Google

Dear Mr. Gates & Mr. Ballmer,

This letter warns that Microsoft's pro-regulation strategy in Washington is backfiring and is likely to end very badly for Microsoft. Microsoft's recent decision to withdraw from the ItsOurNet Coalition during FCC consideration of the pending AT&T-BellSouth merger, offers a golden opportunity for Microsoft to objectively reevaluate whether pursuit of permanent techcom regulation remains in Microsoft's best interests, especially given the experience and changes of the last year.

Upon closer examination, it is evident that Microsoft's:
A) Original political judgment behind the risk-reward tradeoff of net neutrality was badly flawed; and

B) Pro-regulation efforts have made the company worse off than when it started pursuing net neutrality regulation.

History is repeating itself. Microsoft is on path to get wrapped around the Washington regulatory axle just as badly as Microsoft got wrapped around the antitrust axle this past decade. Why history is repeating itself is that Microsoft apparently has learned little about the huge risks Washington can present to Microsoft. Just as Microsoft's political misjudgment got the company legally ruled a monopoly and under the thumb of DOJ and EU regulators, Microsoft's political misjudgment on net neutrality regulation is now endangering the future of the web services model that Microsoft has staked its future on.

I. Microsoft's original judgment of the risk-reward trade-off was badly flawed.

A. Microsoft has much more to lose than gain from Net Neutrality. Just like it’s never smart to play with matches in windy weather when you own a forest, it’s never smart to push for permanent regulation of market power when the political winds are blowing much more regulatory and your company has more market power than any other.

The call for net neutrality regulation, or banning Internet tiers, runs completely counter to the highly-successful, commercial evolution of the Internet.

A recent Cable World article by Paul Kagan "Paying the Piper" highlights this truth, that the "wave of the future" is bandwidth based billing. Usage-based billing is exactly opposite to one-size-fits-all net neutrality regulation. More usage-based billing better serves users becuase it allows them to buy just what they need. Light users pay less and heavy users pay more. As Kagan aptly points out, this is "a marketplace pricing solution that encourages consumers to regulate themselves."  Â 

"Charging for Google is like charging for air" this is a quote from an Oxford student at a Google encouraged "creativity session" on net neutrality. Â The thought embodies Google's goal to be as ubiquitous on the Internet as air is to humans. Where the metaphor crashes and burns is that Google does in fact charge for "air" -- it just charges others than the user for the privilige. Google is paid by advertisers the equivalent of 11 cents per search discrimination result.

• Lets be real. Google does not work for users, users don't pay them anything.
• Google works for advertisers; 99% of Google's revenues come from search advertising. Â 

As one of the greatest economic thinkers of all time, the late great Milton Friedman, said: "There is no free lunch." Somebody pays for it.

"The search engine business will shake down to a natural worldwide duopoly" was how the New York Times paraphrased Randy Befumo, the Co-Director of Research for Legg Mason, which is one of the largest investors of both Yahoo and Google, in the article Sunday "Sunny and Gloomy Signs at a Web Crossroads." Befumo also said: "We think that Google and someone else -- we think the odds are Yahoo -- will do this for a majority of the Internet, ... Very few other people will be able to get the scale of traffic to make it work."

I wanted to highlight another solid data point in the clear pattern of the online giants expecting to use other people's property for free. Tuesday the Washington Post ran an article "Internet Firms Seek Rollback of Quote Fees" which explained that Google, Yahoo, and IAC (ask.com) plan to petition the SEC to forbid stock exchanges from charging them fees for real-time stock price quotes. The Executive Director of this Net Coalition -- of Takers said bluntly, "we dont think they own the information." Obviously the SEC disagreed and believes the exchanges do "own the real-time price quotes" information. However, "takers" don't take "no" for an answer.

It's instructive to point out that this Net Coalition -- of Takers, are some of the same folks that:

• The book publishers and authors are suing for digitzing their book without permission;
• The newspapers are suing for using their headlines and photos without permission;
• Trademark owners are suing for using their trademarks without permission.

This Net Coalition -- of Takers appears to have a very self-serving definition of "ownership." It appears that they think "information generated by others is not "owned" by others because its digitizable, and if its digitizable its fair game for them to search or provide and make money from. Apparently in the digital values and ethics of these online giants, it is "wrong" for others to make money off of the valuable information that their businesses generate, but "right" for the online giants to make money off selling access to information that others produce.

The Wall Street Journal front page story on: "How Microsoft is learning to love online advertising" is a perfect example of Microsoft's hypocrisy and double standard on net neutrality.

The article highlights how after a slow start Microsoft is rushing into online advertising to catch up with Google. Two quotes from the article sum it up well:

• "Online advertising has emerged as the foundation stone of a host of new web businesses."
• "I think everyday its (Microsoft) becoming more of an advertising company than it was the day before."

So?

Those who oppose state and local taxation of the Internet are happy that Sen. Lott (MS) won (25-24) the post of Senate Republican Minority Whip today. Â I blogged on Monday why this leadership race was an important precursor on Internet tax and net neutrality. Senator Lott's opponent in the whip race was Lamar Alexander of Tennessee, the Senate's biggest proponent of ending the Internet Tax Moratorium and allowing state and localities to tax the Internet.  

"On search, you want to be on that first page," Leonsis said. "You don't exist from Page 3 on." This is what Ted Leonsis, a co-founder of AOL, said in the Washington Post this week.

This is very relevant to the online giants and their call for a fifth non-discrimination net neutrality principle in legislation and on the AT&T-Bell South merger. What Leonsis is saying is what we all know. It doesn't matter that Google or Yahoo give a hundreds of thousands of links in our search results, virtually everyone only has the time or inclination to check the first or maybe second page of search results. "You don't exist from Page 3 on."

The Sunday NYT had a great piece on Google by Richard Siklos "A Struggle Over Dominance and Definition." The crux of the analysis is Google: mate or menace? friend or foe? to media players and others?

My favorite quote was Microsoft CEO Steve Balmer: "The truth is, what Google is doing now is transferring the wealth out of the hands of rights holders into Google."

• Duh. Google is getting sued for different kinds of theft by a very wide range of property owners.

However, what I really love is how Google keeps self-redefining themselves in a way that makes net neutrality regulation more likely to apply to them in the future.

While everyone is understandably focused on the changes in Congressional leadership on the Democratic side, arguably one of the most significant potential changes that directly affects the bottom lines of all Internet-related companies and the future of the Internet could be the ascension of Republican Senator Lamar Alexander (TN) to be the Senate Minority Whip, because he is one of Congress' biggest proponents of ending the Internet Tax Moratorium when it expires in 2007.

Why am I flagging this as potentially a very big deal for the Internet world?

First, Senator Alexander, a former Governor of Tennessee, disagrees with the bipartisan and Republican consensus of the last decade that the Internet is inter-state commerce and as such should not be subject to state and local taxes. Sen. Alexander has worked harder than just about anyone in Congress to authorize States and localities to tax the Internet. Why this matters is that any Washington insider knows that tax issues are generally negotiated at the Congressional leadership level and the interests and knowledge of particular leaders can have a very big impact on the policy outcome -- that's why they are leaders. 

Second, adding a new Senate leader, whose pet issue is to end the Internet Tax Moratorium, with the already combusible mix for the Internet of the Democratic takeover of Congress and Democratic support of net neutrality, and one gets a potentially very volatile environment for future taxation and regulation of the Internet. Given the importance of the Internet and broadband to the U.S. economy, and that there is a wide open race for the White House in 2008, this is a potentially very big deal indeed.