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What is most curious about this doctrine is that neither the decisions that have applied it for nearly 300 years, nor its eventual statutory formulation, undertook to define or explain its contours or objectives….Curiously, judges generally have neither complained of the absence of guidance, nor made substantial efforts to fill the void.

Pierre Leval, noting the obvious lack of specific standards for fair use in the Copyright Act of 1976 – § 107 · Limitations on exclusive rights: Fair use.

Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include—

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.

The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

To rent or to own. The record labels may soon find that they have been renting all along. The 1976 Federal Copyright Act included a provision for termination rights, so artists could claw back the underlying economic rights to their songs and music after thirty-five years. Because the 1976 Act did not pass until 1978, 2013 is the magic year, and both sides of the table have already begun their preparations.

As far back as 1999, Mitchell Glazier, then copyright counsel to the Republican head of the Judiciary Committee, inserted language into an omnibus bill that would redefine sound recordings as work for hire. Reclassified as such, the work of musical artists would no longer include termination rights. It would equate them to rank and file employees of the the record labels. The bill and the amendment passed quietly, with little outside recognition of its contents or consequences. Says William Patry (via NYT), “That amendment was essentially passed in the middle of the night.” Within a year, however, artists learned of the change and successfully lobbied Congress to roll it back. Glazier would go on to be the Chief Lobbyist at the RIAA.

Today, with 2012 looming, the field has been set. The recording artists and the recording industry have each dug into their positions. With bulwarks made, the battle is set to begin. Was Springstein’s Darkness on the Edge of Town a work for hire, as the recording industry claims? Or as June M. Besek, executive director of the Kernochan Center for Law, Media and the Arts at the Columbia University School of Law, says, “Where do they work? Do you pay Social Security for them? Do you withdraw taxes from a paycheck? Under those kinds of definitions it seems pretty clear that your standard kind of recording artist from the ’70s or ’80s is not an employee but an independent contractor.”

Don’t expect the debate to be resolved by an unnoticed bill passing in the middle of the night.

I’ve had the date circled in red for 35 years, and now it’s time to move. Year after year after year you are going to see more and more songs coming back to songwriters and having more and more influence on the market. We will own that music, and it’s still valuable.

Rick Carnes, president of the Songwriters Guild of America, remarking on the prospect of exercising termination rights as allowed by the 1976 Federal Copyright Act. The rights allow performers to reclaim copyright for songs after 35 years. Because the Act was passed in 1978, the earliest expected termination will be in 2013: via NYT

This is a life-threatening change for them, the legal equivalent of Internet technology.

Kenneth J. Abdo, chair of the termination rights working group for the National Academy of Recording Arts and Sciences: via NYT

The plaintiffs’ claim against the defendant for ‘hot news’ misappropriation of the plaintiff financial firms’ recommendations to clients and prospective clients as to trading in corporate securities is preempted by federal copyright law.

We conclude that in this case, a firm’s ability to make news — by issuing a recommendation that is likely to affect the market price of a security — does not give rise to a right for it to control who breaks that news and how.

Robert Sack, U.S. Circuit Judge, writing in the joint opinion of a three judge panel, via Bloomberg. The opinion does not impact Judge Cote’s findings of copyright violations by Flyonthewall, it does undermine New York’s hot news doctrine and the enduring notion of property rights for the news.

The facts do not owe their origin to an act of authorship.
Justice Sandra Day O’Connor (Feist v Rural Telephone, 1991)

But does the hunt, the research, the interviews? Or perhaps its organization into a story for the dissemination to a reading public? And can these be made exclusive? These questions have bubbled up as the newspaper industry wrestles with what the internet is doing to their business.

The Cleveland Plain Dealer’s Connie Schultz has argued fervently about the rights of authors and their newspapers to capitalize on their product. She came out against “the aggregators” as though they were a malfeasant band of marauders bent on destroying the institution of journalism and by extension democracy. Citing Daniel and David Marburger, she claimed, “parasitic aggregators reprint or rewrite newspaper stories, making the originator redundant and drawing ad revenue away from newspapers at rates the publishers can’t match.”

