Memo to AT&T: Help Me Help You

This summer I wrote about AOL and how widespread service failure can actually be a bullish signal for a company, if the company responds correctly.

This week, AT&T Mobility Chief Executive Ralph de la Vega disclosed that AT&T was considering "incentives" to encourage customers, especially data-guzzling iPhone users, to reduce the amount of wireless bandwidth they consume. To which, Dan Lyons, in the persona of Fake Steve Jobs, responded in a typically humorous and profanity-laced post:

"So let’s talk traffic. We’ve got people who love this goddamn phone so much that they’re living on it. Yes, that’s crushing your network. Yes, 3% of your users are taking up 40% of your bandwidth. You see this as a bad thing. It’s not. It’s a good thing. It’s a blessing. It’s an indication that people love what we’re doing, which means you now have a reason to go out and double or triple or quadruple your damn network capacity. Jesus! I can’t believe I’m explaining this to you. You’re in the business of selling bandwidth. That pipe is what you sell. Right now what the market is telling you is that you can sell even more! Lots more! Good Lord. The world is changing, and you’re right in the sweet spot."

This is the "America Offline" problem all over again. Consumers on a flat-rate bandwidth plan with a choice of 100,000 apps to run on their iPhones want to take advantage of all the cool stuff they can do with what is essentially a pocket-sized computer. When it faced a similar problem, AOL responded by aggressively adding bandwidth and signing up 27 million households at its peak. True, things eventually went south for AOL... but come to think of it, if AOL had figured out how to offer even more bandwidth by offering its customers a migration path from dial-up to broadband, it might not be the shrunken colossus it is today.

It's been a rough week for AT&T. Mr. de la Vega's disclosure of AT&T's thinking absent any specific proposals led to a groundswell of online suspicion, complaints and rants about AT&T's wireless service at a time when Verizon is aggressively attacking AT&T's 3G wireless coverage in a series of pointed and amusing ads. What's worse, when Dan Lyons (half?) jokingly suggested that subscribers should engineer a "chokehold" on the AT&T network by using bandwidth-intensive applications at a coordinated time, the meme spread via Twitter and Facebook and was picked up by the mainstream media, ensuring that by the end of the week, every sentient American was aware, at a minimum, that lots of other people thought AT&T's wireless service sucks.

The Verizon marketing guys are undoubtedly enjoying an extra round of drinks at happy hour this evening.

AT&T, here's what I'm willing to do to help.

Send me one of those 3G Microcell devices you've announced but seem to be testing only in Charlotte, North Carolina. I'll hook it up to my home network and it'll route my iPhone calls from my home over my DSL service instead of your wireless network.

Admittedly, this isn't going to free up much existing bandwidth on your wireless network, because -- ahem -- I don't make too many calls from the one window on the third floor where I can actually get two bars of service. But at least my cell phone will work in my house and you won't have to put up another tower in the vicinity, so we'll both be ahead.

Oh, and when the 3G Microcell arrives, I don't want to pay $150 for it, nor do I want to pay an additional $19.99 or even $9.99 per month to use it on top of the $100 per month I already pay for my cell phone service. After this week, do you really want to deal with the PR implications of that pricing model? "Unhappy with your cell-phone service? Now you can pay more!" Trust me, you really don't want to go there.

But I'm a reasonable guy, so let me know what your marginal cost is for the millionth unit you manufacture, and I'll pay that.

Now comes the good part. If you build appropriate security into the device, I'll let strangers in my neighborhood route their calls through it too! That will free up bandwidth on your network, provide more coverage and save you money. Even better, you could offer the same deal to my neighbors and pretty soon, you might not see any wireless traffic on your network at all in this neck of the woods. Hell, if y'all want to have some real fun, pay me to switch to Comcast high-speed internet and together we'll route your traffic over their network. This net neutrality stuff is delicious with irony if you just work at it a little.

Admittedly, I didn't think this up all by myself; engineers and entrepreneurs have been talking about wi-fi mesh networks for awhile, but now you have an economic incentive, a user base and a compelling business reason to make it happen.

Rarely in business do you get an opportunity to see the future so clearly because the past provides such a compelling example of how to act.

Let's make this happen, whaddya say?

Can Newspaper Ad Revenue Recover in 2010?

