Net Neutrality

The WSJ reported DoubleClick Inc. "Defends its deal with Google" by "pledging that the information it collects about, and for, its graphical-advertising customers won't be shared with Google after the acquisition later this year."

Let's be real here. They really do think everyone is stupid.

• First, Doubleclick is being bought by Google so what Doubleclick says now doesn't matter after the transaction closes.
• To be taken seriously this pledge needs to made by Google in writing and enforceable as part of the transaction contractually or by court decree.
• It is unlikely that Google will agree to this restriction because Google knows that it can simply change the DoubleClick policy and harmonize it with Google's very loose privacy policy on a going forward basis.
• This public pledge is also a swiss cheese committment.
• With weak privacy policies like Google's, it's about "sins of ommission" what they don't say or commit to, not "sins of commission" what they actually say in their byzantine privacy policy.   

Privacy issues are Google's achilles heel. Google is growing so fast and is so profitable largely because they are most aggressively arbitraging privacy law and american's privacy expectations. The FT said Google's brand is now number 1 in the world.

It is very interesting and ironic that when Former FCC Chairman Reed Hundt was at the FCC he strongly advocated that "Spectrum Flexibility will Promote Competition and the Public Interest" in an article in IEEE magazine with Greg Rosston in the December 1995 issue.

• "...we must stop over-regulating commercial uses of licenses for spectrum use."
• "...in the digital age, innovation is far to rapid for anyone to predict accurately what the best use of the spectrum will be five years from now."
• "The Commission should require that market failures be clearly shown and any restrictions on flexibility narrowly targeted to deal explicitly with the failure."

While I often disagreed with then FCC Chairman Hundt when he diverted from promoting market-based competition by picking winners and losers through hyper-regulation, I must commend Mr. Hundt's logic and policy explained in detail in his IEEE monograph in 1995.  

• Its too bad that he no longer appears to support that pro-competition and pro-taxpayer stance anymore.

Ironically now, Mr. Hundt would financially benefit greatly, if the FCC rigs the 700 MHz auction to lower the value spectrum by requiring a license holder agree to net neutrality.

• The taxpayer would be the biggest loser if the FCC decides to restrict and heavily regulate some of the 700 MHz spectrum up for auction with net neutrality.

The primary impetus behind the 1993 Democratic Congress that passed the law requiring spectrum auctions is that the taxpayer was routinely being fleeced by the FCC granting spectrum by other processes than auctions.

Google turned in another awe-inspring financial performance in 1Q07. Pick your news report for the basics. All you need to know is revenue growth was up 63%. Wow!

• Derek Brown of Cantor Fitzgerald said in the Washington Post today:
• "I am basically convinced that no company in history has put up the type of finanical performance that Google has put up from a growth and financial perspective for as long as they have done it."
• It's hard to disagree with him. There is no other example.
• They are a jugernaut.
• What I questioned in my recent 10-page analysis of the Google-Doubleclick merger, was whether all of that success is legitimate given rampant click fraud and Google's systematic theft of its core inputs -- copyrighted content.

Let me translate some of the earnings call:

Given my recent 10-page white paper which analyzes the antitrust and competitive implications of the Google-DoubleClick merger, I thought it would be helpful public service to pose some questions that reporters/analysts consider asking Google's CEO Mr. Schmidt on Google's earnings call.

1. Does Google have a 50% "antitrust dominant" share of the search market?
2. Is search the new Internet browser?
3. Is search the largest Internet access gatekeeper?
4. Is Google the new Microsoft of the Internet?
5. Would the DoubleClick acquisition foreclose competition in the Internet advertising market?

After almost a year of opposing quotes in articles on net neutrality, the NAM weekly radio show/podcast on business, finally afforded me the opportunity to debate Craig Newmark, the famous founder of Craig's List, one-on-one live.While

• While I was looking forward to hearing his best arguments for net neutrality, it became clear from the outset that he did not want to debate the issue, but wanted to try and discredit me and my personal views from as far back as 1999.
• It turned out to be a decent strategy for him because his knowledge of the issue was surprisingly thin and he obviously did not want to engage on the merits or facts of the issue

I said I was happy to discuss my current and past views with him because it was a tacit concession by him that the net neutrality side of the debate cannot win this debate on the merits and that their best chance is attacks on me as a leading spokesperson for the broadband sector on why the Internet should not be regulated.

The people who still argue that the Internet is "neutral" have some explaining to do.

