In my latest column for The Hill, I explore how “State and Local Meddling Threatens to Undermine the AI Revolution” in America as mountains of parochial tech mandates accumulate. We need a federal response, but we’re not likely to get the right one, I argue.

I specifically highlight the danger of new measures from big states like NY and California, but it’s the patchwork of all the state and local regs that will result in a sort of ‘death-by-a-thousand-cuts’ for AI innovation as the red tape grows and hinders innovation and capital formation.

What we need is the same sort of principled, pro-innovation federal framework or AI that we adopted for the Internet a generation ago. Specifically, we need some sort of preemption of most of the state and local constraints on what is inherently national (and even global) commerce and speech.

Alas, Congress appears incapable of getting even basic things done on tech policy these days. As far as I can tell, not a single AI bill in front of Congress today would preempt most of this state and local AI regulatory activity.

Worse yet, if Congress did somehow pass anything on AI right now, it’d probably just include even more anti-innovation mandates and agencies without preempting any of the state and local ones. Thus, America would just be piling bad mandates on top of bad mandates until we basically become like Europe, where innovation goes to die under piles of bureaucratic red tape.

It’s a miserable state of affairs with horrible consequences for the U.S. as global competition from China heats up on the AI front. America is sacrificing its competitive advantage on digital technology because fear-based thinking and partisan politics continue to prevent the adoption of a principled, bipartisan vision for artificial intelligence policy.

See my new Hill column for more discussion, and also make sure to check out my earlier Hill essay on “A balanced AI governance vision for America,” as well as these two big R Street Institute reports from last year about how Congress can craft sensible, pro-innovation AI policy for America:

• Adam Thierer, “Getting AI Innovation Culture Right,” R Street Institute Policy Study №281 (March 2023).
• Adam Thierer, “Flexible, Pro-Innovation Governance Strategies for Artificial Intelligence,” R Street Institute Policy Study №283 (April 2023).

And here is some additional reading on the dangerous regulatory situation we are facing today in terms of over-regulating artificial intelligence by treating innovators as guilty until proven innocent. America is about to shoot itself in the foot as the global race begins for the more important technological revolution of our lifetime:

• Adam Thierer, “Blumenthal-Hawley AI Regulatory Framework Escalates the War on Computation,” Medium, September 13, 2023.
• Adam Thierer, Statement for the Record, Hearing on “The Need for Transparency in Artificial Intelligence,” September 12, 2023.
• Adam Thierer, “Will AI Policy Became a War on Open Source Following Meta’s Launch of LLaMA 2?” Medium, July 19, 2023.
• Adam Thierer, “The FTC Looks to Become the Federal AI Commission,” Medium, July 15, 2023.
• Adam Thierer, “Microsoft’s New AI Regulatory Framework & the Coming Battle over Computational Control,” Medium, May 29, 2023.
• Adam Thierer, “Is Telecom Licensing a Good Model for Artificial Intelligence?” Medium, July 8, 2023.
• Adam Thierer, “The Schumer AI Framework and the Future of Emerging Tech Policymaking,” R Street Institute Real Solutions, June 27, 2023.
• Adam Thierer, “Here Come the Code Cops: Senate Hearing Opens Door to FDA for Algorithms & AI Occupational Licensing,” Medium, May16, 2023.
• Adam Thierer, “Is AI Really an Unregulated Wild West?” Technology Liberation Front, June 22, 2023.
• Adam Thierer, “The Most Important Principle for AI Regulation,” R Street Institute Real Solutions, June 21, 2023.
• Neil Chilson & Adam Thierer, “The Problem with AI Licensing & an ‘FDA for Algorithms,’” Federalist Society Blog, June 5, 2023.
• Adam Thierer, “The Many Ways Government Already Regulates Artificial Intelligence,” Medium, June 2, 2023.

Yesterday was National Lemonade Day. Over at the Mercatus Bridge blog, Jennifer Skees and I used the opportunity to highlight the increasing regulatory crackdown on kids operating ventures without first seeking the proper permits from local authorities. We ask, “wouldn’t it be better to teach them the value of hard work and entrepreneurial effort instead of threatening them with penalties for not getting costly permits to do basic jobs?” Here’s our answer:

Today is National Lemonade Day. For many Americans a lemonade stand was their first experience in entrepreneurship. But unfortunately, this time honored tradition that teaches the value of hard work, entrepreneurship, and innovation may be under threat from overzealous grown-ups.

Should we really force kids to get licenses to start lemonade stands, sell bottles of water outside a ballpark, or mow lawns for a little extra money? And wouldn’t it be better to teach them the value of hard work and entrepreneurial effort instead of threatening them with penalties for not getting costly permits to do basic jobs?

Recent news stories have highlighted examples of kids being confronted with local regulations that essential tell them not to be entrepreneurial until they’ve gotten someone’s blessing–or else face fines or other penalties for those efforts.

Out in San Francisco, for example, a neighbor threatened to call the police on an eight-year-old girl selling water to raise money for a trip to Disneyland after her mother had lost her job. The neighbor berated the little girl for “illegally selling water without a permit.” Luckily, national outrage seems to have fallen in favor of this rogue entrepreneur instead of “Permit Patty.” But this is far from an isolated case.

