The Profits of Nonprofits: Unfair Competition in the Computer Software and Audiovisual Industries

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THE PROFITS OF NONPROFITS: UNFAIR COMPETITION IN THE COMPUTER SOFTWARE AND AUDIOVISUAL INDUSTRIES

At the 1986 White House Conference on Small Business, "unfair competition" by governmental and commercial nonprofit enterprises (CNEs) was judged to be the third most important concern of the small business sector. Because of special legislative privileges enjoyed by the commercial nonprofit sector, small firms are often at a decided disadvantage when nonprofits engage in commercial activities. CNEs provide many of the same goods and services as for-profits, but because they have nonprofit status, they pay no federal, state, and local income, property, and sales taxes; they recieve special treatment from the federal government regarding unemployment insurance, minimum wages, securities regulation, and antitrust; they have preferential bankruptcy and copyright laws; they enjoy exemptions from many governmental regulations; and they can mail at subsidized postal rates. CNEs are not regulated by the Federal Trade commission, even though they often operate businesses nearly identical to those which are. They also benefit from direct taxpayers subsidies-many government grants and contracts are specifically reserved for nonprofits.

This article covers some important economic issues regarding unfair competition in the computer software and audiovisual industries, two industries where unfair competition appears especially intense. The analysis shows why unfair competition is so critical for small firms: CNEs drive many for profits out of the market and deter others from entering. Since small firms are the major source of innovation and job creation in the U.S. economy, "unfair competition" has undesirable economic effects.

The audiovisual (AV) industry's major customers are schools, libraries, colleges and universities, businesses, and government agencies which use films to educate, communicate, and train. Little is known about the industry's structure and composition, except that it consists of a large number of geographically dispersed small companies. It has been estimated that 95 percent of firms in the AV industry had annual revenues under $5 million and total industry sales were between $300 and $400 million in 1981.(1)

The microcomputer has had a major impact on instructional techniques in the last decade. Development, promotion, distribution, and sales of software for instructional use is a rapidly growing field serving the same customer base as the AV industry. In many cases, software firms are small operations which develop programs for specific applications, e.g., class scheduling or accounting systems for schools. An important characteristic which the AV and microcomputer software industries share is that both experience intense competition from the commercial nonprofit sector, particularly from tax-exempt educational institutions and government agencies.

A case can be made that the initial entry of educational institutions into the media market was unplanned and purely a matter of chance. Consider, for example, the founding of the Instructional Media Center (IMC) at Michigan State University which rents and sells AV instructional materials in direct competition with private firms.(2) From modest beginnings, the IMC at Michigan State quickly expanded into a commercial operation.

Higher education did not face budget exigencies in the late 1960s and early 1970s, so the marketing activities of IMC at MSU might be viewed as an effort to provide a service to the academic community on a self-supporting basis. IMC's commercial activity was (1)Senate Committee on Small Business, Governmental Competition with Small Business, 1981 Hearings before the Subcommittee on Advocacy and the Future of Small Business, 97th Cong., 1st Sess., 1981, p. 128. (2)Betty Decter, "Marketing Your Own Instructional Materials," Instructional Innovator (February 1982), p. 10. limited by an explicit restriction stating that only educational materials developed "in house" by MSU faculty could be sold. …