July 2009

Gov Schwarzenegger Terminates Nexus Tax, Overstock Going Back to Cali

by Braden Cox on July 2, 2009 · 9 comments

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

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

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

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

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Lori Drew Acquitted in Megan Meier Case: What to Do About Cyberbullying?

by Berin Szoka on July 2, 2009 · 31 comments

Lori Drew was convicted late last year on charges related to her role in a cruel hoax that led to the tragic suicide of thirteen-year old Megan Meier in Missouri in 2006. But today, at her sentencing, the judge threw out her convictions. Millions around the world were horrified by Megan’s fate, and many will probably be upset that Drew might go unpunished. But we need to separate three questions in this case:

Should the federal anti-hacking law under which she was convicted really be applied in such cases?
What, precisely, was Drew’s involvement?
The key question: What should be done about the general problems of cyberbullying and cyberharassment?

Misuse of the Anti-Hacking Statute

Judge Wu has yet to issue his written opinion but seems to have agreed with the various experts on Internet law who argued that, however tragic the Meier case was, the Computer Fraud & Abuse Act (CFAA) should not have been applied to Drew. Most notably, the Electronic Frontier Foundation filed an Amicus Brief in support of Drew’s motion to dismiss the charges against her—summarized by Groklaw and the Harvard Journal of Law & Technology. Orin Kerr, a leading Internet law professor, felt so strongly about the consequences of using the CFAA to criminalize violations of privately written terms of service that he joined Drew’s defense team. Kerr demonstrated the problems of essentially allowing private parties to create the grounds for criminal offenses (if violated by users) by suggesting obviously ridiculous new terms of service for the Volokh Conspiracy, the group blog he writes on.

Hard as it may be for those who want to “see justice done” in this case, the CFAA just isn’t the right law to apply—which raises the question of whether new laws are needed, discussed below.

Uncertainty About Drew’s Role

The judge may also have been influenced by uncertainty as to Drew’s actual role in the case. Initial coverage of the story suggested that Drew created the fake MySpace persona of a teen boy (“Josh Evans”), then used that profile to woo Meier, a classmate of Drew’s daughter, only to deliberately—and cruelly—break her heart. After Missouri prosecutors and the FBI declined to press charges against Drew, federal prosecutors in California decided to do so, but Drew consistently maintained that it was not her idea to create the account. Continue reading →

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New Self-Regulatory Principles for Online Behavioral Advertising

by Berin Szoka on July 2, 2009 · 5 comments

The leading trade associations in the online advertising industry have just released their new self-regulatory principles—the first comprehensive self-regulatory principles industry has produced, which track closely with the suggested guidelines released by the FTC in February.

I commend the industry for setting a new standard in transparency, consumer control and data security. These Principles do much to empower Americans to make their own decisions about privacy, but I fear that many critics of so-called “targeted advertising” will never be satisfied, no matter how high industry raises the bar.

These critics have insisted that ordinary users can’t be trusted to make the “right decisions” about privacy and have insisted on imposing restrictive default “opt-in” rules for the online data collection that makes online advertising valuable to websites that rely on ad revenue. Such pre-emptive privacy regulation would stunt the growth of revenue for the “Free” online content and services we’ve all come to take for granted. During a time of economic recession, and as traditional media like newspapers struggle to make the transition from print to the Internet, it’s more important than ever that policymakers allow self-regulation to evolve. Only by doing so can we expect continued innovation and creativity online. We must all remember: There is no free lunch!

I’ll lead a panel discussion on July 10 on Capitol Hill about “Regulating Online Advertising: What Will it Mean for Consumers, Culture & Journalism?” Please RSVP here.

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False Dichotomies and the Death of Print

by Tim Lee on July 2, 2009 · 10 comments

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

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

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

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

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

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

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

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

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Cyberbullying Legislation Debate: Video from FOSI Capitol Hill Event (6/12)

by Adam Thierer on July 1, 2009 · 21 comments

As I noted recently, Berin Szoka and I just released a big PFF white paper (PDF) entitled, “Cyberbullying Legislation: Why Education is Preferable to Regulation,” which examines two very different federal approaches to the issue. One approach is focused on the creation of a new federal crime to punish cyberbullying, which would include fines and jail time for violators. One approach, set forth by Rep. Linda Sánchez (D-CA) in H.R. 1966 (originally H.R. 6123), the “Megan Meier Cyberbullying Prevention Act,” would create a new federal felony: “Whoever transmits in interstate or foreign commerce any communication, with the intent to coerce, intimidate, harass, or cause substantial emotional distress to a person, using electronic means to support severe, repeated, and hostile behavior, shall be fined under this title or imprisoned not more than two years, or both.”