Another story went viral earlier this year involving kids and lemonade stands. Country Time lemonade pledged to pay the fines received or the permit cost for children’s lemonade stands. Who thought we’d reach the day when we need a Lemonade Legal Defense Fund? But just prior to the launch, Stapleton, Colorado police were called to shut down the lemonade stand of  four and six year-old brothersfor failing to have a business license. Kids who probably can’t read or fill out the necessary forms are expected to obtain a formal license for a tradition that dates back about 120 years.

Kids are confronted with other meddlesome local permitting rules even when they aren’t selling food or beverages. The town of Gardendale, Alabama made news last year after attempting to charge a teenager $110 for a business license for mowing neighbors’ lawns during the summer to earn money for a mission trip. A local professional lawn service had apparently pressured local parents about the need for kids to have licenses to mow. The city later clarified teenagers would be allowed to mow lawns for a little extra money without needing a license to do so as long as the work was part-time and they were students.

Should we have expected kids to seek permits in these cases? Some sticklers might say yes, we should. After all, it’s the law!

But complying with the law is costly in two important ways. First, the actual fees can be exorbitant. In San Francisco, for example, the filing fee for a “peddler’s permit” costs $330-$525 depending on whether you are selling non-food or food items. Then, if you get the city’s blessing, you have to pay an additional $166-$624 annually for a license to serve the community. It’s safe to say that most kids and their parents probably could not afford that expense.

But the more important cost might be the mental transaction costs or general hassles associated with navigating the labyrinth of red tape that entrepreneurs must confront to get new ventures started. The very act of going through a laborious, confusing, and time-consuming permitting process will be too much for many to bear, especially kids. When a mother tried to get a license for a lemonade stand in Texas, she was told that an inspection by the health department would also be necessary because of the “bacteria that can grow in lemonade.” As a result some children and parents have gotten creative by not “selling” these dangerous products but instead offering it “free” but accepting donations.

The costs of permitting have important real-world implications. They are sending a clear message to kids and their parents: Don’t even bother trying to be entrepreneurial unless you are willing to deal with a world of regulatory pain. Worse yet, to the extent they learn anything by attempting to comply with such silly rules, it’s probably only a lesson in how to manipulate a political process for your own gain. All too often, many incumbent businesses who already worked their way through the system figured out how to exploit it for their own gain to keep competitors out. They then become the guardians of the licensing systems

This is what Philip K. Howard, chair of Common Good, calls this  The Death of Common Sense, in a book of the same name. “Like sediment in a harbor,” he argues, rules and regulations in the US have accumulated, “until most productive activity requires slogging through a legal swamp. “It’s degenerative,” he says. Indeed, laws and regulations like these sap the entrepreneurial spirit of young Americans and discourage them from taking the initiative and learning important skills they will use throughout their lives.

A common refrain of just about every generation of adults is that the younger generation doesn’t work as hard as their generation did. Such “kids-these-days!” complaints are almost always off-base. But they are particularly outlandish when it’s the adults who are acting juvenile by refusing to reform illogical and costly rules that do nothing to protect the public but make it harder for young people to pursue their dreams and engage in entrepreneurial activities.

We shouldn’t actively encourage kids to break the law, of course. But what happens when rules and regulations utterly defy common sense, as these and countless others do today? Perhaps a little “evasive” entrepreneurialism and civil disobedience is the answer. Luckily, public interest law firms like the Institute for Justice, the Goldwater Institute, and the Pacific Legal Foundation already exist to defend our general right to earn a living. Sometimes it will be necessary to push our luck against what Goldwater’s Timothy Sandefur calls “the Permission Society” if we hope to get policymakers to wake up to the illogical and unfair nature of archaic old licensing regimes.

Luckily some states have started to realize that these burdensome licensing and permitting requirements may have gone too far and at least in some cases are not serving their original purposes. For example, Utah recently passed a law that exempts lemonade stands and other similar child-run businesses from permitting requirements. And recently health inspectors helped a Minneapolis 13-year-old get the necessary permits and paid the costs of the licenses to keep his hotdog stand open. But on a broader front, the right to earn a living is tied both to the value of entrepreneurship and the right to innovate. It is far too easy for incumbents to use licensing schemes to keep out new innovations like ride-sharing and home-sharing. Instead of focusing on raising requirements to prevent new innovations and protect existing industries, we should look to the right to earn a living as a way to even the playing field by reducing the burdens for everyone.

Kids are used to asking permission from their parents, but what are we teaching them when every attempt to do a job or earn a little money also requires endless permission slips from the government? Studies have shown that helicopter parenting makes children struggle emotionally and behaviorally later in life. Imagine how much worse that problem is when the government serves as the ultimate helicopter parent, demanding constant permission to engage in any kind entrepreneurial acts? It seems if we want to stay a nation of innovators and entrepreneurs, the least we can do is tell the kids to stick to asking “Mother may I?” of just their mothers.

Additional Reading:

• Jennifer Skees, “Do You Need a License to Innovate?”, The Bridge , June 29, 2018.
• Adam Thierer, “Making the World Safe for More Moonshots,” The Bridge , February 5, 2018.
• Jennifer Skees & Trace Mitchell, “Will The Electric Scooter Movement Lose Its Charge?” The Bridge , July 18, 2018.
• Jennifer Skees, “Should You Be Able to Fix Your Own iPhone,” Plain Text , June 18, 2018.
• Andrea O’Sullivan & Adam Thierer, “3D Printers, Evasive Entrepreneurs and the Future of Tech Regulation,” The Bridge, August 1, 2018,
• Adam Thierer, “The Pacing Problem and the Future of Technology Regulation,” The Bridge , August 8, 2018. 
• Adam Thierer, “Evasive Entrepreneurialism and Technological Civil Disobedience: Basic Definitions,” The Bridge , July 20, 2018.

