20 - Saving the News

Summary

It is usually a mistake to suppose that a company is the best judge of how its business works.¹ Or that an industry is the best judge of how the industry works. AT&T is a good example. When the Justice Department sat down with management in 1981 to negotiate a breakup of what was then a monopoly provider of telephone service, government lawyers asked which part of the company management wanted to keep after the breakup – the long-distance operations or the regional networks.² The long-distance operations had long been the company’s most profitable, so management asked for those.³

20.1 Introduction

It is usually a mistake to suppose that a company is the best judge of how its business works.¹ Or that an industry is the best judge of how the industry works. AT&T is a good example. When the Justice Department sat down with management in 1981 to negotiate a breakup of what was then a monopoly provider of telephone service, government lawyers asked which part of the company management wanted to keep after the breakup – the long-distance operations or the regional networks.² The long-distance operations had long been the company’s most profitable, so management asked for those.³

It was a mistake. The long-distance operations had been profitable only because AT&T had owned the regional networks and could use them to deny access to competing long-distance companies seeking to complete calls.⁴ Once AT&T had spun off the regional networks, the company could no longer do that.⁵ Competitors flooded the long-distance market, driving down AT&T’s profits. But the regional networks remained protected from competition thanks to the prohibitive cost of running new wires to individual homes. They flourished. Management had failed to grasp that the real source of AT&T’s power was its regional-network monopolies, not its long-distance operations. Two decades later, AT&T was forced to sell itself – to one of the regional networks.⁶

If management sometimes has trouble understanding the value proposition of the single company that it runs, we can forgive newspapers for not understanding the value proposition of the entire industry that they constitute.

Over the past decade, the newspaper industry has been trying to stave off collapse brought on by the very low cost of internet communication.⁷ That low cost has all but eliminated barriers to entry into both the news industry and the broader market for reader attention. That has forced newspapers to engage in ruinous competition for a shrinking share of overall public engagement.⁸ In local news markets, the result has been bankruptcy as newspapers’ declining share of reader attention has reduced the value of newspapers’ main product – advertising distribution – to advertisers.⁹ In national newspaper markets, which still attract enough attention to sustain the market, the result has been fragmentation and quality destruction. Newspapers have replaced fact-reporting with opinion-reporting to differentiate themselves in a more viewpoint saturated national conversation and cut costs.¹⁰

The newspaper industry’s response has betrayed a lack of comprehension regarding the source of its misfortune. The industry has responded to the overall decline in its share of reader attention by calling for antitrust action against the Tech Giants – particularly Google and Facebook – which are principally responsible for the decline.¹¹ But Google and Facebook have prospered because social media is more engaging than newspapers, not because the Tech Giants are monopolies. Whether there is one social media company or hundreds, readers are not going to start substituting more newspaper time for the time they spend on social media. In a fit of blind egomania, the industry has also responded by trying to negotiate payments from the Tech Giants as compensation for their use of links to newspaper articles – part of a broader project of obtaining intellectual-property protection for news articles.¹² But social media has captured the public’s attention for reasons other than the opportunity it provides to share news. Accordingly, the Tech Giants are not willing to pay much for the privilege of linking, whether newspaper articles are protected by intellectual-property rights or not. They would do just fine without linking to news. Finally, the industry has experimented with a microjournalism model of subscriptions for independent journalists and niche reporting. But while microjournalism may prevent the total demise of journalism at the local level and stem losses at the national level, high-quality fact production requires scale in newsgathering that is fundamentally incompatible with such decentralization.¹³

To save newspapers, other approaches are needed. Ruinous competition may be addressed by attacking the root of the problem: the low cost of communication. Policymakers could raise the cost of communication by taxing internet post views at levels just high enough to discourage excessive entry into national news markets and thereby to enable national newspapers to maintain the scale and profitability they need to invest in the production of high-quality investigative journalism.¹⁴ Organizations that cannot pay the tax required to reach a broad audience will be driven from the market. The resulting reduction in competition will alleviate the pressure on newspapers to differentiate themselves through opinion-reporting. It will also drive up revenues, creating both the means and the incentive for newspapers to invest more in fact-reporting. The federal government, in the form of the U.S. Postal Service, already has the tools to impose such a tax by reinterpreting its “letter-box monopoly” to include electronic letter boxes, allowing the postal service to charge postage for the receipt of electronic communications of any kind.¹⁵

