Nothing beats a platform monopoly

Since the birth of broadband, net neutrality’s cheerleaders have feared that service providers might begin to act as the internet’s “gatekeepers,” …The real distortions come from massive “platform monopolies” like Google, Facebook and Amazon, whose proprietary algorithms decide what users see online.

The supposed purpose of “net neutrality” is to stop any internet company from getting a leg up over others. But that’s exactly what happens when Google’s search results prioritize its own services—and profits—over competitors’. …If Google’s favoring its own products while pushing potential competitors down its rankings doesn’t create “fast” and “slow” lanes, what on earth does?

Similarly, avowed net-neutrality supporter Amazon was granted a patent in May for “Physical Store Online Shopping Control,” a system to block shoppers in brick-and-mortar stores from using Wi-Fi to view competitors’ prices. Isn’t “no blocking” the heart of net neutrality? Facebook, meanwhile, has virtually abandoned chronology in its News Feed in favor of picking and choosing what users see—and what they don’t—based on what the company has learned about them.

The costs of such abuses from the platform monopolies are obvious and many. Newspapers have nearly been “prioritized” out of existence by Google’s shameless appropriation of their work: Why click through and read a whole article when Google News will pluck out the most important bits and show them to you free—alongside its own ads, of course. … Last year, the FCC chairman tried and failed to force TV companies to make their feeds available on set-top devices made by—wait for it—Google, Apple and Amazon.

The internet giants behind the Day of Action can now track users’ physical location 24 hours a day, learning where they live and work, by logging where their phones are at different times of day or the Wi-Fi networks they pass. If two phones sit side by side overnight, advertisers knows what that means—and appropriately “targeted” pitches are sure to follow.

From Ev Ehrlich, “‘Neutrality’ for Thee, but Not for Google, Facebook and Amazon,” Wall Street Journal, July 21, 2017.

Internet revisionism

At a campaign stop last week in Virginia, the president said

The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

He also made some other controversial remarks on the role of government in a capitalist economy, but I just want to fact check these two sentences.

Yes, nothing "gets invented on its own." It takes people to do that, whether individuals or quasi-permanent groupings working in an organization who (under US law) are people too (and have been since Roman days). And it’s also true that a complex systems architecture — of which the Internet is the most complex — requires coordination of the distributed efforts of a large number of people.

But who did the inventing? To me, “government research” implies “government researchers” when it was actually university and corporate researchers. Yes, much of this research was government-funded research, including most of the research in the 1960s and 1970s.

The definitive first-hand account of the creation of the Internet was published in 1997 in the leading US computing journal. It said

• An MIT professor, J. C. R. Licklider, conceived of a "galactic network” in 1962 [although other accounts say he was then a vice president of BBN, an MIT spinoff company]. He then went to ARPA, the DoD’s advanced research funding agency
• An MIT graduate student, Len Kleinrock, wrote a paper about packet switching in 1961
• An MIT [Lincoln Labs] researcher, Lawrence Roberts, set up the wide area network (over a dialup line) in 1965 and then in 1966 went to ARPA and proposed the ARPANET. [Wikipedia says in 1971 he went on to found Telnet in 1971, a packet switching common carrier].
• The switches that made the ARPANET possible were built by BBN, and Kleinrock (then at UCLA) got the first one in 1969.
• The Network Working Group [a small group of university and nonprofit software engineers] developed a spec for the first host-to-host communication standard in 1970
• In 1972, Ray Tomlinson of BBN wrote the first e-mail program.
• (D)ARPA funded a spec for TCP, which was implemented by Berkeley in Unix
• Connecting more than one machine at a given site was made possible by Ethernet, invented by Xerox PARC [and then sold as hardware by companies like 3Com.]
• The domain name system was created at USC.
• In 1985, the NSF created a second network, NSFNET, which would serve universities, not just the DoD and DoD contractors — and then defunded it in 1995, forcing it find its own way to self-finance.
• Leadership of the Internet passed to self-organizing [formal or informal] nonprofit entities, including the Internet Engineering Task Force, the Internet Society, the Internet Architecture Board, the Internet Engineering Steering Group and the World-Wide Web Consortium. [Starting in the 1990s, most of the resources for these entities were provided by corporations and universities using their own funds]

So yes, it took a village to create the Internet, and the ball would not have been started rolling without ARPA’s sustained funding over many years. But the actual work of designing and building the Internet was not done by the government, but for the government by smart people that it picked.

Then there is the question of what happened after the ARPA-designed data pipes were in place. An independent account by David Mowery and Tim Simcoe of Berkeley wrote in 2002:

Adoption of the Internet in the US was encouraged by antitrust and regulatory policies that weakened the market power of established telecommunications firms and aided the emergence of a domestic ISP (Internet Service Provider) industry. The large size of the US domestic market, as well as American firms’ large investments in desktop computing and computer networks, created the conditions for rapid diffusion of the Internet following the introduction of the WWW. “Network effects” created by the scale of the US market and the predominance of English language content also contributed to rapid US standardization and diffusion.

