Policy by the Numbers: 2011

From Mixtape to Playlist

Thursday, December 22, 2011

Ten years ago, consolidation in the U.S. music radio market was seen as a threat to creativity. Today, media markets are increasingly more fragmented, vibrant, and competitive than ever before, in ways that were unpredictable just a few years ago.
Recently, Billboard Magazine published an article about “the best ways for emerging [music] acts to get the word out.” Number 1 is being the featured free single on iTunes. YouTube is #2. Pitchfork - an online music magazine that just twelve years ago was a tiny operation in Minneapolis - is #3. Traditional radio airplay doesn’t even make the top 10, except for the “free listen of the week” on National Public Radio’s website.

This article reflects a broader shift in the way music is produced, distributed, marketed, and consumed:

Technology is empowering artists: Data suggests that more music is being commercially released than ever before, and quality appears to be as strong as ever. That’s partly a function of technology lowering the barriers to creativity. More than half the price of a physical CD went to covering the cost of physically making and distributing it. Today, artists are manufacturing entire albums on an iPad, and releasing them directly to music fans online.

Technology is empowering fans: Fans are flocking to online platforms that allow them to customize their listening experience. Between 2006 and 2009, overall music purchases increased by 50% in the U.S., and global digital music sales revenue has grown to over five billion dollars, a 1000% increase over the last six years. It’s true that total sales revenue is down, but that’s largely a result of fans shifting from buying $15 albums to buying individual songs for 99 cents. Today, most consumers are buying or streaming songs a la carte to customize their own experience (and there’s a bigger pool of money than one might think).

Fans are becoming tastemakers via social media: Music is social -- between 1999 and 2009 concert-ticket sales in America tripled, from $1.5 billion to $4.6 billion. Research by GartnerG2 predicted that in 2010 at least 25% of sales would be attributable to features like fan-to-fan recommendations.

But this isn’t a complete shift. Even though the roles of traditional record labels and radio stations are dramatically changing, they continue to play an important role in the ecosystem as they are adapt and thrive on the Internet.

What can be done to clear the way for the next great online music service? Alongside smart enforcement, music rightsholders and start-up innovators are keen to fix licensing. The music industry is leaving hundreds of millions of dollars on the table due to inefficient licensing, and a recent survey of investors found that decreasing the cost and complexity would expand the pool of investors in digital content services by 83%.

In other words: if music and tech work together to accelerate the shift to new music services that give artists and consumers what they want, then everyone wins.
posted by Derek Slater, Policy Manager at Google

Measuring the Benefit as well as the Cost of the Internet Economy

Tuesday, December 20, 2011

Most people have the sense that the Internet is a big and important part of the global economy. Attempts to quantify the economic size and importance of the Internet using traditional metrics bears out that intuition. For example, the McKinsey Global Institute (MGI) recently found that almost $8 trillion changes hands annually through Internet commerce, and BCG estimated that the Internet contributes 7% of the U.K.’s GDP. Indeed, the Internet is now a major contributor to GDP in the industrialized world. It constitutes 3.4% of GDP in large and developed economies and $1.672 trillion worldwide. When compared with sectors like agriculture or utilities worldwide, the Internet has a greater GDP weight. In other words, Internet-related expenditure already exceeds that of other major industries. Over the past five years, the Internet contributed 21% of GDP growth in advanced countries, showing that it’s an increasingly important macroeconomic engine of output.
But GDP is actually not a good way to calculate the total economic impact of the Internet. You can think of GDP as the sum total of all the costs in an economy - if it costs $1 to grow, ship, and sell an apple, then the $1 paid for the apple is added to GDP. But GDP does not reflect the value on top of cost that the consumer experiences. If the buyer of an apple values the apple at $2, the $1 in extra value is lost in GDP accounting. This issue is especially important with Internet products that are free. Consider Wikipedia, whose contribution to GDP is $0 even though millions of hours of effort have gone into producing and consuming its content!

MGI and others try to measure consumer surplus in addition to GDP. Unfortunately, it’s easy to measure costs and hard to measure benefits, since benefits show up in a lot of places and aren’t always written down. MGI’s study looks at a small number of ways in which consumers benefit from the Internet and finds $64 billion in consumer surplus in the US alone. This approach inherently underestimates consumer value since it only looks at a subset of all of the ways in which the Internet is valuable. For example, the MGI study does not attempt to place a value on the millions of hours of free video online, or on the value of social networking.