James Moroney, publisher and CEO of the Dallas Morning News takes a similar approach. He invokes the ‘hot news’ doctrine and asks congress to apply it to the internet. Says Moroney, “perhaps it is time for congress to establish a principle of ‘consent for content’ for breaking news–similar to the ‘hot news’ doctrine recognized by a few states.”

Copyright law sufficed to protect the written word, fixed in a medium, but these claims demand remedy for a larger issue. They aim to protect the investment required to collect the facts and write a story, when it might easily be re-written and distributed by another. But they ask for monopoly control of the story itself — indeed, ownership of the collection of facts and ideas that might make up a breaking story on government corruption, for example. Justice O’Connor, however, finishes with little support for these views: “The distinction is between one of creation and one of discovery.” And discovery is not subject to property rights.

The viewpoints of Moroney, Schultz and the Marburgers have their origin in the nature of print. Print leads to a confusion between controlling the medium and controlling the content – that is, the mistaken idea that breaking a story equates to owning it. The Supreme Court compounded the confusion in 1918 with its decision to augment copyright protection with “quasi-property rights” for the facts and events that make up a news story — the hot news doctrine. It was a legal solution for the disruptive impact of a new technology: newswires. News was paper, and these rights formalized the metaphor. They derived from the physical qualities of the paper, attached property rights to the news and would provide a legal basis from which to make, in this case, the AP’s news exclusive. Theoretically, the AP could then exclude people from learning of it or reprinting it without permission. They wouldn’t just report the news, they would own the news. Read the rest of this entry »

News reporting always has been a complex ecosystem, where what is ‘news’ is often driven by certain influential news organizations, with others republishing or broadcasting those facts — all to the benefit of the public…How, for example, would a court pick a time period during which facts about the recent Times Square bombing attempt would be non-reportable by others?

Brief by Google and Twitter, arguing against the practicality of enforcement and the benefit to society of the hot news doctrine: via Reuters

Information wants to be free….Information wants to be expensive, because in an Information Age, nothing is so valuable as the right information at the right time.

Steward Brand

Before marshalling a quote, review the source. Sometimes the sound-bite doesn’t always match up with the what the author or speaker originally intended. Walter Isaacson reminds us of this lesson in his contribution to the Atlantic’s 14 3/4 review of the biggest ideas of the year. The often ignored final clause to the old saw, information wants to be free, warns: “information wants to be expensive.” But soon after Stewart Brand observed both sides of the information question in the Whole Earth Catalog in 1984, we collectively edited it down to a revolutionary, communitarian call to arms.

Isaacson laments that the rally-cry we’ve attributed to Stewart Brand never resolved the “tension between the two parts of Brand’s maxim.” Now, on the heels of the economic collapse in 2008 and enmeshed in an anemic recovery, the news industry in 2009 became less of a service and more of a question, as in: how can newspapers survive? Will journalism survive? Who will pay for it? For the answer, Isaacson returns us to 1710 and the Statute of Anne, when on April 10th, Parliament asked Queen Anne to assure an author the sole Right and Liberty of Printing their works. The Statute, according to Isaacson, “helped to encourage and sustain generations of creative people and hardworking hacks.” Though the Statute marks seminal moment in the history of copyright, one must not mistake it for an ancestor to today’s problem with the news industry. It underpins the age of the author, not the information age.

The Statute introduced the idea that an author could own their words and assign the right to make copies to booksellers – the copy right. Booksellers, as members of the Company of Stationers, had in many cases divested or abandoned the printing of the actual works and instead focused on amassing a portfolio of copy rights from authors, sourcing a printer, and selling the finished copies. On assignment, the copy rights would last fourteen years, following which, the rights would revert to the author. With the Statute, the author became an economically significant entity in the publication of books and letters. It was a revolutionary step. If a bookseller wanted to publish a work, they would have to negotiate for the copy right with the author, and so we can celebrate with Isaacson the role it played in encouraging and sustaining authors.