Internet postage would solve the problem of excessive competition within the newspaper industry but not the problem of competition for reader attention from the Tech Giants that has hit local newspapers particularly hard. Internet postage should not be set so high as to discourage social media use as a general matter, but only high enough to limit the number of users having large numbers of post views.¹⁶ Social media is, overall, a good thing. Taxing it out of existence would therefore destroy value.¹⁷

To solve the problem of Tech Giant competition, government could adopt a second policy, complementary to the policy of charging internet postage, that would channel advertising revenues back to the newspaper industry. That policy would be to cap the number of ad impressions that social media companies are permitted to sell per year.¹⁸ Because advertising is ultimately a race to the bottom – firms are compelled to do it to counteract the advertising of competitors – advertisers would respond by shifting their advertising dollars back to newspapers, despite the inferiority of newspaper advertising, in order to keep up with each other. For the same reason, modern militaries would purchase bows and arrows if prevented from purchasing more sophisticated equipment.¹⁹ This race-to-the-bottom characteristic of advertising would, incidentally, allow the government to place a cap on all advertising without reducing the amount of revenue generated by advertising distributors.²⁰ Because advertising distorts preferences and therefore leads to misallocation of resources, such a cap would improve economic efficiency – and could be piggybacked on policies targeting Tech Giant advertising.

Neither internet postage nor advertising caps would violate the First Amendment.²¹ The Supreme Court long ago ruled that the U.S. Postal Service’s letter-box monopoly does not violate the First Amendment because people are free to use alternative means of communication such as placing phone calls, slipping paper under front doors, or making in-person appointments.²² And advertising caps must pass constitutional muster because, in the information age, advertising’s information function is obsolete.²³ Consumers can get all the product information they want from a quick Google search, which they can also use to educate themselves about products that they do not yet know to seek out.²⁴ Advertising’s only remaining function is to manipulate consumers into buying products that they do not prefer. But the Supreme Court has extended First Amendment protection only to advertising that enhances consumers’ ability to make independent choices about which products they wish to buy.²⁵

20.2 Newspapers’ Challenges

Newspapers were perhaps the most successful monopolies of the twentieth century, the sort of asset with a “moat” around it that the likes of savvy investor Warren Buffet coveted.²⁶ Newspapers enjoyed protection from competition both because distribution costs were high – paper is costly, and heavy – and because advertisers prefer newspapers that have more readers.²⁷ As a result, a single newspaper serving all advertisers was able to charge lower prices than a smaller newspaper serving a fraction of the market; the larger newspaper could spread distribution costs over more customers. This newspaper could also offer broader distribution to advertisers than a newspaper serving a fraction of the market, making it more appealing to advertisers, as well.²⁸ Nearly, every city therefore came to have a single major newspaper and a handful of papers served the national news market.²⁹