During the late 1990s, the Internet entered a third phase of growth characterized by the development of commercial content and business applications. This phase followed the completion of a long process of infrastructure privatization and a dramatic surge in Internet use associated with the introduction of the WWW. Commercial interest and activity were fueled by the availability of capital from the US venture capital (VC) industry, as well as the strong performance of the US economy.

Mowery would certainly be the first to argue for the importance of government-funded research, but in the end, the Internet would have been little more than a research curiosity (or an internal network for a few universities or DoD sites) without the private investment necessary to grow it into what we have today.

As campaign hyperbole goes, this probably rates only one or two Pinocchios — certainly not a whopper on par with Al Gore claiming he invented the Internet. But I’d hate to think that young people, listening to soundbites, took away from this campaign claim that an omniscient and omnipotent Federal government is how we got the Internet and how we will get similar innovations in the future.

Open platforms and semi-open standards

For unexplained strategic reasons, last month Google said it didn’t want the semi-open H.264 video codec supported in its Chrome browser, but was favoring its semi-open WebM codec instead. This meant that the most popular HTML5 video format would not be available for Chrome users.

Not available, that is, until the intervention of an unlikely savior. Today Microsoft announced that it is supporting H.264 on the three main Windows browsers: its own IE9, and via plugins for Chrome and Firefox. The latter two make use of the extensible browser platforms that their respective open source sponsor created to encourage third party support (albeit not originally intended to help Microsoft.).

(Apple remains firmly committed to H.264 and HTML5 on both Mac OS and iPhone OS, as part of its pointed rejection of Adobe’s Flash.)

As a Mac guy, I rarely agree with Microsoft on standards battles, but I think they’re dead right on several issues.

Here are a few excerpts:

A Web without video would be a dull Web and consumers, developers and businesses want video on the Web to just work. As an industry we know this and have, until recently, been on a path to make this a reality with HTML5 by integrating video into Web pages more natively using H.264.
…
We’ve been clear from the first public demonstration of IE9 that the community deserves a reliable platform for delivering video as part of the modern Web.
…

• IE9 will play HTML5 video in the H.264 format. Why H.264? It is a high-quality and widely-used video format that serves the Web very well today. We describe many of those reasons in blog posts here, here, and here.
• Any browser running on Windows can play H.264 video via the built-in Windows APIs that support the format. Our point of view here is that Windows customers should be able to play mainstream video on the Web. …

Although predictably snarky (as it is about all things Microsoft), The Register noted the significance of Google’s action and Microsoft’s response:

H.264 is the mostly widely used video-playback codec on the web, but Google said in January that it was removing support for H.264 from future versions of Chrome.

Google said its resources would now be directed towards "completely open codec technologies," as the giant's goal is to enable "open innovation" on the internet. H.264 was built by Apple, Microsoft, and others, and is licensed by MPEG LA.

Future versions of Chrome will support only the royalty-free WebM codec that was owned and open sourced by Google last year, and the Ogg Theora codec.

As someone who’s been studying standards wars for more than 15 years, I think the Microsoft people are exactly right. The correct answer for web standards is choice and competition — just as we have choice and competition for cars, TVs, laptops, tablets and smartphones.

Accessing web pages is not like playing back 8-track tapes: it’s easy for a modern computer (and perhaps even a modern tablet or phone) to support multiple browsers.

I have four browsers installed on my MacBook Pro: Safari, Camino, Firefox and Chrome. Mainly I use them because I want to group a different set of pages for different windows, but sometimes I find that printing or browsing works better on one that the other.

Whatever its motives, Google attacking H.264 by banning it from its browser platform is the same idea as Microsoft trying to kill Java by discouraging its availability on Windows. It’s up to vendors to make their case to customers — both content providers and content consumers. Eventually the formats will shake out, but competition will force the codec providers to offer the best price and performance they can.

Google's war on semi-open standards

Google stirred up a controversy this week with its decision dumping H.264 video codec support from its Chrome browser in favor of Flash and its own WebM (VP8).

This clearly is good for Adobe’s Flash, and bad for efforts to build a Flash-free HTML5 Internet that was (until this week) a joint effort of Microsoft, Apple and Google.

The claim that Google is motivated by openness is quite hollow. While technically a Windows browser doesn’t need Google’s help to distribute a free Flash player, Google has been very pro-Flash in its efforts to help Android overtake the iPhone.

Also, even though royalty bearing, H.264 is an open industry standard, whereas Flash and VP8 are not. Flash has only one proprietary implementation.