This is a short excerpt of a longer post I am preparing on newspaper print advertising trends, but a post today by Alan Mutter encouraged me to publish this small excerpt.

Mutter expresses skepticism about the rosy advertising scenario presented by U.S. newspaper executives in a survey conducted by Kubas Consultants. As this table from the Kubas report shows, newspaper executives are hoping for flat advertising revenue in 2010, with a 15% increase in online (approximately 10% of 2009 revenue) offsetting small declines in every print category.

I am particularly curious about the poll's findings regarding retail advertising, which after the steep declines in classified advertising over the past few years, will account for just over 50% of total print ad revenues in 2009, making it the biggest driver of the overall results.

The following graph (click to enlarge) plots retail ad revenue per subscriber against per capita personal consumption expenditures (PCE) for 1952 - 2009. Both the ad revenue and PCE data have been adjusted to constant 2008 dollars using the consumer price index (CPI-U).

Presumably there is a relationship between the amount of goods and services companies sell to consumers each year (represented by PCE) and the amount those companies are willing to spend to reach each consumer or household by advertising in newspapers.


And indeed there is a relationship, or more accurately, several relationships. From 1952 through 1990, newspapers sold retail advertising equal to about 1.76% of personal consumption expenditures on a predictable basis. Coming out of the 1990 recession, however, there was a clear downward shift in the relationship and for the next decade, retail ad sales ran at about 1.52% of personal consumption. (see note 1).

After the 2001 recession, there was another shift down in the relationship between ad spending and personal consumption; and for the next five years, retail ad spending in newspapers was basically flat in real terms. It's worth noting that in real terms, retail ad spend actually peaked in 2000.

Finally, since 2006, real retail ad revenue has plummeted as the recession took hold (in December 2007) and consumers abandoned their free-spending ways.

Recessions often act as antidotes to inertia by making households and companies (link added 04/15/10) reassess how and where they spend their money. Advertisers almost certainly used the past two recessions to reassess their spending in newspapers, and it's a fair bet they'll do the same as the current recovery unfolds.

A slavish reading of the most recent trend suggests that retail ad spending will simply continue to plummet like a rock falling off a cliff. This could happen, but I doubt it. Ad spending, even in newspapers, should respond to an eventual recovery. But making economic predictions around recessions and recoveries is notoriously difficult since prior recessions and recoveries provide limited relevant precedent. To paraphrase Tolstoy, if periods of prosperity are all alike, every recession unfolds in its own way.

But I'll take a stab at it. In a related analysis, I have compared changes in retail ad spending to changes in PCE on a quarterly basis. This analysis suggests that it will take real growth of 3.2% in per capita PCE just to keep retail ad spending per subscriber flat. It would take a sharp "V-shaped" recovery to reach that level of growth, but the WSJ has published a consensus estimate of 3.8% for GDP growth for 2010.

If GDP does grow at 3.8% and per capita PCE matches this growth, retail ad spend per subscriber could come in at +1.5% in real terms. Add 2.0% for inflation if you believe that newspapers will have any pricing power, then subtract 3% for subscriber attrition and you get 0.5% growth.

More pessimistically, if you assume GDP growth (and PCE) come in at 1.7% (the average from the 1992 and 2002 recoveries), retail ad spend per subscriber could come in at minus 4.0%. Assume no pricing power and subscriber attrition of 5% and overall retail ad spending would shrink by 9%

The precision of the numbers should not mislead about the confidence of the forecaster, but for my money, I think a range of flat to down 10% for newspaper print advertising feels about right.

note 1. A more precise, but likely less clear statement about the relationship would say, "From 1952 to 1990, for every $1,000 increase in real consumption expenditures per capita, spending on retail ads (per subscriber) in newspapers increased by 1.76% of this amount, or $17.60." For each of the regression lines, the intercept terms are small enough to make me comfortable with statement in the text.

note on data sources. Annual retail ad spend and paid circulation data comes from the Newspaper Association of America website. Personal Consumption Expenditure data, Consumer Price Index - All Urban and Population data are from the St Louis Federal Reserve Bank's FRED database.

Rupert Murdoch has penned a refreshingly sensible post on his blog, The Wall Street Journal op-ed page.

Mr. Murdoch makes four generally agreeable points:

• Newspaper publishers should stop whining about technology and figure out how to use it.

• Quality content is not free.

• The old ad-supported newspaper model is "dead", so paid content is the future.

