Monday, May 2, 2011

Almost a license to print money

Advertising, in time, proved almost a license to print money, and the effects on broadcasting of the revenue model it introduced can scarcely be overstated. It gave AT&T, and later the rest of the industry, an irresistible incentive not just to broadcast more but to control and centralize the medium. To see why, compare the older model: When revenues came from the sale of radio sets, it was desirable to have as many people broadcasting as possible--nonprofits, churches, and other noncommercial entities. The more broadcasters, the more inducement for the consumer to buy a radio, and the more income for the industry. But once advertisements were introduced, radio became a zero-sum game for the attention of its listeners. Each station wanted the largest possible audience listening to its programming and its advertisements. In this way advertising made rivals of onetime friends, commercial and nonprofit radio.
This is Tim Wu in The Master Switch*, describing the beginnings of commercial radio broadcasting.  When AT&T (who was competing with RCA to dominate radio broadcasting) started using its 'long lines' to carry programs to transmitters across the country, they discovered that advertising to a mass audience was far more profitable--and could support professionally produced, higher quality content--than any other business model available to them. This, in turn, lead the industry to successfully lobby the government to allow only a few, high-power 'clear channel' broadcasters (instead of allowing many lower-power ones.)

It's interesting to see how advertising, because it pays for attention, a resource too easily divisible, caused media to agglomerate. The media industry, in protecting itself from competition, has to limit the number and variety of voices that are heard.  Mass media is, by its nature, homogeneous media.

Two things:

1. Mass media, as it is today, is not the only way things can, or should, be. There was a vibrant radio culture before it became a mass medium, with a more democratic voice.

2. Our adtech allows advertisers to reach small audiences. The advertiser no longer needs mass media. Mass media will, however, fight to maintain their current market position. In almost all of the other media this book chronicles, the government was eventually enlisted to regulate out weaker players. The fight over net neutrality was one of these efforts, but certainly not the last.

* Required reading. This is the first book in twenty years that, as soon as I finished it, I started reading again. A history of the rise, consolidation and disruption of the telephone, radio, motion picture, and television industries, it elucidates the history that can inform scenarios of the possible future of our industry better than any other analysis. It's a good read, too, with wonderful descriptions of the people behind the inventions and companies and how the culture of their times influenced them.


photo blogger said...

You are giving way to much credit to market dynamics and not enough to the underlying technical structure of the medium. The costs, bandwidth issues, and economies of scale of broadcast are so different from the internet when anyone can create content and attract an audience that the analogy falls down. Similar forces maybe. Totally different situation and likely outcomes.

Jerry Neumann said...

But pre government regulation of the radio spectrum, anyone could (and did) create radio content, broadcast it, and attract an audience. Wu talks about this 'golden age of the amateur' in his book. It sounds much like the early days of the internet and the economics were similar (although the potential audience was smaller because the transmitter could only reach so far, offset by the fact that it was much cheaper to own a transmitter and broadcast than it is to own a PC and pay for internet access and server space.)

My point about industry structure is that it did not need to be that way. You say that 'costs, bandwidth issues, and economies of scale... are so different', but costs were cheaper, economies of scale less compelling for radio than the internet, so not sure what point you're making?

The only real defining difference is bandwidth issues. My (Wu's, actually) point is that the precursor to the FCC could have made one of two choices: many low-power stations or few high-power stations. They made the latter, even though that stifled diversity of voice, and they did it at the insistence of corporate power.

The radio could not have been the internet. Of course not. But it could have been more open. The government was convinced to close it. I think this is something worth considering in an analogous situation, as entrenched players again try to use government power to limit competition.

Dick Davies said...

Agglomeration may be overrated. David Weinberger in asks, "Why did the world shatter at the touch of a hyperlink?" in industry after industry.

Jerry Neumann said...

That's a good article. I think his point is that the internet is winning because it allows a diversity of voice. I agree.

But Wu's book shows that there was a diversity of, well if not voice then at least provision, in telephone, radio, and film (at least) before those industries became concentrated. So, while agglomeration is definitely overrated from the point of view of the citizen, you can't ignore the lessons of history.

