Chinese Censorship: Beyond the FCC in the U.S.

Regarding the Chinese government’s attempts to rein in microblogging and television programming, the New York Times observed in 2011, “Political censorship in this authoritarian state remains absolute.” It is therefore perhaps all the more surprising that bloggers in China have been able to post “whistle-blowing” reports at the expense (and embarrassment) of the political elite. That this has occurred at all suggests that once a Jennie gets out of its bottle, it is difficult to reverse course. This is the traditional Western view. Using television programming as a case study, I submit that the picture is actually more complex than the antiquated "black and white" version may suggest. 

On October 25, 2011, the State Administration of Radio, Film and Television ordered 24 regional television stations to limit themselves to no more than two 90-minute entertainment shows per week. The requirement is aimed, according to the ministry, at rooting out “excessive entertainment and vulgar tendencies.” The additional requirement for two hours of news every evening suggests that “excessive entertainment” may refer not only to the decadent sort of programing commonly called “reality shows” in the West, but also to the desire to have a balance of programming available on the public airwaves. Lest the regulations seem too draconian particularly to Americans, having a check on the proliferation of decadent programming spurred on by its low production cost may be something that many Westerners over 30 might favor. That public airwaves are public means that the public, through its government, has a right to regulate the content. For example, American televisions must include public service ads (PSAs) among the paid ads. Even so, the Chinese ministry’s order that television stations ignore audience ratings goes too far in the other direction.

The difficult task of balancing the fact that the airwaves belong to the public with the equally valid point that programming to at least some degree should reflect what people want to see, as per the definition of entertainment, can be evaded by running to either pole; it is far more difficult to manage the competing points. Programming the public airwaves need not succumb to “bottom feeding,” such that one or two segments of the population are effectively allowed to define entertainment for the whole even if this is in the networks’ short-term financial interests (i.e., cheapest programming and largest audience). No constraint on catering to the lowest common denominator can have the effect of facilitating a cultural trajectory into decadence.

At the same time, entertainment cannot be imposed; people simply won’t watch a boring show on public safety. Even forcing people to watch does not mean that they will be entertained. Authoritarianism may seem powerful, but it cannot easily access the inner recesses of the human being. Acting to protect the public airwaves from being monopolized at the expense of the whole need not slip into a control fixation. Indeed, the proliferation of television channels and internet programming even beyond television programming means that particular networks can specialize on specific market segments (either in terms of programming or audience) without segments of the public at large being ignored.

Whereas the Chinese government is too extreme in the authoritarian direction, the FCC in the U.S. could also be criticized for standing by as television networks maximize their profits by catering to “reality show” viewers at the expense of programming that bothers to use actors. Of course, people do not have to watch such shows, but if such programming dominates a significant number of programming venues, the wider public may have a legitimate claim—if not to equal time, then at least to a bit more being offered that is oriented to their tastes. For example, some people might not be edified by Jerry Springer or Jersey Shore—wanting something more like West Wing, LA Law or Boston Legal even though such shows are more expensive to produce. Should the content on the public airwaves be decided by profitability alone?

Imagine, if you will, turning on your television and finding either news shows serving as mouthpieces for certain talking heads, or series “show-casing” low-class, non-actors engaged in “drama” (the term itself has morphed from its ancient Greek association with temple-worship to the absence of any self-discipline, similar to how “professional” has become democratized to fit virtually any occupation). Even though the Chinese government is not known for its lightness of touch, its decision to try to impact programming at the expense of popularity contests might not be as outlandish as it seems. This is my point, rather than that the Chinese government should be defended for having a draconian demeanor. Both consumer demand and the public interest can be reflected in what is broadcast on television. Government regulation along with a market economy is, as of 2011 at least, the best the human race has come up with to accommodate both points. The picture is not black and white (or at least anymore). Perhaps both the Chinese ministry and the FAA could move a bit to the center.

