The Mercatus Center at George Mason University has just released my new white paper, “The Perils of Classifying Social Media Platforms as Public Utilities.” [PDF] I first presented a draft of this paper last November at a Michigan State University conference on “The Governance of Social Media.” [Video of my panel here.]

In this paper, I note that to the extent public utility-style regulation has been debated within the Internet policy arena over the past decade, the focus has been almost entirely on the physical layer of the Internet. The question has been whether Internet service providers should be considered “essential facilities” or “natural monopolies” and regulated as public utilities. The debate over “net neutrality” regulation has been animated by such concerns.

While that debate still rages, the rhetoric of public utilities and essential facilities is increasingly creeping into policy discussions about other layers of the Internet, such as the search layer. More recently, there have been rumblings within academic and public policy circles regarding whether social media platforms, especially social networking sites, might also possess public utility characteristics. Presumably, such a classification would entail greater regulation of those sites’ structures and business practices.

Proponents of treating social media platforms as public utilities offer a variety of justifications for regulation. Amorphous “fairness” concerns animate many of these calls, but privacy and reputational concerns are also frequently mentioned as rationales for regulation. Proponents of regulation also sometimes invoke “social utility” or “social commons” arguments in defense of increased government oversight, even though these notions lack clear definition.

Social media platforms do not resemble traditional public utilities, however, and there are good reasons why policymakers should avoid a rush to regulate them as such. Treating these nascent digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition. Furthermore, treating today’s leading social media providers as digital essential facilities threatens to convert “natural monopoly” or “essential facility” claims into self-fulfilling prophecies. Related proposals to mandate “API neutrality” or enforce a “Separations Principle” on integrated information platforms would be particularly problematic. Such regulation also threatens innovation and investment. Marketplace experimentation in search of sustainable business models should not be made illegal.

Remedies less onerous than regulation are available. Transparency and data-portability policies would solve many of the problems that concern critics, and numerous private empowerment solutions exist for those users concerned about their privacy on social media sites.

Finally, because social media are fundamentally tied up with the production and dissemination of speech and expression, First Amendment values are at stake, warranting heightened constitutional scrutiny of proposals for regulation. Social media providers should possess the editorial discretion to determine how their platforms are configured and what can appear on them.

This 63-page paper can be found on the Mercatus site here, on SSRN, or on Scribd.  I’ve also embedded it below in a Scribd reader. Eventually, a shorter version of this paper will appear as a chapter in a MIT Press book.

Social Networks as Public Utilities [Adam Thierer]

I really appreciate the venture capitalists (VCs) in Silicon Valley subsidizing my soapbox at Twitter.  Seriously, it is an absolutely awesome platform for getting a message out to the masses.  But at some point I worry that the gravy train will come to an end and that users will have to start picking up part of the tab.  After all, will those VCs continue to subsidize Twitter if it never turns a profit?  According to the Wikipedia entry about Twitter:

In total, Twitter has raised over US$57 million from venture capitalists. The exact amounts of funding have not been publicly released. Twitter’s first round of funding was for an undisclosed amount that is rumored to have been between $1 million and $5 million. Its B round of funding in 2008 was for $22 million and its C round of funding in 2009 was for $35 million from Institutional Venture Partners and Benchmark Capital along with an undisclosed amount from other investors including Union Square Ventures and Spark Capital^. Twitter is backed by Union Square Ventures, Digital Garage, Spark Capital, and Bezos Expeditions.

Again, thank you VCs!  But, like them, I do wonder when and how Twitter will bring in some cash.  Is there a “freemium” model that could work?  Perhaps.  “Pro” or corporate accounts have been rumored to be in the works.  Getting someone else to pick up the tab that way might bring in enough cash for Twitter to allow the free ride to continue for the rest of us.  But what about advertising?  It’s been the “mother’s milk” of most online media and platforms for some time now, and Twitter seems perfectly suited to insert a few banner ads or contextual ads here and there.  It could be happening sooner than you think. Austin Modine of The Register notes in a new piece, “Twitter ‘Leaves Door Open’ for Targeted Ads,” that:

Twitter has always been reluctant to commit to serving advertisements as a revenue model – the way most web start-ups today stay afloat. In the past, the website has expressed more interest in developing add-on tools and services for companies and professionals. Yet [Twitter cofounder Biz Stone] … has never ruled out the possibility.