The other legislative approach is education-based and would create an Internet safety education grant program to address the issue in schools and communities. In mid-May, the “School and Family Education about the Internet (SAFE Internet) Act” (S. 1047) was introduced in the Senate by Sen. Robert Menendez (D-NJ) and in the House by Rep. Debbie Wasserman Schultz (D-FL). The measure proposes an Internet safety education grant program that will be administered by the Department of Justice, in concurrence with the Department of Education, and the Department of Health & Human Services.

On June 12, the Family Online Safety Institute (FOSI) hosted a discussion about these bill on Cap Hill, which was moderated by FOSI CEO Stephen Balkam. Representatives from both Rep. Sanchez’s and Sen. Menendez’s offices were on hand to discuss their bills, and I provided some feedback based upon what Berin and I concluded in our paper. It was a good discussion and I encourage you to watch the whole thing because there were some good questions from the audience later in the show.

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Defending Free

by Tim Lee on July 1, 2009 · 28 comments

There’s been a lot of criticism lately of Chris Anderson’s Free. Malcolm Gladwell didn’t like it. Matt Yglesias had a sharp and critical response, and here at TLF Cord offered a strongly negative take on the book.

I haven’t read Free myself yet, but I think I know Anderson’s argument well enough to know the critics aren’t really engaging it. Two really important points seem to be getting missed.

First, when Anderson says “eventually the force of economic gravity will win,” he means eventually. So citing YouTube—a site that’s been in business for barely four years—doesn’t prove anything. Lots of Internet startups lost money for four years and then went on to make a killing.

Moreover, it seems to me that none of Anderson’s critics really address the heart of this argument. In any other competitive market, we know that competition pushes prices down toward their marginal cost. The PC industry, for example, is famous for its razor-thin margins. Given that the marginal cost of content is zero, basic economics would seem to tell us that—at least in highly competitive sectors like mainstream news—competition is going to push prices down to zero and keep them there.

Second, a lot of criticism seems to miss that “free” business models aren’t just about giving stuff away and hoping a miracle occurs. They’re about using free stuff to sell complementary goods. Obviously if YouTube just gives away a lot of free videos, as Matt suggests, that’s not going to make them any money. But their business model is to give away free videos and sell ads. This is a perfectly plausible business model that will almost certainly become viable in the next few years. YouTube’s primary costs are servers and bandwidth, both of which continue to fall in price at a prodigious rate. Advertising revenues have fallen somewhat in the last few months, but there’s every reason to expect them to pick up again when the recession is over. Therefore, the lines will cross in the not-too-distant future, and YouTube will become at least moderately profitable.

It’s important to note that Matt is absolutely right that these businesses may only be moderately profitable. As he says, this is precisely the point of free markets—forcing companies to compete against one another means better deals for us and lower profits for them. So if Anderson claims that “free-based” business models are going to be wildly profitable, he’s probably wrong. Many free-based business models will only be modestly profitable. But they’re not going to keep losing money forever.

Finally, Gladwell, Yglesias, and Blomquist all seem to miss the point about transaction costs: charging small amounts of money is expensive. It costs more than 10 cents to charge someone 10 cents. As a consequence, if the equilibrium price of your product is less than 10 cents, it’s stupid to charge for it because all the revenues will go to the credit card company. I think this is actually more important than the psychological effects Matt talks about. It’s not just that customers have an irrationally strong attachment to the concept of free. It’s that below a certain point the overhead involved in charging for stuff is too high to be worth the trouble.

What’s especially weird about these arguments is that we’re surrounded by examples of Anderson’s thesis. The overwhelming majority of news and commentary on the web is available for free. Online services like search and email are free, and many of them are extremely profitable. Red Hat and MySQL (before it got bought by Sun) built extremely successful businesses around free software. For that matter, let’s forget the Internet and computers entirely. The 20th century radio and television industries, and parts of the newspaper industry, were built on “free”-based business models. It’s obviously true that companies can earn profits while giving away content. And basic economics tells us that we should expect companies that give their content away for free to gradually push out companies that don’t. So why is Anderson getting so much flack for pointing out an obvious and inescapable trend?

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“Free” Isn’t Worth Reading, But It’s Worth Discussing

by Cord Blomquist on July 1, 2009 · 19 comments

Image Courtesy of Flickr User Pieter Baert

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

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

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

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

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

Continue reading →

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