Still, some speculate that argument one reason is the H.264 business model, specifically that Google doesn’t like the H.264 royalties charged by MPEG LA. Here is what Google’s revised justification said Friday:

We acknowledge that H.264 has broader support in the publisher, developer, and hardware community today (though support across the ecosystem for WebM is growing rapidly). However, as stated above, there will not be agreement to make it the baseline in the HTML video standard due to its licensing requirements. To use and distribute H.264, browser and OS vendors, hardware manufacturers, and publishers who charge for content must pay significant royalties—with no guarantee the fees won’t increase in the future. To companies like Google, the license fees may not be material, but to the next great video startup and those in emerging markets these fees stifle innovation.

The idea that Google’s latest push will cause VP8 to pass H.264 is fanciful at best: it will take more than support from the #3 browser to cause the rest of the industry to shift from H.264. If anything, Google’s efforts fragment and thus undercut any efforts to establish an open alternative to Flash.

One theory is that Google wants to ditch H.264 support from YouTube (which, if true, would send iPhone users away from YouTube — good for Android, bad for YouTube.) The theory that Google hates H.264 royalties doesn’t hold water according to an analysis by Ed Bott of ZDNet, because even the worst case cost is not material for a $29 billion/year company.

Clearly there is more to this strategy than meets the eye. A company that aspires to be the (unregulated) benevolent dictator of the Internet would be more transparent about its motivations — perhaps something the next CEO will be better at.

But for now, the only good explanation I’ve found is at the comic strip “Joy of Tech,” which argues that it’s part of a cynical Machiavellian strategy by the “do no evil” crowd to retaliate against Apple and generate controversy.

Facebook takes on Goliath

Facebook got a lot of favorable publicity this week at its f8 developer conference for its ambitious efforts to expand its APIs, and with it transform its influence over its customers and the web.

For most firms, a frontal assault on Google might seem like a bad idea, like David kicking Goliath’s shins rather than pulling out a slingshot. However, because Google has already attacked Facebook (with Buzz), perhaps this is merely shifting from a defensive battle to an offensive one.

At some level, the Facebook model — of relational information interpretation by 400 million volunteer coders — has many technical advantages over the Google model of context-free, semantic-free text searches.

For a young Web 2.0 company, Facebook is also doing relatively well at monetizing its social embeddedness, with revenue doubling annually (to more than $500m last year) and an after tax margin exceeding 25%. However, even if Facebook reaches revenues of a billion or two in 2010, it remains less than one-tenth the size of its newfound rival.

However, the more serious threat to Google is that the success of Facebook is part of the transformation of the openness of the web to a network of browser-accesible walled gardens. If the world’s content is not available on freely accessible HTML pages but inside password-protected silos, then the only content Google can index is that inside its own walled garden.

This process has been dubbed the Splinternet. As my friend and mentor Shane Greenstein observed in his (highly recommended) blog last month:

The Internet should no longer be called a “network of networks”, as it was called two decades ago. That era has passed.

Commercialization has brought with it a new structure, a “network of platforms”. The splintering of the Internet describes the results of platform competition on the Internet.

Sometimes it resembles a horror movie.
…
Splintering happens all the time in this market. But it is a symptom of something bigger, not to be understood in isolation.
…
At any given moment, somebody will be trying to raise switching costs and deter migration. Designing proprietary standards is one way to do that. So it blocking the use of standards from rival firms.

The entire post is recommended reading for those who care about platform competition, Web 2.0, social media or the future of the Internet.

In some ways, with these fragmented and separate platforms, we seem to be re-creating the pre-Internet ISP era of CompuServe, AOL, Prodigy and Delphi. As with the cellphone, cable TV, Baby Bells and other fragmented networks, it will take consolidation of the various walled gardens into a small number of surviving firms or networks to make these networks useful.

Perhaps Facebook and maybe even Twitter can form networks independent of the Monster of Mountain View. (Other social media companies may be able to continue their regional success).

However, even the most successful Web 2.0 platform winners will need to align into the orbit of Microsoft/Yahoo, Apple, Nokia or one of the other major platform owners — under the time-honored (but questionable) rule that the enemy of my enemy is my friend. Whether this is through acquisition or alliances (as with Microsoft-Yahoo) is one of the many open questions of our SplinterNet future.

Cybersquatters abuse the Valley

The Merc ran a story Sunday about all the odd startup company names among recent Silicon Valley Startups, due to the problem of cybersquatters having all the good names. No word on whether the startups used the “Web 2.0 Name Generator,” which sounds better the stories they told reporter Patrick May.

As part of efforts to sell the dead tree-version — or perhaps just laziness on running the website — the online story left out the two best parts of the story. One element is a crossword puzzle with 16 new startup names.

The other part was a quick quiz:

Guess which one of these five company names is fake:
Zencoder
Etacts
Rockyrowed
JamBase
Heyzap

Since you are all reading this on the Internet, the answer is left to the readers as an exercise.