Though the author technically owned the right of copy, the only way to exploit that right was through the Company of Stationers. These booksellers acquired literary property from authors, but with the what amounted to a guild-system, they were also the only ones fully capable of publishing and exploiting the property. They maintained the register of copy rights, certificate of copy right, and storage of nine fine volumes, a process that was eventually abandoned. These were practices that had grown familiar with the Star Chamber Decree and the  Licensing Act in the seventeenth century, both of which effectively delegated regulation and censorship of the press to the Company. Without the booksellers and the Company, the authors had no real alternatives for publication. It was no wonder that many members of the Company would refuse to return copy rights to their owners after fourteen years and effectively enjoy a perpetual right.  The Statute may have introduced the author as a meaningful economic actor, but the system maintained the Company’s role as a regulator of the press.

The Statute offers a telling moment in the history of the press and the author, but today’s problems in the news industry don’t emerge from issues of authorship. There is no longer a Company of Stationers. Anyone can be a publisher, and that is part of the problem. The Company provided as much a means of control and regulation as an engine for publication. Today’s inheritors, however, have looked on with fear as the internet enabled nearly anyone to assimilate, analyze and present the news of the day and its analysis. They can’t control or regulate publications and the press in the same way they might have in the 18th century. Nor does the Statute’s protection of an author’s creative output shield them from having another consume, digest and regurgitate the salient facts and ideas of a given work. Afterall, the Spectator harvested as much in its daily rehashing of manners, mythology, and literature. Today, there is little one can do to stem the tide of commentary, analysis and alternatives that have washed over the shores of the mainstream press. While the Statute provides an ancestor to the age of the author, it remains a silent bystander to the conditions of information age.

Knowledge, instead of being bound up in books and kept in libraries and retirements, is thus obtruded upon the publick
Spectator no. 507 on the Spectator, 1711

One imagines the libraries and retirements encircling prized volumes. Access is limited. The doors are closed on hushed, dark rooms, and rude custodians may or may not respond to the knocks of visitors. The lively entertainments of the mind, pressed flat and laid up in shelves, are collected — excluded from the general population. Mr. Spectator lights up these entertainments, unbinds them from their pages, and sends them around the room and into society. He obtrudes them upon the public.

The pseudonymous Mr. Spectator offers a voice that would direct many of the discussions of the day, through education and entertainment, in 18th Century London. His daily issue, launched and written by Joseph Addison and Richard Steele 1711, would be called The Spectator.

Addison & Steele’s Spectator boasted a distribution of 3000, through hawkers and mercuries, and a readership upwards of 40,000: “every page submitted to the Tast of forty or fifty thousand Readers” [No.508]. But the finances were unclear and, at best, shaky. The paper, which paused mid-stream for a substantial hiatus, only lasted just over six hundred issues.

The optimism is palpable, but the rewards were not. The nascent newspaper was more likely to lose money than make anyone rich. More often than not, publishers struggled to make the business work while slowly draining their investors. The Spectator was among an exceptional few to survive the tax increase of the Stamp Act. Their story, however, is surprisingly similar to what we see in today’s shift to digital media.

What Addison & Steele and others discovered was mass media, a new media in its own right. Then as now, their efforts derived from changes in regulation and technology and competed with the traditional forum for news – the pulpit then, and newspapers today, for example. The competition among dailies divided the public into publics, each driven by the tastes and temperaments of its readers. These early dailies changed the public’s relationship to knowledge and brought it out of libraries and retirements in the same way that today’s new media brings news out of the newspapers, for example, and generally enlarges the free-marketplace of ideas.

Addison & Steele’s budding media empire flourished when placed in the hands of the audience. Today’s newspapers and magazines would have you believe the same, but it’s distinguished in one key way. It has built up a dependence on paid circulation. This was less important than one might think for those early publications. Instead, they relied on reputation and influence at first, followed by advertising. Paid circulation was, in effect, a manner of subsidizing distribution.

