[UPDATE 4/30/13: This article was subsequently published in Volume 65, Issues 2 of the Federal Communications Law Journal in April 2013. The links below now point to the final FCLJ version.]

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “Uncreative Destruction: The War on Vertical Integration in the Information Economy.”  Brent, who is the research director for the Information Economy Project at the George Mason University School of Law, and I have been working on this paper since the Spring and we are looking forward to getting it published in a law review shortly. The paper focuses on Tim Wu’s “separations principle” for the digital economy, something I’ve spent some time critiquing here in the past. Here’s the introduction from the 44-page paper that Brent and I just released:

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Columbia Law School professor Tim Wu responds in the affirmative in his book The Master Switch: The Rise and Fall of Information Empires. Having successfully pushed net-neutrality regulation into the policy spotlight, Wu has turned his attention to what he regards as excessive market concentration and threats to free speech throughout the entire information economy.To support his call for increased antitrust intervention, Wu explains his view of competition in the information economy—a view that deviates substantially from current mainstream antitrust theory. First, Wu contends that “information monopolies” are pervasive in the information economy. Wu’s “monopolists” include Facebook, Apple, Google, and even Twitter. In The Master Switch and essays like “In the Grip of the New Monopolists,” Wu argues that these so-called monopolies are increasing their market power and require more aggressive oversight and regulation.Second, Wu argues that traditional antitrust analysis is not sufficient for information systems because they carry speech. He claims, “Information industries… can never be properly understood as ‘normal’ industries,”and traditional forms of regulation, including antitrust enforcement, “are clearly inadequate for the regulation of information industries.”Wu believes that because information industries “traffic in forms of individual expression” and are “fundamental to democracy,” they should be subject to greater regulatory treatment.Third, in contrast to current competition law’s focus on horizontal relationships, Wu desires a reinvigorated regulatory enforcement that addresses “the corrupting effects of vertically integrated power” in the information sectors.He is particularly concerned about private threats to free speech arising from such vertical integration.The solution, he says, is preventing vertical mergers in the information economy and the mandatory divestiture of vertically integrated companies. To implement this, Wu proposes a Separations Principle for the information economy, which would segregate information providers into three buckets, which we have labeled information creators, information distributors, and hardware makers.This article outlines Wu’s separations proposal, explains why his fears regarding vertical relationships should be rejected by regulatory and antitrust policymakers, and illustrates the legal and practical problems his Separations Principle poses. Wu justifies his Separations Principle by citing monopolies and market power in the information economy. He also advocates using U.S. antitrust authorities to enforce his Principle. We argue that the antitrust harms he fears are not present, and we highlight scholarship on the accepted benefits of vertically integrated firms. We show that Wu’s remedies are policy preferences wrapped in the language of competition law. In fact, the information economy is largely competitive and does not warrant interventionist regulatory enforcement. Since much of American economic vitality flows from the information economy and technology, policymakers should reject a radical antitrust remedy like Wu’s preemptive Separations Principle.

The paper can be downloaded from the Mercatus website, SSRN, or Scribd.

It’s my great pleasure this week to be participating in a 2-day symposium on “Competition in Online Search” that is being hosted by the Antitrust & Competition Policy Blog.  Daniel Sokol, Associate Professor of Law at the University of Florida Levin College of Law, was kind enough to invite me to join the fun. Professor Sokol is the editor of the Antitrust & Competition Policy Blog. Others participating in this symposium include: James Grimmelman (NY Law); Eugene Volokh (UCLA); Marvin Ammori (Stanford Law); Mark Jamison (Univ. of Florida); Eric Clemons (Wharton School); Dan Crane (Michigan Law); and both Marina Lao and Frank Pasquale (Seton Hall); and more.

My entry is now live. In it, I focus on how dynamically competitive and innovative the digital economy has been over the past 15 years and question to need for intervention at this time, especially of the “public utility” variety. I’ve re-posted my entry below, but make sure to head over to the Antitrust & Competition Policy Blog to read all the contributions to this excellent symposium.

_______________

If you blink your eyes in the Information Age you can miss revolutions. Let’s take a quick walk back through our turbulent recent history:

• Just five years ago, MySpace dominated social networking and had The Guardian wondering, “Will MySpace Ever Lose Its Monopoly?” A short time later, MySpace lost its early lead and became a major liability for owner Rupert Murdoch. Murdoch paid $580 million for MySpace in 2005 only to sell it for $35 million in June 2011.
• Just six to eight years ago, the mobile landscape was ruled by Palm, BlackBerry, Nokia, and Motorola. Palm is now all but dead and BlackBerry is trying to stay afloat while Nokia and Motorola had to cut deals with Microsoft and Google respectively in order to survive.
• Just 10 years ago, AOL’s hegemony in online services was thought to be unassailable, especially after its merger with Time Warner. But the merger quickly went off the rails and AOL’s online “dominance” quickly evaporated. Losses grew to over $100 billion and the entire deal unraveled within just a few years as AOL’s old dial-up, walled-garden business model had been completely superseded by broadband and the new Web 2.0 world.
• Just 12 years ago, Yahoo! and AltaVista were the go-to companies for online search. No one turns to them first today when they go looking for information online.
• And just 15 years ago, Microsoft was on everyone’s mind. Today, the firm is struggling to remain part of cocktail party chatter when the topic of modern Tech Titans is discussed. For example, a recent Fast Company cover story on “The Great Tech War of 2012” only mentioned Microsoft in passing. The rise of search, social media, and cloud computing represented disruptive shifts that Microsoft wasn’t prepared for.

The graveyard of tech titans is littered with the names of many other once-mighty giants. Schumpeter’s “gales of creative destruction” have rarely blown harder through any sector of our modern economy. And so now we come to the question of Google’s dominance in the field of search. Should we be worried? Some say yes, and the rhetoric of public utilities and essential facilities is increasingly creeping into policy discussions about the Internet, including the search layer. A growing cabal of cyberlaw experts—Tim Wu, Dawn Nunziato, Frank Pasquale, among many others—argue that some sort of regulation is needed.

But the recent history I recounted above makes it clear that patience and humility are the more sensible policy prescriptions. Calls for regulation or public utility classification are particularly premature and problematic. As I argued in my recent white paper, “The Perils of Classifying Social Media Platforms as Public Utilities,” search and social media platforms do not resemble traditional public utilities and there are good reasons why policymakers should avoid a rush to regulate them as such.

First, there has not been any serious showing of monopoly power in the search or social media sectors in which Google operates. It’s also impossible to find any way in which consumer welfare is currently being harmed by Google. All their products are free and constantly evolving. New technologies and rivals continue to emerge. DuckDuckGo, for example, differentiates itself in search by stressing privacy above all else. Meanwhile, the contours of these markets are constantly evolving in a dynamic way, making market definition challenging. Is Facebook a search company? Signs are good that it soon could soon become a formidable one.

These market-definition considerations are especially important because of how long it takes to formulate regulations or impose antitrust remedies. In a market that changes this rapidly, taking several months or even years to complete rulemakings or litigate remedies will almost certainly mean that most rules will be completely out of date by the time they are implemented. And once implemented, there will be very little incentive to rework them as rapidly as the market contours change. Regulation could retard innovation in search and social media markets by denying firms the ability to evolve or innovate across pre-established, artificial market boundaries. Second, treating these digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition. Public utility regulation has a long, lamentable history that has been well-documented by economists and political scientists. That’s why it is usually considered the last resort, not the first option. Moreover, the traditional goals of public utility regulation — universal service, price competition, and quality service — are already being achieved without intervention. And as Marvin Ammori and Luke Pelican outline in a new study, all the proposed antitrust remedies to deal with Google in particular also have serious downsides. Almost all the cures would be worse than whatever disease it is critics hope to solve with antitrust intervention.

Third, treating today’s leading search and social media providers as digital essential facilities threatens to convert “natural monopoly” or “essential facility” claims into self-fulfilling prophecies. The very act of imposing utility obligations on a particular platform or company tends to lock it in as the preferred or only choice in its sector. Public utility regulation also shelters a utility from competition once it is enshrined as such. Also, by forcing standardization or a common platform, regulation can erect de jure or de facto barriers to entry that restrict beneficial innovation and the disruption of market leaders.

Fourth, 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. As Eugene Volokh noted in a recent white paper, social media providers should possess the editorial discretion to determine how their platforms are configured and what can appear on them.

Will Google meet the same fate as earlier Tech Titans? It’s impossible to know. But with the wrecking ball of creative digital destruction doing such a fine job of keeping competition and innovation thriving, we’d be smart to reject heavy-handed, top-down regulation of such a dynamic segment of our economy at this time.

On Wednesday afternoon, it was my great pleasure to make some introductory remarks at a Family Online Safety Institute (FOSI) event that was held at the Yahoo! campus in Sunnyvale, CA. FOSI CEO Stephen Balkam asked me to offer some thoughts on a topic I’ve spent a great deal of time thinking about in recent years: Who needs parental controls? More specifically, what role do parental control tools and methods play in the upbringing of our children? How should we define or classify parental control tools and methods? Which are most important / effective? Finally, what should the role of public policy be toward parental control technologies on both the online safety and privacy fronts?

In past years, I spent much time writing and updating a booklet on these issues called Parental Controls & Online Child Protection: A Survey of Tools & Methods. It was an enormous undertaking, however, and I have abandoned updating it after I hit version 4.0. But that doesn’t mean I’m not still putting a lot of thought into these issues. My focus has shifted over the past year more toward the privacy-related concerns and away from the online safety issues. Of course, all these issues intersect and many people now (rightly) considered them to largely be the same debate.

Anyway, to kick off the FOSI event, I offered three provocations about parental control technologies and the state of the current debate over them. I buttressed some of my assertions with findings from a recent FOSI survey of parental attitudes about parental controls and online safety.

Provocation #1: While parental controls will continue to play an important role, it may be the case that many parents will not need parental controls technologies quite to the extent we once thought they did.

In one sense, usage of parental control tools is actually surprisingly high. The FOSI survey reported that 53% of parents say they have used parental control tools to assist them in monitoring their child’s Internet usage. That’s much higher than I would have expected.

Of course, that means that the other half of parents aren’t using parental controls. Why aren’t they? It can’t be because parents aren’t aware of the tools. Awareness of parental control tools is growing. According to the FOSI survey, 87% of parents report knowledge of at least one parental control technology.

Some critics claim it’s because the tools are too complicated, but that’s also hard to believe. The tools keep getting easier to use and cheaper—often being completely free of charge.

The better explanation lies in the fact that, first, talking to our kids continues to be the most important approach to mentoring youth and protecting them, just as it was for previous generations of parents. Almost all of the parents surveyed by FOSI (96%) said they have had a conversation with their child about what to do and not to do online.

Second, “household media rules” are the other unforgotten element here. These rules can be quite formal in the sense that parents make clear rules and enforce them routinely in the home over an extended period of time. Other media consumption rules can be fairly informal, however, and are enforced on a more selective basis. In my book on parental controls, I devised a taxonomy of household media rules and outlined four general categories: (1) “where” rules; (2) “when and how much” rules; (3) “under what conditions” rules; and, (4) “what” rules.

The FOSI survey reveals that such household media rules are widely utilized. Nearly all parents (93%) said they have set rules or limits to monitor their children’s online usage. In particular:

• 79% of parents surveyed require their children to only use the computer in a certain area of the house. (This is an example of a “where” rule.)
• 75% of parents limit the amount of time a child can spend online. (This is a “how much” rule.)
• 74% set rules for the times of day a child can be online. (This is a “when” rule.)
• 59% established time limits for use of a child’s cell phone. (This is another “how much” rule.)

Again, many pundits and policymakers routinely ignore the importance of such household media rules when talking about online child safety. They incorrectly assume that lower than expected usage of various parental control technologies means that those tools have failed or that kids are in great danger online. The reality is that most parents usually think of parental control technologies as a backup plan or complement to traditional parental mentoring and rule-setting responsibilities.

In fact, the FOSI survey revealed that, of those parents who have not used parental controls, 60% of them said it was because they already have rules and limits in place. Of course, none of this should be surprising. Most of us over 40 grew up without any parental control tools in our homes. Just like our parents before us, we devise strategies to mentor our youth and guide their development. Simple lessons and smart rules will, therefore, always be the first order of business. Technological controls will often only be used to supplement and better enforce those lessons and rules, if they are used at all.

In sum: parents are parenting!

Provocation #2: Kids are more resilient than we think.

Despite the panic we sometimes hear surrounding online safety and privacy, kids seem to be adapting to online environments and challenges quicker than parents (and policymakers) give them credit for. Without minimizing the seriousness of any particular concern, I think we need to step back and appreciate just how good of a job most kids have done adjusting to the modern Information Revolution.

There’s a great deal of literature in the field of psychology and sociology dealing with resiliency theory. When we think about risk in this world, there exists a range of responses. Prohibition and anticipatory regulation are on one end of the spectrum. Resiliency and adaptation are on the other.