As a general rule, total economic surplus is the sum of producer surplus (GDP) and consumer surplus. Even this approach understates the value of the Internet, because of the Internet’s role as a general purpose technology in increasing productivity and lowering transactions costs throughout the non-Internet economy. When the Internet allows businesses to operate more efficiently and productively, the increase in output is not easily linked to the Internet, and these implications can be quite large. Lots of work remains to be done in understanding the Internet’s impact on productivity for the economy at large.

posted by Jonathan Hall, Policy Economist at Google

Social Networks and Civics in the 21st Century

Friday, December 16, 2011

Ben Golant has taught law school classes in constitutional law, copyright law, and communications law, with a focus on new media, public policy, and social change. He currently is the Assistant General Counsel at the U.S. Copyright Office specializing in copyright licensing, television, and digital technologies. He is a former Senior Attorney at the FCC where he concentrated on content regulation and the First Amendment. Ben is a frequent contributor to Google+.
Since joining the Google+ community in July of this year, I have seen hundreds, if not thousands, of individuals expressing their concerns about the role government plays in their daily lives. Whether it is freedom of speech and the Occupy Wall Street movement, censorship of the Internet, or the Fourth Amendment and the use of GPS to track citizens, people have shown a genuine and heartfelt interest in the rule of law in modern society.

However real these sentiments may be, I have witnessed a fuzzy understanding of the Constitution, especially the Bill of Rights and the role of the three branches of the Federal government. For example, I have seen many complain that their First Amendment rights have been infringed when a website or online forum has removed a photograph or posting that violates a terms of service agreement. People honestly do not know that government action has to be involved in order for the First Amendment’s protections to be invoked.

This is not surprising. According to the First Amendment Center’s 2011 “State of the First Amendment” report, only 17% of those surveyed could name the “Freedom of the Press” as a right guaranteed by the First Amendment, and only 3% could identify the right to petition the government to address grievances. An astounding 30% of Americans could not list any of the rights guaranteed by the First Amendment!

Using my background as a Law professor, I have attempted to address the apparent knowledge deficit by being an active participant on Google+. Through various postings, I have tried to impart civic knowledge by providing links to law review articles (that are written in plain English, of course), and posting websites that show trends in law and society. I have gotten positive feedback regarding my efforts, which shows that people are thirsty to learn more about civics, and that social networks have become an influential factor in the daily lives of many citizens.

I realize that much more action has to be taken to further facilitate civics education and Constitutional knowledge in the 21st century. This requires a broad-based public education campaign that includes a concerted effort to teach everyone the basic precepts of the American form of government, ranging from the separation of powers, to the separation of Church and State, to Federalism, to the First Amendment, and beyond.

The big question is how to initiate a civics education campaign that will raise public awareness about personal freedoms to everyone, everywhere. This is where the power of social networks comes in; Google+, Facebook and others should be an integral part of the educational process involved in creating and spreading civic knowledge. They could help create a focal point and momentum for such a campaign. Such voluntary efforts would no doubt serve the public interest.

So, I call on everyone in the social network universe to join me in this campaign. It is a worthwhile investment in the future. As the saying goes, a little knowledge goes a long way.

Posted by Ben Golant

Everyone Already Pays their Fair Share

Wednesday, December 14, 2011

Six years ago, CEO Ed Whitacre declared that his company (then SBC, now AT&T) and cable operators had invested too heavily in the Internet’s infrastructure to let companies like Google, Yahoo! or Vonage “use the pipes for free.” His argument recently resurfaced in a report by A.T. Kearney, which claims that consumers don't pay enough for telephone, cable or other Internet service providers (ISPs) to continue building broadband infrastructure. The report also says that companies like Google should pay additional money to the ISPs in a “two-sided market.”