• They certainly don't want you to read the super Forbes cover story on Akamai: "Video Prophet: How Akamai survived the dot-com bust to thrive on speed."
• Check out these quotes from the article that drive home the point that the Internet has never been "neutral:"
• ..."Akamai's big idea is that by rewriting the Internet's basic rules--making some computers smarter and more equal than others--it can let the Net grow infinitely large without breaking down."...
• Horrors! Akamai is not treating bits equally! Someone call the Government!
• ..."a basic idea: Connect computers to the far reaches of the Net, then program them to communicate with one another to spot better routes for getting e-mails, Web pages and other packets to where they needed to go."...
• But the Internet is supposed to be a DUMB network! A "smarter" network would not be innovative...that can't be right...
• ..."Eventually they refined a business idea: a service that essentially would be the FedEx (nyse: FDX - news - people ) of the Internet. People could always trust the public Net to deliver their information cheaply. But others might be willing to pay Akamai a premium to deliver their content faster and more reliably..."
• Horrors again! Someone had the gall to think the perfectly "equal" Internet could be made better with a market concept of a tiered Internet... oh tell me its not true!
• ..."Every few months the algorithm writers in Cambridge inject better software into the global network to make it shrewder at picking routes for Internet traffic."...
• Egads! There are dark forces out there making the Internet less equal every few months!

I feel kinda bad that all those well-intentioned people that fell for the original slogan of "net neutrality" were suckered into assuming the Internet was "neutral" and needed to stay that way.

Today's WSJ editorial page hits the free-market nail on the head once again in its lead editorial: "The Spectrum Game"; it's about the FCC's upcoming decision on how to auction the 700 MHz of spectrum that is considered by the market to be "the Riviera beachfront property" of all spectrum potentially available.

• WSJ: "... Like Mr Hundt, they know such conditions [like net neutrality] might scare off auction competition and increase the chances of Frontline grabbing the licenses for a song."

WSJ understands this is the most valuable spectrum the FCC has ever auctioned.

• Naturally this valuable spectrum has spawned a cottage industry of policy entrepreneurs who want to figure out a way to divert the billions of dollars due the American taxpayer under the law -- to their companies' coffers. 
• They try to justify this multi-billion wealth transfer from the American taxpayer to companies by saying it would forward a "popular" net neutrality mandate, a social-engineering policy which Congress specifically rejected mandating only last year.    

I hope the FCC is wise enough to see through this net neutrality spectrum scam, and not effectively bypass Congress' authority by effectively legislating corporate spectrum entitlements unauthorized by Congress.

To guard against charges that there is an-under-the-table transfer of billions of dollars due the American taxpayer under the law, the FCC needs to be completely transparent and upfront about the implications their decisions have on auction proceeds.

The news of Google acquiring Double-Click prompted me to spend a good part of my weekend analyzing the competitive implications of this seminal proposed acquisition for the future of the Internet.

My analysis focused on answering the following key questions of interest:

• What is Google's real competitive endgame with DoubleClick?
• Why is this acqusition likely to pass antitrust muster?
• Why will Google increasingly dominate Internet search?
• What other anticompetitive behaviors by Google position Google to dominate Internet advertising?

Summary of my conclusions:

It seems that having ~90% gross proift margins, a $145b market capitalization, and one of the highest-flying stocks in the market is just not enough resources for Google.

• Egads! They certainly don't have any money to pay more for upgrading Internet capacity for video! Ick!

Not surprisingly, Google CEO Eric Schimdt's has come up with yet another creative new answer for who should pay for upgrading Internet capacity for video --  the American taxpayer! Certainly not Google! 

• Internetnews caught Schmidt proposing the government effectively pick up Google's tab for using the Internet more than any other company.

• "Schmidt thinks the government should pay more of the rising [Internet] infrastructure costs. "We didn't ask for private citizens to pay for the highway system up front," he said. He said it would be "great" if the U.S. government recognized the advanced position other countries have in providing greater broadband access to their citizens as a competitive threat leading to further investment here."

• It's not surprising that Google wants to stick it to the taxpayer. Throughout the net neutrality debate, Google has supported the position that the consumer should pay for the upgrade of the Internet and not websites like Google.

Cost avoidance and sticking it to the taxpayer is part of a pattern for Google. 

MultiChannel News has a great write up of a tough speech on net neutrality by David Cohen, Executive Vice President of Comcast.

• “When you cut through the rhetoric, what they [Google, Yahoo] want from the federal government is new regulations that would guarantee them below cost-access to the broadband networks that carry most of the Internet content in this country,â€? Cohen said in a speech to the World Affairs Council of Philadelphia.

Kudos to Mr. Cohen for taking the gloves off and saying what needs to be said.