When highly disruptive information technologies come on the scene, the first reaction is often prohibition or anticipatory regulation. That’s driven by fear of the new and unknown. Oftentimes, however, patience is the better disposition. Building resiliency and crafting adaptation strategies often makes more sense. Instilling principles and lessons to last a lifetime will ultimately do more to make our kids smart, savvy cyber-citizens and prepare them for the worst of what the world might throw their way.  It’s like the old “teach a man to fish” approach, except in this case it’s “teach a child to think.”

In many ways, this is precisely what has been happening for the past decade. Both parents and kids have been “learning on the job” so to speak. They’ve been adapting to new online worlds and gradually assimilating them into their lives. In the process, they have learned important lessons and become more resilient.

Of course, some risks are serious enough that they demand a more anticipatory solution, perhaps even prohibition. Child porn and online child abuse of any sort are the primary examples. But for most other things, social adaptation and resiliency responses generally trump prohibition or anticipatory regulation as the smart solution.

Provocation #3: The most interesting and important public policy debate going forward—both for child safety and kids’ privacy concerns—continues to be the vexing question of where to set to defaults and who sets them.

This isn’t the provocative part of this particular provocation. After all, we’ve always know that defaults matter . Psychologists speak of “status quo bias,” or the general inclination for humans to often stick with the choice they’ve initially been offered. Thus, default parental control and privacy-related settings are often quite “sticky.” Where safety and privacy defaults are set out of the gates is usually where they stay for many people.

A lot of people would like to find a way to change that—potentially through regulation—because they do not approve of the initial defaults offered by various online sites, service, or devices.

Generally speaking, there are two sets of hard questions here. First should we default to the most restrictive setting, the least restrictive, or should we force the consumer to make the choice before using the site, service, or device? Second, who makes that call? Private or public actors?

So, here’s my real provocation: We are better served as a society when these defaults evolve organically and are not imposed from above. Trial and error experimentation with varying defaults help us better understand the relative value of online safety and privacy to various users. That experimentation also sends important signals to other players in the marketplace and encourages them to offer innovative alternative or approaches to these issues. [Here’s a longer paper I penned on this issue explain why mandatory and highly restrictive defaults usually aren’t a good idea.]

The obvious objection to my position is that, if companies are the ones setting the defaults, then only their values get heard and their preferred defaults will always prevail. In reality, however, defaults often do evolve from where they are initially set. (Think of how browsers and social networking sites have added and changed privacy and security controls over just the past few years.) Press exposure and social pressure—especially from average parents and advocacy groups—typically help make sure service providers are responsive to needs of their communities.

Importantly, just because some the preferred defaults of some child safety or privacy advocates do not prevail, that doesn’t constitute “market failure.” There are many competing values at work here. First off, we must never forget that only 32% of all U.S. households have children present in them at any given time. And of that 32%, a small subset might need parental controls or enhanced privacy settings. Many others won’t need any. We live in a diverse nation with a wide spectrum of values and approaches when it comes to rearing our children and protection their safety and privacy. Some parents will never use any parental control or privacy tools. Others will layer them on. Others will use a mix of tools and strategies as outlined above.

In the end, we should expect that experimentation with varying defaults will continue and that there will always be some who are cranky about their preferred defaults not prevailing. But I think we are better off if we allow experiments to continue.

After I offered these initial provocations at the FOSI event, we had a terrific conversation among a diverse group of attendees. I took notes and tried to distill the key takeaways from the conversation, which was off the record. Here are 5 themes that I kept hearing coming up again and again from participants:

1. There is no single tool or silver-bullet solution that can solve all these problems; many tools and solutions are needed for the various concerns that are out there today
2. The term “parental controls” is too narrow since it just implies tools. We need a broader term or paradigm that incorporates education, awareness, empowerment, household media rules, etc.
3. Whether we are talking about tools or awareness efforts, there is remains a trade-off between sophistication and usability.  Many people and policymakers say they want more sophisticated tools but then turn around and complain about complexity of those solutions later. Stated differently, there will never be a “Goldilocks formula” that gets it just right precisely because needs and values evolve.
4. There are shifting concerns among parents from old days. In the early days of the Net, the concern tended to be focused more on content consumption (mostly adult material). Today, the concern seems to have shifted strongly toward content creation (ex: user-generated content on social networking sites, Twitter, SMS, etc.)
5. Kids are getting online at a younger age despite regulatory prohibitions such as COPPA and we’re going to have to grapple with that reality and whether we’ll allow it.

Last night, Declan McCullagh of CNet posted two tweets related to the concerns already percolating in the privacy community about a new Apple and Android app called “Color,” which allows those who use it to take photos and videos and instantaneously share them with other people within a 150-ft radius to create group photo/video albums. In other words, this new app marries photography, social networking, and geo-location. And because the app’s default setting is to share every photo and video you snap openly with the world, Declan wonders “How long will it take for the #privacy fundamentalists to object to Color.com’s iOS/Android apps?” After all, he says facetiously, “Remember: market choices can’t be trusted!”  He then reminds us that there’s really nothing new under the privacy policy sun and that we’ve seen this debate unfold before, such as when Google released its GMail service to the world back in 2004.

Indeed, for me, this debate has a “Groundhog Day” sort of feel to it.  I feel like I’ve been fighting the same fight with many privacy fundamentalists for the past decade. The cycle goes something like this:

• an innovative new information-sharing / social networking technology appears on the scene.
• the technology encourages more information production / sharing and defaults to sharing as the norm (but usually with opt-out capabilities or privacy settings of some sort built in).
• importantly, the technology in question is almost always free to consumers.
• immediately, a vociferous crowd of privacy fundamentalists lament the announcement and calls for the technology or service to be rolled-back or even regulated by the government. At a minimum, major design changes (usually an opt-in privacy default) are requested.  These advocates usually ignore or downplay the inherent quid pro quo involved in the deal, i.e., you share some info and tolerate some ads to get the free goodies.
• most privacy-agnostic people (like me!) usually yawn, sit back and enjoy the new free goodies, and wonder what all the fuss is about. In other words, over time (and usually fairly quickly), social norms adjust to the new technologies and modes of sharing.

In this regard, my favorite case study of this process in action is the one that Declan already mentioned: Gmail. It’s easy to forget now, but back in 2004 there was quite a hullabaloo over the introduction of Gmail. Indeed, the privacy fundamentalists wanted it stopped cold. Letters started flying from privacy groups, sent first directly to Google itself (31 groups signed this letter asking the company to roll back the service), and then to the attorney general of California requesting an investigation following an immediate suspension of the service.  Those signing that particular letter (Chris Jay Hoofnagle of EPIC, Beth Givens of  Privacy Rights Clearinghouse, and Pam Dixon of the World Privacy Forum) also warned of civil and criminal penalties and private rights of action.

It was at about that time that, well, I blew my top. After seeing some traffic on Declan’s old “Politech” listserv about this, and fearing that action might be forthcoming by government officials aimed at restricting this new technology, I fired off this response to the Gmail-haters on April 30, 2004:

-------- Original Message --------
Subject: RE: [Politech] EPIC letter compares Gmail to FBI's Carnivore,
Total Information Awareness [priv]
Date: Fri, 30 Apr 2004 09:16:54 -0400
From: Adam Thierer 
To: Declan McCullagh 

Oh brother, I can't take this lunacy from the privacy absolutists anymore:

(1) What part of VOLUNTARY is it that these privacy fundamentalists do
not understand? How many times and in how many ways must it be said: YOU
DO NOT HAVE TO SIGN UP FOR THIS FREE SERVICE!

(2) Second, these privacy absolutists persistently attempt to equate
private sector privacy concerns and government privacy violations. There
is a world of difference between the two and it basically comes down to
the fact that governments hold guns to our heads and coercively force us
to do certain things against our will. That is the real Big Brother
problem. Google, by contrast, isn't holding a gun to anyone's head and
forcing them to sign up.

(3) If you're concerned about how government might co-opt this service
for its own nefarious ends, that is not a Google problem, that is a Big
Government problem. Let's work together to properly limit the
surveillance powers of government instead of shutting down any new
private service or technology that we feel the feds might have to chance
to abuse.

(4) Final point about these privacy fanatics: Do they not believe in
freedom of contract? Do I or do I not have a right to contract with a
company to exchange certain forms of personal information for a the
right to free e-mail access and storage? Can I not VOLUNTARILY agree to
such a deal? If not, then I fear that there are a heck of lot of things
in this world that these people would make illegal in the name of
"protecting privacy."

Do they believe that companies like Google will - - out of the goodness
of their hearts - - just hand over free e-mail services and massive
storage capacity to everyone without anything in exchange? There is no
free lunch in this world but Google is giving us about the closest thing
to it. And yet, the privacy fanatics want to reject that offer on the
behalf over everyone in society. Well guess what EPIC... you don't speak
for me and a lot of other people in this world who will be more than
happy to cut this deal with Google. So do us a favor and don't ask the
government to shut down a service just because you don't like it.
Privacy is a subjective condition and your value preferences are not
representative of everyone else's values in our diverse nation. Stop
trying to coercively force your values and choices on others. We can
decide these things on our own, thank you very much.

It turns out that I didn’t really have as much to fear as I thought when I fired off that angry email. Most people immediately embraced the new Gmail service.  And why wouldn’t they? It was an amazing innovation at just the right price — free!  Don’t forget that, at that time, Yahoo! mail (the leading webmail provider) offered customers less than 10 megabytes of email storage. By contrast, Gmail offered users an astounding gigabyte of storage that would grow steadily over time.  Rather than charging some users for more storage or special features, Google paid for the service by showing advertisements next to each email “contextually” targeted to keywords in that email — a far more profitable form of advertising than “dumb banner” ads previously used by other webmail providers. That raised some privacy concerns, but it also offered users the ultimate email free lunch.  And they ate it up.

Today, 190 million+ people around the world use Gmail and the service continues to evolve to meet the needs of users.  While I’m not a fan of Gmail’s spartan user interface and lack of other useful features found in other services (like Outlook loaded up with Xobni), there’s no doubt that Gmail has been a terrific boon to consumers. But we should not so easily forget that some people wanted to preemptively kill it by imposing the equivalent of what I have called a “Privacy Precautionary Principle” and stopping innovation before they had given it their blessing.

Again, as I noted in my 2004 rant above, many privacy fundamentalist too often forget that privacy is a highly subjective and ever-changing condition. As Abelson, Ledeen, and Lewis noted in their excellent recent book, Blown to Bits:

The meaning of privacy has changed, and we do not have a good way of describing it. It is not the right to be left alone, because not even the most extreme measures will disconnect our digital selves from the rest of the world. It is not the right to keep our private information to ourselves, because the billions of atomic factoids don’t any more lend themselves into binary classification, private or public. (p. 68)

This struggle to conceptualize privacy and then protect it is going to continue and become quite a heated debate at times. I want to be clear, however, that while I do not share the values of those in the privacy fundamentalist camp, I do understand and appreciate that there are some people who are hyper-sensitive about this issue and I’m fine with them pressuring companies to change their privacy policies or, better yet, encouraging them to offer more tools that will allow users to better manage their own privacy.  I think Microsoft, Facebook,Yahoo! and Google (among many others) have made some amazing strides in this regard and some of the credit must go to the hard-core privacy advocates for pushing them to offer more flexible privacy-enhancing tools and settings for those who demand them.

But let’s be clear about another thing: This should be an evolutionary, experimental process. Educating and empowering consumers to handle their personal privacy settings is a wonderful thing. On the other hand, making those decisions for consumers preemptively, as some privacy advocates often seem to want to do, is an entirely different matter. A Privacy Precautionary Principle mentality — as we saw in display in the early spat over Gmail — would have resulted in hundreds of millions of people being denied an amazingly innovative new service based on largely on phantom fears and conjectural “harms.”  It is better to let these things play out in the information marketplace and see what the ongoing interaction of consumers and companies yields in terms of new innovation and new privacy settings / norms.  Those new settings and norms may not always be to the liking of some privacy fundamentalists, or even to privacy agnostics like me, but that experimental, evolutionary, organic process remains the right way to go if we value both progress and liberty.

Update 3/29: I somehow completely spaced-out and forgot about this terrific old 2004 essay by Tim O’Reilly on “The Fuss About Gmail and Privacy: Nine Reasons Why It’s Bogus.”  Go back and read it. Great stuff.  This Business Insider article brought it back to my attention.

I’m in front of a non-TiVo-enabled television this evening, which has permitted me to see ads for a search site called YP.com. It’s a rebranded YellowPages.com, affiliated with AT&T, and it’s organized to be a search engine for the things in your life—dining, travel nightlife—distinguished from Google’s utilitarian-tech web search. Meanwhile Microsoft’s Bing has overtaken Yahoo! as the number two search engine. I was surprised to learn that “undisputed search king” Google has only 65 percent of the search market. Google is doing well, of course, but it can’t be comfortable with all these well-funded rivals circling it.

