The Power Imbalance: Internet Giants Stymy News Outlets' Financial Health

One bill is called the American Innovation and Choice Online Act (AICOA), which would police the dominant platforms' acts of "self-preferencing," or favoring their affiliated content or merchandise over that of independent rivals. Although it would regulate self-preferencing outside antitrust law, pursuant to a new standard, the AICOA is often referred to in the press as antitrust reform.

The second antitrust-related bill, the Journalism Competition and Preservation Act (JCPA), hasn't received the same amount of press attention, but Big Tech is determined to kill it as well. Among other protections for news publishers, the JCPA would grant an exemption to antitrust laws for news publishers so they can better coordinate their dealings with the tech giants.

I had the privilege of testifying before the House Antitrust Subcommittee on the AICOA, and before the Senate Antitrust Subcommittee on the JCPA, both times as the Democrats' economic expert. To my pleasant surprise, there was significant Republican support for the AICOA, beyond the GOP co-sponsor Rep. Ken Buck (R-CO).

Time is running short for passage of one or both antitrust bills. It must happen before Congress is reconstituted, after the midterms, while Democrats still have leverage.

Before going any further, I want to be clear: antitrust exemptions are rare, and that's a good thing. Powerful entities should not be immunized from antitrust scrutiny. In some limited circumstances, however, coordination among small suppliers, when dealing with a large buyer, is necessary to overcome a power imbalance that is causing input prices and employment to fall below competitive levels.

This market failure is the basis for the current exemptions for farm cooperatives (in particular) and labor (in general) from the antitrust laws. And it is the same basis for extending a new exemption to newspapers in their dealings with dominant internet platforms.

The platforms' massive buying power (a.k.a., monopsony) over news publishers is evidenced by high market shares combined with high barriers to entry. Facebook and Google account for over half of U.S. digital display advertising. eMarketer puts Google (including YouTube) at 10.2% and Facebook at 42.5% in 2022.

Facebook's bullying reaction to the prospect of having to pay for access to news evinces its buying power. In February 2021, Facebook temporarily blocked news to Australians on its platform as legislators refined the "news code." And in July 2022, with Congress deliberating on the JCPA, Facebook announced that it will no longer pay U.S. news organizations to have their material appear in Facebook's News Tab.

By providing a time-limited period during which publishers could coordinate their dealings with the dominant online platforms for compensation, the JCPA would help balance the playing field and provide a lifeline for high-quality journalism in America.

Numbers help explain why this is so critical. The news industry has incurred losses in advertising revenue every year since 2006, according to the Pew Research Center. The year 2006 was around the time that the platforms solidified their market power over digital advertising.

This is not to say that Facebook's and Google's domination of digital advertising came entirely at the expense of newspapers. Rather, it is to provide context as to how any underpayment to newspapers can exacerbate an environment that is already quite dire.

The effect of shrinking advertising revenues – in part caused by underpayment from dominant platforms – is less cash flow to support journalists, a clear employment effect flowing from the exercise of monopsony power by the dominant platforms. Employment among newspaper employees fell from 71,000 in 2008 to 31,000 in 2020, according to Pew.

As a result of the deteriorating news media landscape described above, hundreds of local newspapers have been acquired or declared bankruptcy.

Facebook and Google reframe newspaper articles in rich previews containing headlines, summaries and photos. The platforms also curate newspaper content alongside advertisements. This reframing and curation decrease the likelihood of a user clicking on the article, thereby depriving news publishers of clicks while enriching the dominant tech platforms. The appropriation of newspaper content also decreases newspaper subscriptions. And when the clicks on newspaper content eventually come from the platforms' websites, the associated advertising revenues are taxed by the platforms at excessive take rates.

A study I conducted, which was commissioned by the News Media Alliance, found that allowing current market forces to dictate the newspapers' "pay shares" (that is, the portion of platform revenues that redounds to newspaper publishers) ensures that newspapers are compensated at rates significantly below competitive levels.

This underpayment results in underemployment of journalists and other news employees. And it also can cause a host of social ills associated with local news deserts, including less competent local governments; greater spread of partisanship and misinformation; removal of economic stimulus to local economies; and a reduction in the diversity of viewpoints, particularly among minority populations.

