A potential path forward between big tech and the news industry

A deep dive on why the biggest regulation attempt to date has backfired and why a Senator in California might have the solution

I wanted to take on a slightly different topic today.

Instead of transparency, I wanted to talk about some of the latest policy approaches to supporting the news industry in California and a potential path forward that could change everything.

And some quick context on my background since this is a bit off my normal beat. Through my work at CrowdTangle, I spent almost 10 years with a front-row seat to watching as hundreds of news outlets try to navigate the transition to the digital era (in fact, our single biggest cohort of partners was local news). On top of that, at Meta, the team we worked the closest with was the Facebook Journalism Project, which partnered with hundreds of new outlets around the world. I’ve also personally invested in and advised a handful of local news start-ups.

TL;DR

We know that the news industry is in a crisis, and it’s possible that big tech can play a meaningful role in supporting news going forward. But it’s clear at this point that the regulatory model pioneered in Australia isn’t the answer and is actually making things worse.

However, the good news is that there are a lot of policy alternatives out there, and in fact, a bill was recently introduced in California that could be a game-changer.

Ok, let’s dig in.

When it comes to news, we’re in the middle of a real crisis.

Let’s start with some very quick history.

As has been covered many times by much better writers and researchers, the internet fundamentally broke the traditional business model of the news industry. Like many industries built on top of monopolies, the industry was very slow to respond (especially local news outlets). I won’t rehash all the data, but if you think having an informed citizenry is important to democracy, the numbers should keep you up at night.

There are some promising signs of a new future for the industry. In September of last year, a group of philanthropists led by the MacArthur Foundation in the U.S. announced a new fund of $500 million over the course of five years to support local news. Entrepreneurs and journalists are also making increasingly promising attempts to build new, internet-native outlets (it certainly helps when they don’t have to make venture capital-esque returns).

But we still have a long way to go and that’s why, in the mid-2010’s, some people began to look towards potential government interventions to shore up the news industry.

The news industry turned to the government for help, but the first generation of regulatory approaches were based on a fundamentally flawed idea.

I want to focus on the most recent and influential attempt at a regulatory solution between news & big tech, which was Australia’s '“News Bargaining Code” in 2021. The code itself was modeled after Germany’s Leistungsschutzrecht law in 2012, which had spawned a series of copycat bills across Europe largely focused on Google’s use of links. You can read a full history of a lot of these efforts in Jeff Jarvis’s history of the space.

While the goal of the Australian legislation was a laudable and important one, the underlying logic of the model seemed fundamentally flawed to a lot of observers (including me). At worst, though, the Australian campaign didn’t have any noble aspirations at all but instead, was just a cynical campaign by Rupert Murdoch to shakedown his two biggest advertising rivals after years of seeing them eat away at his business empire and doing it all under the veneer of saving journalism (a campaign that had precedents in earlier copyright fights in Europe and that some private equity firms would eventually pick up and run with in the U.S. as well).

After a rocky launch, though, the truth is that the legislation seemed to be working.

By December of 2022, Google and Meta had formalized deals with dozens of publishers and, in the process, put tens of millions of dollars into the Australian news industry, much of which was going directly to hiring journalists and even small publishers (at least according to an analysis by the Australian Treasury).

It appeared so successful, in fact, that other countries, including Canada, California, New Zealand, and even the U.S. Congress, began to express interest in following Australia's example.

But the cracks in the model eventually started to show, and in the three years since it passed, the impact of the regulation has almost entirely backfired.

Let’s start with Meta and how it impacted them.

Once it was clear that the Australian model might proliferate around the world, the underlying math of being in the news business immediately stopped making sense for Meta (something Kali Hays documents in this piece for Business Insider). There was just no way news was worth billions of dollars of payouts to publishers a year. As much as publishers didn’t want to believe it, news was simply wasn’t that important to Meta. And the truth is that, behind the scenes, Meta was already considering getting out of news for a host of other reasons.

When Canada eventually passed their own version of the Australia bill in 2023, Meta began blocking all outbound links to news publishers and never looked back. Moreover, Meta made it clear that they would do the same thing Australia once the current deals are done, as well as in Illinois, California, and it’s safe to assume, anywhere else that uses the same model.