This is good news for consumers. These competitors are driving Google to improve, and they can pull consumers away from Google by serving search niches such as lifestyle search (as YP does), more privacy protective search, and so on. Competitors will threaten and cut into Google’s advertising profits, too.

Television ads also remind us that HughesNet is offering broadband Internet via satellite. It’s mostly aimed at moving rural Internet users off of dial-up, but it’s an outlet for consumers anywhere who are unsatisfied with cable or DSL service. Critics will point out that it’s not very fast, kind of expensive, and includes daily usage caps. But this doesn’t deny HughesNet’s role as competition for cable and DSL.

Internet service provided badly enough by the major ISPs would make satellite broadband a viable competitor. If HughesNet’s investors were confident that they could sign up enough customers, they would make the investments that bring satellite broadband to the economy of scale it needs to be price-, speed-, and usage-competitive.

The spur of competition does not have to pierce the horse’s belly to have its effect.

Companies often promote consistent and reliable customer experiences. KLM touts itself as “the reliable airline” while Michelin touts its dependability “because so much is riding on your tires.” And now we have Yahoo, who announced that it will be increasing the social networking functionality in Yahoo Mail. Yahoo has the ability to promote consistency in determining user defaults for sharing information.

But social networking is a product much different than most – it is participatory. Passengers can’t fly airplanes and drivers don’t design tire tread, but social networking users control what and with whom they share information.

So what happens when a social networking service changes functionality or adds new features? How does a company be consistent in carrying-over a user’s preference from the prior version to the new one? What assumptions should it make on user privacy preferences for new features?

These considerations matter whenever an online service tries to increase its social networking functionality. Last week, Facebook unveiled new privacy controls, and we blogged that it was a welcome response to clear-up confusion. In the coming weeks Yahoo will change how status updates work in Yahoo Mail. Michael Arrington’s TechCrunch article describes it well:

[C]urrently to see status updates for others in Yahoo Mail, you have to have a mutual follow, meaning both people have agreed to be “friends.” You can then see that user’s Yahoo status updates as well as updates on third party services that they have added to their Yahoo profile as well. In the new version there will no longer be a requirement for a mutual follow. So, like on Twitter, users can follow whomever they choose. This isn’t actually a dramatic change for Yahoo, since users can follow others in this way already on Yahoo Messenger.

Like Google and Facebook before it, Yahoo is adding features to make its service more “social.” And because of the scrutiny over the changes by Google and Facebook, Yahoo seems to be going out of its way to assure users that they can rely and depend on Yahoo. According to the Yahoo Corporate Blog:

Before Yahoo! Updates is expanded to Yahoo! Mail where many more people will see their Contacts’ activity, we want you to explore your Updates settings and make sure you know who can see what you’re publishing. Even if you are among the many Yahoo! users who haven’t ever generated an update, we want to encourage everyone to actively manage these settings. Because the majority of events listed within Updates are inherently public activities, our defaults are set to allow anyone to see them (that is, for people over 18; we have different defaults that are age-appropriate for people under 18 – learn more in our FAQ).

In one sense, Yahoo is trying to stay consistent: in Yahoo Messenger, user updates are public, so they’re going to make updates public in Mail too. But in another sense, Yahoo is making assumptions—that users want to have their updates be public. Hence the rationale for Yahoo’s explanation: Updates are inherently public activities, our defaults are set to allow anyone to see them.

As online services add features and functionality, they will be faced with decisions about setting defaults about what most users prefer. Google Buzz presumed that Gmail users would want to publicly reveal which people they emailed the most—but based on the wide range of user pushback, Google chose this default poorly.

In the case of Yahoo, it is trying to make it easy for users to control and opt-out of sharing status updates: “[Y]ou can easily limit who sees your Updates stream either by editing the controls for each specific activity…or by turning your Updates stream off entirely in one simple step.”

Yahoo and other online services will strive to seek a balance. They will want to respect previously expressed user preferences, while defaulting settings so that people see and are encouraged to use new features.

But if the threat of regulation—beckoned by the noisy call of privacy critics—becomes too great, companies will be afraid to take risks and introduce new service. Forcing online sites to perpetually maintain original settings prevents innovative business models and services (just ask Microsoft about how slavish consistency to decade-old software makes Windows innovation so difficult). Strict consistency is a brake on innovation.

We know that companies won’t always get the right balance. But online services need the freedom to experiment with new ways for publishing and sharing information.

As the social web matures, we’ll see more and more sites confronted with this balancing act. They’ll need to carryover preferences from old to new versions, and make assumptions on what information most users will or will not want to disclose. If sites get it wrong, some users will change their settings, while others will leave—ultimately, either is a better expression of user preferences than any law or regulation.

Check out this amazing map of the “Dogs of War” of online competition created by Gizmodo’s Shane Snow (view full size here):

For all the complaining about these three tech titans, they’re locked in fierce competition with each other. This chart doesn’t even mention other players in the vibrantly competitive online ecosystem, like Facebook, Yahoo!, Twitter, and countless others. Makes you want to go spend a weekend playing an endless game of Risk, Axis & Allies or Supremacy with your best frenemies, doesn’t it? But of course, the board game analogy only goes so far, because today’s battlelines and players are only a snapshot of a long-term process of dynamic, highly rivalrous competition. But as Adam and I noted in our Forbes.com piece last fall calling for quick approval of Microsoft’s search partnership with Yahoo!:

Alas, regulators seem stuck in the past. European officials in particular seem hell-bent on continuing the antitrust crusade of the ’90s against Microsoft, myopically focused on fading paradigms (desktop operating systems and Web browsers). But instead of narrowly defining high-tech markets based on yesterday’s technologies or market structures, policymakers should embrace the one constant of the Internet economy: dynamic, disruptive and irrepressible change. Innovation isn’t just transforming the way we use the Web, it’s rapidly changing the competitive landscape too. Some of the predictions of the ’90s are finally coming true: Browsers have morphed into platforms for applications including e-mail, word processing and real-time collaboration. A decade ago, few would have predicted Google would build its own browser, turn that browser into an operating system, build an OS for smart phones, or go head-to-head with Microsoft Office. And the idea that Microsoft would ever take Office into the cloud was at one point unthinkable, but that’s happening now too. Meanwhile Google, and more recently Microsoft, have become full-fledged advertising companies–in competition with traditional media giants. Again, no one saw this coming. The Yahoo!/Microsoft pact is just the latest pairing of Web 1.0 titans struggling to reinvent themselves and compete with Google, a titan that still thinks of itself as a start-up. All three companies will struggle to meet new challenges as search evolves toward the social (reflecting what your friends like), the semantic (reflecting the precise, rather than presumed, meanings of Web content), the personalized (reflecting your own preferences) and the interactive (including user-generated comments or reviews).

That’s true in the search market as it is in other online markets. In the end, consumers are the winners from this relentless, revolutionizing rivalry.

Last July, Adam Thierer and I argued in a Forbes.com piece that the Microsoft/Yahoo! search partnership should be cause for “celebration among as a good thing for consumers. By providing a strong competitor with a combined 28% market share, the deal should also be a source of relief at Google, which has come under increasing attack for its supposed market dominance.” Today, 205 days later, the companies have finally announced that EU and US antitrust regulators have approved their deal.

So… how does a delay of nearly seven months help consumers? Wouldn’t we be better off if the two companies had been able to start working together immediately to develop a stronger search engine competitor without this “Mother, May I?” routine?

Last year, I described how Microsoft’s delayed entry into search advertising put them at a serious disadvantage in competing with Google. (The company dithered over buying search ad startup Overture and ultimately decided to build its own system—which proved a serious miscalculation.) I’ll just reiterate what we said about the Yahoo!/Microsoft deal when it was first announced.

Yahoo!/Microsoft pact is just the latest pairing of Web 1.0 titans struggling to reinvent themselves and compete with Google, a titan that still thinks of itself as a start-up. All three companies will struggle to meet new challenges as search evolves toward the social(reflecting what your friends like), the semantic (reflecting the precise, rather than presumed, meanings of Web content), the personalized (reflecting your own preferences) and the interactive (including user-generated comments or reviews)…. Despite this whirlwind of change, the Yahoo!/Microsoft deal is bound to lead to some hand-wringing from lawmakers and antitrust officials in Washington and Brussels. Regulators already blocked a somewhat similar advertising partnership between Google and Yahoo last year. What unites these regulatory responses is the belief that rapidly evolving digital technologies can be regulated like the static utilities of the analog era–and the failure to understand that antitrust is just another form of regulation. Instead, policymakers should recognize that the business, user and technological paradigms of the Web are constantly being re-invented and replaced. They shouldn’t delay approving this deal, especially as any delay would lengthen an awkward period of uncertainty for the corporate couple at the antitrust altar. Moreover, they should avoid micro-managing the transaction through regulatory blackmail: demanding “voluntary concessions” before giving their blessing. For many of the same reasons, policymakers should exercise great care and humility when listening to the growing cacophony of calls for antitrust intervention against Google. “Googlephobia” has reached a fever pitch in recent months with plenty of critics in both government and industry hinting that they’d like to see the company crippled with new restrictions or obligations–much as Microsoft was in the ’90s. The idea of antitrust regulators becoming a veritable “Federal Search Commission” for such a rapidly evolving sector seems highly problematic. America’s high-tech sector is the envy of the world precisely because, generally speaking, the U.S. has rejected heavy-handed regulation of the Information Economy. Indeed, no one knows better than Microsoft how much “antitrust oversight” can hamstring a company’s ability to stay ahead of transformative change.

I very much enjoyed Dennis Baron’s new book, A Better Pencil: Readers, Writers, and the Digital Revolution, and highly recommend you pick it up. Baron does a wonderful job exploring the history of techno-pessimism and the endless battles about the impact of new technologies on life and learning, something I have written about here before in my essays on “Internet optimists vs. pessimists” (See: 1, 2, 3).

I have a complete review of Baron’s A Better Pencil now up on the City Journal‘s website here.  I’ve also pasted it down below.

Plato Wrote it Down by Adam Thierer

a review of A Better Pencil: Readers, Writers, and the Digital Revolution, by Dennis Baron (Oxford University Press, 280 pp., $24.95)

In the beginning, Dennis Baron reminds us in his new book, A Better Pencil, there was the word—the spoken word, that is. Oral tradition, the passing of knowledge through stories and lectures, was the primary method of instruction and learning throughout early human civilization. But then a few innovative souls decided to start writing everything down on stones and clay. Almost as soon as they did, a great debate began on the impact of new communications technology on culture and education. And it rages on today, with a new generation of optimists and skeptics battling over the impact that computing, the Internet, and digital technologies have on our lives and on how we learn about the world.

Baron, a professor of English and linguistics at the University of Illinois, begins his splendid history of these debates with the well-known tale from Plato’s Phaedrus about the dangers of the written word. The Egyptian god Theuth boasts to King Thamus about how his invention of writing will improve the wisdom and memory of the masses. Thamus shoots back, “The discoverer of an art is not the best judge of the good or harm which will accrue to those who practice it.” Thamus then passes judgment on writing’s impact on society, saying he fears that the people “will receive a quantity of information without proper instruction, and in consequence be thought very knowledgeable when they are for the most part quite ignorant.”

Of course, as Baron points out, we remember this warning only “because Plato wrote it down.” It’s one of the recurrent ironies in the history of techno-skepticism that while “the shock of the new often brings out critics eager to warn us away,” those critics often embrace—or, at the very least, benefit from—the very tools that they want the rest of us to shun. Whether it’s Luddites On-Line winning Yahoo’s “Cool Site of the Day” award, or the Writing Instrument Manufacturers Association promoting National Handwriting Day via the Internet, or Ted Kaczynski’s Unabomber Manifesto attracting unprecedented readership thanks to its availability on the Web, those who have a “common tendency to romanticize the good old ways” of doing things often fail to appreciate how new technology can benefit society—including themselves.

Baron walks us through a litany of historical examples—the printing press, the telegraph, telephones, typewriters, pocket calculators, personal computers, word processors, webpages, blogs, social-networking sites, and more—and identifies the usual pattern: we greet each new technology with deep distrust and dire warnings, but in time we adapt to the new realities. Indeed, as a species, we have an unparalleled ability to learn new ways of doing things. We don’t always like technological change, and often we deeply resent or fear it, but in the end, we learn to live with it and eventually to embrace it.

With the rise of the Internet and digital technologies, we see this pattern unfolding once again. “According to the latest generation of critics and naysayers,” Baron notes, “today it is computers that are producing texts whose value and credibility we question; computers that are giving too many people control over the creation and publication of text; computers that are wreaking havoc with our handwriting.” Contemporary critics also fret over “information overload.”

The backlash against computers and digitization began while the Internet was still in its cradle, with the 1992 publication of Neil Postman’s anti-technology screed, Technopoly: The Surrender of Culture to Technology. Postman’s intellectual descendants include Internet critics such as Lee Siegel, Andrew Keen, and Mark Helprin, whose works drip with disdain for all things digital. They warn of a coming dystopia where truth and authority vanish, culture crumbles, and political polarization breeds closed-mindedness and even the death of deliberative democracy.