While the market mechanism can function well in allocating non-essential goods and services, it may be vulnerable to succumbing to the “systemic risk” of being reduced to a lowest common denominator functioning like a vortex or black hole of sorts. It is a legitimate function of government to look after the public good, and this can include stepping in when a market mechanism succumbs to some decadent exuberance wherein a minority preference trumps the good of the whole. A government need not be obsessed with maintaining public order and decency (as though in 1950's America) to exercise its duty with respect to the public airwaves.

Source:

Sharon LaFraniere, Michael Wines, and Edward Wong, “China Reins in Entertainment and Bloggers,” The New York Times, October 27, 2011. 

Did Pandora's IPO Eclipse Fiscal Gravity?

Pandora, an internet-based radio company oriented to music, sold its initial public offering at $16 per share late on June 14, 2011. The shares opened the next day at $20 and rose as high as $26, only to fall into the teens before market close. At $26, the company had a market value of $4.2 billion, more than the value of AOL at the time. Just two weeks earlier, Pandora’s management had been looking at the $7 to $9 range.  Despite offering only 9 percent of its shares to the public, the company raised twice as much money as it had expected.

Astonishingly, Pandora had not made a profit in its 11 year history. On June 15^th  when the share price was over $20,  Pandora’s CEO, Joe Kennedy, refused to say whether the company would make a profit in the next five years. Instead, he pointed to the operating margin and cash flow, and to the business model, as reasons to invest long-term in the company. "Our focus has always been to build a great company. That’s our dream, that’s our passion, that’s our focus," he said, according to CNBC. It can be asked whether investors were engaging in irrational exuberance or on the rational expectation that it can take time for a company to begin showing profits.  

With all the attention typically paid to quarterly earnings, it is refreshing to hear a CEO stress the long-term nature of investing in his company. It would be nice if Pandora’s owners also had had a passion in Pandora as a going concern pushing along the technological wave by providing music tailored to individual listeners’ tastes. Such long-term investment would have bode well for corporate governance as owners take more of an interest in holding their management accountable through directors and stockholder referendums.

At the same time, Pandora’s reliance on advertising revenue even as an increasing proportion of use on smart phones may suggest a flawed business model. For internet companies in general (as well as bloggers!), it is difficult to turn non-paying users into subscribers. At the time of its IPO, Pandora had 94 million registered users, most of which were non-paying customers. "The excitement for Pandora is driven by people's usage of the service and the enjoyment of the service," said Richard Greenfield, an analyst with BTIG Research. "But in order to justify a high valuation, they need to get far more advertising, and they need to get more people paying for the service." But this can be difficult in a marketplace where users can simply switch to a free service. While a nice set-up for us users, I’m not sure the business model is viable, given how much internet advertisers pay for clicks of their ads (which in turn is a reflection of users being able to ignore ads).

My understanding is that the phenomenon wherein a very high proportion of customers can use a product for free is pretty much limited to the internet. Tangentially, free wifi at coffee shops and even some restaurants (e.g., McDonalds) has given rise to customers “camping out” for hours to use the free service long after finishing their drink.  Incidentally, as I write this essay, I’m using Starbucks’ wifi long after my ice tea and slice of coffee cake. I’m watching the 100-minute full lunar eclipse live (just showed the video feed to the store’s manager and another customer—both of whom are amazed) as I contemplate Pandora’s business plan relative to fiscal gravity here on earth. It is just such amazement at the marvels of technology that a long-term investor in a company like Pandora can have while participating in the innovation; but lest we lose too much perspective, it is well to observe that a business model is trite, artificial and even profane next to the translucent liminality of the eclipsed rock otherwise known as our moon.

If Pandora’s advertising revenue is not sufficient to pay for the rights to the music the station plays, then not being allowed by the market to charge most users can mean eventual financial ruin for the company, especially given the extent of the competition facing the company. According to Msnbc.com, “Pandora is going up against traditional radio companies, satellite radio provider Sirius XM, music services such as Rhapsody, not to mention services from Apple, Google and Amazon that allow users to access music from anywhere.” The internet platform itself can mean not only relatively low advertising rates, but also low barriers to entry for future competitors.