The truth is that no one is using the “pipes” for free. Most ISPs tell their investors that their contributions pay off and customers pay monthly fees for Internet access. Upon closer inspection of the data, we’ve drawn the following conclusions:

Consumers pay for Internet access because they want services like Google, YouTube, Netflix, and Yahoo! -- not because they are loyal to their ISP. 75 percent of consumers say they’re willing to pay for better service and higher data rates to improve the quality of streaming to their home.

Network operators are experiencing a downward pressure on prices -- a normal response in a market where unit costs are falling faster than consumption is growing. This demonstrates a successful competitive market rather than a failure, as A.T. Kearney claims. In addition, it validates researchers’ predictions that supply and demand for Internet access would grow at comparable rates and level prices -- thanks to Moore's law.

Companies like Skype that were once startups in a garage are now the driving force for consumers to purchase high-speed Internet. Broadband and mobile data providers made approximately €155 billion in Europe last year as a result of consumer demand for Internet-based content and applications.

A.T. Kearney’s proposal would result in European fixed network charges of approximately $1.5 billion for YouTube, which is, according to third parties, more than three times YouTube’s estimated global revenue of $450 million. Imagine the impact that this would have on new entrants (the next YouTube) which may not have the backing of a company like Google. It would effectively shut them out of the market.

To be clear, there’s something to be said for Whitacre’s sense of entitlement with fiber, copper and other miscellaneous attachments -- a sense of entitlement that I have felt, advocated for, and believed in. Prior to joining Google, I worked in telecommunications for almost 18 years, deploying infrastructure that makes the Internet work. The business is tough, expensive and heavily regulated because everything is installed on shared, public infrastructure. It takes a lot of people, machinery and coordination to get the networks built.

But there’s a line to be drawn. Regulators have done well to ensure that competitive providers have access to public resources like the Internet’s infrastructure, but we should be careful about asking them to dictate pricing structures for services that run over that infrastructure. Shouldn’t this be left to the consumers and the market?

posted by Patrick S. Ryan, Policy Counsel at Google

Protecting personal data through encryption is not enough

Monday, December 12, 2011

Everyone worries about companies losing their customers’ data. Consumers are upset when their private data is exposed, and rightly so. Firms fret about the potential legal consequences and costs of security breaches, which on average decrease their market capitalization by 2.1%. Policymakers feel they should do something to limit this market failure, but what?

One solution that looks like a one-size-fits-all easy fix is encrypting consumer data. In theory, encryption should be foolproof because it means data cannot be read without an encryption key. Many laws currently offer firms “carrots” to use encryption. For example, firms do not have to send out costly notifications to consumers about lost data if the lost data was encrypted.

My research (also found on SSRN) with Amalia Miller of the University of Virginia and RAND investigates how effective encryption regulation has been in reducing the risk of data breach. We focus on healthcare because there is data on encryption software adoption and publicized data breaches in that sector, and because medical data is especially personal.

Surprisingly, we find empirical evidence that when hospitals adopt encryption software, it does not reduce instances of publicized data loss. Instead, adopting encryption software makes publicized data losses more likely, particularly instances of data loss due to negligence or internal fraud. The result is a moral hazard: firms using encryption software are more careless about controlling internal access to encrypted data and their employees are more careless about computer equipment containing encrypted data. Losing a computer with encrypted data might matter a lot, especially since employees often keep the key with the encrypted data or lose the password, compromising the encryption.

We therefore recommend that encryption software is not the answer when it is the only security measure a firm takes. Instead, firms should use a broad set of practices, including training and awareness programs, manual procedures and controls, and strong identity and access-management deployments. The fact that encryption software adoption is associated with an increase in fraud may suggest that firms relying on encryption software often do not also deploy effective data access controls.

Our findings matter for policymakers because safe harbors for companies that encrypt their data are at the heart of the recently proposed federal bills governing the security of data. Encryption only works as well as the firm's ability to protect the password or key. By promoting this seemingly easy technological solution in isolation, while failing to promote additional human-based processes that complement encryption's effectiveness, giving a safe harbor to encrypted data may not have the intended effect.

posted by Catherine Tucker, Douglas Drane Career Development Professor in IT and Management and Associate Professor of Marketing at MIT Sloan School of Management

Crowdfunding: connecting investors with start-ups

Thursday, December 8, 2011

New businesses drive economic growth and job creation, but today entrepreneurs are facing a global capital crunch. By some estimates, only 2.3% of startups are able to receive private financing of any kind. That’s why policymakers ought to take a close look at a new investment model called “crowdfunding” -- and how they might fix laws that could hold it back.

