Investing

Bret Swanson of Entropy Economics penned another great op-ed on net neutrality today entitled: "Google and the problem with net neutrality: Broadband has been a rare bright spot in the economy. Why discourage investment?" 

My favorite point Bret made was pointing out all of the investment, innovation and competitive benefits that have occured since net neutrality supporters have said there was a problem requiring regulation circa 2004. 

• Not only have net neutrality supporters not been able to find credible evidence of an industry pattern of anti-competitive problems over the last five years, they also are ignoring all the competitive gains and benefits that have occurred over the last five years as well. 

Facts matter and facts are not the friends of net neutrality proponents.    

How could American taxpayers get stuck with a multi-trillion dollar tab that they weren’t even aware that they were running up? How could that huge tab still be allowed to run up unchecked today? For the Financial Crisis Inquiry Commission, the sad answer is one of the biggest root causes of last fall’s devastating financial crisis and one of the biggest continuing systemic risks to the financial system and the economic recovery.  

A decade ago, in what may prove to be the most expensive bipartisan legislative mistake in U.S. history, a bipartisan policy became law that effectively ensured that no Federal regulator had oversight or enforcement jurisdiction over derivative financial instruments. The Commodity Futures Modernization Act of 2000 (CFMA) created “legal certainty for excluded derivative transactions.” That law allowed a shadow derivative overlay system to be built literally on top of the public financial system, with none of the inherent accountability of the underlying financial system.  In other words, a deliberate bipartisan U.S. government policy change a decade ago unwittingly created an unaccountable “black hole” market that sucked enormous value out of public markets, (Bear Stearns, Lehman, AIG, Fannie, Freddie, securitized sub-prime mortgages, etc.) while laundering the risk to the U.S. taxpayer.

I was surprised that the Wall Street Journal editorial page printed Andy Kessler's datatopian rant today, which essentially calls for the Federal Government to economically regulate the competitive broadband Internet as a monopoly and move away from a market-driven property rights model for mobile Internet infrastructure.

After one reads Mr. Kessler's compilation of datatopian platitutudes and selective analysis, please consider the litany of datatopian assumptions (below), which undergird Mr. Kessler's regulatory recommendations. 

• Mr. Kessler's: "Why AT&T Killed Google Voice: Telecom operators are yesterday's business. It's time for a national data policy that encourages innovation."

Mr. Kessler's Datatopian Assumptions:

First, assume a broadband pipe(s).

Second, assume broadband/Internet works, always.

Third, assume all the billions of daily Internet transmissions just happen -- perfectly.

Fourth, assume everyone can always use as much bandwidth as they want.

Fifth, assume its all free.

Sixth, assume broadband doesn't need return on investment.

Seventh, assume that the broadband competition everyone sees everyday in TV/online/print advertising doesn't exist.

Kudos to Link Hoewing's insightful post on "The Internet's Evolution and Network Management" on Verizon's Policy Blog.  

• Its an important analysis and perspective for anyone wanting to understand how FCC regulation of the Internet and network management could negatively and seriously harm innovation and the Internet's natural evolution.

When Investment News asked John Bogle, Vanguard's founder and the father of indexing, about my "Indexing into the Ditch" thesis (that indexing is one of the root causes of the financial crisis) he said: it “is nuts! Last time I looked, index funds accounted for about 0.4% of all stock trading ... Just perhaps the other 99.6% might bear a teeny-weeny bit of the responsibility.”

Let me first respond to Mr. Bogle's points in order.

The thesis "is nuts! "I must admit I smiled at the ad hominum implication that my thesis was "nuts" and not worth listening to; I remembered that Bernie Ebbers called me the "idiot Washington analyst" because my research was the first to charge that WorldCom's business simply did not add up.

With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing."

Yahoo's announced earnings confirm that Google continues to take substantial search advertising revenue and profit share in the first full quarter of financial results since the DOJ blocked the Google-Yahoo Ad Partnership as anti-competitive.

• Yahoo's owned and operated search advertising revenues fell 3% compared to Google-site search advertising revenues which grew 9% -- a 12% differential -- signalling significant market share gain by Google at Yahoo's expense.
• Yahoo's affilitate (syndicated) advertising search revenues fell 16% compared to Google-site syndicated advertising search revenues which fell 3% -- a 13% differential -- again signalling significant and comparable market share gain by Google at Yahoo's expense.

Google's dominance of search advertising profit share is even greater than that of revenues because historically the only other publicly-traded search advertising players with significant search advertising revenues: Microsoft, AOL, and IAC/Ask.com all consistently lose money in this search advertising segment.

The main takeaway from Google's earnings is Google continues to take substantial revenue market share -- it is becoming increasingly dominant in search advertising and search syndication despite the economic downturn.  While Google's growth has slowed, its market share gains don't appear to have slowed as much -- evidence of Google's many network effects.  

• Google grew 6% overall, however when you break out the revenue mix one can see the network effects at work -- because there is a 12% differential within the Google model between direct Google site revenues, which grew 9%, and indirect Google Network revenues (from other website partners) which fell 3%.
• We will have to wait and see what Yahoo, Microsoft, AOL, Ask/IAC and others report in the coming days, but unless there is a major surprise they all will have negative search advertising revenue growth or at best very slow revenue growth that is less than Google's 6%. 
  • When those data points come in we will be able to better confirm how much more market share Google has taken in the first quarter of this year. 

In short, the strongest gets stronger, at smaller players' expense.  

Tom Wheeler, of Core Capital partners, has a must read piece today: "The Wireless Way Out" on TMCNet. It highlights:

• How U.S. wireless broadband competitors are heavily investing in infrastructure despite the recession; 
• That U.S. private wireless infrastructure investments dwarf the public investment in broadband in the stimulus pakage; and
• That wireless broadband produces huge productivity benefits for the economy.

The big takeaway from this piece is that the fastest growing part of the U.S. broadband market, wireless, is strong, competitive and investing heavily -- which is very different than the state of non-communications industries in this economy. 

For those who don't know Tom's impressive background... he most recently was one of the most senior advisors for Technology on President Obama's Transition Team, and he also is a past head of both the CTIA and the NCTA.