According to The New York Times, Pandora had just 3 percent of the market at the time of the company’s IPO and had lost $92 million cumulatively since it began. In 2010, revenue of $137.8 million was more than double from the previous year, but the company’s 2010 loss was at $1.8 million. Most significantly, the company had never earned a profit and yet investors were rushing to invest in the company’s IPO. "I think it's heavily overvalued," Anupam Palit, an analyst with GreenCrest Capital, said according to Msnbc.com. "It's a great company but what we're seeing right now is incredible investor demand for Internet IPOs and a lot of dollars chasing very little supply." In rushing to invest, investors may have been ignoring a fundamentally flawed business model—in effect defying fiscal gravity.

An unsustainable imbalance between relying on on-line advertising revenue rather than subscribers and having to pay labels substantial fees for content mean that Pandora may never earn a profit. According to The New York Times, “the fees [Pandora] pays to record labels for songs remain its largest expense. The cost to acquire content more than doubled last year to $69.4 million. ‘As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue,’ the company warned.” According to The Wall Street Journal, “The company faces hefty payments to music labels and publishers, similar to traditional radio companies, and has yet to offset such expenses with advertising revenues and user fees.” It would seem that the labels and publishers were not making a sufficient allowance for the discounted nature of internet-advertising revenue relative to that of brick-and-mortar radio stations.

I would be remiss if this business analysis did not place Pandora in historical context. In the closing years of the twentieth century and during the first decade of the twenty-first century, managers of “dot.coms” grasped at how to monetize the internet wherein the norm was free content. That norm had such gravitas and the internet itself was so new that business practitioners had trouble simply grasping how to get a handle on the platform. Indeed, the internet itself was changing—prodded along by the likes of companies such as The New York Times that led the way to confining their internet-users to a subscription-basis. At the time, no one knew whether the momentum would shift to this basis across the internet; no one knew whether the free access to stuff on the internet would continue unabated or suffer a decline.

Theoretically, a movement toward “subscription-only” access could pass a threshold-point beyond which businesses (and bloggers) could discount the impact of alternative free vendors and the monetization trend would be irreversible. The more traditional, more financially-solid business model could then be applied by internet companies. By the end of the first decade of the twenty-first century, internet-company managers could not even be sure that such a threshold would be crossed. At the same time, relying on advertising revenue seemed to be an insufficient basis for sustained profitability.

In other words, the uncertainty in the air at the time of Pandora’s IPO was not limited to the company. Fundamentally, the world was still grappling with how to make money using a completely new platform. It takes years for such novelty to be understood and thus ably used, even if in hindsight it seems simple. The human mind is indeed quite finite, particularly as it struggles to make sense of a new environment.

 Those people willing to invest in Pandora in its IPO on the ides of June 2011 were indeed taking a risk, and the CEO was correct to stress the long-term (which is the best perspective for stock-ownership anyway). Unless or until the monetization threshold point is hit on the internet as a whole, Pandora’s management (and investors) ought to have been taking seriously the possibility that the company’s business model was not in balance. Content should be in balance with ad revenue, and negotiating with labels and publishers ought to reflect such a balance as even the suppliers cannot earn money from defunct distributors such as Pandora. A viable business model is indeed possible for internet companies before the threshold point unless they face an overwhelming amount of free-content by competitors and ad revenue is tiny (e.g., blogging). The question at the time of Pandora's IPO was whether the company would go down this route or be able to adjust its business model even without the internet itself reaching a monetization threshold-point. 

Sources:

Margo D. Beller, “Pandora Soars, Then Falls in Market Debut,” CNBC, June 15, 2011.

“Pandora Shares Surge at Their Debut,” msnbc.com, June 15, 2011.

Lynn Cowan and Don Clark, “Pandora IPO Is High Note,” The Wall Street Journal, June 15, 2011.