The monopoly position of newspapers created a number of positive externalities. One was independence for the press from interference by either government or corporate advertisers. Monopoly profits meant that newspapers did not require government subsidies and a monopoly position meant that advertisers strove to please newspapers, not the other way around. Another positive externality of monopoly was that newspapers enjoyed both the means and incentive to invest in expensive fact-reporting.³⁰ In a competitive news market, each newspaper caters to a relatively small, ideologically homogenous readership.³¹ Any attempt to attract ideologically distant readers fails because those readers have access to alternative options that are better aligned with their political views.³² In a monopoly news market, the monopolist caters to a large, ideologically diverse group of readers because readers who are ideologically distant from the monopolist have no alternative newspaper to which they can turn.³³ To induce such readers to subscribe rather than forgo news entirely, a newspaper monopolist must deemphasize ideology to the greatest extent possible and invest in fact-reporting. Facts have broad appeal across ideological lines, even if each reader prefers a different spin on the facts.³⁴ The scoop rather than the hot take was therefore king. And, as monopolies, newspapers could afford to invest in scoops. It is no accident that the ethic of objectivity in reporting came to dominate journalism over the course of the twentieth century as newspaper monopolies arose and became more entrenched.³⁵ The result was a willingness to invest in high-cost investigative journalism that incidentally served democracy.³⁶ Finally, the monopoly position of newspapers paid a dividend in terms of social stability. There is, of course, no such thing as a neutral or objective report of the facts. Each newspaper must choose a location along the ideological spectrum. As median-voter theory has taught in the context of elections, however, the point that has the broadest appeal is the center. Newspapers therefore tended to promote viewpoints that interpolated between political extremes, exerting a moderating influence on national debates.³⁷ All this was true even in markets, such as national news markets, that had a small number of newspapers as opposed to a single monopolist. In those markets, the small number of competitors meant that most readers still lacked ideologically aligned news sources, creating an incentive for papers to use fact-reporting and centrism to reach them. And the small number of competitors meant that papers still earned handsome profits.

The low cost of communication created by the internet dealt a death blow to newspaper monopoly on the reader-facing side of the business and created new competitors on the advertiser-facing side, eliminating the positive externalities that had come with newspapers’ privileged market position. Printing and distribution of paper editions on a daily basis requires large, up-front investments in printing presses, trucks, paper, and of course labor, making entry into paper news markets difficult.³⁸ With the maturation of the internet, anyone who could post news online – and that was almost everyone – could compete with The New York Times.³⁹ Low-cost communication also introduced new competition into advertising markets. It created an entire new category of media – social media – that gave advertisers a desirable alternative to advertising in newspapers, putting pressure on news industry revenues.⁴⁰

Low-cost communication tore down barriers to entry into news markets, increasing competition for the attention that consumers devote to news. Social media made new categories of consumer attention available to advertisers by causing interactions that might once have been carried out around the dinner table or by email to be conducted on internet platforms through which they could be subjected to advertising.⁴¹ People spend more time engaging in these interactions than they spend reading news, and the interactions themselves are more revealing than news-reading. That enabled social media companies to offer advertisers a larger audience than newspapers and to profile consumers and target advertising in ways that newspapers – even in digital form – cannot.⁴² This shifted the flow of advertising dollars from newspapers to social-media giants like Google and Facebook.⁴³

The result was the fragmentation of national news markets and the demise of many local news markets. In national news markets, competitors fanned out across the ideological spectrum, picking off legacy papers’ ideologically nonaligned readers, who had been weakly held to the legacy papers by an interest in facts.⁴⁴ Expensive fact-reporting could no longer pay dividends in the form of a broader readership and newspapers now had to defend their own ideological turf against assault from new internet entrants, including both news websites and social media users with large followings. A turn to inexpensive opinion-reporting was the only option.⁴⁵ This was ruinous competition in the economic sense.⁴⁶ Firms were forced to degrade their own products’ quality in order to survive in the market. High-quality fact-oriented reporting was replaced with low-quality opinion-based reporting. This effect was magnified by competition for advertising from social media companies, which reduced the revenues flowing into news, creating a further incentive to substitute opinion-reporting for expensive fact-reporting. In many local news markets, which were too small to support newspapers on reduced advertising revenues, competition from social media had an even more catastrophic effect; newspapers simply disappeared.⁴⁷

By the 2020s, the positive externalities created by the monopoly position of twentieth-century newspapers were gone. Newspapers no longer had the incentive or the revenues to invest in high-quality fact production. Ideological centrism had been replaced by ideological fragmentation, and so newspapers no longer exerted a moderating influence on politics. And the influx of competition into news markets, combined with the competition for advertising from social media companies, had starved national newspapers of revenue and driven many local newspapers out of business entirely. Far from being in a position to speak truth to power, newspapers’ continued existence was in doubt, leading to calls for government subsidization.⁴⁸