These overly pessimistic critics turn a blind eye to both the wonders of the digital age and humanity’s ability to adapt. As Baron persuasively argues, “English survives, conversation thrives online as well as off, and on balance, digital communications seems to be enhancing human interaction, not detracting from it.” In fact, we live in a world of unprecedented media abundance that previous generations would have found unimaginable. As Baron puts it: “The Internet is a true electronic frontier where everyone is on his or her own: all manuscripts are accepted for publication, they remain in virtual print forever, and no one can tell writers what to do.” Such human empowerment is worth celebrating, even if it does have the occasional downside. Abundance is better than a world of scarce choices and few voices.

Baron’s retelling of the history of techno-skepticism is edifying, but it leaves one with the nagging feeling that these debates will never cease. Each generation will witness a technological watershed that brings out a fresh crop of both pollyannas and pessimists. Like Plato, however, most of us will embrace whatever’s next and move forward.

The Google juggernaut’s revenue growth has slowed steadily in the last five years, causing the Wall Street Journal to caution investors about buying Google stock. While much of the slow-down in Google’s revenue may be attributed to the recession, the WSJ cautions that:

• Microsoft is offering stiffer competition in search, which will only intensify once antitrust regulators approve its partnership with Yahoo! and the two companies actually implement their partnership (which could take another year);
• YouTube’s promise as an ad platform remains uncertain;
• Google lags behind Apple and Research in Motion in developing mobile phone operating systems, with Android still unproven;
• It remains unclear how successful the company will be in expanding beyond its existing lead in small text  ads into the potentially lucrative realm of banner ads.

Somehow I doubt Google’s fall to Earth will do much to allay the concerns of those who see Google as the kind of evil monopolist Microsoft was made out to be in the 90s.

As the Journal concludes, “It would be foolish to predict that Google won’t have another business success, of course… Google may itself discover the next Google-like business.” As long as someone’s out there working to turn today’s idle fantasies into tomorrow’s multi-billion dollar businesses, consumers win—whoever that bold innovator might be.

Microsoft and Yahoo’s proposed deal faces a tough antitrust gauntlet. In today’s The Seattle Times, Jonathan Hillel and I have an op-ed in which we argue that trustbusters should let the deal go through:

MICROSOFT and Yahoo want to join forces in Internet search to better compete against Google. But first, they need the blessing of government antitrust enforcers. Senate Antitrust Subcommittee Chairman Herb Kohl, D-Wis., already has threatened “careful scrutiny” of the deal. But trustbusters should not go fishing for problems in the Internet search market. In the relentlessly fast-moving digital economy, government intervention contorts the market and ultimately harms consumers. Under their proposed decade-long pact, Yahoo searches will be powered by Microsoft’s Bing search engine, which launched this June. The two search firms will maintain separate Web sites, but Microsoft will administer the technical side of both. Microsoft will also gain access to Yahoo’s vast volume of searches and query data. In exchange, Yahoo will receive 88 percent of ad revenues from searches performed on its own site.

[…]

Scale may make Microsoft and Yahoo more competitive, but it hardly guarantees them success. Indeed, history tells us that innovation, not scale, is the one true silver bullet in Internet search. Google earned its crown nearly a decade ago by revolutionizing search technology, devising the revolutionary PageRank system for indexing the Web and toppling AltaVista in the process. More recently, Microsoft’s Bing has made inroads by combining a clever cataloging system with alluring design.

Read the rest here.

We’ve written a lot lately about Microsoft’s efforts to reinvent itself, first rebranding its Live search engine as the Bing, and then partnering with Yahoo! to make Bing the search engine on Yahoo!’s still-impressive empire of content and services. But if Microsoft is going to beat Google in Search 3.0 and master shifts in the driving paradigms of the Internet from search and browsers to ubiquitous integration of social networking and other paradigms as yet unforeseen, Microsoft will need more than just brilliant engineering: They’ll need clever marketing.

So it seems that the software titan is turning to user-generated advertising, such as this gem:

WARNING: Battlestar Galactica spoiler: Google may well be in danger of losing its monopoly on cool to Microsoft if Bing can get at least four of the Final Five Cylons to volunteer as back-up singers in a promo video contest.

Google clearly considers Microsoft a threat, having recently launched an ad campaign of its own for its Apps services, which compete directly with Microsoft Office.

Maybe Obama should invite Google CEO Eric Schmidt and Microsoft CEO Steve Ballmer over to the White House for a beer to settle the two companies’ differences!

http://www.youtube.com/v/Q0umKaGxkkE While he’s at it, Obama might want to invite Apple CEO Steve Jobs, too, since the common cause Apple and Google once made against Microsoft now seems to be giving way to increased rivalry between the two titans of Internet cool. Or how about Facebook CEO Mark Zuckerberg, given Facebook’s growing challenge to Google? Yahoo!’s Carol Bartz seems to get along much better with everyone than the boys in the group, so she’d probably help Obama keep things under control. The Internet industry’s war-of-all-against-all is reminiscent of Tom Lehrer‘s classic 1960s satire “National Brotherhood Week”:

Like many others, I’ve wondered whether Yahoo! got less than it should have becuase government antitrust regulators prevented Google from bidding up the value of a deal with Yahoo!.

Carl Icahn, who owns 5% of Yahoo! seems happy enough while others still wonder if Microsoft got the better end of the deal,  BusinessWeek reports. While many observers have howled that Yahoo! gets revenue-sharing instead of cash up front, Yahoo! Carol Bartz notes that a cash deal “would have had significant tax consequences while contributing only $3 million in annual interest to Yahoo’s bottom line.”

Whatever the initial terms of the deal, its value depends on speedy approval without onerous conditions being imposed by antitrust regulators—even if they take the form of “voluntary” concessions. Let’s hope the government gets out of the way to give this new partnership a real chance to go toe-to-toe with Google in search, as I’ve suggested here, here and especially here.

Nick Wingfield has a great piece in today’s WSJ: Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft’s Ballmer (subscription required but can be found through a Google News search) about how Microsoft’s fortunes may be looking up across the board—especially with yesterday’s Yahoo!/Microsoft search/advertising partnership. The most interesting passage is this one:

For [Microsoft CEO Steve] Ballmer, the agreement provides some redemption in an area he has stressed is critical to Microsoft’s future. In an interview, he says the Yahoo deal received “more of my personal attention over the last 18 months than anything else we’re involved with,” including focusing on its most important new product in years, Windows 7. “It’s a big deal,” he says.

Of course, complex partnerships always require lots of time from senior management, but in this case, Ballmer’s quip speaks directly to the costs of antitrust scrutiny in terms of one of the most valuable resources available to any company: the time and attention of senior management. The “attentional cost” can of this deal for Microsoft could be broken into four parts beyond the normal costs of structuring any deal to make the most business sense:

1. How to structure the a Microsoft/Yahoo! deal so that it would be approved by regulators (defensive);
2. How to block a Google/Yahoo! deal (offensive);
3. Nursing the deal through the regulatory approval process over the coming months; and
4. The possibility that all of these costs could be wasted, to varying degrees, if antitrust regulators decide to block or restrict the deal.

These are all “deadweight losses” on the economy pure and simple—and ultimately costs to consumers.

I also speculated yesterday that uncertainty as to whether DOJ would block a Google/Yahoo! deal probably contributed to a delay of well over a year in concluding a Microsoft/Yahoo! deal—exacerbating the attentional costs to Microsoft. Yahoo! will also bear costs Nos. 1, 3 & 4 and Google bore its own costs in responding to Cost No. 2 and in trying to craft its own deal with Yahoo! last year, cost No. 1, which Yahoo! shared.

All three companies could have—and should have—been spending these critical attentional resources on the very things antitrust is, in theory, is supposed to promote: developing better products! If a company’s senior management spends all day on the phone with overpaid lawyers tinkering with deal structure and rearranging commas, all the engineering genius in the world won’t do much good.

As I noted yesterday, in rapidly evolving markets like search and advertising, distractions or delays of even a few months, can make a big difference to a company’s long-term ability to stay ahead of technological change:

the delay of over a year in reaching a [Yahoo!/Microsoft] deal is itself a significant cost of what economists would call the “regime uncertainty” created antitrust: Without clear rules, it’s difficult for economic actors to predict the decisions by regulators. A delay of a year could well prove to make a big difference in the ability of the two companies to mount a successful response to Google in search and advertising—just as Microsoft’s 18 month delay back in 2003-2004 in developing a search ad auction system to respond to Google’s AdWords system (which now produces 2/3 of its revenue) probably did much to thwart Microsoft’s initial efforts to compete in search.

As Adam as put it, Antitrust Law Can’t Keep Up with High-Tech! The sooner we learn this, and take antitrust off the table in high tech markets—both as a risk to corporate planning and as a potential weapon against competitors—the better all companies will be able to re-invent themselves as the paradigms of the web continually evolve.

Let’s hope that, as Holman W. Jenkins suggested last week in a WSJ op/ed, that Google and Microsoft in particular will find a way to work out a “cease-fire” in the rapidly accelerating arms race they’ve been in for the last decade—and agree to do battle on the field of pure competition.

Eric Goldman, one of the few active cyberlibertarians in legal academe, has a thoughtful post about the search partnership announced today. Eric notes blogger Danny Sullivan’s observation about the decline in Yahoo’s assets and his comment that:

Microsoft is getting a huge bargain courtesy of the US Department Of Justice. Without Google being able to compete for Yahoo’s business, the billions that were floating around in 2008 become millions in 2009.

Danny and Eric certainly have a strong point: One of the costs of the Justice Department’s decision to block Google from partnering with Yahoo! is that Yahoo! wound up fetching much less in its deal with Microsoft. But the intervening slump in the economy and online advertising has also contributed in the drop in Yahoo!’s share price and overall valuation, so it’s difficult to make an apples-to-apples comparison. Eric is probably right that in assessment that:

Yahoo was unbelievably crazy for passing on Microsoft’s acquisition proposal from a year-and-a-half ago. It looked like a foolish mistake at the time, and hindsight has definitely not improved that assessment!

It would seem that both Yahoo! and Microsoft under-estimated the likelihood that antitrust regulators would block a Yahoo!/Google deal a year ago: Microsoft probably wouldn’t have offered as much as it did to acquire Yahoo!’s search business ($31/share) and Yahoo! (currently $15.14/share) certainly wouldn’t have held out for a better deal from Google. While the end result ended up being a Yahoo!/Microsoft deal anyway, the delay of over a year in reaching a deal is itself a significant cost of what economists would call the “regime uncertainty” created antitrust: Without clear rules, it’s difficult for economic actors to predict the decisions by regulators. A delay of a year could well prove to make a big difference in the ability of the two companies to mount a successful response to Google in search and advertising—just as Microsoft’s 18 month delay back in 2003-2004 in developing a search ad auction system to respond to Google’s AdWords system (which now produces 2/3 of its revenue) probably did much to thwart Microsoft’s initial efforts to compete in search.

Sadly, no one can undo the mistakes of the past—either by regulators or businessmen. But as Adam and I conclude in our Forbes.com op-ed about the deal, to avoid doing further damage:

policymakers should recognize that the business, user and technological paradigms of the Web are constantly being re-invented and replaced. They shouldn’t delay approving this deal, especially as any delay would lengthen an awkward period of uncertainty for the corporate couple at the antitrust altar. Moreover, they should avoid micro-managing the transaction through regulatory blackmail: demanding “voluntary concessions” before giving their blessing.

A key point that Berin and I try to get across in our Forbes editorial today about the Yahoo!-Microsoft deal is that the high-tech marketplace evolves too rapidly for creaky Analog Era antitrust laws to keep up. We wanted to say more on that point in our piece, but we had a tight deadline (and a strict word limit!)  Well, turns out that we really don’t need to do so now because Farhad Manjoo of Slate has done a better job than we ever could have making that point in this essay today entitled, “The Case Against the Case Against Google“:

But if the government was right on the facts [in the Microsoft case], it was wrong on the big picture. The theory behind the prosecution was that Microsoft’s mobster tactics would raise the price of software and slow down innovation. But that didn’t happen. In 2002, Microsoft settled the antitrust case with the Bush administration; it faced no substantial penalties for its years of bad behavior. At that point, it still looked unbeatable—it had the same OS monopoly, office-software monopoly, and Web-browser monopoly. And you know what happened? It got beat anyway. Many of Microsoft’s assets turned out not to matter, because upstarts like Google and old foes like Apple found ways to innovate around them.