Evelyn M. Rusli, “Pandora Prices Its I.P.O. at $16 a Share,” The New York Times, June 15, 2011.

Big Soda Campaigning against a Proposed Tax in San Francisco: A Vested Interest Thwarting Democracy?

With a proposed 1-cent per ounce tax on sweetened beverages such as soda-pop on the 2016 ballot in Oakland and San Francisco, the effected industry reserved about $9.5 million in television-ad time.[1] As of August 10^th, the American Beverage Association had already spent $747,267 on campaign consultants and advertisements against the proposed tax in Oakland, whereas supporters of the proposal had spent only $23,297.[2] The imbalance itself could mean that business was subverting democracy by overwhelming voters. If big-soda’s ads were unethical as the pro-tax camp contended, the subversion would be especially harmful.

We’re “up against a campaign that’s willing to lie,” Campbell Washington, an Oakland Councilmember said.[3] As if the industry’s massive ad blitz were not enough of a problem for people like her, the industry was claiming that the tax would increase the prices of eggs, bread, and milk. “It’s an incredibly painful and unethical lie,” said Oakland Councilwoman Rebecca Kaplan. “People worry about having to pay for their groceries. To threaten that their groceries are going to be taxed when it’s not true is a totally despicable tactic from the soda industry.”[4] Hoe Arellano, a spokesman for groups opposing taxes, retorted that grocers “have shown repeatedly that they will pass on those costs to their consumers.”[5] He was assuming that the grocers would not up the price of sugary drinks, but would do so on other foodstuffs.

With the proposed tax being only 1-cent per ounce, Arellano’s assumption that consumers would see a significant increase in the prices of other foods and drinks seems a stretch. The industry’s strategy does seem to include scare tactics, which are unethical. The question of whether grocers would up the prices of soda to fully capture the tax increase is more difficult to answer. The evidence from Berkeley’s tax from 2014 shows that consumption of soda, energy drinks, and other taxed items fell by 21 percent in some neighborhoods after the tax took effect.[6] So People would likely cut down on their purchases of soda. It is possible, therefore, that grocers would not try to capture all of the tax with price increases on the drinks. Even so, the grocers’ profits could take a hit instead of prices of other foods and drinks being affected. I must conclude, therefore, that the industry’s advertising campaign contained untruthful fear-mongering and hence was unethical.

The broader question is whether the huge imbalance in advertising spending was getting in the way of the will of the people being found by democratic means. That is, aside from the fear-mongering, does a large imbalance of campaign spending cause voters to lean too far in one direction when they would otherwise weigh both sides as each having a point. Put another way, such an imbalance can keep a side from getting its message out. To be sure, the pro-tax camp was relying on a grass-roots approach, but that has its limitations in reaching the mass-electorate which has been saturated with ads from the opposing side.

It may be that business has a social responsibility, being within a democratic system, not to overwhelm it with spending on political ads. When an industry has a vested interest in the vote, it may be best for the industry to limit itself to providing facts to the public discourse. To be sure, election results do not always favor the party that spent most; money isn’t everything. Even so, it seems unethical for business to dominate society simply because the bottom line is affected. Free speech is of course a right, but the U.S. Supreme Court’s ruling that spending is speech can be regarded as problematic. If so, the use of public policy to reinforce good social responsibility would be possible and perhaps even advised in the interest of protecting the democratic process from being overwhelmed.

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[1] Michael McLaughlin, “Big Soda Spends Millions on ‘Unethical’ San Francisco Area Ads Fighting Drink Taxes,” The Huffington Post, August 24, 2016.

[2] Darwin Graham, “Big Soda Is Spending Big Money Against Oakland Surary Beverage Tax Proposal,” East Bay Express, August 10, 2016.

[3] Ibid.

[4] McLaughlin, “Big Soda.”

[5] Ibid.

[6] Ibid. See the following: http://ajph.aphapublications.org/doi/abs/10.2105/AJPH.2016.303362