20.3 Newspapers’ Inadequate Response

20.3.1 To Social Media

Newspapers’ responses to these challenges betray a lack of understanding regarding their causes. The basic premise of newspapers’ response to competition from social media companies in their advertising markets has been to argue that social-media companies are stealing newspaper content. Specifically, newspapers argue that social-media companies are using links to news content to attract social-media users without providing newspapers with adequate compensation in return.⁴⁹ This premise underlies a campaign by newspapers over the past decade to drum up support for antitrust action against Google and Facebook.⁵⁰ Not only has the News Media Alliance – newspapers’ lobbying organization – explicitly called for antitrust action, but newspapers from across the political spectrum have appeared to use favorable reporting, editorials, and the publication of op-eds by antitrust activists to promote it as well.⁵¹ Whether the apparent pro-antitrust slant to reporting is a product of deliberate policy or anti-tech sentiment among journalists, who believe that their livelihoods are threatened by social media, is unclear.⁵² But the premise that Google and Facebook are appropriating something of value from newspapers is not. Newspapers hope that the introduction of more competitors into social-media markets via antitrust action will make it easier for newspapers to negotiate compensation from the social-media industry.

The premise that social media is stealing from newspapers also underlies newspapers’ attempt to lobby Congress for an antitrust exemption that would permit the industry to form a cartel to negotiate compensation from social-media companies.⁵³ If newspapers can negotiate as a block, they reason, they will be able to extract larger payments from social-media companies than they might otherwise. The theft premise also underlies the News Media Alliance’s interest in achieving intellectual-property protection for news-article links or news content more generally.⁵⁴ At present, newspapers have no legal right to demand payment from social-media companies for links to news content.⁵⁵ All newspapers can do to encourage payment is threaten to program their websites to reject incoming web traffic from social-media platforms.⁵⁶ The hope is that intellectual-property protection for linking would strengthen newspapers’ bargaining position.

It is hard to view newspapers’ conviction that the Tech Giants’ success is built on appropriation of newspaper content as anything other than narcissistic pathology. The news industry seems unable to conceive that its readers might wish to do something on social media other than find news. But, in fact, they do.⁵⁷ While some small fraction of the attention that social-media companies generate may represent attention that once would have been devoted to newspapers – and may even be attention poached from newspapers in the sense that news article links are used to attract this attention – the lion’s share is not.⁵⁸ The success of social media comes not from poaching news readers’ attention but from expanding the overall pool of commercializable attention in the economy. Social-media companies will, therefore, be unwilling to pay newspapers anything but a small fraction of the advertising revenues that newspapers have lost to social media. This is true whether the social-media industry is concentrated into a few Tech Giants or deconcentrated into large numbers of small providers. Either way, an industry that relies little on news links is not going to pay much for access to them.

The importance of news to social media was demonstrated in early 2021 when the government of Australia sought to compel social-media companies to pay newspapers for links.⁵⁹ Facebook responded by disabling news-linking on its platform and pointing out that only 4 percent of the material shared on its platform involves news.⁶⁰ Facebook simply did not need the news. While Facebook and Google eventually agreed to make some payments for news, the amounts – which are estimated to be in the low tens of millions of dollars per year – were an infinitesimal of the Tech Giants’ own advertising revenues and an order of magnitude below annual declines in newspaper advertising revenues. Newspapers declared victory, if only to save face.⁶¹

20.3.2 To News Competition

There has been no analogous industry-wide initiative to counter the threat of ruinous competition in national news markets. By its nature, intra-industry competition pits news providers against each other, complicating collective action. Instead, the ruinous-competition problem has been left to individual newspapers and journalists to solve in decentralized fashion. Left to their own devices, newspapers and independent journalists have sought shelter from the competitive gale in news through two strategies: product differentiation and abandonment of the ad-based funding model in favor of subscription models.⁶² Newspapers have differentiated their product based on ideological orientation, making the problem of ruinous competition worse, further fragmenting news markets, and forcing opinion-reporting on their competitors. Newspapers have also differentiated their product based on subject matter, reporting on a particular industry, profession, neighborhood, or other area of interest. At an extreme, it involves independent journalists taking refuge in subscription-based blogging services like Substack. Differentiation of this and also the ideological variety can help newspapers or independent journalists avoid bankruptcy. But it also results in insufficient revenues to sustain high-quality fact production except in the few ideological or subject matter markets having well-heeled audiences, such as markets for opinion that support moneyed interests or for news about Silicon Valley, Wall Street, or Capitol Hill.⁶³ Thus while there might still be years-long investigations of Silicon Valley, there will be no years-long investigations of corruption at City Hall. There have been some notable attempts to overcome the revenue squeeze through pooling of resources across organizations to carry out specific investigations.⁶⁴ But these are limited by inter-organization coordination costs that the old newspaper monopolies did not face. The move to subscription-based funding models is also unlikely fully to replace lost advertising revenues. If it could do that, then newspapers would have relied more on subscriptions than advertising in the first place.⁶⁵