• Government funding of newspapers is a supremely bad idea.

There's more of course, and publishers without the breadth of News Corp's resources may find Mr. Murdoch's prescriptions for success elusive or unattractive.

True, Mr. Murdoch's Wall Street Journal successfully charges for its online content, but it's the exception that proves the rule. And when Mr. Murdoch writes, "media companies need to give people the news they want," I can hear some publishers harrumphing he's got it backwards: real journalists want to give people the news they need.

I wholly endorse Mr. Murdoch's sentiments regarding government funding of newspapers (Is there anyone who remembers Pravda as a model of independent journalistic achievement?) I'm even sympathetic to his predictable plea for less media regulation, although he's so wrapped in the flag of his adopted thirteen colonies as he calls for relaxation of the FCC's cross-ownership rules his detractors will undoubtedly recall Samuel Johnson's observation about patriotism and scoundrels.

Mr. Murdoch's candid acknowledgement that the old business model for newspapers is broken is a welcome change from the chorus of "blame Google" laments that have turned "Future of Media" confabs into the conference circuit equivalent of Japanese Noh theater.

But Mr. Murdoch is not prepared to let bloggers and online news aggregators off easily. He writes:

"[T]here are those who think they have a right to take our news content and use it for their own purposes without contributing a penny to its production. Some rewrite, at times without attribution, the news stories of expensive and distinguished journalists who invested days, weeks or even months in their stories—all under the tattered veil of 'fair use.'"

"These people are not investing in journalism. They are feeding off the hard-earned efforts and investments of others. And their almost wholesale misappropriation of our stories is not 'fair use.' To be impolite, it's theft."

"Right now content creators bear all the costs, while aggregators enjoy many of the benefits. In the long term, this is untenable. We are open to different pay models. But the principle is clear: To paraphrase a famous economist, there's no such thing as a free news story, and we are going to ensure that we get a fair but modest price for the value we provide."

In a nutshell, Mr. Murdoch asserts the same argument made by Supreme Court Justice Mahlon Pitney in the 1918 case International News Service v. Associated Press. In that case, a 6-2 majority upheld a lower court injunction prohibiting International News Service from "bodily appropriation" of freshly published Associated Press news stories, which were often telegraphed westward and published simultaneously in competition with AP-affiliated newspapers on the U.S. west coast. In the case, Associated Press prevailed on a theory of unfair competition (copyright was not an issue because it was generally unavailable to news stories at that time) in a case that established "misappropriation" as a form of unfair competition.

Over time, the force of International News Service v. Associated Press with regard to the original issue has faded, in part because subsequent jurists and legal scholars concluded that the formidable dissenters in the case, Justice Holmes and Justice Brandeis, had the better arguments, but also because of changes to copyright law in the intervening decades.

Lately, however, David and Daniel Marburger have circulated a paper advocating an amendment to copyright law that would effectively reinstate publishers' rights to enjoin aggregators from republishing without consent. What's more, current Associated Press CEO, Tom Curley, has been floating the notion of a licensing "head start" for cooperating publishers and aggregators, a central theme in the 1918 case. This idea seems to be gaining traction among publishers, and the threat may be partly responsible for some of Google's recent conciliatory gestures toward the publishers.

But in a wonderful irony, while Mr. Murdoch's argument reads like the majority opinion he favors, his words echo Justice Brandeis's right up to the conclusion:

"Plaintiff further contended that defendant's practice constitutes unfair competition because there is 'appropriation without cost to itself of values created by' the plaintiff, and it is upon this ground that the decision of this Court appears to be based. To appropriate and use for profit, knowledge, and ideas produced by other men without making compensation or even acknowledgment may be inconsistent with a finer sense of propriety, but, with the exceptions indicated above, the law has heretofore sanctioned the practice." (emphasis added).

For a fascinating, detailed and eminently readable overview of the case, I recommend University of Chicago Law School's Douglas G. Baird's "Property, Natural Monopoly and the Uneasy Legacy of INS v AP".

Murdoch's Sun Encourages File-Sharing, Deep Linking

The theme's been done before, but News Corp's tabloid, The Sun is running an advert touting the paper as "The UK's Best Handheld for 40 Years."

The spot is cute, if a bit predictable; but what struck me was the message, "This is how easy it is to share content with friends" (at the 0:38 mark).