. And all this we will do.

On how to determine whether government intervention is warranted:

The question we ask today is not whether our government is too big or too small, but whether it works…. Where the answer is yes, we intend to move forward. 

On regulatory policy:

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control….

So what does all this mean for tech policy?

Clearly, Obama considers subsidies for broadband deployment to be a rhetorical winner.  But in an era of painfully tight budget constraints, the stimulus package unveiled last week includes “only” “$6 billion to promote deployment of high-speed Internet access in unserved and underserved areas… considerably less than the $44 billion requested by Internet advocates”—per the WSJ, which also notes that this corporate welfare would be tied to “open access” (a/k/a “net neutrality”) mandates.  Obama’s even more serious about spending “stimulus” money on health IT.  The stimulus plan includes $20 billion in e-health spending (again, per the WSJ).  I’ll bet that both programs will be dwarfed in size by Obama’s subsidies for “green” energy sources.

Obama’s emphasis on “what works” will no doubt be greeted by many as a welcome return to “reality-based” policy-making.  But even if one attempted to implement this approach free of any “ideological pre-dispositions,” how would one actually evaluate the efficacy of any proposed government intervention?  How often will there be anything remotely resembling a controlled experiment to inform policy-making?  As difficult as it is to predict the unintended consequences of intervention, it’s even more difficult to do so in high-tech sectors of the economy, where the rate of change is particularly rapid.