Indeed, in many ways Microsoft’s size was a liability, not an asset. This is the classic innovator’s dilemma; the company was so intent on protecting its cash cows—it derives most of its revenue from two products, Windows and Office—that it was blind to opportunities in new markets. Microsoft couldn’t make a Web e-mail system like Gmail, because that would have threatened Outlook. And why should Microsoft bother with free online word processing apps when Office was doing so well? When journalist Steven Levy showed Bill Gates the first iPod, Gates’ first reaction was, “It’s only for Macintosh?” Gates saw the iPod through the lens of desktop computers; if the iPod connected only to Macs, it didn’t pose a threat to Microsoft. What he didn’t figure out was that the iPod would herald the iTunes Store, allowing Apple to become not only the most influential entertainment company in the world, but also the dominant software maker for mobile devices. Yes, the first iPod didn’t work on Windows. In time, it would help render Windows irrelevant.

Exactly right. Antitrust advocates have often failed to appreciate that markets are evolutionary and dynamic, and when those markets are built upon code, the pace and nature of change becomes unrelenting and utterly unpredictable.

We’ve just published an op-ed over at Forbes.com about today’s big Yahoo!-Microsoft deal.

Searching For Success: Web 1.0 Titans Struggle to Reinvent Themselves by Berin Szoka & Adam Thierer

Yahoo! and Microsoft on Wednesday announced a partnership in which Microsoft’s Bing search engine technology will power search for both companies, but Yahoo! will manage advertising sales and content creation.

This should be cause for celebration as a good thing for consumers. By providing a strong competitor with a combined 28% market share, the deal should also be a source of relief at Google, which has come under increasing attack for its supposed market dominance. But if recent concerns about online search, advertising, competition and privacy are any guide, many will fail to appreciate why the deal is pro-consumer, or what it says about the rapid evolution of the Internet.

It’s easy to forget that just a decade ago most of us still hadn’t done our first Google search, Microsoft was still focused on the desktop and Yahoo! was still serving up the online equivalent of the Yellow Pages. AltaVista, AOL, CompuServe and Geocities still ruled the roost.

Today, as we enjoy the fruits of a true cyber-renaissance, cyberspace circa 1999 increasingly looks like the Digital Dark Ages: The old online walled gardens have crumbled, desktop applications have migrated to the cloud and search has redefined our experience of the Web.

Oh, and did we mention just about all of it is “free“? Sounds like exactly the sort of vigorous innovation, expanding consumer choice, falling prices and cut-throat competition that policymakers should want, right?

Alas, regulators seem stuck in the past. European officials in particular seem hell-bent on continuing the antitrust crusade of the ’90s against Microsoft, myopically focused on fading paradigms (desktop operating systems and Web browsers). But instead of narrowly defining high-tech markets based on yesterday’s technologies or market structures, policymakers should embrace the one constant of the Internet economy: dynamic, disruptive and irrepressible change.

Innovation isn’t just transforming the way we use the Web, it’s rapidly changing the competitive landscape too. Some of the predictions of the ’90s are finally coming true: Browsers have morphed into platforms for applications including e-mail, word processing and real-time collaboration. A decade ago, few would have predicted Google would build its own browser, turn that browser into an operating system, build an OS for smart phones, or go head-to-head with Microsoft Office. And the idea that Microsoft would ever take Office into the cloud was at one point unthinkable, but that’s happening now too. Meanwhile Google, and more recently Microsoft, have become full-fledged advertising companies–in competition with traditional media giants. Again, no one saw this coming.

The Yahoo!/Microsoft pact is just the latest pairing of Web 1.0 titans struggling to reinvent themselves and compete with Google, a titan that still thinks of itself as a start-up. All three companies will struggle to meet new challenges as search evolves toward the social (reflecting what your friends like), the semantic (reflecting the precise, rather than presumed, meanings of Web content), the personalized (reflecting your own preferences) and the interactive (including user-generated comments or reviews).

Even the business model of search is changing, with Microsoft offering consumers cash back for their searches. Meanwhile, new paradigms of social networking like Facebook and Twitter are emerging with business models whose potential remains both unclear and unlimited.

Despite this whirlwind of change, the Yahoo!/Microsoft deal is bound to lead to some hand-wringing from lawmakers and antitrust officials in Washington and Brussels. Regulators already blocked a somewhat similar advertising partnership between Google and Yahoo last year. What unites these regulatory responses is the belief that rapidly evolving digital technologies can be regulated like the static utilities of the analog era–and the failure to understand that antitrust is just another form of regulation.

Instead, policymakers should recognize that the business, user and technological paradigms of the Web are constantly being re-invented and replaced. They shouldn’t delay approving this deal, especially as any delay would lengthen an awkward period of uncertainty for the corporate couple at the antitrust altar. Moreover, they should avoid micro-managing the transaction through regulatory blackmail: demanding “voluntary concessions” before giving their blessing.

For many of the same reasons, policymakers should exercise great care and humility when listening to the growing cacophony of calls for antitrust intervention against Google. “Googlephobia” has reached a fever pitch in recent months with plenty of critics in both government and industry hinting that they’d like to see the company crippled with new restrictions or obligations–much as Microsoft was in the ’90s. The idea of antitrust regulators becoming a veritable “Federal Search Commission” for such a rapidly evolving sector seems highly problematic. America’s high-tech sector is the envy of the world precisely because, generally speaking, the U.S. has rejected heavy-handed regulation of the Information Economy. Indeed, no one knows better than Microsoft how much “antitrust oversight” can hamstring a company’s ability to stay ahead of transformative change.

Some will protest that this is just a case of the big getting bigger, but there have always been big fish in the high-tech pond. The difference today is that there are new fish jumping in the pond more rapidly than ever before, and today’s pond probably won’t be tomorrow’s evolutionary battleground.

Lacking a technological crystal ball with which to predict the future of this fast-paced sector, there’s no way to know which of those players or technologies will thrive or what the digital paradigms of the next decade will look like. But heavy-handed antitrust regulation based on static thinking will lock us into an “industrial policy” for the Internet. Treating America’s tech titans like smokestack-era utilities won’t benefit consumers or enhance America’s competitive standing in the world.

The latest edition (Version 4.0) of my PFF special report on “Parental Controls and Online Child Protection: A Survey of Tools & Methods” is now up.  For those not familiar with the report, it explores the market for parental control tools, rating schemes, education and media literacy efforts, and various other tools, methods, and initiatives aimed at promoting online child safety.  After evaluating that state of this market, I conclude: “There has never been a time in our nation’s history when parents have had more tools and methods at their disposal to help them decide what constitutes acceptable media content in their homes and in the lives of their children.”  Moreover, I believe that the parental controls and content management tools cataloged in the report represent a better, less restrictive alternative to government regulation.

Version 4.0 of the report is now over 250 pages long (up from 200 pages in Version 3.0) and it contains almost 70 exhibits (up from 50), 725 references (up from roughly 500), and numerous updates in all five sections of the book. Major updates have been made to the Internet, social networking, and mobile media sections, reflecting the growing importance of those sectors and issues. Other new sections or appendices have also been added to the report, including:

• a new section examining how many households really need parental control tools;
• a new appendix on the downsides of mandatory parental controls and restrictive default settings;
• a new section on the dangers of “deputizing the online middleman” solution as an approach to solving child safety concerns;
• a new appendix reviewing the findings of 5 past online safety task forces;
• … and much more.

I issue major updates once a year and 1 or 2 minor tweaks during the course of the year to reflect the evolution of the parental control and online child safety marketplace and debate. The report is available free-of-charge on the PFF website, and the previous editions of the report are housed there too in case you want to see how it has evolved over the past couple of years. For those interested in taking a quick look at the report, I have embedded it down below the fold as a Scribd file. Finally, as is always the case, I encourage readers to send me updates and suggestions for how to improve the report and I will incorporate them into future versions.

We often talk about the problem of having all 50 states impose different regulatory requirements on the Internet, with the most restrictive standard effectively applying to all Internet actors.Fortunately, in the U.S. such efforts can be stamped down either by invoking the “Dormant Commerce Clause” (DCC) in court or by passing “preemptive federal regulation.”  (Unfortunately, most who complain about patchwork approaches, both in industry and the advocacy community, usually forget about the DCC and move right to federal legislation.)

But what about the 195 independent countries in the world (to say nothing of their regional/local subdivisions)? What if they each tried regulating Internet activity? Our friends at the Center for Democracy at Technology report on a scary precedent set by a Belgian court in March when it ruled that Belgian law applied to Yahoo! merely because Belgian citizens could access Yahoo! Mail. Thus, the court ruled that Yahoo! violated Belgian law when the company refused to hand over user data in response to an email from a Belgian prosecutor. CDT rightly applauds Yahoo! for insisting that the Belgians “follow established diplomatic and legal processes in order to gain access to user information.” But as the post notes, the really scary prospect is that of one country asserting authority over every site or service on the Internet that can be accessed in their country.

If this precedent stands, it’s likely to cause, at the very least, many companies to limit access to their sites or services by persons from countries with burdensome regulatory approaches. Even if those foreign laws are well-intentioned and laudable—such as efforts to punish fraud (as in the Belgian case) or to crack down on, say, child porn or protect user privacy)—the result could be to balkanize Internet services.  This would be especially unfortunate, given the incredible importance of services that might previously have seemed “un-serious” like Twitter or Facebook as “technologies of freedom.” CDT notes the danger to Internet freedom:

To understand how problematic this ruling is, we need only imagine how the governments of China, Iran, Vietnam or other repressive regime of your choice may decide that the precedent set here is one well worth following. Such actions undermine Belgium’s moral authority since, after all, it would only be hypocritical for Western democracies to criticize such radically overbroad assertions of jurisdiction by other nations.

Fred Vogelstein’s essay in Wired, “Great Wall of Facebook: The Social Network’s Plan to Dominate the Internet — and Keep Google Out” describes the intensifying clash between Google and Facebook—a clash that focuses on the ability to target advertising:

Like typical trash-talking youngsters, Facebook sources argue that their competition is old and out of touch. “Google is not representative of the future of technology in any way,” one Facebook veteran says. “Facebook is an advanced communications network enabling myriad communication forms. It almost doesn’t make sense to compare them.”

Apart from noting that Facebook directs users to Microsoft’s Bing as its default search engine for the Internet at large, the most interesting part of the article is Facebook’s “4-Step Plan for Online Domination”:

1. Build critical mass. In the eight months ending in April, Facebook has doubled in size to 200 million members, who contribute 4 billion pieces of info, 850 million photos, and 8 million videos every month. The result: a second Internet, one that includes users’ most personal data and resides entirely on Facebook’s servers. 2. Redefine search. Facebook thinks its members will turn to their friends—rather than Google’s algorithms—to navigate the Web. It already drives an eyebrow-raising amount of traffic to outside sites, and that will only increase once Facebook Search allows users to easily explore one another’s feeds. 3. Colonize the Web. Thanks to a pair of new initiatives—dubbed Facebook Connect and Open Stream—users don’t have to log in to Facebook to communicate with their friends. Now they can access their network from any of 10,000 partner sites or apps, contributing even more valuable data to Facebook’s servers every time they do it. 4. Sell targeted ads, everywhere. Facebook hopes to one day sell advertising across all of its partner sites and apps, not just on its own site. The company will be able to draw on the immense volume of personal data it owns to create extremely targeted messages. The challenge: not freaking out its users in the process.

Facebook can’t keep losing money forever.  Indeed, investors are willing to keep sinking money into Facebook during Phases 1-3 because they think it will pay off in Phase 4—when Facebook really threatens to be a fGoogle-killer.  But rather the fact that investors are willing to subsidize the creation of a wonderful platform now used by 200 million people (one fifth of all Internet users worldwide), or that Facebook might finally provide a counter-weight to the fearsome Google, the People for the Ethical Treatment of Data (PETD) are appalled.  One commenter on the Wired story put it best:

I find it amazing that people will willingly post personal information to websites that will only use it for data mining and advertising revenue. They lay their entire life open to a corporation that’s only looking to profit from the information said corporation can gather for itself or it’s affiliates. When the government reads our emails, listens to our phone conversations, reads our text messages and monitors what we do online people are outraged at the invasion of our privacy. But then they log in to Facebook or Myspace or Twitter and reveal all. The Facebook “community”. Please. It’s a way for Big Business to pry into our private lives and exploit us in any way they can for the money they can make.

Such arrogant entitlement is astonishing—but hardly atypical: What makes this person (or his PETD comrades) so certain that they really know what’s best for everyone else and that Facebook users are poor, ignorant suckers being victimized by corporate greed?  As Adam Thierer and I have been saying, there is no free lunch! Do the PETD folks expect investors to pour hundreds of millions into building innovative social networks like Facebook out of… love?  As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

While most in the PETD crowd are too young (or just historically deprived) to know the words to  The Internationale (my favorite line: “Masses, slaves, arise, arise!”), one can easily imagine them kicking off PETD meetings with a somewhat more recent anthem, Aquarius, from the hit 1967 rock musical Hair:

When the moon is in the Seventh House And Jupiter aligns with Mars Then peace will guide the planets And love will steer the stars This is the dawning of the age of Aquarius Harmony and understanding Sympathy and trust abounding No more falsehoods or derisions Golden living dreams of visions Mystic crystal revalation And the mind’s true liberation

Nothing better captures the spirit of that thankfully-bygone era of narcissistic self-indulgence than the beginning of the 1979 film version:

Yes, Virginia, the marijuana-induced socialist-utopian delusions of the Sixties live on in a new generation of Techno-Aquarians, who want to have their digital cake—and eat yours too.  Something for nothing, free lunch for everyone!  Down with profit, up with privacy!  The “vision” (as in “Golden living dreams of”) behind this frenzy of frustration with online capitalism and PETD’s demands for regulation is what Thomas Sowell has called the “Vision of the Anointed,” “the talented few” who consider themselves wiser than everyone else, and therefore seek to impose their preferences on others, as Adam Thierer and I have both discussed.

