FCC and net neutrality

The FCC made news last week when it issued a new set of regulatory guidelines that would allow broadband companies to charge content providers for faster access to customers.  In the "I could not make this up if I tried department," the proposal blocks the Comcasts and AT&Ts of the world from blocking or slowing down any website.  In other words, it is ok to shake companies down for money but you cannot block them out of pure meanness.

It is hard to find anyone who is happy with the proposal.  The hard-core net neutrality crowd is displeased because they want the internet to be the same speed for all.  They do not spend too much time thinking about what incentives Comcast and its ilk would have to build and maintain the bandwidth necessary to make that happen.  Moving 180 degrees to the other side of the political spectrum, any hint of regulation has stirred concerns that the FCC will impose 1970s style telephone regulation.

There is one basic point that is getting lost in this discussion -- as more broadband hungry services become available, someone's gotta pay for the pipes.  Either Netflix, HuLu and other heavy-duty video providers start charging their customers higher rates (to reflect the payments they will have to make to Comcast and Verizon) or the internet providers themselves will have to start directly charging heavy-duty video consumers more.  Hopefully the FCC can remember this simple fact before adopting final regulations.

Can Pandora ever make money?

WSJ reported last week that Pandora is a classic case of the old adage: "We lose money on every transaction but we make it up on volume."  Pandora must pay record companies and artists $0.0011 every time a listener hears a song.  With 59.2m users these costs rose to $65.7m in the third quarter of this year.  Pandora depends on ad revenue to make its business model work, but there are fewer advertising opportunities on mobile devices than laptops and desktops.  Hence, as more Pandora customers shift their listening to iPhones and iPads, Pandora gets squeezed.  Its stock dropped 18% in one day last week. 

Pandora's response: one would think it might raise its ad rates or start charging users on mobile devices.  But no!  Instead we have them (along with other internet music operations) trying to push the Internet Radio Fairness Act (IRFA) through Congress before it adjourns.  Currently the rates paid by Pandora and other internet-based music providers are set by the Copyright Royalty Board.  The board has set higher rates for Pandora than for satellite or cable radio.  Pandora screams foul, but in actuality the rates seem to reflect historical circumstance more than anything else.  Cable radio and Sirius have been around longer and they received a better deal when they entered the market.  To make things even more confusing, traditional over-the-airwaves radio pays zero royalties. 

IRFA would lower rates paid to artists and recording companies, making Pandora potentially profitable.  Another bill would force all players up to the Pandora rates.  My question: would we be better served if all broadcast entities had to contract with the music owners rather than cut deals in Congress?  Spotify, which lets you pick the songs you want to hear, is partially owned by the major recording labels.  Maybe this is the business model Pandora, Sirius and broadcast radio should be adopting. 

On SOPA

I have refrained from posting about the Stop Online Piracy Act (SOPA) because, frankly, I do not have either the time or expertise to make sense of all the legal details.  Proponents argue that we need it to deter theft of intellectual property; others say it goes too far and holds companies liable for actions over which they have no control.

Yesterday's WSJ ran an op-ed by UT-Dallas economics professor Stan Liebowitz who, sometime co-authoring with my NC State colleague Steve Margolis, is one of the country's leading experts in the economic issues associated with digital property rights.  Liebowitz' research shows that music sales (both CDs and online) are down 50% since 1999 and that the main reason is theft (aside: you may call it downloading, but it really is theft.) 

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Closing thought: it is one thing for the U.S. to pass a law banning and punishing online piracy, another thing to enforce it.  Chasing and punishing digital thieves overseas may be like whack-a-mole.

How much is that laptop worth?

Much more than you paid for it, especially if you have had it for a while.  A recent article in Slate examines how much consumer surplus is derived from computer ownership and internet access.  If one buys a new computer every four years and has a $40/month internet connection, the package costs roughly $700/year.  But the article raises the provocative question: suppose someone stole your computer and hacked your connection -- how much would you pay to get them back?  The difference between this ransom (annualized over the expected lifetime of the computer) and $700/year equals consumer surplus.

Before he became an economic advisor to the President, Austan Goolsbee (then at the University of Chicago) estimated that only 0.2 percent of income went to computers and internet access, but since people spend 10 percent of their leisure time online, the value of the internet is closer to 2.0 percent of income. 

Key implications: (1) competition in computer manufacturing and internet access yields big gains for consumers and (2) we really are a bit better off than the GDP statistics say we are.