Net neutrality to preserve the status quo

Holman Jenkins is right. The big industry money fighting to get the FCC to impose net neutrality comes from powerful incumbents who want to preserve the status quo:

Google has been one of the most influential net-neut proponents. It recently secreted its top lobbyist, Andrew McLaughlin, into a White House job as deputy head of telecom policy. But Google also understands, as its chief Eric Schmidt recently put it, "It's very, very important that the telecom operators have enough capital to continue the build-outs."

Google's trick will be to lobby for the optimum of Internet socialism—"tiered" pricing may be OK, in which some consumers pay extra for a bigger pipe. But usage-based pricing that would give consumers a reason to think twice before clicking on a Google-sponsored ad? It would be the end of Google's business model.

And Google has allies. The greatest fear of Microsoft, Amazon, eBay and Yahoo is having to plumb their deep pockets and offer competing payments to broadband carriers to speed their bits to consumers. They much prefer spending their money to sprinkle server farms around the globe, assuring fast, reliable access for their customers in a way that no newcomer can easily replicate.

What if some startup Google sought to achieve the same goal by outsourcing its data management to the telecos, say, by mounting servers in their premises to help deliver Web applications more quickly? This would be a win-win for both parties. Data that travels within a carrier's system is cheaper to deliver than data that must be handed off between two or more carriers.

I often disagree with Jenkins, but today I think he’s right on the money. The successful dot-com incumbents are quite happy with the current Internet distribution and cost structure, and want to avoid any change that might threaten their power of incumbency.

Another point he alludes to only in passing: the dot-com winners don’t want to change an allocation of spoils between their high margin, highly scalable (network effects) business to give more to the capital-intensive operators that supply the essential last mile infrastructure they must have.

Both GOOG and T have gross margins of 60%. However, Google’s operating profit (EBIT) is 26.7%; AT&T (due to high SG&A plus depreciation) has an operating profit ratio of 18.6% and Verizon a mere 11.9%.

Latest in a series of outsourced economic policy criticism as a cost-cutting move during difficult times.

Free Internet conference Wednesday

Santa Clara U and its High Tech Law Institute are hosting another free conference on technology policy topics, in this case the West Coast edition of the annual State of the Net conference. The conference —hosted by a 501c3 advisory board — features 3 members of the Congressional Internet Caucus (2 D, 1 R) plus the administration’s CTO and various scholars and other luminaries. Among the academics will be Tim Bresnahan, Michael Katz and AnnaLee Saxenian.

The conference will be held Wed Aug. 5 from 9am-2pm at the Santa Clara law school. For more information or to sign up, see the conference website.

Semi-private, semi-open name spaces

This summary is not available. Please click here to view the post.

Nyet to philosopher kings

A key axiom of capitalism is that the distributed, decentralized consumers and entrepreneurs are more effective at optimizing an economy than any attempt at centralized control.

As Adam Thierer (formerly of Cato) recounted on Friday, cybervisionaries like George Gilder and Nicholas Negroponte predicted that the a wired world would enable decentralized empowerment. (Sound familiar?)

However, Thierer notes that Stanford (now Harvard) law prof Larry Lessig was far more pessimistic in his book Code and Other Laws of Cyberspace. Thierer summarizes the various reasons for the failure of Lessig’s predictions:

Had there been anything to the Lessig’s “code-is-law” theory, AOL’s walled-garden model would still be the dominant web paradigm instead of search, social networking, blogs, and wikis. Instead, AOL — a company Lessig spent a great deal of time fretting over in Code — was forced to tear down those walls years ago in an effort to retain customers, and now Time Warner is spinning it off entirely. Not only are walled gardens dead, but just about every proprietary digital system is quickly cracked open and modified or challenged by open source and free-to-the-world Web 2.0 alternatives. How can this be the case if, as Lessig predicted, unregulated code creates a world of “perfect control”?

Thierer reacts to an earlier essay (also at Cato) by Declan McCullagh of CBSNews and CNET, also critiquing the Lessig book.

McCullach attacks the philosophical basis of Lessig’s critique:

Lessig goes out of his way to assail libertarianism and “policy-making by the invisible hand.” He prefers what probably could be called technocratic philosopher kings, of the breed that Plato’s The Republic said would be “best able to guard the laws and institutions of our State–let them be our guardians.” These technocrats would be entrusted with making wise decisions on our behalf, because, according to Lessig, “politics is that process by which we collectively decide how we should live.”

I’ve heard Lessig speak a few times. He always struck me as a smart guy. However, his work never struck me as scholarship, merely opinion couched as advocacy. His presentations tended to assume the audience agreed with him, rather than using empirical evidence to support his positions. (As with open source, a lot of preaching to the faithful.)

Compared to Lessig, I was always more impressed by the work of Pam Samuelson (a Berkeley law prof). Both took similar positions on key copyright issues, but Samuelson’s positions were based on real evidence. Maybe that’s while Samuelson is still an IP expert while Lessig has abandoned IP to move on to the next crusade.