Imagine you need money to start your business. Instead of raising lots of money from a few people, you can raise little bits of money from lots of people, the “crowd.” You can do this through a variety of web services, which enable you to instantly ask for funding from the billions of people online today.

Consider the following examples:

Kiva has helped entrepreneurs in developing nations raise $243 million in loans since 2005.
IndieGoGo has helped over 50,000 projects around the globe get funding -- from bakeries to baby blankets, 3D printers to grocery stores, t-shirts to iPad accessories. For example, banks turned down Emmy's Organics for a small business loan, but the founders were able to use IndieGoGo to raise $15,000 to start their bakery in Ithaca, New York and are now selling in 25 states. In aggregate, IndieGoGo projects raise millions of dollars every month.
Kickstarter has helped 13,000 projects raise one million funding pledges totaling over $100 million dollars. For instance, Steve Taylor raised more than $300,000 to adapt the best-selling book Blue Like Jazz into a feature length film.

So what does this have to do with public policy? Businesses that use these platforms generally distribute non-monetary rewards to investors, like special versions of an album or a band poster. But if they’d like to give the crowd of investors a financial return, like a stake in the company’s profits, that could be illegal.

For example, in the U.S., the Securities Act of 1933 places limits on soliciting investments from the public at large and on receiving funds from non accredited investors. And while crowd-investing platforms like Seedrs are developing in the U.K., legal barriers are also present in Europe as well.

These regulatory barriers were created with good intentions: preventing fraud and facilitating trust in the stock market at a time when it was difficult for a prospective investor to get information about a business. Back then, less than 5% of people invested tradable securities. Today, more than 50% of people invest in the public markets and information is relatively abundant. In the future, investment accreditation courses could be offered online, and Yelp-like platforms could help people determine what’s a good or bad investment.

As technology changes, policymakers are rightly asking whether laws need to be updated. In the U.S., there’s bipartisan support to change regulations in ways that would enable crowdfunding while protecting against fraud.

Crowdfunding legislation, if implemented well, could jumpstart a new model of job creation and investment. Countries looking for ways to attract foreign venture capital or unlock access to domestic capital could focus on empowering their nation’s inventors by connecting them with investors, wherever they may be. In turn, crowdfunding could be a critical piece of the economic recovery puzzle.
posted by Derek Slater, Policy Manager at Google

Why data matters for public policy

Tuesday, December 6, 2011

“The purpose of computing is insight, not numbers.” - Richard Hamming

As a computer scientist and engineer, I’ve always been fascinated by the process that determines how policies and institutions are created. Unlike computing systems, policymaking is anything but binary. An unpredictable combination of special interests, money, hot topics, loyalties and many other factors shape legislation that passes into law.

Now, more than ever, we need to use data to build sound policy frameworks that facilitate innovative breakthroughs. In order to inspire confidence in the future (and the markets), governments have to lead by using today’s facts to place big bets on—not against—a better tomorrow.

To get conversations rolling, Google’s public policy team will be sharing data insights here on this blog. We’ll also be inviting researchers, policymakers and thought leaders to contribute their interpretations of various data sets and what they mean for public policy. This forum will be open to ideas, and we welcome everyone to leave comments discussing their opinions.

Measurement and analysis provide the checks and balances we need to build a better future in the information age. When we don’t examine the numbers, policy is all too often created at the expense of the next generation. The Internet generates 2.6 jobs for every one lost, and today the world’s data is doubling every two years. We need to make sure that we sustain the laws that got us the open Internet we have today, and that sound policies are in place to keep this unparalleled engine of growth going.

Public discussions that are grounded in numbers reveal whether laws are effective and relevant or failing to protect citizens’ interests. We are all entitled to our own opinions, but we are not entitled to our own facts; the facts speak for themselves and it is folly to ignore them. With this blog, we hope to spark policy debates, foster discussions among policymakers and constituents and help citizens exercise their right to hold governments accountable.
posted by Vint Cerf, Internet architect and policy enthusiast