20.4 Postage and Ad Caps as Alternatives

20.4.1 Charging Online Postage

One way to restore newspapers’ dwindling revenues would be through direct government subsidization along the lines of what Britain does for the BBC in the broadcast arena.⁶⁶ To maintain the political independence of the press, government could impose a special tax on communications – in Britain, all television hookups are taxed at a flat rate – and dedicate the proceeds to newspapers, ensuring that any attempt to punish newspapers by directing the funding elsewhere would be viewed by voters as a misappropriation of public funds.⁶⁷ Britain does this by taxing all television hookups at a flat rate. On a similar theory, Franklin D. Roosevelt insisted that Social Security tax be charged as a separate line item to taxpayers in the United States in order to protect Social Security from rollback.⁶⁸ A few state and local governments are already dabbling in direct subsidization as a way of rescuing local news. But the direct subsidization model is unlikely to spread thanks to America’s deeply engrained anti-statism, which resists both taxation and government influence over public debate, however tenuous.⁶⁹ Even if it were to spread, it could be no more than a partial solution to fragmentation and political polarization at the national level. Entry into that market would remain free and readers would continue to be drawn to the private news sources that best fit their ideological preferences. But so long as subsidies were to reward fact-reporting, more of that would be supplied to the market.

Another approach would target fragmentation and political polarization in national news markets in particular, and avoid the pitfalls of direct subsidization. That approach would be to leverage a mode of indirect support for the news with which Americans are comfortable and which is so firmly embedded in the nation’s history that it was one of the means by which the country obtained independence from Britain in the eighteenth century: the postal service.⁷⁰ Although Americans today think of the postal service as a rapidly obsolescing mode of private communication through the exchange of paper letters, it started life as a method of distributing newspapers.⁷¹ The British Crown had a monopoly over the provision of postal services in the colonies and its postmasters leveraged this monopoly to favor carriage of newspapers that they themselves published, excluding competing viewpoints.⁷² In response, the American revolutionaries created a national postal service that lavishly subsidized the distribution of American newspapers, enabling any newspaper to transmit the news to customers at virtually no cost.⁷³ Alexis de Tocqueville, viewing the results some decades later, remarked with awe that, thanks to America’s subsidized news distribution, a backwoodsman in Michigan knew more about the rest of the world than a suburban Parisian.⁷⁴

By the start of the twentieth century, the postal service had largely ceased to be an important disseminator of news. The advent of the telegraph and a general decline in transportation costs allowed newspapers to build private distribution networks that disseminated the news far more quickly.⁷⁵ The challenges faced by newspapers today give the postal service an opportunity once again to carry out its original mission to sustain the press.⁷⁶ Whereas the challenge faced by the press at the nation’s founding was how to overcome an excessively high cost of communication, today the challenge faced by the press in national news markets is how to overcome an excessively low cost of communication that has led to ruinous competition and political polarization. It follows that, whereas the job of the postal service at the founding was to lower the cost of distributing the news by charging low, subsidized postage rates to newspapers, the job of the postal service today should be to raise the cost of distributing the news by charging postage for online posts.⁷⁷