Charting Google's inexorable march

USC’s Institute for Communication Technology Management is promoting an hour long webcast on Tuesday at 10:30am PST (1:30pm EST). It’s not on their website but below is what the email blast said; interestingly, the banner says more about Google than does the body of the message.

Net Neutrality is a really big deal... even if you're not talking about it.

Net Neutrality has some fierce proponents and formidibale opponents.

Do you know where Google stands (and lobbies) on the issue?

Who's going to pay for the video, music and gaming going through the pipes?

The presenters are Steven Shepard and Morley Winograd of USC. The webcast is free with prior registration.

I’m not sure if I can attend, because I have a 10am meeting and teach at noon. I would certainly watch the podcast if there is one.

Sex sells commodity IT

Sunday is the Super Bowl, and so, among other things, it’s time for another tasteless Go Daddy ad.

Since 2005, Go Daddy has been running Super Bowl ads involving scantily clad women, and this year is no exception. Since the first ad, Go Daddy has relied on claims of “censorship” to draw attention to its ads, but this year the argument didn’t work: two ads were cleared by NBC: “baseball” and “shower.” Instead,the publicity stunt is faux-suspense over which ad will air in the $3 million slot. (If it wanted, it could have paid another $3 million for one of the two unclaimed 60-second spots).

Of course, that assumes that viewers even know what’s being advertised. Of the two, the product plug in “baseball” is more effective, with spokesperson Danica Patrick delivering the pitch near the climax of her conflict with two bimbos. The spot also harkens back to the original 2005 ad theme of stodgy congresisonal hearing, and Parsons has been bragging about his “uncut” version. The (broadcast) ad is the one I would choose.

The “shower” ad shows less but promises more. It’s a lowbrow ad, akin to Carl’s Jr. or the most crass beer ad. Worse yet, the plug is mumbled at the beginning, before the viewer knows what is going on. If Go Daddy happens to choose this one (unlikely), it must have decided that titillation will generate more traffic to the website.

As with previous years, Go Daddy has been doing a good job
of generating click-throughs, using the TV ad (and free publicity) to draw viewers to see the “uncensored” spots

"Viewers have come to expect our edgy Internet-Only versions on Super Bowl Sunday and this year's online video really pushes the envelope," said Go Daddy CEO and Founder Bob Parsons.

Once they see the online adds, viewers also see a postroll ad with a $3 off coupon for a domain purchase. Having a product that can be purchased over the Internet puts Go Daddy in an ideal position to translate Super Bowl exposure into action and sales.

As in other businesses, sex sells. Parsons is consciously using sex to sell commodity IT services — domain name registration — where one provider is as good as the other.

I’ve been a Go Daddy customer since the summer of 2005, not because of the sex, but because they were one of the cheapest providers out there and a friend had good luck with them. The same low prices that enable cybersquatters has allowed me to carry 15-30 domains during this time, such as OpenITStrategies.com, MITtoQualcomm.com, and JoelWest.org. Go Daddy has been edging up its prices, so it’s probably time to find another provider for these commodity services.

I’m not so clear why Patrick, the former Indy 500 rookie of the year, is lending her body to a campaign that goes beyond Maria Sharapova, let alone a Chris Evert. I guess Patrick has decided she needs the exposure in her career (and the endorsement money) while she can still get it. As any starlet would probably advise her, in today’s society you need to exploit your looks and celebrity while you can. However, the normal pattern is to work your way up to classier roles: think Nicole Kidman and Chanel No. 5.

For Go Daddy, the continuing use of the same ad theme for five years suggests a lack of creativity on Parsons’ part — being “edgy” has become safe. From using the same approach, the (privately-held) Go Daddy should be feeling diminishing returns by now. Among those who procure domain name services, it has a firm position as the mindshare and marketshare leader. Unlike an Apple or Yahoo, its website creation tools are for techies and not consumers, so there isn’t much upside there.

Perhaps, as with other celebrity CEOs (Mark Cuban or Lee Iacocoa come to mind) Parsons has grown addicted to the limelight and is using publicity stunts to stay there. Perhaps he really he believes the meaning of the Go Daddy brand is controversy, sensational, “edgy” and Bob Parsons. (How is resolving a name to an IP address “edgy”? Never mind.)

Or perhaps like other men pushing 60, the ex-Marine enjoys being surrounded by buxom bimbos. I’ve never met the man, so I can’t say.

Oddest TLD

Most readers have seen the .TV domain, in which the 12,000 people on the island of Tuvalu rent out their Internet birthright (except for .com.tv and .org.tv) because of a convenient overlap with an English acronym.

However, I think I found an odder Top Level Domain — not currently being rented out, but associated with an even less populated geography.

The .AQ domain is for the continent of Antarctica, i.e. everything south of 60° S latitude. The continent has no natives, no government and no industry, just a few thousand scientific tourists. I found it in a Google search Monday, because AQ is an acronym used in business school accreditation.