But back to Wired:

The drumbeat of controversy surrounding Facebook illustrates the catch-22 the social network faces: It has a massive storehouse of user data, but every time it tries to capitalize on that information, its members freak out. This isn’t an academic problem; the company’s future depends on its ability to master the art of behavioral targeting—selling customized advertising based on user profiles. In theory, this should be an irresistible opportunity for marketers; Facebook’s performance advertising program allows them to design and distribute an ad to as narrow an audience as they would like. (It has also developed a program to create ads that are designed to be spread virally.) But as the Beacon debacle showed, there is a fine line between “targeted and useful” and “creepy and stalkerish”—and so far, not enough advertisers have been willing to walk that line… In a way, Facebook’s dilemma extends from its success. Users see the site as sanctified space, a place to engage in intimate conversations with friends—not to be laser-beamed by weirdly personal advertising. But with initiatives like Connect and Open Stream, Facebook can sell ads beyond its own site. Just as Google’s AdSense program sells ads on any participating Web site, Connect and Open Stream will eventually push Facebook-brokered advertising to any member site or app. But unlike with AdSense, Facebook’s ads could be exquisitely tailored to their targets. “No one out there has the data that we have,” says COO Sandberg.

Better targeted ads?  More useful information for Internet users?  A strong competitor for Google that could provide an alternative channel for advertisers and help drive up advertising revenue for publishers of “free” content and services?  Sounds great for all concerned.  Oh, but some people find relevant advertising “creepy?”  Ah, well, let’s call the whole thing off!  I’m sure Facebook will get by just fine selling crudely targeted ads on its own site for pennies a click.  Maybe they could ask for donations or hold a digital bake-sale (including tie-dyed t-shirts, of course)? Or we could just have “the government” support the most popular social networks (along with newspapers, banks, hedge funds and car manufacturers). And while they’re at it, why not have wise bureaucrats use antitrust laws to cripple Google and thus make up for the lack of a competitive threat from Facebook and the other Google-killers-that-might-have-been?

Wired suggests that Facebook’s strategy played some role in causing Google to embrace Interest-Based (behavioral) Advertising, playing catch-up to No.2 Yahoo!:

Google has even shown a willingness to join Facebook in gingerly tapping the third rail of Internet marketing—behavioral targeting. The search giant has long assured its users that it would never use their personal information to deliver targeted advertising, relying instead on aggregate data or search activity that preserves anonymity. (“There is a line with users that you don’t want to cross,” Google CEO Eric Schmidt said in the wake of the Beacon controversy.) But in March, Google started its own behavioral targeting campaign—tracking users’ browsing to deliver more-customized ads. Users have the option to either edit their profiles or opt out entirely.

With Google in the game, the fight is on.  The grand prize is clear—tapping into the most lucrative advertising purchased by leading brands:

Today, global online brand advertising accounts for just $50 billion a year. Offline brand advertising, meanwhile, accounts for an estimated $500 billion.

But I doubt there will ever be any clear “winner” in this race.  Instead, we’re likely to see fierce competition and ongoing one-upsmanship over the coming decade (and beyond) for users, for user data, and for they ad dollars they bring, among a variety of paradigms for what the Internet of the future should look like.  Facebook has already started implementing its paradigm with  Connect (launched Dec. 2008) and  Open Stream API (launched April 2009):

Connect and Open Stream don’t just allow users to access their Facebook networks from anywhere online. They also help realize Facebook’s longtime vision of giving users a unique, Web-wide online profile. By linking Web activity to Facebook accounts, they begin to replace the largely anonymous “no one knows you’re a dog” version of online identity with one in which every action is tied to who users really are. To hear Facebook executives tell it, this will make online interactions more meaningful and more personal…  But you don’t build a competitor to Google with people alone. You need data. And Connect and Open Stream are intended to make Facebook a much more powerful force for collecting user information. Any time someone logs in to a site that uses Connect or Open Stream, they give Facebook the right to keep track of any activity that happens there—potentially contributing tons more personal data to Facebook’s servers. Facebook Connect and Open Stream are also designed to make each user’s friend network, which belongs to Facebook, even more valuable and crucial to the Web experience. Together, they aim to put Facebook users’ social networks at the center of all they do online.

I, for one, think this competition will create enormous value for users by driving innovation that improves the usefulness of the Internet and increases the amount of funding available for an ever-greater, ever-richer torrent of “free” (ad-supported) content and services.  But if the Techno-Aquarians at PETD succeed in imposing regulatory mandates on the collection and use of online data through legislation or creeping regulation at the FTC, the Internet of the future won’t look all that different from the Internet of today: online content and services will continue to attract a small share of all ad dollars (just 7% in 2008), search engines will reap the bulk of that (42% in 2008), and most online content-publishers and service-providers will continue to get literally pennies per click while only a few are able to meet evolving standards of quality with purely ad-supported business models.

Heaven forbid we should allow those who offer “free” content and services to extract… profit from the unwashed masses of helpless consumers who are either too stupid, too lazy or too ignorant to manage their own privacy, no matter how powerful the privacy management tools at their disposal! The better alternative is empower users to make their own decisions about privacy, rather than imposing top-down “Industrial Policy for the Internet” on the entire country through outright prohibitions or restrictive defaults concerning data collection and use for targeting advertising—as Adam and I have said:

The ideal state of affairs would be to create a system of tools and data disclosure practices that would empower each user to implement their personal privacy preferences while also recognizing the freedom of those who rely on advertising revenues to “condition the use of their products and services on disclosure of information”—not to mention the viewing of ads!

As Google and Facebook do battle with each other, Microsoft, Yahoo! and other upstart rivals as-yet-unknown, I only hope they all—particularly their government affairs departments—remember that their common enemy is the Techno-Aquarians who seek to impose their subjective preferences about privacy on everyone else, no matter the costs to innovation, consumers, culture or media. We’ll discuss these trade-offs at our upcoming PFF Capitol Hill Briefing on July 10.

In episode #44 of “Tech Policy Weekly,” Berin Szoka and Adam Thierer engage in a debate with Internet security expert Chris Soghoian, who is a student fellow at the Berkman Center for Internet & Society at Harvard University. He is also a Ph.D. candidate at Indiana University’s School of Informatics.

Chris is an up-and-coming star in the field of cyberlaw and technology policy as he has quickly made a name for himself in debates over privacy policy, data security, and government surveillance.  He straddles the line between academic and activist, and the role he often plays in many tech policy debates is somewhat akin to what Ralph Nader has done in many other fields through the years. Except, in this case, instead of “Unsafe at Any Speed” it’s more like “Unsafe at Any Setting,” since Chris is often raising a stink about what he regards as unjust or unreasonable privacy or security settings that various online websites or service providers use.

On the show, Chris talks about two of his recent crusades to get certain online providers to change their default settings to improve user security or privacy: (1) His effort this week to get major email providers—and Google in particular—to change their default security settings on their email offerings; and (2) his earlier crusade to create permanent opt-out cookies to stop behavioral advertising by advertising networks.

There are several ways to listen to today’s TLF Podcast. You can press play on the player below to listen right now, or download the MP3 file. You can also subscribe to the podcast by clicking on the button for your preferred service. (And do us a favor, Digg this podcast!)

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Finally, here’s some relevant links that were mentioned during today’s show:

• Chris Soghoian’s webpage + his Harvard Berkman Center page
• Chris’s blog (“Slight Paranoia”)
• Chris’s “TACO” (Targeted Advertising Cookie Opt-Out) plug-in for Firefox (and description of it on his home page)
• Chris’s “Caught in the Cloud” paper (+ a video of him presenting it at Harvard)
• The letter from 38 cybersecurity researchers that Chris sent to Google
• Berin Szoka’s response to Chris’s “Caught in the Cloud” paper
• Berin’s discussion of the issue of preserving user choice through permanent opt-out cookies

by Berin Szoka & Adam Thierer

This morning, the House Energy & Commerce Committee will hold a hearing on “Behavioral Advertising: Industry Practices And Consumers’ Expectations.” If nothing else, it promises to be quite entertaining:  With full-time Google bashers Jeff Chester and Scott Cleland on the agenda, the likelihood that top Google officials will be burned in effigy appears high!

Chester, self-appointed spokesman for what one might call the People for the Ethical Treatment of Data (PETD) movement, is sure to rant and rave about the impending techno-apocalypse that will, like all his other Chicken-Little scenarios, befall us all if online advertisers were permitted to better tailor ads to consumers’ liking. After all, can you imagine the nightmare of less annoying ads that might actually convey more useful information to consumers? Isn’t serving up “untargeted” dumb banner ads for Viagra to young women and Victoria’s Secret ads to Catholic school kids the pinnacle of modern online advertising?  Gods forbid we actually make advertising more relevant and interest-based!  (Those Catholic school boys may appreciate the lingerie ads, but few will likely buy bras.)

Anyway, according to National Journal’s Tech Daily Dose, the hearing lineup also includes:

• Charles Curran, Executive Director, Network Advertising Initiative
• Christopher Kelly, Chief Privacy Officer, Facebook
• Edward Felten, Director, Center for IT Policy, Princeton University
• Anne Toth, Chief Privacy Officer & Vice President, Policy, Yahoo!
• Nicole Wong, Deputy General Counsel, Google

That’s an interesting group and we’re sure that they will say interesting things about the issue. Nonetheless, because four of them have a corporate affiliation that fact will inevitably be used by some critics to dismiss what they have to say about the sensibility of more targeted or interest-based forms of online advertising. So, we’d like to offer a few thoughts and pose a few questions to make sure that Committee members understand why, regardless of what it means for any particular online operator, targeting online advertising is very pro-consumer and essential to the future of online content, culture, and competition.  As Wall Street Journal technology columnist Walt Mossberg has noted, “Advertising is the mother’s milk of all the mass media.”  Much of the “free speech” we all cherish isn’t really free, but ad-supported!

Our Approach

We have previously set forth a framework for analyzing advertising policy issues in two PFF reports: “Online Advertising & User Privacy: Principles to Guide the Debate” and “Targeted Online Advertising: What’s the Harm & Where Are We Heading?” At root, our model depends heavily on two common-sense, and inter-related, principles:

1. We live in a world of trade-offs; and
2. There is no free lunch.

Their Approach

We are deeply concerned that too few people are talking about—or even understand the relevance of—those two principles in the debate over targeted online advertising. It seems that too many who wish to retard the further evolution of the advertising marketplace are living a lie based upon the antithesis of our model. Many privacy advocates seem to imagine that regulatory actions don’t have consequences and that Congress can simply mandate new privacy standards for the Internet without having any impact on the free flow of ideas supported by, and direct facilitated through, advertising.

Simply put, the privacy critics often imagine that their values are indicative of everyone’s values. Our blogging colleague Jim Harper of the Cato Institute has referred to this as “preference imposition” but we’ll use a simpler term: Elitism. In essence, privacy advocates seem to believe that:

1. People are too ignorant, busy or just plain stupid, and cannot be trusted to make wise decisions for themselves (or their children); and/or
2. Everyone shares the same values or concerns when it comes to privacy such that a national “baseline” regulatory standard (namely, mandatory “opt-in” regulations for data collection and use) should govern the entire online marketplace.

Let’s be clear: Such a mandate, and the thinking behind it, would greatly impoverish the future Internet economy. Too many people think of the Internet as a magic box that just keeps cranking out free goodies. But something powers that box of goodies: advertising.  More than anything else, it’s advertising that keeps the Internet “Free, Innovative & Open,” to borrow the slogan of our friends at CDT, which seems to flirt with joining the PETD movement, despite their well-earned reputation for pragmatic skepticism of government interference with the Internet.

The regulatory advocates complain that giving consumers the right to opt-out of data collection and use isn’t meaningful because very few consumers will exercise the opt-out.  Again, they presume that this must be because users just don’t know what’s good for them because of course if they really understood what was being done with “their data,” they would never choose to just “give it away” for a few scraps from the advertisers’ table.  It never occurs to them that (i) many, perhaps most, users just don’t care and that (ii) that their “ignorance” about the all specific details of “how the sausage is made” (online data collection and use practices for targeting advertising) may be completely rational.

But just as importantly, would-be privacy regulatory don’t seem to understand—or perhaps simply don’t care—that what’s true of opt-out is also true of opt-in:  in practice, few people will bother doing either.  In a world of perfect information and infinite time, of course, there would be no difference in outcomes with the two different rules.  But in the real world with real constraints on time, knowledge and everything else, mandating opt-in would make all the difference in the world by severely limiting the ability of advertisers to target advertising.