The best way to correct this market failure is for the government to permit the news publishers to coordinate their dealings with the digital platforms over payment terms and conditions, as contemplated in the JCPA. Given the massive power imbalance, collective bargaining by itself might not be sufficient to achieve competitive payments, in which case some structured bargaining among the parties (e.g., mandatory arbitration) with an enforcement mechanism would be needed as a backstop.

Opposing Arguments

During the Senate hearing on the bill, a would-be newspaper coalition was referred to as a "cartel" by a Republican witness, Daniel Francis – a lecturer at Harvard Law School and a former Federal Trade Commission official.

This misunderstands the term. A cartel is anticompetitive because it suppresses output. But by driving up the price for accessing news towards competitive levels, the coalition created by the JCPA would increase newspaper output, the exact opposite of a cartel. Calling the coalition of newspapers, a cartel makes about as much sense as calling a union of unpaid college athletes a cartel. Neither would restrict output. And neither would lead to higher prices for consumers, as neither would increase the marginal cost of the respective platforms.

Basic pricing theory shows that an increase in a firm's fixed costs, such as a lump sum transfer payment that doesn't change with output, will not affect a firm's pricing. Just as NCAA schools have not raised ticket prices or television license fees after having to pay college athletes for the rights to the athletes' name, image and likeness, Google and Facebook would have no reason to begin charging users for search or social media, respectively.

The payments to newspapers would not rise with each click, but instead would be a lump-sum, fixed payment for the right to access the content. Upon making the access payment, the platforms would be free to monetize newspaper content however they desired (subject to applicable copyright law).

Curiously, some traditional anti-monopoly groups have stated their resistance to granting countervailing bargaining power to newspapers in their dealings with dominant platforms. In a joint statement, the American Antitrust Institute (AAI), Public Knowledge, Consumer Reports and Consumer Federation of America argued that "a new antitrust exemption will only hurt consumers, citizens and businesses that are not invited to the negotiations that this exemption is supposed to facilitate." It bears noting that some of these groups depend on the dominant platforms for funding.

The slippery-slope argument advanced by the AAI in a white paper would have condemned the antitrust exemption originally extended to labor and to farm cooperatives, as they were the first exemptions granted. Given the extremely limited scope of the antitrust exclusion proposed – newspapers would not be allowed to coordinate in their dealings with consumers – it is unclear how collective bargaining of newspapers vis-à-vis the dominant platforms over an access fee would have unintended consequences in the form of increased prices for consumers, as suggested in the white paper.

Instead of the JCPA, some detractors have called for greater enforcement of existing antitrust laws against Google or Facebook. Even if successful, such a lawsuit could recover only a fraction of the underpayment – the overcharges from excess take rates when traffic originates from the platforms' websites. There would be no compensation for traffic that was diverted from the publishers' websites, and no access fee.

Moreover, a successful antitrust lawsuit against (say) Google would provide zero relief for publishers in their dealings with Facebook. And a successful antitrust lawsuit against Google or Facebook would require several years to adjudicate, and the appeals might not be resolved for nearly a decade. In the interim, newspapers would be left twisting in the wind. Given the newspapers' precarious financial state, it is not clear how long many could survive without an intervention today.

Time to Act

The opportunity to restore a level playing field is closing fast. The JCPA bill has broad support among Democrats and narrower support among Republicans, but enough to pass the Senate. If Democrats lose their Senate or House majorities in the fall, the JCPA, as well as other competition-based bills, might not get another shot.

The JCPA has undergone significant amendments to accommodate legitimate concerns. The current version wisely introduces baseball-style arbitration; guarantees that publishers of all viewpoints are eligible to participate in negotiations; and imposes a size limit to focus support on small and local outlets.

More recent amendments ensure that a significant share of funds (65%) collected pursuant to the JCPA would be based on the proportion of budget dollars that newspapers spend on journalists, and they require transparency on what news providers receive from platforms annually and how that infusion is spent on news production.

Now is the time for Senate Majority Leader Chuck Schumer to bring the JCPA to a vote and quit kowtowing to Big Tech.

This article was originally published in the Sep/Oct issue of TFM.

Hal Singer is managing director of Econ One, an economic consulting firm, and an adjunct professor at Georgetown's McDonough School of Business. He is also a consultant to the News Media Alliance, a coalition of newspapers in support of the JCPA. Singer can be reached at hsinger@econone.com.

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