Access to Antarctica is governed by the Antarctic Treaty, and in fact the Antarctic Treaty Secretariat has a website in four languages: English (because of the US, UK and Australia), Spanish (because the closest inhabitants are in South America†), Russian (in deference to the former superpower) and French (because of the former French colonies in the Caribbean and Africa?). However, not all the content is translated from English.

The TLD is maintained by Swizzle Limited of Auckland, NZ, headed by Internet entrepreneur Peter Mott, who also has the exclusive .PN TLD franchise for Pitcairn Islands (think Mutiny on the Bounty). The domain for the nominal AQ administrator is icenic.aq, but (unlike say CIRA) it has no web server.

However, a Google search of the TLD produces 20,000 web pages. The most interesting is the list of 65 facilities on the continent — 33 manned stations, plus miscellaneous runways and other facilities. As with anything else, it even has a Google map representation — in this case using Google Earth.

The Google map points out an interesting curiosity. Ushuaia, capital of the Argentine province of Tierra del Fuego is 54° S, (visible at lower left). South Georgia island (a U.K. territory shown in upper left) is 54.5° S. The South Orkney Islands (60.5° S) are the subject of conflicting claims between the UK and Argentina, but because they are South of 60°S, they are covered by the Antarctic Treaty and their bases are officially listed in the .AQ database. 

Television disintermediation

Driving home from work (a Saturday class), I happened to flip to a Sacramento radio station that was running a syndicated computer radio show by Kim Komando. It’s not sexist to say that — although I didn’t know this while driving — Kim is far prettier than her major rivals (Leo Laporte and Larry Magid). What caught my attention on first listen was that she struck the right balance of knowledgeability without either being obvious or condescending. I’ll certainly look for it next time I’m driving alone on a Saturday between 12-3.

Kim pointed out an article that I had yet to read from Friday’s Wall Street Journal, which spells out how the Internet is increasingly a flexible and cost-effective substitute to cable TV:

Turn On, Tune Out, Click Here
TV Viewers Cut Cable's Cord; Here's What They're Watching Online Instead
by Nick Wingfield

Kim was right to identify the importance of this article identifying an important trend for television distribution. Nowadays, most broadcast TV episodes and an increasing proportion on cable TV shows are available online via iTunes, Hulu, YouTube or the network’s website, as with the recent Sarah Palin satire on Saturday Night Live.

Cable was the ultimate IT monopoly — either you paid your local provider, or had to settle for broadcast. Then VSATs made possible DirecTV and Dish Network, so that cable had some viable substitutes. Today the two surviving Baby Bells, Verizon and SBC, are offering fiber-to-the-home based competitors under the FiOS and U-verse brands.

The Internet offers the prospect of disintermediating these pipes for distributing this television content to the home. (Let’s leave aside for now the minor problem that except for WiMax, all those Internet connections are provided by these same companies).

While some of these solutions are obviously inferior in terms of resolution and other performance metrics, the rise of the Internet as an alternative has arrived much quicker than I would have anticipated even 18 months ago when one of my students was proposing to make a video download box. There’s been an obvious boost from AppleTV, the Netflix Player (from Roku), and the various Slingbox and SlingCatcher products.

When I first used Amazon.com more than a decade ago, I underestimated how quickly it was going to change both my personal habits and retailing in general, including contributing to the death of America’s greatest record chain. Given that, I think Cox, Time Warner and especially Comcast have a grim future. Unlike The Phone Companies, they have few options for diversification and vertical integration, even if they are doing their darnedest to surpass TPCs’ (admittedly low bar for) customer service and customer satisfaction.

Violate WTO rules, forfeit your IP?

With lousy Internet access over Christmas vacation, it was nice to have an RSS reader that automatically downloads stories for offline reading. One of the stories I found intriguing was on the Madisonian blog, about an odd case of IP retaliation in world trade.

The story starts with US efforts to prevents its residents from gambling using unregulated Internet casinos. (While I’d heard about the controversy, I didn’t realize that it was big enough to have a dedicated MSNBC news page).

In May 2003, offshore gambling interests filed a complaint at the World Trade Organization saying that the US ban on Internet gambling is an unfair trade practice. In November 2004, Antigua and Barbuda won their case.

If I understand the reasoning, because the US allows off-track betting within the US, the WTO regulators think it should allow offshore betting. Presumably the US could comply by imposing regulations for remote wagering (such as permit fees, bonding and background investigations) that could be applied equally to US and foreign remote betting organizations, but thus far the Bush administration has not made WTO conformance a priority. (The US still holds that its ban on interstate gambling is being applied fairly to international gambling).

The reason? Perhaps it was because there were real questions about the ability of the small countries to enforce the sanctions. So instead, Antigua (and its gambling industry) sought to collect the damages in other ways.

A week ago, the WTO arbitrator ruled (original bureaucratese here) that Antigua could violate US copyrights to the tune of $21 million every year. The novel precedent was successfully pushed by a clever Texas lawyer representing the gambling interests.