Yesterday, the White House Council of Economic Advisers released an important new report entitled, “Occupational Licensing: A Framework for Policymakers.” (PDF, 76 pgs.) The report highlighted the costs that outdated or unneeded licensing regulations can have on diverse portions of the citizenry. Specifically, the report concluded that:

the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities,  and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing.

The report supported these conclusions with a wealth of evidence. In that regard, I was pleased to see that research from Mercatus Center-affiliated scholars was cited in the White House report (specifically on pg. 34). Mercatus Center scholars have repeatedly documented the costs of occupational licensing and offered suggestions for how to reform or eliminate unnecessary licensing practices. Most recently, my colleagues and I have explored the costs of licensing restrictions for new sharing economy platforms and innovators. The White House report cited, for example, the recently-released Mercatus paper on “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem,’” which I co-authored with Christopher Koopman, Anne Hobson, and Chris Kuiper. And it also cited a new essay by Tyler Cowen and Alex Tabarrok on “The End of Asymmetric Information.”

Moreover, along with Christopher Koopman and Matt Mitchell, I recently submitted comments to the Federal Trade Commission for a sharing economy workshop. In those comments, as well as a recent paper on the same subject, we documented how occupational licensing rules were often “captured” by affected interests and are then used to discourage new forms of competition and innovation. This harms both consumers and workers by depriving them of new and better options. Many sharing economy operations are having great success in breaking down these barriers and proving that consumers and workers do better in an environment free of unnecessary and costly licensing restrictions. This suggests that consumer welfare would be improved even more by reforming other licensing regimes.

Mercatus has published dozens of other things related to this issue, many of which I have listed down below. Just recently, in fact, we published a new paper on “Breaking Down the Barriers: Three Ways State and Local Governments Can Improve the Lives of the Poor,” by economist Steven Horwitz. The report begins by documenting how “occupational licensure laws disproportionately burden the poor by requiring them to spend significant resources just to enter a market.” This is consistent with the findings from other Mercatus reports and other academic publications.

Anyway, check out the new White House report and, if you are serious about studying the issue of occupational licensing in more detail, you’ll want to take a closer look at some of these other Mercatus Center publications on the issue. The case for occupational licensing reform is strong and non-partisan, as the release of this White House report makes clear.

Mercatus Center publications and related material on occupational licensing & barriers to entry 