The Ignored Trade-offs

We’ve been assembling evidence on the real-world costs of restricting targeted advertising. Here are just a few data points we’ve seen to give you a sense of what’s at stake:

• Relevance to Users: The best evidence that users prefer seeing more relevant ads is their increased likeliness to actually click on an ad—instead of just ignoring it or trying to block it. The most recent study of this issue concluded that Click-Through Rates (CTR) can be improved by as much as 670% by using basic behavioral targeting as compared to simple contextual targeting—0r even more than 1000% using more sophisticated targeting. Conversion rates (the percentage of clicks that actually result in a sale) also strongly indicate that consumers find ads more interesting, and in one 2005 study, were estimated to increase up to 3000% with behavioral targeting.
• Macro: More Revenue to Fund All Services & Content: eMarketer (in June 2008) estimated that U.S. spending on behavioral targeting would grow from $.775 billion in 2008 to $4.4 billion in 2012—representing fully a quarter of display ad spending.  The total amount of money at stake is huge:  U.S. online ad revenues totaled $23.5 billion in 2008.
• Micro: More Revenue for Individual Publishers: Estimates on the increased profitability of behavioral targeting range as high as 1200% (eMarketer).

While these examples illustrate the broad outlines of the trade-offs ignored by privacy regulatory advocates, the key dilemma to understand is this: If, under an opt-in regime, publishers would be able to target advertising for webpages based on the keywords contained within those pages, and not on other content the user has looked at, the value of most Internet content will depend not on how many eyeballs it attracts but primarily on the economic value of the keywords that are directly associated with it. Pages with keywords related to products and services will fetch a fine price because advertisers will be able to make money off ads on those pages ( e.g., a site for digital camera reviews). But content with little commercial value will generate little revenue. Indeed, this is perhaps the single greatest problem faced by journalism sites. Who wants to advertise on a story about North Korea? How many users are going to be interested in taking a honeymoon in the DMZ?

But if such websites could target advertising to users’ user’s likely interests based on an anonymous profile of their interests created by collecting data about their browsing “behavior,” web content becomes valuable because of the audience it attracts, not just because the content itself serves as a rough proxy for a user’s interests. This democratization of Internet advertising revenue is essential for sustaining the future of journalism in particular, but also for “free” culture more generally.

As we noted in our response to the FTC’s proposed self-regulatory guidelines on data collection for advertising:

Depending on how regulation is structured, therefore, it is possible that new privacy mandates would severely curtail the overall quantity of content and services offered—and greatly limit the ability of new providers to enter the market with innovative offerings. Alternatively, or perhaps additionally, companies would change the character of their offerings and water-down sophisticated services that cater to consumer demand; in other words, the quality of service would deteriorate. Bottom line: Something must give because there is no free lunch. Regulation is a giant game of economic whack-a-mole: Attempting to control one of the primary variables of price, quantity, or quality inevitably results in non-optimal adjustments in the other two variables. The absence of price as a variable in this context means there is one less variable for the government to control in the first place. Simply stated, stifling the evolution of the online advertising marketplace will likely result in fewer free online services and less content, less high-quality online services and content, or some combination of both… We stand at an important crossroads in the debate over the online marketplace and the future of a “free and open” Internet. Many of those who celebrate that goal focus on concepts like “net neutrality” at the distribution layer, but what really keeps the Internet so “free and open” is the economic engine of online advertising at the applications and content layers. If misguided government regulation chokes off the Internet’s growth or evolution, we would be killing the goose that laid the golden eggs…. These observations are even more relevant to the online marketplace, where advertising has been shown to be the only business model with any real staying power. Walled gardens, pay-per-view, micropayments, and subscription-based business models are all languishing. Consequently, the overall health of the Internet economy and the aggregate amount of information and speech that can be supported online are fundamentally tied up with the question of whether we allow the online advertising marketplace to evolve in an efficient, dynamic fashion. Heavy-handed privacy regulation (or co-regulation) could, therefore, become the equivalent of a disastrous industrial policy for the Internet that chokes off the resources needed to fuel e-commerce and online free speech going forward.

Our Challenge to the Advocates of Privacy Regulation

For these reasons, we have repeatedly issued the following three-part challenge in our previous work to those who advocate the regulation of online advertising:

1. Identify the harm or market failure that requires government intervention.
2. Prove that there is no less restrictive alternative to regulation.
3. Explain how the benefits of regulation outweigh its costs.

We’re still waiting…

We’ve also made it clear that there is an alternative to the pre-emptive, one-size-fits-all regulation demanded by the regulatory advocates:  We’ve proposed a “layered approach” based on user education, user empowerment, self-regulation and FTC enforcement of privacy policies.  Our goal is as follows:

The ideal state of affairs would be to create a system of tools and data disclosure practices that would empower each user to implement their personal privacy preferences while also recognizing the freedom of those who rely on advertising revenues to “condition the use of their products and services on disclosure of information”—not to mention the viewing of ads! Self-regulatory efforts can be refined, especially through technological innovation to better satisfy the concerns of policymakers, privacy advocates, and average consumers. For example, if websites and ad networks participating in a self-regulatory framework supplemented their current “natural language” privacy policies with equivalent “machine-readable” code [ e.g., P3p], that data could be “read” by browser tools that would implement pre-specified user preferences by blocking the collection of information depending on whether the privacy policies of certain websites or ad networks met the user’s preferences about data-use. Such robust and granular disclosure, if implemented for behavioral advertising, would exceed the wildest dreams of those who argue that users currently do not read privacy policies—without disrupting the browsing experience or cluttering websites. But this system would only work if users had to make real choices about “pay*ing+ for ‘free’ content and services by disclosing their personal information.”

A Final Word About Advertising

On some level, this debate isn’t about user privacy at all, but about the alleged evils of advertising as inherently manipulative.  Jeff Chester straddles both camps.  His rantings about the use of “neuromarketing” boil down to the same simple idea that the Neo-Marxists have been pushing for decades:  Since people are stupid, ignorant and/or lazy (see above), they’re easy to control and trick with shiny objects, pretty faces, memorable slogans, and catchy jingles. No better response to this argument has ever been made than was offered in this 1959 magazine ad by the ad firm Young & Rubicam (emphasis added for Chester’s benefit):

There is no chestnut more overworked than the critical whinny: “Advertising sells people things they don’t need.” We, as one agency, plead guilty. Advertising does sell people things they don’t need. Things like television sets, automobiles, catsup, mattresses, cosmetics, ranges, refrigerators, and so on and on. People don’t really need these things. People don’t really need art, music, literature, newspapers, historians. wheels, calendars, philosophy, or, for that matter, critics of advertising, either. All people really need is a cave, a piece of meat and, possibly, a fire. The complex thing we call civilization is made up of luxuries. An eminent philosopher of our time has written that great art is superior to lesser art in the degree that it is “life-enhancing.” Perhaps something of the same thing can be claimed for the products that are sold through advertising. They enhance life, to whatever degree they can.

Cory Doctorow has called for a Wikipedia-style effort to build an open source, non-profit search engine. From his column in The Guardian:

What’s more, the way that search engines determine the ranking and relevance of any given website has become more critical than the editorial berth at the New York Times combined with the chief spots at the major TV networks. Good search engine placement is make-or-break advertising. It’s ideological mindshare. It’s relevance… It’s a terrible idea to vest this much power with one company, even one as fun, user-centered and technologically excellent as Google. It’s too much power for a handful of companies to wield. The question of what we can and can’t see when we go hunting for answers demands a transparent, participatory solution. There’s no dictator benevolent enough to entrust with the power to determine our political, commercial, social and ideological agenda. This is one for The People. Put that way, it’s obvious: if search engines set the public agenda, they should be public.

He goes on to claim that “Google’s algorithms are editorial decisions.”   For Doctorow, this is an outrage: “so much editorial power is better vested in big, transparent, public entities than a few giant private concerns.”

I wish Doctorow well in his effort to crowdsource a Google-killer, but I’m more than a little skeptical that anyone would actually want to use his search engine of The People.  My guess is that, like most things produced in the name of “The People” (Soviet toilet paper comes to mind), it will probably won’t be much fun to use, and will likely chafe noticeably. (For the record, I love and regularly use Wikipedia; I just don’t think that model is unlikely to produce a particularly useful search engine.  As Doctorow himself has noted of Google, “they make incredibly awesome search tools.”)

But I’m glad to see that Doctorow has conceded an important point of constitutional law: The First Amendment protects the editorial discretion of search engines, like all private companies, to decide what to content to communicate.  For a newspaper, that means deciding which articles or editorials to run.  For a library or bookstore, it means which books to carry.  For search engines, it means how to write their search algorithims.

Doctorow’s “We’ll build our own darn rocket ship in the backyard!” response  to his deep concerns about Google’s dominance of search does not, of course, impinge on Google’s editorial discretion—and for that, I commend him.  But others, most notably Frank Pasquale, have indeed proposed government action to address such concerns in ways that most surely would impinge on the First Amendment rights of all search engines.

Pasquale’s comlpaint about Google is essentially the same as Doctorow’s, but rather than proposing an innovative (if unrealistic) alternative (like Doctorow), he  has called (PDF) for the “creation of a Federal Search Commission to parallel the Federal Communications Commission” and declared that ” In order to reduce opportunities for clickfraud and unfair treatment of indexed entities, qualified transparency will be needed in order to open up the ‘black box’ of search engine operations to at least some third parties.”   He focuses on search algorithms because:

The heart of a search engine and the key to its success is its search algorithm. Effective algorithms are protected by a veil of secrecy and by various intellectual property rights. As a result, new entrants cannot easily appropriate existing algorithms. Moreover, many algorithms are trade secrets. Unlike patents, which the patent holder must disclose and which eventually expire, these trade secrets may never enter the public domain. Search algorithms may be analogous to the high-cost infrastructure required for entry into the utility or railroad markets.

He diagnoses the problem as follows:

given the emphasis on secrecy in the search engine business model, no one can verify that such rankings have not been manipulated or that subtler biases in favor of search engines’ partners are not being worked into the search algorithm… If search engines are to be accountable at all, if their interest is to be balanced against those of the various other claimants involved in search-related disputes, and if social values are to be given any weight, some governmental agent should be able to peer into the black box of search and determine whether or not illegitimate manipulation has occurred.

But what about editorial discretion?  Why should Google be forced to change its PageRank algorithms any more than The New York Times should be forced to change how it decides which stories to run?  Moreover, why should Google be forced to disclose how this process works?  Assigning a government monitor to sit in on meetings of the Times‘ editorial board “to detect bias” would clearly impinge on their editorial discretion.  Similarly, I don’t see why forcing a Yahoo!, Microsoft or any other search engine to disclose their equivalent processes for ranking search results should pass constitutional muster.

Editorial discretion means getting to make your own decisions, even if they might seem biased to those wise elites who “know better” because, well, it’s your decision and not the government’s!  Saying that speakers can make whatever decisions they want as long as they’re not biased means speakers don’t really have editorial discretion after all.

So, if recognizing that search algorithms are a form of editorial discretion is a problem (as Doctorow implies), it’s only insofar as this might frustrate the desires of those who would regulate search.

Adam Thierer & I have just released a detailed examination (PDF) of brewing efforts to expand the Children’s Online Privacy Protection Act of 1998 to cover adolescents and potentially all social networking sites—an approach we call “COPPA 2.0.”

As Adam explained on Larry Magid’s CNET podcast, COPPA mandates certain online privacy protections for children under 13, most importantly that websites obtain the “verifiable consent” of a child’s parent before collecting personal information about that child or giving that child access to interactive functionality that might allow the child to share their personal information with others. The law was intended primarily to “enhance parental involvement in a child’s online activities” as a means of protecting the online privacy and safety of children.

Yet advocates of expanding COPPA—or “COPPA 2.0″—see COPPA’s verifiable parental consent framework as a means for imposing broad regulatory mandates in the name of online child safety and concerns about social networking, cyber-harassment, etc. Two COPPA 2.0 bills are currently pending in New Jersey and Illinois. The accelerated review of COPPA to be conducted by the FTC next year (five years ahead of schedule) is likely to bring to Washington serious talk of expanding COPPA—even though Congress clearly rejected covering adolescents age 13-16 when COPPA was first proposed back in 1998.