The goal would not be to drive distribution costs back to pre-internet days. The low cost of communication has created immense value for society by allowing a greater diversity of voices and information to enter public debate. Rather, the goal would be to drive costs up enough to strike a balance between the benefits and harms of easy entry into news markets.⁷⁸ Just as the Federal Reserve uses data on capital markets to set interest rates, the postal service could use data on news markets to adjust online postage rates to achieve a level of ease of entry that properly balances benefits and harms.⁷⁹ By imposing a zero price of postage for posts to social-media sites, blogs, or newspaper websites that garner small numbers of views but a substantial fixed price for posts to such platforms that have a moderate number of views, the postal service could impose a fixed cost on writing for the general public as opposed to private friend groups. That cost would drive down the number of news organizations in the market. With competition reduced, the news organizations that would remain in the market would have the opportunity and incentive to maximize their readership through fact-reporting.⁸⁰ Scale would be rewarded, and fragmentation and product differentiation discouraged.⁸¹

The postal service already has the statutory authority to act.⁸² Federal law gives the postal service a “letter-box monopoly” – the sole right to deliver mail to mailboxes – and the authority to define, by regulation, what a mailbox is.⁸³ By redefining mailboxes to include electronic mailboxes, including email and social-media accounts, the postal service could acquire the exclusive right to deliver internet communications.⁸⁴ It could then grant a license to make those deliveries to the firms, such as Google and Facebook, that actually deliver them today. But the postal service could retain the right to charge postage for such delivery. To minimize the resemblance of such postage to a tax, the postal service could distribute the proceeds to the public. This would demonstrate that, even if internet postage would have the effect of a tax on participants in news markets, its purpose would not be to raise revenue for the postal service or the government more generally, or to subsidize the news industry à la the BBC’s tax on television hookups, but only to alter the structure of news markets in ways that improve the quality of the news and reduce political polarization.

20.4.2 Capping Advertising

Internet postage would insulate national newspapers from ruinous competition from other news sources, but it would not restore the revenues that national newspapers have lost to social media. Internet postage also would not help local newspapers, which lack the advertising revenues they need to stay in business, much less engage in ruinous competition. Some additional policy is required to address newspapers’ loss of advertising revenue to social media. One approach would be for the postal service to use high postage rates for social-media views to destroy social media. That would eliminate the competition that is diverting newspapers’ advertising revenue flows. But that is not a desirable solution. Social media represents a genuine improvement upon communication, which is why it is so popular.⁸⁵ Destroying it would be wasteful.

A better solution would be for government to place a cap on the number of advertising impressions that social-media companies distribute each year.⁸⁶ Normally, a restriction on the sale of a superior product will not necessarily help a competitor offering an inferior product because buyers might exit the product category entirely rather than purchase the inferior product. If you cannot obtain a high-quality ice cream, you might purchase a pastry instead, rather than poor-quality ice cream. So, in principle, capping social-media advertising, which advertisers view as superior because of its reach and the opportunities it affords for targeting, would not necessarily induce advertisers to advertise in newspapers. They might choose to stop advertising entirely and invest in improving the technology of their products instead.

But advertising is different. Firms rarely have a choice about whether to advertise because their competitors already advertise. If they do not use counter-advertising to cancel out their competitors’ advertising, they will lose business.⁸⁷ It follows that firms that are locked out of high-quality advertising distribution will substitute low-quality advertising distribution because they fear that their competitors will substitute low-quality advertising distribution.⁸⁸ A cap on the amount of advertising that social media can distribute would, therefore, channel advertisers’ dollars back to newspapers rather than away from advertising entirely.⁸⁹ By adjusting the cap, a regulator could adjust the precise amount of advertising revenue that would be returned to the newspaper industry. The regulator could even set the cap so low as to redirect all social-media profits to newspapers, allowing the social-media industry only enough revenue to cover costs.⁹⁰ Thus a cap would not have the redistributive limitations inherent in the news industry’s current approach of seeking to extract payment from social-media companies that place a low value on access to news content. While the Federal Communications Commission (FCC) currently enjoys some authority to regulate advertising, new legislation would be required to enable the FCC or another regulator to implement this approach.⁹¹