• Working Papers, Filings & Testimony
  • Mercatus research paper, “Breaking Down the Barriers: Three Ways State and Local Governments Can Get Out of the Way and Improve the Lives of the Poor” by Steve Horowitz (July 21 2015).
  • Testimony before the South Carolina Health Planning Committee department of Health and Environmental Control, “Certificate-of-Need laws: Implications for South Carolina” by Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse (June 12, 2015).
  • Mercatus on Policy, “Certificate-of-Need Laws: Implications for Arkansas” by Christopher Koopman, Thomas Stratmann, and Mohamad Elbarasse (June 9, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for West Virginia” by Christopher Koopman and Thomas Stratmann (June 2, 2015).
  • Mercatus working paper, “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the “ Lemons Problem” by Adam Thierer, Christopher Koopman, Anne Hobson, and Chris Kuiper (May 26, 2015).
  • Mercatus FTC filing, “The Sharing Economy: Issues Facing Platforms, Participants, and Regulators” by Christopher Koopman, Matthew Mitchell, and Adam Thierer (May 26, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for Kentucky” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 26, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for Michigan” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 19, 2015).
  • Mercatus publication, “How state CON Laws restrict Access to Health Care” by Christopher Koopman Thomas Stratmann, and Mohamad Elbarasse (May 13, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for Missouri” by Christopher Koopman, Thomas Stratmann and Mohamad Elbarasse (May 11, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for Georgia” by Christopher Mercatus on Policy, “Certificate-Of Need Laws: Implications for South Carolina” by Christopher Koopman and Thomas Stratmann (May 5, 2015).
  • Testimony before the Indiana Senate Commerce and Technology Committee, “Occupational Licensing Gone Wild? Why Licensing is Not Always the Answer” by Edward Timmons (April 16, 2015).
  • Koopman, Thomas Stratmann and Mohamad Elbarasse (March 31, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for Tennessee” by Christopher Koopman and Thomas Stratmann (March 24, 2015).
  • Mercatus on Policy, “Certificate-of-Need Laws: Implications for Florida” by Christopher Koopman and Thomas Stratmann (March 3, 2015).
  • Mercatus policy recommendations, “Florida Fiscal Policy: Responsible Budgeting in a Growing State” by Randall Holcombe (February 26, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for Virginia” by Christopher Koopman and Thomas Stratmann (February 24, 2015).
  • Mercatus working paper, “Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States” by Edward Timmons and Anna Mills (February 17 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for North Carolina” by Christopher Koopman and Thomas Stratmann (February 12, 2015).
  • Mercatus on Policy, “Certificate-Of Need Laws: Implications for New Hampshire” by Christopher Koopman and Thomas Stratmann (February 4, 2015).
  • Testimony before the New Hampshire House Health, Human Services and Elderly Affairs Committee, “Certificate-of-Need laws: Implications for New Hampshire” by Christopher Koopman and Thomas Stratmann (January 28, 2015).
  • Mercatus publication, “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change” by Christopher Koopman, Matthew Mitchell, and Adam Thierer (December 8, 2014).
  • Mercatus interactive publication, “40 Years of Certificate-of-Need Laws across America,” by Matthew Mitchell and Christopher Koopman (October 14, 2014).
  • Mercatus working paper, “Do Certificate-of Need Laws Increase Indigent Care?” by Thomas Stratmann and Jake Russ (July 15, 2014).
  • Mercatus working paper, “Regulatory Reform in Florida: An Opportunity for Greater Competitiveness and Economic Efficiency” by Patrick McLaughlin, Jerry Ellig, and Dima Yazji Shamoun (March 18, 2014).
  • Mercatus on policy, “A Tale of Two Labor Markets: Government Spending’s Impact on Virginia” by Keith Hall and Robert Greene, (September 20, 2013).
  • Mercatus publication, “The Pathology of Privilege: The Economic Consequences of Government Favoritism” by Matthew Mitchell, (July 8, 2012).
  • “Beyond Bailouts: What is Cronyism?” by Matthew Mitchell, (July 8, 2012).
• Journal Articles
  • Published in Econ Journal Watch, “Was Occupational Licensing Good for Minorities? A Critique of Marc Law and Mindy Marks” by Daniel B. Klein, Benjamin Powell, and Evgeny S. Vorotnikov (September 2012).
  • Published in Cato Journal, “Occupational Licensing and Asymmetric Information” by David Skarbek (Jan 2007).
• Charts and Videos
  • “The Wrath of CON | How Certificate-Of-Need Laws Affect Access to Health Care” by Matthew Mitchell (May 12, 2015).
  • “Occupational Licensing: Bad for Competition, Bad for Low-Income Workers” by Veronique de Rugy (March 25, 2014).
• Media
  • Christopher Koopman discusses certificate of need laws on The Bill LuMaye Show on WPTF in North Carolina (5/11/2015).
  • Edward Timmons and Anna Mills publish, “Short-Sighted Policy,” at S. News and World Report (2/17/15).
  • Veronique de Rugy publishes, “Free the Horse Masseuses!” in Reason Magazine (July 2014).
  • Veronique de Rugy discusses state occupational licensing on Richmond’s Morning News on WRVA in Virginia (6/6/14).
  • Veronique de Rugy publishes “Licensing laws protect special interests at the expense of opportunity,” at The Washington Examiner (3/28/14).
  • Patrick McLaughlin discusses occupational licensing on The Ed Dean Show in Florida (3/27/14).
  • Donald Boudreaux publishes “Occupational licensing: Reality differs from rhetoric,” in The Pittsburgh Tribune-Review (3/25/14).
  • Emily Washington blogs “Occupational Licensing Hurts Consumers and Limits Entrepreneurship,” at Neighborhood Effects (8/20/13).
  • Veronique de Rugy blogs “More State Occupational Licensing Law Abuse: Kentucky Edition,” at National Review’s The Corner (7/17/13).
  • Emily Washington blogs “Small steps in VA occupational licensing reform,” at Neighborhood Effects (6/25/12).

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.

I’ve just released a short new paper, co-authored with my Mercatus Center colleagues Christopher Koopman and Matthew Mitchell, on “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change.” The paper is being released to coincide with a Congressional Internet Caucus Advisory Committee event that I am speaking at today on “Should Congress be Caring About Sharing? Regulation and the Future of Uber, Airbnb and the Sharing Economy.”

In this new paper, Koopman, Mitchell, and I discuss how the sharing economy has changed the way many Americans commute, shop, vacation, borrow, and so on. Of course, the sharing economy “has also disrupted long-established industries, from taxis to hotels, and has confounded policymakers,” we note. “In particular, regulators are trying to determine how to apply many of the traditional ‘consumer protection’ regulations to these new and innovative firms.” This has led to a major debate over the public policies that should govern the sharing economy.

We argue that, coupled with the Internet and various new informational resources, the rapid growth of the sharing economy alleviates the need for much traditional top-down regulation. These recent innovations are likely doing a much better job of serving consumer needs by offering new innovations, more choices, more service differentiation, better prices, and higher-quality services. In particular, the sharing economy and the various feedback mechanism it relies upon helps solve the tradition economic problem of “asymmetrical information,” which is often cited as a rationale for regulation. We conclude, therefore, that “the key contribution of the sharing economy is that it has overcome market imperfections without recourse to traditional forms of regulation. Continued application of these outmoded regulatory regimes is likely to harm consumers.”

We note that this is especially likely to be the case when the failure of traditional regulatory models is taken into account. As we document in the paper, all too often, well-intentioned “public interest” regulation is often captured by industry and used to to serve their interests:

by limiting entry, or by raising rivals’ costs, regulations can be useful to the regulated firms. Though regulations often make consumers worse off, they are often sustained by political pressure from consumer advocates because they can be disguised as “consumer protection.”

We provide evidence of the problem of regulatory capture and note it has been a particular problem in many of the sectors that are now being disrupted by sharing economy innovators–such as taxi and transportation services. It is evident that regulation has not lived up to its lofty expectations in many sectors. Accordingly, when market circumstances change dramatically—or when new technology or competition alleviate the need for regulation—then public policy should evolve and adapt to accommodate these new realities.