While it wasn’t working with Meta, the Australian approach seemed to work as a mechanism to force Google to the negotiating table…but I think those days might be over.

In 2021, Google threatened to walk away from news while the Australia deal was being finalized, before eventually coming to an agreement. They did the same thing in Canada before eventually agreeing to a negotiated settlement that resulted in $73 million (USD) being set aside to go to publishers.

In response to California’s AB 886, they’re making the same threat once again.

But I think things are different this time.

The world has changed a lot in the last three years and even in just the last six months and I think we should take their threat a lot more seriously.

First, Google is under a historic legal threat over anti-trust issues around their ad offerings. Second, thanks to generative AI, they are facing the prospect of serious competition for search for the first time ever.

Third and most importantly, though, is what they announced on Tuesday, May 14th at their I/O Conference.

Instead of returning their famous blue links, Google is increasingly going to summarize multiple websites with AI-powered “narrative overviews” when users look up information. It’s the most dramatic redesign of their basic search business in their history and among other things, it means links are going to be far less important.

And people are noticing.

Platformer’s Casey Newton lays out all the reasons it’s such a fundamental change to Google, their relationship to publishers and the underlying structure of the internet. Gerrit De Vynck and Cat Zakrzewski of the Washington Post write why it could be devastating to the news industry. And there are lots of others.

But the announcement matters for this discussion because it would mean that Google would be in a position to easily follow through on its threats to block links.

In fact, it might be simpler than that…there might not be any links to block.

Unfortunately, there are real consequences to Google and Meta getting out of news in a rushed manner…ones that are bad for the news industry and bad for an informed public.

In Canada, the cost of Meta abruptly leaving became increasingly clear to the Canadian publishing industry relatively quickly, including making it harder to get important information out to the public during times of crises, including when there were out of control wildfires, as well as simply dramatically reducing organic traffic to small publishers overnight.

As the founder of Village Media put it, “Keep your damn money and give us the Facebook traffic back.” (h/t to Jeff Jarvis for the quote). Or Rene J. Roy of Wreckhouse Press, who put it even more bluntly in an interview with Voice of America, “The Canadian government has done more damage to Canadian media than they were hoping to. I think they destroyed small media.”

In my own experiences, I found something similar. I visited Montreal in November of 2023 and talked to some of the largest publishers in the country, and even they all seemed to regret their support of the bill.

While we desperately need a news industry that isn’t overly dependent on big tech (or any other company) but we also need to manage that transition responsibly.

Canadian regulators, seeing the impact of the initial legislation, eventually went back to the drawing board and passed several other bills designed to tackle the problem from different angles and to much more success (more on this later).

(Also, for more on the overall impact of Meta leaving news in Canada, this is a great piece in Nieman Lab which is a preview of a more in-depth report coming out later this summer from two universities in Canada that I’m looking forward to reading).

And that brings us to California.

In March of last year, the California Journalism Competition and Preservation Act (AB 886) was introduced in California, and it was largely modeled after Australia’s approach.

The bill would require platforms to pay news publishers a “journalism usage fee”; in other words, when platforms run ads next to links to news content. Not surprisingly, Meta is taking the exact same approach that they did in Canada: they are saying that they will simply block news if this AB 886 is passed. Google is threatening something similar while facing a business & regulatory landscape that is dramatically different than 3 years ago or even 6 months ago.

AB 886 is currently making its way through the California legislature and has the support of a lot of large publishers, but as far as I can tell, it is generating a lot of anxiety among smaller, ethnic, and niche media outlets (ones who have all watched what happened in Canada and are also much less organized than larger publishers in the state). In fact, a decent number of small outlets publicly signed onto a letter opposing the bill at this point.

At this point, I think passing AB 886 as it’s currently written would be a huge blow to the news industry in California.

I think even the staunchest supporters of a usage-based model for compensating publishers would have to admit that the approach is (1) incredibly risky and (2) has a smaller & smaller upside. In fact, I think it’s actually probably even a bit worse than that: passing additional versions of it would likely be a net negative for the news industry. And maybe a big one.

If Meta and Google both follow-through on their threats, the likely real-world outcome of passing the bill would be:

• If there are no links anymore, there will be no compensation tied to them. That means zero new dollars to new publishers.

