Paid news and the economics of the news industry10 min read . Updated: 04 Jun 2016, 11:41 PM IST
Competition in the media business may lower rather than raise the quality of news
Almost every recent election in India has featured allegations of paid news, and the latest round of assembly polls was no exception. Paid news, which refers to the practice of passing off paid-for advertorial content as news items, is perhaps the most evident way in which media houses can distort the working of a democracy, but there are several other ways in which they can tilt and slant public discourse in a country.
While there has been a lot of discussion on paid news and the role of vested interests in recent years, including a parliamentary standing committee report on the subject, there is as yet no consensus on how to deal with the problem.
Will the forces of competition suffice to weed out biases and corruption in the news industry over the long run? It may be instructive to look at lessons from economics and history to answer this question.
The history of paid news is nearly as old as news itself. In the 19th century, newspapers in the US used to publish “reading notices", which were advertisements presented as news. Barring a few upright owners and editors, most newspapers were happy to run marketing campaigns disguised as news articles. One of the newspapers endorsed these “reading notices", making a case that the targeted audience for a reading notice “is insidious, attractive and interesting. Appearing as it does in a semi-news way, it will be read and thoroughly considered, because it carries the endorsement of the medium in which it is published".
The growth in actual advertisements and the rise of a new kind of rule-based journalism in the US eventually put an end to this practice. But the recent decline in ad revenues has led many media houses to reconsider the idea of reading notices, fashionably rebranded as “native advertising".
Native advertising is very much the reading notices of the 21st century—ads are presented in a way that readers assume that they are part of the actual content. Such content, which British humourist John Oliver called “repurposed bovine waste", is a classic case of a market for lemons; readers cannot distinguish between actual news and the ad.
Microeconomic theory suggests that the media is not a typical (i.e., demand-and-supply-driven) market. Newspapers, news channels and online portals get revenue in two ways: they make money from consumers, and they also provide advertising space to interested firms.
In case revenues from readership are minimal, advertising revenues become very important. A large and diversified pool of advertisers may create incentives for a media organization to zealously protect its brand value and credibility, but if the market for advertisements is narrow, it may well lead to unethical practices and capture by special interests.
In a 2008 research paper on this subject, Luis Zingales of the University of Chicago and others argue that a well-functioning media can actually prevent regulatory capture. Zingales points out that it is “too expensive for voters to become informed on the relevant issues given the infinitesimal payoff to the individual voter for doing so".
“Media, however, reduce this cost in two ways," he and his co-authors wrote. “First, by collecting, verifying and summarizing the facts, they eliminate the collective action problem associated with gathering information that is socially beneficial. Second, by repackaging information in a way that makes it entertaining, media overcome even the private cost that individuals face in processing the gathered information. Even if it is not in each individual’s monetary interest to become informed, the utility benefit provided by the entertainment component can overcome the cost of the time spent in absorbing the information."
Pointing to the role of the media in early 20th-century America, Zingales and his co-authors argued that the muck-racking press of that era had a key role to play in the approval of progressive-era legislation and in helping bring an end to the gilded age of capitalism in that country. They argued that if the media is focused purely on making profits, they can act as effective watchdogs preventing the government to cater to special interests.
However, they add two important caveats to their findings.
First, that in countries with low media penetration (owing to barriers such as poverty), the interests of the rich and the affluent may get reinforced rather than challenged by media narratives as there won’t be any incentive to attract the marginal reader or viewer. This suggests that the more unequal a country, more likely it is that media narratives will be skewed.
Second, this relationship is entirely contingent upon the ownership structure of the media and the composition of advertising revenues. When a handful of media groups exist with strong political leanings, owners’ political interests take precedence over readership-based profit maximization.
Similarly, whenever the advertising set is limited, “the power of each media outlet to resist the pressure of politically interested advertisers is limited. A more concentrated set of advertisers may thus lead to a less inquisitive press and, hence, to political decision-making that is more responsive to private interests."
Zingales’s colleague Matthew Gentzkow also came up with similar findings in a series of research papers on the economics and biases of the mainstream media for which he was awarded the Clark medal in 2014. The Clark medal for under-40 economists is considered the second most prestigious award after the Nobel Prize in the economics profession.
Gentzkow’s work, which was featured in an earlier Economics Express column (“The political economy of the mainstream media"), showed that bias can persist when the management of a media outlet has a proclivity towards gaining political mileage instead of being driven by simple profit-making motives.
A new paper by Zingales shows that even if media houses are driven by profit motives, they may fall prey to capture by powerful interest groups such as banks when the entire industry is reeling under losses, or is burdened with a huge pile of debt. He tested his theory on the Italian news industry, which has been suffering losses and acquiring debt for several years now, and shows that the media coverage of financial issues seems to be heavily influenced by Italian banks.
Zingales examines the response of the media to two major events.