Of course, many bad laws and regulations that policymakers remain on the books and have constituencies who will defend them vociferously. Our paper concludes with some recommendations for how to “level the regulatory playing field” in a pro-consumer, pro-innovation fashion. We note that while differential regulatory treatment of incumbents and new entrants does represent a potential problem, there’s a sensible, pro-consumer and pro-innovation way to solve that problem:

such regulatory asymmetries represent a legitimate policy problem. But the solution is not to punish new innovations by simply rolling old regulatory regimes onto new technologies and sectors. The better alternative is to level the playing field by “deregulating down” to put everyone on equal footing, not by “regulating up” to achieve parity. Policymakers should relax old rules on incumbents as new entrants and new technologies challenge the status quo. By extension, new entrants should only face minimal regulatory requirements as more onerous and unnecessary restrictions on incumbents are relaxed.

Download this new paper on the Mercatus website or via SSRN or ResearchGate. Incidentally, we plan to release a much longer Mercatus Center white paper early next year that will explore reputational feedback mechanisms in far greater detail and explain how these systems help address the problem of “asymmetrical information” in these and other contexts.

Also see: “The Debate over the Sharing Economy: Talking Points & Recommended Reading,” which includes the following video of me on the Stossel Show discussing these issues recently.

Ajit Pai, a Republican commissioner at the Federal Communications Commission (FCC), had an outstanding op-ed in the L.A. Times yesterday about state and local efforts to regulate private taxi or ride-sharing services such as Uber, Lyft, and Sidecar. “Ever since Uber came to California,” Pai notes, “regulators have seemed determined to send Uber and companies like it on a one-way ride out of the Golden State.” Regulators have thrown numerous impediments in their way in California as well as in other states and localities (including here in Washington, D.C.). Pai continues on to discuss how, sadly, “tech start-ups in other industries face similar burdens”:

For example, Square has created a credit card reader for mobile devices. Small businesses love Square because it reduces costs and is convenient for customers. But some states want a piece of the action. Illinois, for example, has ordered Square to stop doing business in the Land of Lincoln until it gets a money transmitter license, even though the money flows through existing payment networks when Square processes credit cards. If Square had to get licenses in the 47 states with such laws, it could cost nearly half a million dollars, an extraordinary expense for a fledgling company.

He also notes that “Obstacles to entrepreneurship aren’t limited to the tech world”:

Across the country, restaurant associations have tried to kick food trucks off the streets. Auto dealers have used franchise laws to prevent car company Tesla from cutting out the middleman and selling directly to customers. Professional boards, too, often fiercely defend the status quo, impeding telemedicine by requiring state-by-state licensing or in-person consultations and even restricting who can sell tooth-whitening services.

What’s going on here? It’s an old and lamentable tale of incumbent protectionism and outright cronyism, Pai notes:

These are just the latest chapters in an old economic story. Incumbents have long promoted regulation in the name of protecting consumers when their actual goal is to block new entrants and stifle competition. As Milton Friedman observed, “The pressure on the legislature to license an occupation rarely comes from the members of the public … the pressure invariably comes from members of the occupation itself.”

Indeed, this is exactly the sort of cronyist nightmare that Brent Skorup and I documented in our new Mercatus Center report, “A History of Cronyism and Capture in the Information Technology Sector.” Our 73-page working paper outlines the evolution of government-granted privileges in America’s information and communications technology marketplace and in the media-producing sectors. Sadly, there are all too many examples of special interests seeking to commandeer the levers of government power to distort market outcomes and head off disruptive forms of innovation or new competition.

“Consumer protection is important,” Pai notes, “and rules to ensure safety and to deter fraud are necessary. But many regulations aren’t about safeguarding consumers; they’re about entrenching incumbents (at consumers’ expense), and they’re typically created by the very agencies that are supposed to oversee those incumbents.” he correctly observes.

The costs of cronyism can be significant. In our paper, Skorup and I note that when companies seek and receive favors from government, it can 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. Every dollar spent trying to influence government is a dollar that could have been better spent trying to develop the next iPhone or other innovative gadget or service. Thus, cronyism can 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.

Worse yet, 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. Just ask the agriculture and transportation sectors how their experience with favor-seeking has worked out. Yes, they have often received the special favors and benefits they sought, but along with the goodies came a litany of demands from lawmakers and regulators about how to run their businesses.

At the end of the day, it all goes back to the consumer and how they get screwed in this process. As Pai eloquently puts it:

Heavy-handed regulations hurt the very consumers they’re supposed to help. Consumers fare best when the barriers to business entry are low, which helps ensure that the market — any market — becomes competitive and stays that way. …  Governments at all levels should guard against this tendency by prioritizing innovation and removing unnecessary regulations that burden risk-taking entrepreneurs.

Amen, brother! If only all government officials thought this way. I hope some of them at least take the time to read Commissioner Pai’s excellent essay.

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

As we’ve noted here before, state and local politicians just love wireless taxes. They are going up, up, up. Dan Rothschild outlined this disturbing trend in his recent Mercatus Center paper making “The Case Against Taxing Cell Phone Subscribers,” and I discussed it in my recent Forbes essay lambasting the “Talking Tax.”  Another new study by Glenn Woroch of the Georgetown University School of Business notes how “The ‘Wireless Tax Premium’ Harms American Consumers and Squanders the Potential of the Mobile Economy.” Woroch estimates that “the American consumer forgoes over $15 billion in surplus annually compared to when cell phones receive the same tax treatment  as other goods and service.” Read the entire study but I want to draw everyone’s attention to this chart that appears on page 7 of the report comparing state and local wireless taxes burdens to beer taxes.  It really makes you realize just how drunk on wireless taxes are local lawmakers have become! [Click to enlarge. Red bar = wireless taxes.]