An advertising cap has the virtue of continuing the newspaper industry’s tradition of funding itself through advertising.⁹² That approach is the principal way in which an anti-statist society such as the United States funds information-related public goods, including not just newsgathering but also the arts, entertainment, and sports.⁹³ All of these activities provide benefits to society as a whole – newsgathering is critical to a successful democracy, for example – for which consumers are sometimes not willing to pay in full if charged directly.⁹⁴ Rather than fund these activities through taxation – the textbook means of funding public goods – the United States for the most part leaves it to those engaged in these activities to acquire their own funding through the distribution of advertising. Consumers still end up paying for these activities, but they do so indirectly by purchasing advertised products. Advertising manipulates consumers into paying higher prices for goods and services. Advertisers pay a portion of the additional revenues they generate from those higher prices to the providers of informational public goods who distribute their advertising. In this way, advertisers end up manipulating consumers into paying for public goods for which consumers would not be willing to pay if asked to do so directly.⁹⁵ The result is a decentralized model of public goods financing that minimizes the influence of government over the news and culture more generally. Such minimization of government influence is not necessarily good for either the news or culture.⁹⁶ Moreover, there is something odd about using a practice that manipulates consumers into buying products they would not otherwise buy to fund a newspaper industry devoted to empowering citizens to think for themselves.⁹⁷ But this funding model may be the only approach to subsidizing the news that Americans will accept, at least in the short term.

An added benefit of placing a cap on social-media advertising is that it would afford government the opportunity to reduce the overall amount of advertising in the economy.⁹⁸ Reducing advertising is desirable because advertising short-circuits free markets. Free markets enable consumers to impose their preferences on firms, showering profits on those that please them and starving those that do not.⁹⁹ Consumers who have been manipulated by advertising into buying things that they would not otherwise buy are unable to impose their will on firms, however. Firms use advertising to ensure that consumers buy products that firms prefer rather than products that consumers prefer.¹⁰⁰ While counter-advertising by other firms tends to prevent advertising from raising demand for individual firms – that’s the canceling effect of advertising – it does not prevent consumers from being manipulated by advertising. The net effect of advertising may well be that those who prefer Coke drink Pepsi and those who prefer Pepsi drink Coke, even if advertising does not increase overall demand for either product.¹⁰¹ The result is inefficiency: Advertising prevents markets from allocating resources in ways that consumers would value the most.¹⁰² It was once possible to argue that advertising had an offsetting benefit in the form of the product information that it provided to consumers. In the world before the internet, a consumer might not have been able to find a product that they really did prefer without the aid of advertising.¹⁰³ But in the information age, advertising’s information function has become redundant. Consumers can find all the product information they desire – much of it in the form of unvarnished consumer reviews that are more informative than any advertisement – through a Google search.¹⁰⁴

A regulator empowered to place a cap on social media advertising could go one step further and place a cap on all advertising.¹⁰⁵ For the same reason that the canceling aspect of advertising ensures that capping social-media advertising would not reduce the total amount of money spent by firms on advertising but would merely shift it to newspaper advertising, capping all advertising would not reduce the total amount of money spent by all firms on advertising either. But because now there would be no alternative form of advertising to which the money could flow, capping social-media advertising would instead cause advertisers to bid up the price of the advertising that would remain available under the cap. Indeed, because firms advertise in order to cancel the advertising of others, a cap on all advertising would lead firms to bid up the price of advertising impressions – so as not to lose the opportunity to counteract a competitor’s employment of this scarce resource – until they find themselves spending the same amount on advertising as they did before the cap.¹⁰⁶ Funding for public goods financed through the distribution of advertising – whether the good is news, the arts, or sports – would, therefore, not be reduced by a cap on all advertising.¹⁰⁷ So long as the regulator were to cause the cap to fall disproportionately on social-media advertising relative to newspaper advertising, dollars would still be diverted from social media to newspapers, but the overall number of advertising impressions served up by the advertising-distribution industry would fall.