• If there are no links, that means a dramatic reduction in social and search traffic that publishers currently get.

• Without any focus on news, Google and Meta will likely sunset their news partnerships programs. In fact, Meta’s already done this and Google could do the same thing. But those programs funneled real money and real support to local news.

• Finally, as a lot of integrity engineers will attest, low-quality content is likely to replace a lot of the space that the links to high-quality news outlets took up.

In other words, if your goal is to create a long-term, sustainable path to funding journalism, it would be a disaster…and not just for publishers but for an informed citizenry in California. And that’s all in the middle of an historic election year.

The good news is that there are other regulatory approaches out there and that’s where we should start focusing.

The good news is that since the Australian model was first introduced, there has been a lot of promising experimentation with other ways to approach this problem.

Jeff Jarvis does a great job laying out all the alternatives in his comprehensive piece, including direct funding through fellowships, public notice advertising, and the use of tax credits (for both supply and demand side interventions). Issie Lapowsky and Jason White also authored a great report looking at the lessons learned from Canada’s use of tax credits, which you can read here and I highly recommend.

In fact, New York recently passed $30m worth of tax credits for news outlets, prompting the head of the local NewsGuild to call the legislation “historic” and “monumental.”

But the most exciting regulatory approach was introduced several weeks ago in my home state of California, and I think it represents a potential sea change in the entire debate.

But there’s one approach that could change everything, and it was just introduced in California.

On May 1st, California State Senator Steve Glazer of the 7th Senate District introduced SB 1327.

It’s a simple bill designed to help revive local journalism. Instead of complicated usage-based mechanisms, this approach is very straightforward. It’s an online advertising tax that funds tax credits to support education and journalism. In this case, it’s a 7.25% ad tax (matching the state’s sales and use tax rate) on companies with more than $2.5 billion in revenue.

And here’s the rub: it would raise more than **$500 million**.

That’s every year.

To put it in context, the single largest philanthropic commitment to local news in the U.S. was the MacArthur announcement I mentioned in the first of this post. That funding represents $100 million a year and is spread across the entire country. This would be 5x that number, would grow over time, has no end date, and is just for California. Of course, as I understand it, some of this money would have to go to the general fund and be directed towards education in the state…that’s also a great use of the funds and there would still an enormous amount left for news (we’ll know more on these exact numbers as more official analysis is completed).

But that is a staggering amount of money and a game-changing amount of potential funding for news in the state. And it’s something that could easily replicated across the country.

On top of that though, there are a lot of things to like about the approach and ways in which it learned from the mistakes of the Australian & Canadian models, including:

• Unlike AB 886, none of that money would depend on the platforms' strategic or business decisions. In fact, the only thing it would be tied to is their underlying success. If they continue to grow, so does their contribution to the state.

• It covers a wider array of companies, including new entrants in the space.

• In fact, if you think we need a news industry that is much less dependent on a few large platforms (which I do), this is a solution that works just as effectively even if Meta and Google continue to reduce the visibility of links (and would allow for a more gradual transition).

• It is largely build on top of allocating the funds through jobs-based tax credits. We have a lot of early evidence that jobs-based credits are one of the most effective form of credits (see the Lapowsky/White report) and moreover, in Google’s negotiated deal in Canada, they ended up with jobs-based tax credit as well (which means they theoretically would support them elsewhere).

• Unlike the Australian model, this policy model also has a lot of precedent. At both the federal and state levels, we have passed taxes on business models that have some sort of externalities associated with them. Even if you wanted to argue that Facebook and Google are net good for the world, there’s no debate that there are some externalities. This is a time-tested policy approach to helping pay for them.

• Finally, the idea of a digital ad tax is also gaining momentum across the U.S. and the rest of the world. Similar digital advertising taxes have been proposed in Montana, Kansas, Connecticut, Tennessee, West Virginia and more. Maryland has actually passed one. In fact, there’s even a second proposal in California to fund youth mental health services (AB 2829).

Ok, so what are the arguments against the bill?

You can see a good legislative analysis of the bill here, including some of the arguments against the bill, but from what I’ve read, there are three that stood out to me: (1) it’s unconstitutional, (2) platforms will simply pass the cost of the tax onto their advertisers and eventually all the way down to consumers, and (3) some objections from Jeff Jarvis, including a larger philosophical one.