If what you (and Weinberger) are saying is "this time it's different"... well, not unless we make it so.

photo blogger said...

The difference between recording content, building a radio transmitter, and running a radio station compared to posting to twitter, a blog, youtube, or any other type of internet content creation are simply night and day. You are off by orders of magnitude. Maybe thousands or tens of thousands of individuals created and broadcast back then, billions create and distribute on the internet.

Btw, the login got messed up on this comment, this is Zach Coelius.

Jerry Neumann said...

OK, Zach, I agree with your point. But so what? The same business logic holds: that by shutting out small content distributors, the incumbents control the market. At that point, the logic of the mass market takes hold.

Content creators were not the ones being shut out, as the history of the Edison Trust in film shows. People made independent films (mainly in France) but they could not get a license to distribute in the US because the Edison Trust--who controlled all the film patents here--would not let them.

Who control the various distribution chokepoints on the internet today? Apple, Google, the cable and telecomm companies, etc. I don't think it's such a bad idea to assume that each of these would prefer to control the medium and to guard against it. This pattern has repeated itself in all the modern communications industries; I don't think there's something so very different about the structure of the internet that inherently prevents it from happening again.

photo blogger said...

Ah, that is the crux of our disagreement. I would argue that because the internet is an open and distributed system that the "seeming" control of google is in fact not actually control because individuals how the ability to switch at virtually zero cost if Google tried to shut down other voices. Because individuals have unlimited and frictionless choice the internet has unlimited distribution with no one effectively controlling it.

Yes, theoretically the cable companies could attempt to exercise control because of their ownership of the delivery pipes, but using what argument? In the case of radio the bandwidth and signal conflict issues were actually real and did require some government regulation. Moreover, if somehow the cable companies were able to exercise control I would argue that the internet and the companies that depend on it being open are sufficiently mature and powerful to be able to quickly reverse such a move.

Basically my argument is that the internet is too big, open and distributed to be a good analogy to radio.


Anonymous said...

I'm at the same chapter in Wu's book. Disagreements aside, important people like Tim Berners-Lee are advocating that the web is kept open against the closed walls of Apple and Facebook. I am reading the Wu text with that context in mind. Maybe it won't be regulatory, but certainly there will be moguls who seek to throttle the information. Wu writes "the market's invisible hand waves in some great mogul..or band of them...who promise a more orderly and efficient regime for the betterment of all users...he defines a new type of industry, integrated and centralized. Delivering a better of more secure product, the mogul heralds a golden age in the life of the new technology. At its heart lies some perfected engine for providing a steady return on capital. In exchange for making the trains run on time...he gains a certain measure of control over the medium's potential for enabling individual expression and technical innovation"

Frank Ruscica said...

Wu writes:

“A successful Separations regime ultimately depends less on the enactment of useful laws – although we need these too – as on the cultivation of a popular ethic concerning our society's relation to information.”

For Wu, then, an ideal Master Switch will reward people who facilitate this cultivation.

Enter my patent-pending design of an online market for the ad spaces on single-author blogs. This market design includes a virtual currency that will be available only to market participants who tie their user accounts to personal identity.

Benefits for participants who sell (some of) their ad space for this currency, and who advertise their blogs by using these currency earnings to buy ad space on other blogs:

* a better way than LinkedIn to engage and improve one's professional network
* a better way to attract buyers of ad space who pay with cash

For details, see pages 17-28 of the .pdf embedded at

To understand why this market is at least a good bet to prove foundational for a Master Switch, see the whole document – pages 29-32 and 2-11 in particular (the former excerpt explains why said market is foundational for establishing a “workflow market” that Clayton Christensen likens to the eBay of customized education; the latter excerpt shows that said markets and others are very likely to be central to America's next “jobs engine”).

And remember: markets are engines for “two-sided” search. :-)

Btw, if you're interested in launching an ad-space market of said kind, I'm happy to help, not least because I'm in the process of rolling out a media complement of this kind of market. Also, I can put you in touch with an ACM Fellow computer scientist who is ideally suited to design the software that best complements the market (i.e., to design a particular kind of query optimizer).


Frank Ruscica
frank at opportunitv dot com