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.

I testified this morning in the House Energy and Commerce Committee’s Subcommittee on Communications, Technology, and the Internet at a hearing titled, “An Examination of the Proposed Combination of Comcast and NBC Universal.” Among those testifying were Comcast Chairman and CEO Brian L. Roberts, and NBC Universal President and CEO Jeff Zucker.  Down below I have attached my brief remarks (we only had 5 minutes), but see the Scribd doc at the very bottom to also see the embedded charts. I also wrote a paper about the proposed deal back in December entitled, “A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC” as well as this editorial for Forbes.

____________

Mr. Chairman and members of the Committee, thank you for inviting me here today. My name is Adam Thierer and I am the President of The Progress & Freedom Foundation (PFF).

Although we are still early in this process, there has already been a great deal of hand-wringing and even some dire predictions about the pending merger of Comcast and NBC Universal. I hope to put this proposed marriage in some historical context and explain why the deal certainly won’t have the detrimental impact some critics fear, and also explain why it might even be one potential model for how to sustain traditional media going forward.

Beware Media Merger Hysteria

First, let’s remember that we’ve been here before. Paranoid predictions of a media apocalypse have accompanied the announcements of many previous media mergers, from AOL-Time Warner to News Corp.-DirecTV to XM-Sirius.[i] In these cases and almost all others, however, the “sky is falling” claims proved to be greatly overstated.[ii] The only “harm” that one could reasonably claim came from those mergers was not to consumers or content providers, but to the merging firms themselves and their shareholders. That’s because many mergers simply fail to create the sort of synergies and benefits originally hoped for and consequently die of natural causes over time.

Other firms, however, have found ways to make deals work and deliver important new services that previously were unimaginable or simply too expensive to offer alone.[iii] Regardless, the point here is that we’ll never know what works unless we permit marketplace experimentation with new and innovative business models.

“Gatekeeper” Myths: Why Restricting Content Options is Economic Suicide

Second, the fear that Comcast-NBCU will act as a “gatekeeper” over video content is also largely overblown—especially in light of the preemptive concessions they have already made on program access and carriage. But it’s important to realize that the merger will only marginally affect vertical integration in the cable marketplace. Currently, the percentage of cable channels owned by video distributors is in the single digits, and even after this merger it will only be in the teens.[iv] (See Exhibit 1) Stated differently, the vast majority of cable channels will be independent of Comcast-NBCU control.

More importantly, it’s hard to believe the new firm would restrict its content to just Comcast-owned distribution networks since they would be losing the eyeballs, advertisers, and revenues that would accompany the carriage of their content on other video platforms. Likewise, it would make little sense for the firm to block new or competing channels on their own platform since they would incur the wrath of the programmers and the viewing public alike. And those channels will likely quickly find a home elsewhere, which could incentivize subscribers to switch video service providers. (See Exhibits 2-6)

Indeed, the great thing about the modern media marketplace is that there is always another place for consumers to turn to find what they want. Comcast faces increasingly robust competition in the video programming marketplace from satellite and telco providers, as well as from Internet-based video providers.^[v] (See Exhibit 7) And NBC Universal’s stable of programming, while impressive, is a mere trickle in an ocean of content that consumers can choose from.^[vi]

Meanwhile, many consumers are increasingly “cutting the cable cord” altogether and instead getting the video they want from a bewildering array of online video services.[vii] Netflix, Hulu, Joost, Roku, Apple, the Sony PlayStation Store, the Microsoft Xbox store, and others offer traditional TV fare while sites like YouTube, Vimeo and Justin.TV offer a mix of professional and amateur content.

In sum, there has never been so much competition for our eyes and ears, and audiences and advertising dollars have become increasingly fragmented as a result.[viii] (See Exhibits 8-10)

What Future for Broadcasting & Local News in Turbulent Times?

Finally, we need to realize that the ongoing digital revolution is upending many traditional media business models—especially advertising supported over-the-air broadcasting—and that alliances like Comcast-NBCU may be one blueprint for how traditional media operators can evolve and compete going forward.  With both the FCC and FTC currently investigating whether journalism is in trouble and what it might take to “save the news,” many media economists and industry analysts seem to agree that at least some degree of consolidation or collaboration might be necessary.

Consider last week’s news that NBC Universal saw quarterly profits plunge by a whopping 30% in the fourth quarter of 2009.[ix] This is indicative of the general downturn the entire media sector has been experiencing as of late.  Why not then let Comcast help NBCU try to get back on track rather than force them to make it on their own in a radically uncertain future?  And it goes without saying that Comcast might be better positioned to protect NBC Universal’s copyrighted content from digital piracy, at least over its own pipes.

Those who are concerned about the future of broadcasting and local news should remember that news—and local broadcast news in particular—isn’t cheap. Unless we want to embark on a massive government subsidization scheme to bailout traditional media providers, Congress and regulatory officials must be willing to grant private media operators the flexibility to restructure their business affairs so they can continue to provide important public needs while also turning a profit.[x] That can’t happen unless we allow media markets to evolve and let operators experiment with new business models and ownership structures.[xi] Although there are no guarantees, creator/distributor alliances like Comcast-NBCU may be one model that helps firms create, extend, and then also monetize their media content.  But, again, regulatory flexibility is crucial so we can figure out what works and what doesn’t.

