Internet parasites

Remember the Little Red Hen? She’s the one in the folk tale who asks the other barnyard animals if they will help her cut the wheat, grind it into flour and bake the bread. They refuse. But when the warm bread emerges from the oven, they are eager to help the hen eat it.

Now let’s suppose the story continues, with the Little Red Hen opening a roadside stand to sell her bread. Instead of merely eating it themselves, the cow, the pig and the dog each take some of her loaves and open competing roadside stands. Vying for sales, they undercut her price and each others’. Because the Little Red Hen bore all the costs to produce the bread, and the other animals bore none, she can’t afford to match their prices, and they drive her out of business.

Current law compels one business in the U.S. to play the role of the Little Red Hen -- the daily news business. Unexpected side effects of the federal copyright law have combined with the unique qualities of the Internet and inevitable laws of economics to threaten the survival of any firm that originates daily written news reports online.

San Francisco’s only daily newspaper has the largest circulation on the West Coast after the Los Angeles Times, and the 12th-largest readership in the nation. Three years ago, its online edition was fifth among newspaper websites with more than 5 million unique visitors each month. Yet the Chronicle, after 144 years of publishing, almost closed a few months ago because it was losing enormous sums.

Other long-standing daily newspapers, like this one, have sought bankruptcy protection. Some have closed, and most have had to lay off scores of journalists. When newspapers shrink, readers leave, and when readers leave, so do advertisers.

Bloggers and “new media” publishers say newspapers don’t know how to adapt. Yet today’s newspapers have been adapting for more than 100 years, surviving the Depression, shortages during two world wars and cutthroat rivalries with crosstown papers. They’ve held their own against new technologies as they came along, including radio and broadcast and cable television.

Today, newspaper websites attract millions of readers, so why can’t newspapers successfully compete online? After all, they still originate most of the nation’s news. Part of the reason is that online ad rates don’t begin to match print ad rates.

Why? A big reason is what economists call free-riding. Practically anyone can start a website and get software that snags fresh online news from those who originate it. Website owners pluck the freshest, most interesting reports and quickly post condensed rewrites. That costs them little, and they then surround the rewrites with cut-rate ads.

When readers get to work in the morning, they can read fresh news on the newspaper’s site or equally fresh rewrites on competitors’ sites. The free-riders may link to the newspaper’s report, but why click on the link to read the same story twice?

Take Newser.com, an “aggregator” of others’ news reports. It boasts on its site: “We choose the most important stories from hundreds of U.S. and international sources and reduce them to a headline, picture and two paragraphs. And we do it 24/7 -- you can come back morning, noon, night (and in between) for something new that matters.”

Competing with each other and newspapers for advertising, free-riders enter the market undercutting each others’ ad rates until many of them can still profit, but newspapers, which bear the hefty labor costs of gathering the news, can’t.

Usually we all benefit when more efficient competitors enter the market and drive inefficient competitors out of business. But the Internet has not made “new media” publishers more efficient at gathering news than their print counterparts. It has made them more efficient at taking news from their print counterparts and using it to compete while the news is fresh.

Broadcasters have rewritten newspaper reports for decades, but they weren’t direct substitutes for newspapers.

Copyright isn’t much help. The Constitution limits copyright to authors’ original ways of expressing ideas, a good fit for fiction and clever prose. But facts don’t originate in authors’ minds, so copyright can’t cover facts. Because facts dominate daily news reports, parasitic free-riders don’t risk much by trading on others’ news reports.

Copyright limits wouldn’t be a problem if the copyright law hadn’t abolished publishers’ rights that once existed outside of copyright. In 1918, the Supreme Court decided that the International News Service, a smaller rival of the Associated Press, could not compete against AP by rewriting AP’s coverage of World War I.

The INS found AP stories in the early editions of New York newspapers, rewrote them and telegraphed the rewrites to California papers. The rewrites reached the West Coast at about the same time AP’s stories did, so the smaller rival was competing against AP with the wire service’s own stories. AP got an order barring the INS from rewriting AP’s stories, but only during the peak of the stories’ commercial value. For daily news, that’s about a day.

Because copyright didn’t protect the facts that AP reported, AP won based on common-law unfair competition. Common law comes from appellate court rulings in lawsuits.

In 1976, Congress amended the copyright law to abolish all laws that function like copyright. Initially, Congress was going to make an exception for the ruling of the AP case, allowing it to remain alive. But the Justice Department objected, misreading the case as granting property rights in facts. Congress dropped the exception.

The prevailing view is that copyright law allows newspapers’ online competitors to do to newspapers what the INS did to AP. The effect is to compel all originators of daily news to subsidize online competitors with free news-gathering services, the heaviest cost of online news.

If the law continues to allow such free-riding, firms that discover and supply America’s news can’t survive. Innovating won’t save them because online competitors can free-ride on that too.

Congress must lift its apparent ban on unfair competition rights in the news business -- not for lawsuits but for bargaining power.

It would take only one sentence much like this: “The copyright act does not abolish statutory or common-law unfair competition or unjust enrichment, regardless of whether the contested publication infringes copyright.”