Mass media’s origins in 18th century newspapers began with two developments. The speed of the printing press introduced the possibility of the daily — something unthinkable in the age of scriptoriums. The status of the written word would shift from scarcity to abundance. The dearness of a volume, which had been measured by the many hours and men required to copy it, was rapidly sliding toward the price of the paper on which it was printed. Second, with the lapse of the Licensing Act in 1695, prepublication censorship ceased. Print would emerge everywhere and could include anything. Many would publish not only the inventions of the moment, they would uncover and disseminate the knowledge from those libraries and retirements — all for not much more than the price of the paper itself.

Early newspapers would supplant the pulpit and occupy an advanced position on both book publishing and the congregation. The pulpit provided the equivalent of a weekly news show. Congregations received the news once a week in a format and fashion that was faster and easier to consume than books. As Elizabeth Eisenstein observes in The Printing Press as an Agent of Change, “before the advent of printing, events of significance, when reported at all, were usually conveyed from the pulpit” [p. 553]. The sermon might address world events, local trade, real estate transactions, and politics. The newspaper, however, would insert itself in the daily routine of many: “the pulpit was ultimately displaced by the periodical press” [p. 131].

If changes in regulation and technology leading up to the 18th century fostered the sudden supply of publications, what drove the need? The demand for publications such as the Tatler, the Spectator, the Craftsman, the London Daily Post emerged as a genie from a bottle. The public wanted newspapers. They wanted something different than the weekly lessons and announcements from the pulpit. Eisenstein remarks, “the dictum ‘nothing sacred’ came to characterize the journalist’s career” [p. 131]: it wasn’t the church. Instead, among the teeming dailies, one could choose the the right one for one’s self. Dailies didn’t just discover an interested public, they discovered interested publics, each with their own tastes and preferences.

Addison & Steele’s ambition to serve a reading public changes society’s relationship to knowledge. Knowledge would no longer be exclusive. Obtruded upon the publick, it would reach into new corners of society to be consumed, critiqued, and engaged. Addison & Steele’s Mr. Spectator would write in Spectator no. 10, “I have brought philosophy out of closets and libraries, schools and colleges, to dwell in clubs and assemblies, at tea-tables and in coffee-houses.” The Spectator would be one of many vehicles for this change, and distribution would drive it to thousands in 18th century London.

The Spectator would mine the libraries, his competitors, and the conversations at the coffee-houses for the facts and ideas behind each missive. The collected ore would only be valuable inasmuch as it would capture the attention of his readers. With the diversity and detail of the web, today’s contributors mine newspapers, magazines, books, official announcements, and just about anything they can get their hands on. One might characterize these as transactions in the free marketplace of ideas, but then as now, they sparked controversy. Just as the pulpit may have been upset with the rise of the newspaper, traditional media finds itself frustrated by the thousand-fold rehashing and reinvention of the facts and ideas that had once seemingly been their province alone.

The public begins as the recipient of the shifting relationship to knowledge, but they also become the object. The Spectator, for example, took the public as a specimen under its lens. Mr. Spectator is among them, observing them, surveying them, and refracting everything back through its daily issue. Jurgen Habermas would later claim, in The Structural Transformation of the Public Sphere, “in the Tatler, the Spectator, and the Guardian the public held up a mirror to itself.” The public could see itself through these early papers and have a “conversation with itself.”

Today’s changes in technology and a mindset rooted in net-neutrality and open systems have yielded similar innovations. The internet, blogs, and increasingly creative media ventures that have become substitutes and complements to traditional media. Both moments yielded an efflorescence of expression that was fertilized by rapidly diminished costs and threatened to supplant existing institutions: the congregation and traditional media. And both moments relied on the ability to rehash and reinvent the accumulated knowledge of their time to fill their pages, virtual or otherwise. The resulting fragmentation of readers would replay many of the changes ushered in with the the early 18th century dailies.

Could these early publishers charge for this? Barely. What would matter for Addison & Steele and their counterparts today was the audience, and their success would not be measured in how much people paid for the content, but in the reputation they developed and the ability to advance the interests of the proprietor and their investors.