Thank you again for inviting me here to testify.

[ii] Adam Thierer, A Media Morality Play, Forbes, Dec. 15, 2009, www.forbes.com/2009/12/14/media-merger-antitrust-opinions-contributors-adam-thierer.html

[iii] A good example: Disney’s seamless and successful integration of ABC Television Group (ABC + Disney cable properties), Walt Disney Studios, the Walt Disney Internet Group, its many ESPN properties, and its parks and resorts.

[iv] 2006 is the last for which the FCC has made data available, but as of that time the overall number of national programming networks available in America stood at 565 channels. That is up from just 70 channels in 1990, an astonishing increase in program choices.  The FCC noted that, “Of the 565 networks, 84 (14.9 percent) were vertically integrated, or affiliated, with at least one cable operator.” Federal Communications Commission, FCC Adopts 13^th Annual Report to Congress on Video Competition and Notice of Inquiry for the 14^thAnnual Report, Nov. 27, 2007, at 4, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-278454A1.pdf What that summary fails to mention, however, is that vertical integration has fallen steadily since the FCC’s first Annual Video Competition Report was issued, when over 50 percent of all channels were affiliated with a cable operator. Indeed, the video marketplace exhibits less vertical integration than ever before. As far as vertically integrated industries go, no impartial observer would conclude that this industry is being controlled by “gatekeeper,” pay TV platforms, as some critics suggest. Most new pay TV channels today are independently owned and offer an unprecedented diversity of programming options. This trend is a strong sign of how healthy and vibrantly competitive this marketplace is today. Finally, these numbers do not take into account the split between Time Warner Entertainment and Time Warner Cable, which represented a significant portion of the 15% of vertically owned channels before 2006. That is the percentage of cable channels owned by video distributors is in the single digits today.

[v] Adam Thierer, The Progress & Freedom Foundation, Video Competition in a Digital Age, Testimony before the Subcommittee on Communications, Technology and the Internet, U.S. House Committee on Energy and Commerce, Oct. 22, 2009, www.pff.org/issues-pubs/testimony/2009/10-22-09-thierer-testimony-video-competition-digital-age.pdf

[vi] Adam Thierer, The Media Cornucopia, City Journal, Vol. 17, No. 2, Spring 2007, at 84-89, www.city-journal.org/html/17_2_media.html

[vii] See generally The Progress & Freedom Foundation, “Cutting the Video Cord,” PFF Blog Ongoing Series, http://blog.pff.org/archives/ongoing_series/cutting_the_video_cord/

[viii] Adam Thierer and Grant Eskelsen, The Progress & Freedom Foundation, Media Metrics: The True State of the Modern Media Marketplace, PFF Special Report, Summer 2008), www.pff.org/mediametrics

[ix] David B. Wilkerson, NBC Quarterly Profit Plunges 30%, MarketWatch, Jan. 22, 2010.

[x] W. Kenneth Ferree, The Progress & Freedom Foundation, Another Naïve Proposal for Government Entanglement with the Fourth Estate, PFF Blog, Feb. 1, 2010, http://blog.pff.org/archives/2010/02/another_naive_proposal_for_government_entanglement.html;  Adam Thierer, Socializing Media in Order to Save It, City Journal, March 27, 2009, www.city-journal.org/2009/eon0327at.html; Adam Thierer, The Progress & Freedom Foundation, Public Option for Press Should Get the Red Pen, Progress Snapshot 6.4, Jan. 25, 2010, www.pff.org/issues-pubs/ps/2010/ps6.4-OP-ED-for-Daily-Caller-A-Public-Option-for-the-Press.html

[xi] W. Kenneth Ferree, The Progress & Freedom Foundation, Media Ownership Proceedings, Testimony before the Federal Communications Commission, Nov. 3, 2009, www.pff.org/issues-pubs/testimony/2009/11-03-09-ferree-media-ownership-testimony.pdf; Adam Thierer, Media Myths: Making Sense of the Debate over Media Ownership (The Progress & Freedom Foundation, 2005), www.pff.org/issues-pubs/books/050610mediamyths.pdf

Testimony of Adam Thierer – House Hearing about Comcast-NBC Merger 2-4-10 http://d1.scribdassets.com/ScribdViewer.swf

There was a hearing today in the House Energy and Commerce Committee on “Reauthorization of the Satellite Home Viewer Extension and Reauthorization Act,” which got into the sticky of issue of whether must carry mandates should be applied to satellite television (DBS) operators. My boss, Ken Ferree, president of the Progress & Freedom Foundation, testified in opposition to that notion. Here’s what he had to say about proposals that would require satellite operators to carry local broadcast TV stations from even the smallest markets:

Because Congress cannot repeal the laws of physics, there are only two ways in which a satellite company might comply with such a mandate: 1) it may add capacity (i.e., launch new satellites and build associated ground equipment), or 2) it may convert capacity currently used for other purposes to local television carriage in the most sparsely populated parts of the country. Neither approach makes economic sense. That is, these proposals, if they were to become law, would impose considerable costs on satellite operators while generating no appreciable revenue.