Modine reports that Twitter recently changed its Terms of Service in such a way that makes this more likely.  Here is what the new Terms of Service say:

The Services may include advertisements, which may be targeted to the Content or information on the Services, queries made through the Services, or other information. The types and extent of advertising by Twitter on the Services are subject to change. In consideration for Twitter granting you access to and use of the Services, you agree that Twitter and its third party providers and partners may place such advertising on the Services or in connection with the display of Content or information from the Services whether submitted by you or others.

As Tony Bradley of PC World argues:

Why not? Advertising is the grease that keeps the Internet revenue engine running smoothly. Its tried and true. Internet entities like Google have grown from the embryo stage to technology behemoth primarily by feasting on a steady diet of ad revenue.

Absolutely correct.  Of course, that probably won’t stop some people — especially the privacy zealots — from whining about commercial exploitation, mind manipulation, and so on — especially if Twitter really does make their ads highly targeted.  But that’s the natural evolution of things for Twitter and similar sites, and it’s very pro-consumer because it supports the continued provision of service at no charge to the vast majority of users. That’s especially important for a communications platform like Twitter, which carries a massive amount of non-commercial speech, as Berin Szoka and I pointed out in our papers, “Online Advertising & User Privacy: Principles to Guide the Debate,” and “Targeted Online Advertising: What’s the Harm & Where Are We Heading?  It’s essential that policymakers not interfere with the evolution of business models that could support speech-enhancing platforms like Twitter going forward.  This is why we always point out the relationship between economic regulation and speech regulation. Burdensome regulation could stifle the “technologies of freedom” like Twitter and diminish our speech opportunities in the process.

The proliferation of Web 2.0 social media services has magnified the old problem of cyber-squatting: Every new service represents the possibility that someone else might claim your name, or your organization’s trademark, as a user name before you do! This problem is especially significant where user names correspond to vanity URLs, as with Twitter and, more recently, Facebook.

So I was intrigued to discover that the market is responding to this need: ClaimMyName (CMN) will take care of user registrations on 30 Web 20 services for $329 or on an astounding 300 services for $799. CMN is a “freemium” service offered by DandyID.com, a nifty free service that allows users to organize all their social media profiles for something like 390 services so that buttons for each service can easily be added to an author bio page on a blog, as we’ve done at the TLF. So if I really wanted to make sure that no one else registered http://<WEB2.0service>.com/berinszoka, or /techliberation or /ProgressFreedom, this service would allow me to do so with just a few clicks—at a price of either $10.97/service for thirty or $2.66/service for 300 services.

CMN is essentially a mini-Mark Monitor, the international company famous for protecting trademarks online—except that CMN facilitates self-help by users outside of trademark law: No registration is required; everything is done on a first-come-first-serve basis. Pretty cool.

Regular readers will know that Adam and I have been waging a lonely defensive action in the war on “Free!” (ad-supported) content and services online, pointing out that restrictions on data collection and use for advertising would ultimately hurt consumers by reducing funding for the sites they love (1, 2, 3, 4). In short, there is no free lunch! I’ve also written a number of posts this past week about the dangers inherent in antitrust regulation—arguing that government efforts to make online markets more competitive through antitrust tinkering generally do more harm than good (1, 2, 3).

These two debates have long shared a common thread: Some have argued that effects on privacy should become a part of antitrust analysis and those who consider Google to be “Big Brother” want Washington both to clamp down on data use (“baseline privacy legislation”) and to ramp up antitrust scrutiny of the company.

But a French company has opened a much more direct front in the War on “Free.” Bottin Cartographes has sued Google for unfair competition (concurrence déloyale—literally, disloyal competition) and abuse of its market dominance. The case is a little more complicated than English language reports suggest: It’s not just that Google is giving away a product (Google Maps) that Bottin charges, or wanted to charge, for.  Like Google, Bottin charges enterprise users. But Bottin complains that Google doesn’t show ads on the public version of Google Maps. (Neither does Bottin, but maybe that’s part of why they’re upset.) Bottin’s lawyer claims that Google’s “strategy is to capture the market and squeeze out the competition by creating a monopoly for itself.” He goes on to assert that Google is “ruining the market” for mapping services.

Bottin seeks half a million Euros (plus interest) in damages, but their lawyer insists: “It’s not a question of money. Either Google puts advertising on Google Maps or the company must be forced to pay damages and abide by the terms of fair competition.”  The hearing is set for October 16.