The Spectator built Addison’s reputation. He wasn’t concerned that his readership far exceeded the paid circulation by more than ten-fold: the more, the better. His reputation among them would provide other opportunities. The Spectator, after all, was his second publication. It followed the Tatler, and it was his reputation that enabled him to do both. Later, he would harvest these efforts through the sale of bound volumes of each.

We see something similar with blogs such as Joel on Software, which was later published as a series of books. Combined, the blog and books undergird his company’s credibility as a leading software developer, which has led to ventures such as Stack Overflow. Meanwhile, Brad Setser’s consistently trenchant, though not always well edited, observations on currency flows from the Council on Foreign Relations ultimately led him to a position in the White House, and Julie Powell’s musings on Julia Child morphed into a book deal, a movie, personal complications, followed by another book deal.

Investors in early newspapers sought influence and profits through circulation. More often than not, they may have found influence, but not the profits. The paper, however, was well-suited to advancing their individual interests. They may have been merchants or theater owners, so they would use their position to obtain better advertising rates, coverage or otherwise. Michael Harris, in London Newspapers in the Age of Walpole, remarks: “the efficacy of the papers as vehicles for house advertisements could more than offset a limited return.” In these cases, the newspaper is an agent for the partners’ agenda: providing owners a venue to advertise their establishments.

Fred Wilson’s blog has slowly impressed him upon the New York venture community in a way that uniquely positions his venture capital firm among investors and entrepreneurs. Michael Arrington’s thriving conference business owes its origin to Techcrunch. Barry Ritholtz has leveraged The Big Picture to cultivate an asset management business. The reputations in each of these examples drive a venture-investment business, a conference business, and an asset management firm.

Addison & Steele’s were early days in the newspaper business. They and others managed to advance the reputation and interests of themselves and their investors. Soon, however, they would make a dramatic realization. If they could do it for themselves, they could certainly do it for others, and they would have a third leg on which to stand. Doing so would require a dramatic leap: they would have to sell the audience. They would invent advertising as we know it.

Advertising started as the province of the proprietor and his investors. Advertisements were a privilege bundled with ownership – house advertisements. We see advertisements for booksellers, who may have been investors or close associates. But this would change. Just as blogs have been festooned with advertisements, early newspapers would realize that the audience might also be valuable beyond the proprietor and his investors.

The first advertisements in the Spectator were almost an afterthought. They showcased books that their printer, Sam Buckley, or his friends had printed. In Lawrence Lewis’sThe Advertisements of the Spectator, he observes, “As the circulation of the ‘Spectator’ increased among ‘the quality,’ the example of the booksellers was followed, first by the mercers and haberdashers, then by the dealers in snuffs and wines and teas, by quacks and sellers of cosmetics and nostrums for every human ill, and, finally, by the managers of places of amusement.”

Advertisers began to include not just partners, but interested parties. Advertisements for soap or perfume joined those of the booksellers. Harris observes, “by the mid-1720s the amount of space devoted to this material was provoking some vigorous criticism.” By the mid-1720’s, early newspapers had meaningfully unbundled the privilege of advertising from ownership. For the first time, anyone who wanted an audience could access one. The audience became a service to be delivered:the newspaper, a the service provider.

Early newspapers, like new media, flourish when they’re in the hands of an audience. They flourish when they enhance the reputation and influence of their proprietors and, through advertising, others — not because they’ve been charged for it, but because of the externalities that develop from an engaged, reading public. If that’s the case, should The Spectator have become a free publication and follow today’s flat dictum that information wants to be free?

Addison & Steele never conceived of giving the Spectator away, but it’s worth wondering if they would today. They were thrilled to claim a total readership of more than ten times the paying readers, but would they give those paying readers up? Probably not. Addison & Steele’s circulation pattern provides an early example of versioning in information goods. Hal Varian explains versioning as a pricing method for information goods that sorts potential customers based on the quality of the good that they need. In Addison’s case, those who absolutely needed The Spectator would buy it on its first run. Those who could wait would pick up copies from friends or a table at Button’s coffee-house.