20.4.3 First Amendment Concerns

Both internet postage and advertising caps regulate speech. Postage burdens internet communication and advertising caps prevent advertisers from speaking about their products. Neither of these policies would violate the First Amendment, however. In Postal Service v. Council of Greenburgh Civic Ass’ns, the Supreme Court rejected a challenge to the postal service’s letter-box monopoly on the ground that regulation of the speech that passes through mailboxes does not prevent speakers from communicating by other means.¹⁰⁸ According to the Court, the postal service’s control over mailbox speech is rather like the military’s control over speech on military bases – necessary for government to act.¹⁰⁹

To be sure, were the postal service to redefine the definition of “letter-box” to include all virtual receptacles of online communications, the definition would be far more expansive than the physical mailbox on a stick on the front lawn contemplated by the Supreme Court in Greenburgh.¹¹⁰ But all of that expansion would be to areas that did not exist when the Supreme Court decided Greenburgh in 1981.¹¹¹ If, at a time when virtual mailboxes were not an extant alternative to mailing letters, the Court thought that depriving Americans of the right to speak through physical mailboxes without paying a toll left Americans enough alternative modes of communication for free speech to remain uninfringed, then it is hard to see why depriving Americans of the freedom to speak un-tolled through new virtual mailboxes that did not exist at the time Greenburgh was decided could deprive Americans of sufficient alternative modes of communication to pose a threat to free speech.¹¹² Moreover, in both the case of the physical letter-box and the virtual letter-box, regulation is essential to the government activity of promoting a healthy news industry that is the original purpose of the postal service.

Advertising caps do not violate the First Amendment because advertising’s manipulativeness – which is its exclusive function now that its information function has been rendered obsolete by the information age – places all advertising in the same unprotected First Amendment category as false advertising.¹¹³ The Supreme Court has said that false advertising receives no protection because it tends to impair the ability of consumers to make “intelligent and well informed” purchase decisions.¹¹⁴ That is, false advertising impairs consumers’ ability to impose their preferences on markets. All other forms of advertising today do the same, but they do it by manipulating consumer preferences rather than hiding the true characteristics of products from consumers, as false advertising does.¹¹⁵ While advertising’s information function, which does help consumers make well-informed purchase decisions, once enabled advertising to enjoy First Amendment protection, the obsolescence of that function has eliminated this rationale for protecting advertising.¹¹⁶ The notion that the First Amendment no longer protects any advertising would seem to clash with the apparent alacrity with which the Court has extended the First Amendment to ever-larger amounts of commercial speech in recent decades.¹¹⁷ But a careful reading of the cases shows that the Court has never extended protection to advertising that it has understood to be exclusively manipulative in function, as all advertising is today.¹¹⁸

20.5 Conclusion

By lowering the cost of communication almost to zero, the internet created two challenges for newspapers. The first was that, by making possible the creation of the social-media industry, the internet greatly expanded the amount of commercializable attention in the economy, relegating the quality of the advertising distribution product offered by newspapers to second-class status, and driving revenues so low that newspapers disappeared from many local news markets. The second was that, by enabling virtually anyone to distribute news, the internet greatly increased competition within national news markets, forcing newspapers to substitute opinion-reporting for fact-reporting, fragmenting the industry, and polarizing American public discourse.

Newspapers’ responses have been inadequate. Attempts to force social media companies to share revenues will not restore newspapers’ lost profits because the sharing of news links is a small part of social-media activity. The Tech Giants will not pay enough for links to restore newspapers’ lost revenues. Embrace of a small-is-beautiful ethic in newsgathering, in the mode of Substack authoring, will only increase opinion-reporting, industry fragmentation, and polarization.

One solution to the problem of ruinous competition between newspapers would be to restore some of the cost of communication. The postal service could reinterpret its letter-box monopoly to apply to virtual mailboxes, allowing the postal service to charge postage for internet posts that garner large numbers of views. That would reduce the number of players in news markets and so the opinion orientation, fragmentation, and political polarization that afflict the industry. A solution to competition from social-media companies would be for regulators to cap the number of advertising impressions that social media companies are permitted to distribute per year. Because advertising is a race to the bottom, such a cap would not reduce the amount of money spent on advertising, but it would drive advertising dollars back to newspapers.