News aggregation and the rise of fake news

Image source: Wired

News publications and media outlets face a strange problem. More people consume news through social media than through media outlets. It is estimated that around 57% of the millennials in the US consume news daily through social media.

This is aided by news aggregators like Google News, Facebook etc. who pool in stories from different publishers and present a curated news feed based on your interests.

This is running into choppy waters now. Let’s see why!

Who is pocketing the profits?

Digital News publications make money through:

  • Subscriptions
  • Advertising

Digital news outlets incur a significant cost of maintaining a reporting and editorial team, but the benefit seems to be going to the news aggregators since people consume news within that platform.

So, shouldn’t digital news outlets be compensated for the loss in revenue?

This is what the Australian Competition and Consumer Commission suggested recently.

The flip argument

But Facebook doesn’t quite agree citing the following arguments:

  • It claims that it sends annual traffic of ~2Bn hits to the news outlets in Australia.
  • News is not a contributing factor to why a person spends time on Facebook.

Facebook and Google News now threaten to stop showing news on their feed in Australia, since they claim it increases their cost to do business while not giving them proportional benefit.

Underlying Economics

Let’s look at the underlying economics of the business from both sides.

Digital news outlets

They incur cost to bring out the story. However, the marginal cost to serve an additional consumer is almost zero. At the same time, every additional consumer brings in money to the firm (either through subscription or advertising revenue).

News aggregators

They enjoy positive externalities as a result of inclusion of news in their feed. If the news aggregator benefits from this externality, they are bound to pay the news outlet.

*Positive Externality: If the production or consumption of a product or service (news) benefits someone (aggregators) who is not directly involved in the transaction, then this third-party is said to enjoy positive externality.

However, news aggregators claim that there is no positive externality in this case. Facebook states that just 4% of an average user’s feed is news. Google does not monetize Google News and claims that it does not derive benefit from aggregating news.

It is to be seen if these tech platforms use the data of news consumption of a person as an input to classify them according to their spending habits since a person’s willingness to pay for a service is correlated with their interests. A person who seeks something based on his interest is 5x times more likely to pay for a service than others.

If the inclusion of ‘news’ provides additional data to the tech giants to improve their advertising platform, then it is a case of positive externality.

A controlled test can help to quantify the part worth utility of news as a feature and the positive externality accrued to the tech platform from its inclusion.

Let’s also consider what happens if news aggregators are mandated to pay a ‘snippet tax’ to the news publishers for using their content on the feed.

News aggregators will be driven to source content at lower rates and this might lead to the commoditization of news.

Also, there is a risk of market failure because at one price level, there will be only sub-standard fake news and at another price level, the news aggregator might decide against including news in the feature altogether.

Solution

The risk of market failure may be avoided by two measures:

  1. Putting the onus of weeding out fake news on the news aggregator.
  2. Fixing a level of price that is commensurate with the expected benefit that the news aggregator will derive from including the news on their platform.

This brings the question into focus: Should factually incorrect news sources be allowed a platform because denying a medium could go against Freedom of Expression? Does it also assume that the audience is not rational enough to differentiate between facts and opinions?

The answer lies in the way we view the world.

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