Building and launching new satellites in order to carry local television stations in the smallest markets would of course cost hundreds of millions of dollars, while the return on such an investment, without any doubt, would be negligible. On the other hand, satellite television operators make capacity decisions in order to maximize net revenue. If they are required to delete program services that are profitable to make room for those that are less so, they necessarily lose in the transaction. Indeed, if delivering local television signals in the smallest markets made sound business sense, the satellite companies would be doing so already and no legal mandate would be necessary. Moreover, and fatally for any such proposal, requiring DBS companies to provide local signals (effectively adopting a satellite must-carry requirement) would almost certainly be unconstitutional. Cable must-carry was upheld by the Supreme Court by a bare majority only because there was a voluminous record suggesting that weaker broadcast stations would fail absent a cable must-carry requirement, thus depriving over-the-air viewers of additional video programming choices. There is no similar record, nor any reason to believe that one might be assembled, suggesting that the same would hold true absent some enhanced satellite carriage rule. Carriage requirements impose significant burdens on the commercial and First Amendment rights of those bound by them. In the current environment, imposing enhanced carriage mandates on DBS operators would be unwarranted, economically indefensible, and unconstitutional.

The WSJ reports on the intensifying economic pressure on local TV stations: declining viewership, ad revenue and the threat that national networks might go straight to cable.  

Many stations are looking to the Internet for salvation:

Stations are scrambling to find new revenue streams. Some are testing out technology that will send their signals to cellphones and mobile devices, and beefing up their Web sites to boost online advertising. Others say rather than shrinking local news coverage, they’re expanding it, since it’s the only original content they still have….   Nexstar Broadcasting Group Inc., a Texas-based company that owns or manages 51 stations around the country, launched highly local “community” Web sites. Stations owned by NBC Universal are piping content and ads to TV screens in supermarkets, taxi cabs and their own Web sites. “These tough times really force you to look at everything,” says John Wallace, president of NBC Local Media, the cadre of stations owned by NBC. “It remains to be seen how this is going to evolve, but I do believe there will be a market for local television well into the future.”

Over on the Poynter Online blog, Amy Gahran has a very smart piece on some of the confusion surrounding debates about “media localism.” In her essay asking “How Important is Local, Really?”, she challenges some of the assumptions underlying the Knight Foundation’s new Commission on the Information Needs of Communities in a Democracy.

I particularly like her line about how, “in many senses, ‘local’ is just one set of ripples on the lake of information — especially when it comes to ‘news.’ And for many people, it’s not even the biggest or most important set of ripples.” That is exactly right. Today, local choices are just a few more choices along the seemingly endless continuum of media choices. It’s foolish to assume that “media localism” in a geographic sense is as important now as it was in the past for the reasons Gahran makes clear in her essay:

I’m glad that the Knight Foundation is asking basic questions about what kinds of information people need support community and democracy. However, I question the Commission’s strong focus on geographically defined local communities. It seems to me that with the way the media landscape has been evolving, geographically defined local communities are becoming steadily less crucial from an information perspective. I suspect that defining communities by other kinds of commonalities (age, economic status/class, interests, social circles, etc.) would be far more relevant to more people — although more complex to define.

I suspect that clinging reflexively to “local” as the paramount criteria for “relevant” reflects a newspaper perspective that was never a good fit for most people, and that never really served most people’s information needs well. I’m not saying local doesn’t matter. Local is important. It’s especially important for people who are newcomers to communities. It’s especially important for identifying accessible resources and services that people might need in their daily lives. But in many senses, “local” is just one set of ripples on the lake of information — especially when it comes to “news.” And for many people, it’s not even the biggest or most important set of ripples. So my question for Knight is: Why do you assume that geographically defined local communities should be the paramount focus of people’s informational diet, or even to support democracy? Did you seriously consider any other perspectives? Today, you’re at Google — where folks are used to viewing people’s information needs as a complex mosaic, where no one filter is paramount for everyone. I hope you take advantage of their insight.

Gahran has it exactly right, but over at the Knight Foundation blog, a debate is raging about her comments. I posted some of my own thoughts on the topic, which were originally posted here in my essay on Our Continued Wishful Thinking about “Media Localism”. Read that for more details on the forgotten dimensions of this debate.

As we’ve discussed here before, newspapers are struggling. We all know that. The question is what, if anything, will save them? Most pundits tend to point to a two-fold solution: (1) get serious about leveraging the natural local advantages newspapers hold; (2) and find away to do so online as quickly as possible before they lose the bulk of the local online ad market to other competitors. This is why there’s a lot of talk these days about turning traditional papers into “hyper-local” web portals for their communities. Of course, there’s no guarantee that will work, especially in light of changing attitudes about “media localism.”

But let’s assume that that is indeed the best path forward. Will it really save newspapers? As eMarketer reports in today’s newsletter on “Can Local Web Ads Save Newspapers,” it’s a bit of a good news–bad news story:

The good news is that newspaper site ad revenues are growing along with other online ad spending, especially for local news sites. Local newspaper online ad revenues are predicted to reach $3.7 billion this year, according to eMarketer calculations based on Borrell Associates data. The bad news is that this spending will not make up for print ad losses for some time, according to Lisa Phillips, senior analyst at eMarketer. Ms. Phillips noted that advertisers still pay more for print readers than for online readers. “This is a transition that will take several years,” she said. “Local advertisers are paying attention to the shift in reader behavior, but it will take a while for everyone to adjust.”

And so we will have to wait to see how it all plays out. But I am highly skeptical that traditional newspapers operators will be able to make up anywhere near the amount of revenue online that they are hemorrhaging over on the print side of the business. There’s just too much other competition out there online already for our eyes and ears. The age of “protectable scarcity” is dead and that means newspapers just don’t have the lock on local or regional markets they once did.