Let’s dig into them.

On the constitutional side, the only place where a digital-only ad tax has been tried so far is in Maryland, and their attempt is being challenged on a number of grounds. But at the moment, it is in effect. I’m not a constitutional lawyer, so I’ll let smarter and more knowledgeable people than me weigh in, but based on what I’ve read & the conversations I’ve had with people who are experts, I keep hearing that the Maryland bill wasn’t written very well and there are some easy ways to avoid some of the issues they ran into (even critics concede it could be written in ways that avoided their complaints).

Lastly and perhaps most importantly, New Mexico also passed one (they added digital ads to an existing advertising tax) and it isn’t currently being challenged.

For the second point, it also doesn’t strike me as a deal-breaker for a variety of reasons, including:

• The largest online advertising platforms on the internet have very high margins (50%+) and could easily absorb a single-digit tax. Passing along those costs would be a decision, not a necessity. And in fact, we’ve seen examples where they chose not to pass along similar fees.

• There are over a dozen countries where similar fees have been in place without major disruptions to small businesses.

• Several of these platforms charge their own fees they charge small businesses that are significantly higher (see Apple’s 30% app store fee).

• If the fee is too large, there’s also room to potentially create a more tiered system or simply have a lower rate.

If the bill picks up momentum, I’ll be eager to get into more of the substance of these issues and see if they are convincing or not but at the moment, I don’t find them compelling and they certainly don’t seem to justify the Chamber of Commerce’s claim that it would be “devastating to small businesses”.

Lastly, Jeff Jarvis, who I reference several times in this piece and have a lot of respect for, came out very strongly against SB 1327. You can read all his arguments here and they’re all worth taking seriously. I think he makes some important points, especially leveraging civil society collaborations to play a role in the distribution of funds (in fact, California already did a version of this through a partnership with the University of Berkeley), but I’d make two points.

First, there is a free-lancer credit in the bill. I think that’s exactly why the bill has support from independent, local news outlets. This is a letter of over 25 small groups expressing support, as well as this op-ed from the Jewish News of Northern California. Anecdotally, I’ve also heard the same thing from the small publishers I’ve talked to.

But I couldn’t agree with the underlying concern more. Any regulatory approach in this space absolutely has to avoid being captured by large, institutional players in the space. Most of these entities are not helping. You can also see some of the best practices in how to structure the tax credits to favor small newsrooms in the Lapowsky & White report from above.

Second, I disagree with the underlying philosophical argument that it’s a bad model writ large.

Yes, ads are technically collecting information but there are harmful uses of data. Alcohol advertising is regulated because while you could technically call it a form of knowledge sharing, we know there are some externalities associated with alcohol consumption.

The same is true for enormous UGC platforms with advertising-based business models. They have some built-in harms that come with them. That’s not a sensational claim. Platform executives themselves regularly acknowledge that their systems can be used for good and bad, and that’s why they invest in trust & safety teams, build out social good programs, and (occasionally) invest in transparency.

In fact, the whole point is that they will have some negative impact no matter how responsibly they’re managed. They’re too big not to. That’s why taxing them to help support some of those externalities seems perfectly reasonable to me.

That being said, I think he’s right that the more intellectually consistent way to do it (and what seems like the more constitutional way) is to simply make the regulation cover all ads. Which is exactly what New Mexico did.

If there are other arguments that I’m missing or any of the analysis above is wrong, I’d love to hear from folks.

So, what’s next?

That leaves us with the following state of play.

If AB 886 moves forward as its currently written, I think it would be a huge blow to the news industry and to residents of California. And it might happen during a historic election year.

On the other hand, 1327 could potentially generate hundreds of millions for publishers using a policy approach that has been used in other industries and builds on top of the learnings we’ve had over the last three years in the space.

I don’t know enough about California politics to predict what’s going to happen, but I’ll be closely watching over the next two weeks. If SB 1327, and maybe even some amended version of AB 886 were to become law, it also seems extremely realistic to imagine similar pieces of legislation being copied and passed in every state in the country.

That could very well represent a generational moment in the fight to rebuild a long-term, sustainable news industry here in the United States.