We’ll discuss some of the key points of our paper in a series of blog posts, but here are the top nine reasons for rejecting COPPA 2.0, in that such an approach would:

• Burden the free speech rights of adults by imposing age verification mandates on many sites used by adults, thus restricting anonymous speech and essentially converging—in terms of practical consequences—with the unconstitutional Children’s Online Protection Act (COPA), another 1998 law sometimes confused with COPPA;
• Burden the free speech rights of adolescents to speak freely on—or gather information from—legal and socially beneficial websites;
• Hamper routine and socially beneficial communication between adolescents and adults;
• Reduce, rather than enhance, the privacy of adolescents, parents and other adults because of the massive volume of personal information that would have to be collected about users for authentication purposes (likely including credit card data);

• Would likely be the subject of massive fraud or evasion since it is not always possible to definitively verify the parent-child relationship, or because the system could be “gamed” in other ways by determined adolescents;
• Do nothing to prevent offshore sites and services from operating outside these rules;
• Present major practical challenges for law enforcement officials in the face of such evasion by both domestic users and offshore sites;
• Could destroy opportunities for new or smaller website operators to break into the market and offer competing services and innovations, thus contributing to consolidation of online content and services by erecting barriers to entry; and
• Violate the Commerce Clause of the U.S. Constitution, since Internet activity clearly represents interstate commerce that states have no authority to regulate.

As faithful readers no doubt know, I’m a big fan of Section 230 and believe it has been the foundation of a great many of the online freedoms we enjoy (dare I say, take for granted?) today. That’s why I’m increasingly concerned about some of the emerging thinking and case law I am seeing on this front, which takes a decidedly anti-230 tone.

Consider, for example, how some might weaken Sec. 230 in the name of “child safety.”  You will recall the friendly debate about the future of Sec. 230 that I engaged in with Harvard’s John Palfrey.  Prof. Palfrey has argued that: “The scope of the immunity the CDA provides for online service providers is too broad” and that the law “should not preclude parents from bringing a claim of negligence against [a social networking site] for failing to protect the safety of its users.”  Similarly, Andrew LaVallee of The Wall Street Journal reported from a conference this week that Sec. 230 became everyone’s favorite whipping boy, with several participants suggesting that the law needs to be re-opened and altered to somehow solve online “cyber-bullying” problems.

There’s also some potential trouble brewing in the courts, as Braden Cox noted recently.  As usual, the prolific Eric Goldman has the best summary of what’s been going on over at his Technology & Marketing Law Blog. After Eric’s takes a close look at the most recent 230-related case of Barnes v. Yahoo!, Inc., which contained some troubling language about 230, he continues on to note:

47 USC 230 has weathered plaintiff attacks very well in the past dozen years, but the last 6 months have opened up a number of angles for plaintiffs to explore. Consider the track record: * Woodhull (October): soliciting and publishing a defamatory third party email wasn’t covered by 230 * Doe v. SexSearch (December): as mentioned, the court stepped back from saying 230 preempted liability for marketing representations * StubHub (January): interference with business claim wasn’t preempted by 230 * Gourlay (March): web host who provided extra commercial services to its customer couldn’t claim 230 * Project Playlist (March): 230 doesn’t preempt state IP claims (this is a loss only because it contravenes the wrongly decided Ninth Circuit ccBill case, which was more defense-favorable). * This case, saying that a promissory estoppel claim isn’t preempted by 230. I’m not sure what to make of this trend, but it’s clear that we’re finally finding some substantial limits in 230’s reach, and that’s creating new litigation opportunities for plaintiffs.

And let’s be clear about why these trends are so troubling. Keeping online intermediaries free from burdensome policing requirements and liability threats has created the vibrant marketplace of expression and commerce that we enjoy today. If not for Sec. 230, we would likely live in a very different world today.  The alternative approach of strict secondary liability on ISPs and other online intermediaries would have a profound “chilling effect” on online free speech and expression.  That’s why Sec. 230 is so important, and worth defending.

And so begins another fight over data retention. As Declan summarizes:

Republican politicians on Thursday called for a sweeping new federal law that would require all Internet providers and operators of millions of Wi-Fi access points, even hotels, local coffee shops, and home users, to keep records about users for two years to aid police investigations. The legislation, which echoes a measure proposed by one of their Democratic colleagues three years ago, would impose unprecedented data retention requirements on a broad swath of Internet access providers and is certain to draw fire from businesses and privacy advocates. […] Two bills have been introduced so far — S.436 in the Senate and H.R.1076 in the House. Each of the companion bills is titled “Internet Stopping Adults Facilitating the Exploitation of Today’s Youth Act,” or Internet Safety Act.

Julian also has coverage over at Ars and quotes CDT’s Greg Nojeim who says the data retention language is “invasive, risky, unnecessary, and likely to be ineffective.”  I think that’s generally correct.  Moreover, I find it ironic that at a time when so many in Congress seemingly want online providers to collect and retain LESS data about users, this bill proposes that ISPs be required to collect and retain MORE data. One wonders how those two legislative priorities will be reconciled!!

Don’t get me wrong. It’s good that Congress is taking steps to address the scourge of child pornography — especially with stiffer sentences for offenders and greater resources for law enforcement officials. Extensive data retention mandates, however, would be unlikely to help much given the ease with which bad guys will likely circumvent those requirements using alternative access points or proxies.  Finally, retention mandates pose a threat to the privacy of average law-abiding citizens and impose expensive burdens of online intermediaries.

We’ve had more to say about data retention here at the TLF over the years.  Here’s a few things to read:

• Yahoo! Data-Retention Policy vs. The New Justice Department, by Cord Blomquist
• Another Reason to Be Wary of Age Verification & Data Retention Mandates, by Adam Thierer, October 30, 2006.
• Mandatory Data Retention: How Much is Appropriate? by Adam Thierer, June 26, 2006.
• Internet Data Storage Is The Wrong Way To Combat Child Sexual Exploitation, by Hance Haney, Sept. 20, 2006.
• Data Retention on the Move, by Jim Harper, June 1, 2006.

The WSJ reports that a study will be released tomorrow noting an 8% drop in total “paid search” revenues in 2008.  Google’s Fourth Quarter results will be released Thursday.  While this is clearly bad news for Google, Yahoo!, Microsoft and other companies that sell ads next to the results of their search engines, it’s also terrible news for the Internet users who have come to take for granted not just these free search engines, but the other free services and content cross-subsidized by search ad revenue.  A quick look at the offerings pages of Google,  Yahoo! and Microsoft (downloads and some services) should remind you of a few of these ad-supported offerings.

What’s even worse for users is that search ad spending may be the “canary in the coalmine” for online advertising overall:  A drop in search ad spending may suggest that display ad revenue for 2008 may have fared even worse.  While search ad revenue funds offerings from search engine providers, display ad revenue is the bread & butter of millions of websites, from the “short head” (big websites like ESPN.com) to through the “long tail” (small websites).   As advertisers cut back on buying web ads, there will be less funding available for “Free!” culture—and we’ll all suffer from the resulting decline in creativity and innovation.  

Let’s hope 2009 is a better year for advertising—both search and display—than 2008.

Jerry Yang’s departure as Yahoo! CEO opens the door to a renewed bid by Microsoft to buy Yahoo!’s search business (or Yahoo! itself).  Such a merger could produce a significantly stronger challenger to Google in the search market.  With this possibility in mind, the WSJ just ran a fascinating history of the “paid search” business—the placement of “contextually targeted” ads next to search engine results based on the search terms that produced those results.

In a nutshell, Microsoft failed to see (back in 1998-2003) the enormous potential of paid search—just as small start-ups (such as Google) were starting to develop the technology and business model that today account for a $12+ billion/year industry, which is  twice the size of the display ad market and which supports a great deal of the online content and services we have all come to take for granted online.  Microsoft first put its toe in the water of paid search with a small-scale partnership with Goto.com in 1999-2000.  But this partnership failed because of internal resistance from the managers of Microsoft’s display-ad program.  In 2000, Google launched Adwords and thus began its transformation from start-up into economic colossus.  By 2002, Microsoft realized that it needed to catchup fast, and approached Goto.com (by then renamed Overture) about a takeover.  But Microsoft ultimately chose in 2003 not to buy the startup because  Bill Gates and Steve Ballmer “balked at Overture’s valuation of $1 billion to $2 billion, arguing that Microsoft could create the same service for less.” 

Microsoft, meanwhile, spent the next 18 months deploying hundreds of programmers to build a search engine and a search-ad service, which it code-named Moonshot. The company launched its search engine in late 2004 and its search-ad system in May 2006.

But Microsoft’s ad system came too late:

Advertisers applauded Moonshot for its technical innovation. But Microsoft had trouble coaxing people to migrate to its search engine from Google; advertisers were unwilling to spend large sums on MSN’s search ads. By building a new system instead of buying Overture, Mr. Mehdi says, “we really delayed our time to market.”

What’s most fascinating about the piece is that it seems to suggest that Microsoft missed its opportunities to get into paid search not because it was “dumb,” “uninnovative” or a “bad” company, but for the same sorts of reasons that big, highly successful and even particularly innovative companies fail.  The reasons companies generally succeed in mastering “adaptive” innovation of the technologies behind their established business models are the very reasons why such great companies struggle to encourage or channel the “disruptive” innovation that renders their core technologies and business models obsolete.  This dynamic was described brilliantly in Harvard Business School professor Clayton Christensen’s classic 1997 book The Innovator’s Dilemma:  When New Technologies Cause Great Firms to Fail.  (Read chapter one here and Tim Lee’s recent discussion of the book here.)  

Whatever one thinks about the debate over whether antitrust intervention is necessary to restrain Google’s growth, I’m sure we’d all applaud the evolution of increased competition in the paid search market through market forces.  Let’s hope that Microsoft—as well as Yahoo!—have carefully studied the vast literature produced by business schools in the wake of Christensen’s book about how big companies can avoid the Innovator’s Dilemma by promoting—and capitalizing on—radical innovation from within.  Indeed, this seems to be precisely what has guided Google’s own strategy as it has grown from “disruptive innovator” to become the very sort of behemoth that cannot easily escape the Dilemma, even if corporate managers are fully aware of the problem on a theoretical level.  If Google can do it, Microsoft should be able to, too.  But let’s also not discount the possibility that, no matter how hard Google’s management might try to retain the innovative culture of a start-up, the giant  can’t do that well enough to prevent its own apparent market dominance from being disrupted by new upstart innovators in search and advertising technologies.  

The head of Google Research talked about some of these possibilities in July 2007 and the Google has recently covered other possibilities.  Here are my own bets—for what little they’re worth—as to what such “disruptors” might be:

• Semantic search and social search – whichever search engine masters these tools will likely dominate the market for search, and thus search advertising.
• Micro-payments to search users for using a search engine and discounts for clicking on ads – something Microsoft has pioneered with its Cashback system but which is probably still only in its infancy.
• Behavioral targeting that can make display ads competitive with search ads by making display ads as relevant to consumers as search ads (or even more so), rather than simply trying to target display ads based on the context of a page—which limits the economic value of the ad “display inventory” that websites try to fill with ads, especially for smaller websites in the Internet’s “long tail” whose subject matter might have little relevance to the keywords for products or services that are more highly valued by advertisers.  
• Technologies that allow contextual targeting of ads in or around videos based on the contents of the video (and associated discussion by viewers in comments). Even the imperfect ability to automatically create transcripts of a video, and then search for keywords, could hugely increased the value of advertising associated with video content.

I suspect we’d all be at least a little surprised if we could see what search engines—and online advertising—really looked like in, say, 2019.  But I won’t be terribly surprised if Google—for all its ingenuity—ends up making some of the same mistakes Microsoft made with Search 1.0 ( c. 1998-2005).

Should U.S. businesses involved in Internet commerce do business in nations governed by oppressive regimes? This is a question that many libertarians—including some of us on TLF—have grappled with for some time.

Now Yahoo, Google, and Microsoft have signed on to a set of principles for conducting business in countries that disregard human rights. Today’s Wall Street Journal reports:

Under the new principles, which were crafted over two years, the technology titans promise to protect the personal information of their users wherever they do business and to “narrowly interpret and implement government demands that compromise privacy,” according to the code.

It’s welcome news for defenders of liberty that U.S. Web giants plan to play hardball with foreign governments who would use information gleaned from Internet firms to violate their citizens’ human rights. Several troubling reports have surfac ed in the past few years about American companies abetting egregious actions by oppressive governments. In January, Indian police beat a man whose arrest stemmed from Google’s cooperation with the Indian government. And in 2005, Yahoo gave information to the Chinese government that led to the arrest of a journalist accused of giving out state secrets (the case was later overturned).

As I pointed out in the E-Commerce Times a couple months ago, it’s unclear whether this code of conduct is truly voluntary. Did these firms act out of genuine concern for human rights, or merely to get Congress off their backs? I suspect both of these elements played a role, but it’s the looming threat of political predation that worries me.

So far, no laws have surfaced in Congress (at least not in the current session) that would prevent U.S. firms from conducting business in restrictive nations. But when a U.S. Representative says to a business, “morally you are pygmies,” legislation can’t be far behind.

The decision to operate in nations that violate human rights is a delicate one, but it should left up to the management of each company to weigh the competing values of shareholders, consumers, and, of course, activists. If Microsoft, Yahoo, or Google decides that the benefits of creating greater returns for investors and allowing oppressed people increased access to information trump the ugly aspects of doing business in these nations, then Congress–itself hardly a champion of civil liberties–should stay out of the way.