The first took place in January 2015 when the Italian government directed large cooperative banks (Banche Popolari) to become stock companies, which led to violent protests from the management of these banks.
The second one occurred in April 2016, when the government proposed the creation of a bailout initiative called Atlante to rescue the struggling banking industry by buying shares and non-performing loans. The government and the central bank coaxed other financial institutions, including insurance firms, to invest in Atlante.
As Zingales put it, “in part, it was regulatory arbitrage... and in part, it was a transfer of the banks’ losses onto the portfolio of pensioners and retirees". The major banks supported the initiative enthusiastically. Newspapers, on average, supported the latter initiative strongly and vehemently opposed the Popolari decree, Zingales found. The more indebted a newspaper, the more aligned was its opinion with that of the banks.
When there are no big oligarchic interests financing the media, it is often the government that provides the bulk of revenues to media houses through government ads. This too can have disastrous consequences for a democracy.
Rafael Di Tella of the Harvard Business School and Ignacio Franceschelli of Northwestern University studied the coverage of political scandals in four major newspapers of Argentina during 1998-2007. They found a negative correlation between the quantity of front-page coverage of scandals and the amount of advertisement money that came from the government.
Surely greater competition in the news industry can be a corrective, you might think. But there is really no a priori reason to expect that, Harvard University economists Sendhil Mullainathan and Andrei Shleifer pointed out in a fascinating yet disturbing 2005 AER paper.
Greater competition compels media houses to cater to the prejudices of the readers, they showed using a theoretical model. Media consumers prefer news and opinions that align most closely to their prior views. Therefore, the duo contended that the news market will have an incentive to present news confirming partisan beliefs.
In a 2014 paper, Julia Cagé, an economist at Sciences Po in Paris, investigated the effect of new entrants in the French newspaper market on the provision of information and found that political participation was lower in regions where competition was more intense.
Cagé argued that the entry of a newspaper into a market may have a negative impact on incumbent newspapers if there is “business stealing", that is, “the total circulation of the entrant exceeds the increase in the news market total circulation". This then leads to lower average revenues across the industry, leading to staff cutbacks affecting the collection of hard news and investigative reportage.
Cagé documents that an increase in the number of newspapers was indeed followed by a fall in the proportion of “hard news" and a rise in the proportion of “soft news" in the French counties she studied.
In his famous book Irrational Exuberance published in 2000 at the height of the dot-com bubble (which burst just after the book warned of the gross overvaluation in the market), Nobel Prize-winning economist Robert Shiller painted a grim portrait of typical market reporting in the media, which many readers might find accurate even today.
“There is no shortage of media accounts that try to answer our questions about the market today, but there is a shortage within these accounts of relevant facts or considered interpretations of them," wrote Shiller.
“Many news stories in fact seem to have been written under a deadline to produce something—anything—to go along with the numbers from the market. The typical such story, after noting the remarkable bull market, focuses on very short-run statistics. It generally states which groups of stocks have risen more than others in recent months. Although these stocks are described as leaders, there is no good reason to think that their performance has caused the bull market.
“The news story may talk about the ‘usual’ factors behind economic growth, such as the Internet boom, in glowing terms and with at least a hint of patriotic congratulation to our powerful economic engine. The article then finishes with quotes from a few well-chosen ‘celebrity’ sources, offering their outlook for the future. Sometimes the article is so completely devoid of genuine thought about the reasons for the bull market and the context for considering its outlook that it is hard to believe that the writer was other than cynical in his or her approach."
Shiller argued that the media often tended to play a pro-cyclical role in fuelling booms and busts, exacerbating both bubbles and panic attacks. A similar point was made recently in an article by Oxford economist Simon Wren-Lewis, in which he castigated the British media for encouraging the government to pursue austerity even when the mainstream consensus had veered away from such a view.
The great French novelist Honore de Balzac’s story La Peau de chagrin is about a magical piece of hide. Whoever gets possession of this hide will have all her wishes fulfilled. However, she has to pay a price: “Your life will belong to me." In her book Saving the Media: Capitalism, Crowdfunding, and Democracy, Cagé draws an analogy between the magical hide in La Peau de chagrin and the public listing of media houses in the US in the 1960s. Going public led to an initial rise in profits. However, with stagnant circulations, dependence on ads grew, skewing the priorities of media houses.
The last word on this belongs to Shiller.
“Should the media be faulted for presenting debates on topics of little merit?" asked Shiller. “One can argue that they ought to focus on a variety of topics of interest to general audiences, so that the public can refine their views. Yet in doing so, the media seem often to disseminate and reinforce ideas that are not supported by real evidence. If news directors followed only their highest intellectual interests in judging which views to present, the public might indeed find its consciousness constructively broadened. But that is apparently not how the media see their mission—nor do competitive pressures encourage them to rethink the matter."
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