This argument, crazy as it sounds, is one Google is likely going to have to fend off repeatedly in the coming years—and not just in Europe, where “unfair competition” is still very much about protecting competitors rather than consumers. Chris Anderson, author of the new book Free, recently addressed this very issue. Anderson’s book describes multiple ways of supporting “Free” content and services.

This use of Free is part of [Google’s] “max strategy” — it uses Free to get its products in the hands of the greatest number of users, and then figures out some way to get money from them (mostly with ads, but sometimes with “pro” versions of the services, in which users can pay for more storage or features, using the “freemium” business model).

Google does, indeed, charge for an Enterprise version of Google Maps, while giving away the basic version for free with no ads. Anderson puts his finger on why this might seem problematic to some:

Google can give away so much because the incremental cost of serving one more Web page to one more user is almost nothing — and falling as technology gets cheaper. This is the difference between the “bits economy” and the “atoms economy.” The marginal cost of production for digital things is so low that Free becomes not just a marketing gimmick but the default price in most markets, driven by economic forces as real online as gravity is in the real world.

But companies still have to make money, so there are limits to how much they can provide free. Not a problem for Google. Its core advertising business is so powerful, dominant and profitable that it can subsidize almost everything else the company does, using Free to get customers in new markets.

Is that fair, when so many of its competitors don’t have a similar golden goose at the core of their operations?

In response, Google’s Dana Wagner pointed out that

1. “almost no one believes that Google would or could start charging exorbitant prices for products like search and Gmail”—for the very same reasons that everyone else gives these services away:  It’s very difficult to charge anything for digital goods and services whose marginal cost is effectively zero.
2. “competition laws are concerned with what’s best for consumers, not for competing companies, and there’s little doubt that from a consumer perspective, free products are usually a great thing.”

In the French case, what would really be best for consumers? Why should freemium be considered unfair competition? Why should anyone be required to charge all users for a service, or show ads, if they can find a way to make money by getting some users to pay? If Bottin can’t compete with its own Freemium model, too bad! (Maybe they could team up with has-been Mapquest?)

And even if Google weren’t charging anyone for Google Maps and really were just cross-subsidizing it from other revenues, why would that be bad? This may well be what’s going on right now with Google Docs, which has no ads ads and isn’t upsold in a Freemium model. As Anderson said of Google Docs:

Microsoft, meanwhile, is doing just the opposite: using the profits from its dominance of word processors and spreadsheets (Microsoft Office) to subsidize its competition with Google in search (Microsoft Bing). In each case, the companies are using a highly profitable paid product to make another product free, on the hopes of gaining market share by taking price off the table.

Dana’s reply is dead-on:

Rather than exemplifying a competitive problem, Chris’s example makes the point that in fact there is robust competition, between two companies pursuing similar strategies to win over users from each other. That’s competition in action!

The same could be said of Google Earth and Microsoft’s Virtual Earth, neither of which is ad-supported or upsold, as well as many of the free services Google offers, such as Goog-411, Google Desktop and Google Scholar. Maybe Google will figure out a way to make money from these services directly. But even if it doesn’t, as Ryan has asked, what’s the harm to consumers?

Vive la Free!

Somewhere between Nick Carr’s “Typology of Network Strategies” and Chris Anderson’s “Four Kinds of Free” is the secret to understanding our new economy:

Carr’s “Typology of Network Strategies”:

1. Network effect
2. Data mining
3. Digital sharecropping, or “user-generated content”
4. Complements
5. Two-sided markets
6. Economies of scale, economies of scope, and experience

Anderson’s “Four Kinds of Free”:

1. Direct cross-subsidy (get one thing free, pay for another)
2. Ad-supported (third-party subsidizes second party)
3. “Freemium” (a few people subsidize everyone else)
4. “Gift economy” (people give away things for non-monetary rewards)

Of course, both Carr and Anderson are building on theories and business models previously articulated by many others. A few that come to mind:

• Carl Shapiro & Hal Varian, Information Rules: A Strategic Guide to the Network Economy (1999)
• Stan Liebowitz, Re-thinking the Network Economy (2002)
• Jeffrey H. Rohlfs, Bandwagon Effects in High-Technology Industries (2001)
• Oz Shy, The Economics of Network Industries (2001)
• Don Tapscott & Anthony Williams, Wikinomics: How Mass Collaboration Changes Everything (2006)