Versioning, however, works differently today. The internet has no equivalent to picking up a newspaper from the table at Button’s or the floor of the subway. If there is, it’s in the form of passed links, aggregators, and comments and analysis that show up on blogs. But unlike with The Spectator, or even a paper copy of The New York Times, the chain generally does not begin with an initial sale. The first version is either free or behind a pay-wall: either available or not. It isn’t sold and read, only to be left on the coffee-house table. And if it’s behind a pay-wall, barring any individual indiscretions with copyright, there is no second version for someone to pick up. By analogy, it would mean Addison’s reliance on a readership of 3000, not 40,000. What would that do to his ability to monetize his following? It certainly would have impacted his influence.

The consternation about pay-walls that has captured the current imagination is fundamentally a question about versioning. The New York Times and Newsday and others are looking for the digital equivalent to the table at Button’s coffee-house. What model will allow them to sell a first-version? The physical paper provided a solution, but the shift to digital does not invoke an obvious replacement. And a pay-wall risks severely limiting their audience and influence.

Many online media ventures have avoided the issue entirely by offering one version, free of charge, to their audience. Passed links, blog-mentions, aggregators and others provide the digital equivalent of shared and found newspapers – the digital coffeehouse. Their influence can grow with the appeal and availability of their perspective. Considering half of the Spectator‘s circulation revenue went to the Stamp Tax, after the cost of printing and paper, there was very little left over for the owners, so there would be very little difference between being a free publication on the internet and a paid publication in print. An online Spectator would probably be a free Spectator: today’s raft of free blogs and new media ventures, its inheritors.

The Spectator and early newspapers would evolve into the inky reams that we know today, but it turns out that they may be a closer cousin to today’s emerging media landscape. Both moments fostered marginal businesses that owed their origin to dramatic changes in technology and a change in regulation, in the case of the Licensing Act, and a mind-set, in the case of net-neutrality and open systems that dominates the web. Neither looked like any newspaper that we would recognize in the 20th century, but they would go on to change society’s relationship to knowledge and disrupt traditional sources of information, from the pulpit then to institutions such as modern newspapers now. Their economic success for lay in the ability to derive externalities from their audience in the form of reputation and, later, advertising.

A bright line, however, still separates our modern print publications and the inheritors of The Spectator: the ability to version. The ability to version on the internet has proved difficult to incorporate and become a painful reminder of the many differences between print and the digital medium. What is the digital equivalent to the 18th century coffeehouse? Encouragingly, the New York Times recently answered with the announcement of its paywall strategy. If it’s passed to you, by twitter or a friend, please read it; otherwise, pay. You’re either a patron or a coffeehouse. Perhaps invoking the spirit of Addison and Steele will reinvigorate their prospects.

Dow Jones invests considerable resources to produce timely and trusted news and business information. Briefing.com has been brazenly taking a free ride on the reputation of our publications and on the investment Dow Jones makes in quality, real-time journalism….Dow Jones respects and defends the rights of other news organizations to report on news events in a timely manner. Here, however, Briefing.com did not use its own resources to uncover, verify and describe news events. It waited for Dow Jones to do all the work, and then simply copied the content. In order to continue to offer the quality news and business information customers expect and count on, Dow Jones will take action to stop the misappropriation of its content.

Mark H. Jackson, general counsel for Dow Jones: via BusinessWire

Breifing.com has been free-riding on Dow Jones’ substantial investments in gathering and reporting timely news

The Complaint

It’s produced a river of gold, but those words are being taken mostly from the newspapers. I think they ought to stop it, that the newspapers ought to stand up and let them do their own reporting.

Rupert Murdoch, speaking at a taping of “The Kalb Report” at the National Press Club in Washington on April 6: via Bloomberg

There are those who think they have a right to take our news content and use it for their own purpose without contributing a penny to its production. Content creators bear all the costs, while aggregators enjoy many of the benefits. In the long term, this is untenable…It’s not fair use. To be impolite, it’s theft.

Rupert Murdoch, speaking at the U.S. Federal Trade Commission’s workshop in December: via Bloomberg, BusinessWeek

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.

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