The $21 million represents a compromise damage amount between the US estimate of $0.5 million and the Antigua-Barbuda claim of $3.44 billion. Still, the decision sets a terrible precedent.

I realize that mutual hostage taking is the norm in international disputes — e.g., if Iranians seize US assets then the US government can seize Iranian assets. But having the WTO (which nominally is required to protect IP rights) sanction IP theft creates untold opportunities for mischief by countries that like to ignore IP rights already. There's also the question (as in many international sanctions) of punishing companies not party to the dispute.

Blogger Corry Doctorow argues that the US — which pushed hard to create the WTO — has been “hoisted on its own petard.” True enough. Since the US is pursuing an important public policy goal (reduced gambling) — even if through an imperfect manner — I wonder whether the ruling will fuel further U.S. cynicism towards subjecting domestic policies to review by international institutions.

The real Web 3.0

The Mercury News has fixed their mistake of buying Nokia's propaganda that Web 3.0 is just a mobile Web 2.0. In search of a Wii, I bought this morning's dead-tree edition and found the headline “Designing Web 3.0” on a story by Dean Takahashi.

In his profile of Tim Berners-Lee (formerly of CERN), Takahashi gets it exactly right:

Now he believes that the next step in making the Web more useful is to create the standards that enable computers to fully understand the Web and that allow users to find the right information more efficiently.

He and many other forward thinkers are working on the "semantic Web," an enhancement that would provide a universal exchange of data. The semantic Web is sometimes called "Web 3.0," following the Web (Web 1.0) and the social Web (Web 2.0).

Get off e-mail and pick up the phone!

Will probably remain behind on blogging under both sets of MBA grades are filed. For decent blogging productivity, I also need a few hours to reinstall/reconfigure my blogging software.

One of the points I try to remind students is how e-mail can cause more problems that it solves. For example, some people (unknowingly) adopt a passive-aggressive stance that says “this is what I’m going to do — let me know if you have a problem with that.” As in “I’m going to miss class tomorrow. Let me know if you have any questions.” And maybe they don't intend it to be passive-aggressive, but without context it’s hard for the reader to tell.

Certainly around our house and at the office (both industry and now university), more than one or two back-and-forth prompts the cry “just pick up the phone.”

The NYT this week has an article about all the reasons that e-mail is prone to misunderstanding. In trying to be the definitive article on the subject, it perhaps takes itself a little too seriously, but it provides a comprehensive view of why excessive reliance on e-mail can be very risky for your career and relationships.

Swimming against the business model tide

About five years ago, I was brought as a consultant to help turn around Live365, an Internet radio station aggregator. The gig didn’t last long, but I did come up with a couple of teaching cases.

Live365 was founded in the go-go 1990s, and with a 1999 VC infusion took the standard dot-com business model: get as many eyeballs as you can, and then monetize those eyeballs by selling banner ads. The problem was, after the dot-com crash, the online ad market had cratered and most companies couldn’t give them away. With very loyal broadcasters and a unique product for listeners, company made a transition to a primarily fee-based model and (AFAIK) is now cash flow positive.

Thus, it was more than a little ironic for me to read in Tuesday’s WSJ about the VC reaction to the latest round of web startups. Reporter Rebecca Buckman spelled it out:

Tech entrepreneur Glenn Kelman's online real-estate brokerage, Redfin Corp., allows consumers to buy or sell homes online and takes a cut of each real-estate transaction it brokers.

To Mr. Kelman, it’s a sensible business model. But when he sought backing from venture capitalists this past spring, he found the process much tougher than he had expected.

During his meetings with Silicon Valley financiers, many kept urging the Seattle company to start selling advertisements on its Web site instead of making money from commissions, he says.

“Today, there’s nothing more fashionable than having an ads-driven model,” says Mr. Kelman, 36 years old. Content to be unfashionable, he stuck to his guns and ultimately raised $12 million.

Dig a little deeper, and the VC concerns are not just the revenue model: charging money for services requires people to deliver them, and thus VCs worry that such models don’t scale as well. As blogger David Kaplan notes, Redfin may not make the best poster child for VC myopia, since the company has other issues.

Still, the idea that all Internet startups need to use Google’s business model is absurd. As Yogi Berra would say, this seems like déjà vu all over again, with companies trying to imitate the unique market position of the market leader. In the 1980s, every mainframe company wanted to be IBM; in the 1990s, every software company wanted to be Microsoft. Today, there’s still only one IBM, Microsoft and Google. As the earliest Marx brother said, History repeats itself, first as tragedy, second as farce.

With any of my hats on — teacher, researcher, consultant or entrepreneur — I can’t understand why anyone would embrace the one-size-fits-all business model idea. Where would Amazon or Google or eBay or Skype be if they had only used established business models? My conjecture is that the Internet encouraged business model experimentation, because delivering value was often decoupled from the physical limits of retail locations, travel and inventory.

