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The PEW Project for excellence in journalism recently published its annual survey on the state of the news media. The report framed readers of online news media as mysterious strangers with dubious habits and few loyalties. They read promiscuously. They spend little time with the news online. And they are quick to abandon any site that might ask for compensation. Online journalism is in trouble.
The business of connectivity, however, is thriving. Both video and internet access, whether it’s through Verizon or Comcast or another, continue to increase penetration and, seemingly, price, and the FCC’s 100 Squared initiative will spread access wider and push it deeper than before. But the PEW project pits an underfunded online news media against the mysterious stranger who doesn’t seem to recognize or care for their impact on or the consequences for the media or perhaps the higher goals of journalism itself.
How can the fate of internet access and online media be so divergent? They’re actually intertwined. It’s not that we’re not paying for news. We are. Internet access bundles the full array of sites, services, and entertainment online with the physical connection, just like cable. But unlike cable, it doesn’t pay for the privilege.
Cable and the internet are a lot a like. Both are networks. Both distribute entertaining and educational programs and services. Both are actually bundles. But unlike the cable bill, which must pay out to the various networks, the internet bill doesn’t pay the panoply of sites across the internet. It pays only the ISP.
Cable bundles content in a way that’s immediately obvious. The guide shows a raft of networks, and with digital cable, many of these programs are available on-demand. Cable permissions the content, pays the rights-holders, and distributes it over a proprietary network — all for a monthly fee. These networks and programs are the complement to the cable network.
The internet portion of the bill, whether it’s from the telecom company or the cable company, appears to do none of that. It’s billed as pure connectivity that terminates in an ethernet connection. The ISP may market tiered levels of access, so an online gamer can experience a faster connection and lower latency than someone who only needs to check their email and stream The Daily Show. Everything about how it’s billed, marketed and promoted would suggest it has only priced connectivity, but it’s not just selling connectivity. It’s selling a bundle, just like the cable side of the bill, and that bundle includes the manifold benefits of all the sites, services, and entertainment of the internet.
Bundles solve one very important problem for companies – pricing. Not every customer will value any one product or service in the same way. A price for one customer might be too high; for another, too low. One could price each good or service to suit each customer, but price discrimination on this order is inefficient and becomes costly with each transaction. Over an entire portfolio of products or services, however, variances in customer perception begin to even out. No customer may value any one product or service, but taken as a the whole, the bundle may be valued similarly by all. Erik Brynjolfsson argues that bundles provide greater pricing efficiency and higher profits, and with digital information goods — the internet — the bigger the bundle the better. This is the power of the bundle.
The ISP bundles connectivity and its network of complements in the form of sites, services, and entertainment available online. The internet bundle, however, is distinguished in one important way – market power. The ISP wields market power in two ways. It’s not only a means to maintain and perhaps increase pricing with the consumer. It is also through the lack of market power inherent in the network of complements that constitute the sites, services and entertainment available online.
Market power starts with an explanation. Economists assume that within a perfectly competitive market no one competitor would have the power to raise prices for a particular good or service. If they did, customers would switch to a ready substitute at a lower price. These are the conditions of pure competition, in which a particular good or service is a commodity. Experience would suggest, however, that markets aren’t always perfectly competitive. What characterizes this divergence? Market power. In those cases, the company has the power to raise prices without losing customers to competition. At the extreme, market power may manifest as monopoly.
The market power of an ISP that has captured most of our attention faces the customer. It starts with the high barriers to entry associated with having laid the local loop in the form of copper lines, cable plant, and now fiber. These barriers limit competition, often to a maximum of two players in any particular area: a telco, such as Verizon, and a cable company, such as Comcast. Indeed, the FCC’s 100 Squared initiative admits 85% of markets have only one player, and in the remaining 15% markets much of the legacy telco infrastructure has not kept pace with the cable offering, so there is effectively one player. As the Berkman Center’s Next Generation Connectivity report suggests, these are regional monopolies and duopolies that have enormous market power over the consumer. Yochai Benkler’s recent op-ed in the New York Times, for example, drew stark parallels between the generous service offerings driven by regulated markets internationally than the relatively stingy offerings in the US.
What has drawn less attention is the effective market power ISPs have over the sites, services, and entertainment online. It’s this condition that allows ISPs to sell the bundle but keep the money.
The ISP operates as a broker and bundler between the user and the Internet. While selling the connection to the customer, the ISP also effectively provides access to the sites, services and entertainment available on the internet. Similar to a cable package, these are the complement to internet access, but unlike a cable package, the ISP doesn’t have to pay retransmission rights. Access is free, ostensibly. Who set the price? Who has market power? The ISP.
The Pew Project for Excellence in Journalism follows the thread all the way to the end customer and dismal results. Some 82% of customers are likely to go somewhere else if their favorite news site were to begin charging for access, and only 35% even have a favorite news site. To customers on the internet, substitutes may be so pervasive and available that it often does not even merit a respondent’s identifying a single one. Taken literally, only 7% of online readers would pay for access to their favorite news site.
Does that mean that customers aren’t paying for news? No. Customers are paying for news. The internet bill isn’t just for connectivity. They’re paying for the bundle – news, among other sites, services and entertainment online. The service would hardly be a worthwhile transaction for as many people as it is at $40 a month without youtube, The New York Times, Amazon. But the ISP’s market power conveys the proceeds of the internet access bill to the ISP, not the media.