One of the people who’s done more than anyone to advance the study of business models is Henry Chesbrough, both with his 2002 paper on Xerox spinoffs, and his three books on open innovation. In his 2003 book, the last section of Chapter 9 “The Value of a Multiplicity of Business Models for Innovation.” That says it all.

Later this year, I hope to have some evidence to support my assertions. Right now I’m supervising a master’s thesis project at SJSU, where German Benitez and Eduardo Sanchez are looking at social media business models. They’re still working on the hypotheses, but in the sample so far there’s considerable variation in business models. The companies may not be old enough to get success measures (even survival), but eyeballing the data suggests that different value propositions require different revenue models.

Technorati Tags: business models, Internet, startups

Blockbuster movie distribution deal

Blockbuster has decided to buy Movielink, a struggling digital movie download site. The site was launched by the big movie studios who have been paranoid about IP issues even since their audio cousins got Napster’d. (Of course it’s not paranoia if everyone really is hoping to steal your stuff).

I’m not sure why the movie studios are buying. Perhaps they feel the need to be an honest broker to iTunes, Amazon and other alternative digital distribution channels. But my hunch (based on no data) is that they had trouble actually agreeing on how to run a business, and thus never were able to make the decisions necessary to make the company competitive.

The price wasn’t disclosed, nor was the financial performance of Movielink. Rick Aristotle (a Netflix shareholder on Motley Fool) thinks that it went very very cheap. I suspect it will be significant enough to be mentioned in the Blockbuster 10-K next March.

It’s pretty obvious why Blockbuster is buying. (So trivial that it’s not even worth leaving to the reader as an exercise). There is one physical video rental store, Blockbuster, competing against one mail-order video store (Netflix) with both a bricks-and-postal solution. In an earlier media distribution battle, there were two major physical bookstores — one got serious about having an online presence (Barnes & Noble) and one did not (Borders); both are losing business to Amazon.

So if driving to the corner video store becomes passé, and waiting for the USPS to deliver envelopes becomes passé, then Blockbuster needs to have a stake in other ways of delivering video content. (Netflix has been rumored to be planning a digital download for more than a year).

Of course, if paying for movies becomes passé, then both Blockbuster and Hollywood lose. So perhaps Hollywood wants someone to make a credible go of selling movies, just as Apple has done with music. But unlike with the iTunes Store, it helps Hollywood to have multiple online channels. (Class: which of the 5 forces is this?)

Technorati Tags: business models, diversification, information goods, Internet, movie industry, video

The dream of a device-independent web

In looking for something else, I found a post a few months back by Helen Keegan on the top mobile websites in the US and UK, which she cobbed from M:metrics.

She reports the top 10 sites from “metered smartphone users from a panel.” Hmmm... Not sure what biases that introduces, but at least some data is better than sheer guesswork.

But it was really interesting to compare the top sites. Google and Yahoo were the top two in the US, while in the UK, Google UK was #1, Google US was #6 and Yahoo was #10.

On the US side, the list broke down into two categories: desktop sites (Google, Yahoo, CNN, Weather, MySpace) and Microsoft sites (MSN, Microsoft, Live, Passport.net). I wonder if somehow they were metering Windows Mobile phones? What sites are default on a Windows Mobile phone? (Certainly Windows Mobile users do more browsing. I’m guessing that that Blackberry and Treo users are mainly e-mail users, and there are almost no Symbian users in the US). Of course, mobile data pricing has been ridiculous here so it’s almost all price-insensitve business users.

Meanwhile, in the UK side, there were a few Internet properties, including the BBC instead of CNN. But 4 of the top 7 were the major operators: Orange, Three, O2 and T-Mobile. So if it’s not a walled garden, then at least the default homepage (as on the desktop) is worth something.

What’s the point? If you’re a top site like the UK carriers, you know that you need to tailor your site for mobile users and try it out with the various form factors and browsers. Similarly, the big boys like Google, MS and Yahoo get enough traffic that it’s worth having a large mobile-specific development staff.

But what about the midtier, or the little guys? Yes, I’ve looked at my blog via my mobile phone (via Wi-Fi), but I don’t spend any time thinking about it.

As with any positive network effects market, there’s the chicken and egg problem: how do you justify the work to make a site support the quirks of the many mobile browsers without having the traffic to justify it? And what about sites that use rich web apps, like Google’s Ajax-enabled maps, or the Flash on YouTube? Very few cell phones have Flash, although FlashLite has caught on in Japan. Apple solved the problem by getting YouTube to port its content to H.264, but few device makers (or sites) are that big.

Users just want web pages to work. The ordinary desktop sites want a content creation/delivery system that works the same way on the desktop and the mobile. The mobile phone makers want access to all that content that (in most developed countries) is desktop-focused. But will it ever be realized? HTML was supposed to be device independent, but so many websites today were written by lazy programmers for a single browser.

Technorati Tags: Google, Internet, mobile phones