Code Benders

Posted by Taus May 12, 2006

The blogosphere and traditional media is abuzz about new proposed legislation aimed at regulating the Internet. Specifically, it has been proposed that those company’s that provide Internet connectivity to popular web sites, such as Google, Yahoo, etc., should be allowed to charge an additional fee to allow these sites premium or uninterrupted status to end users. Today, systems exist that would that allow large Telcos and ISPs to prioritize packets sent to customers from specific URLs.

MoveOn.org has recently initiated a petition drive to both raise awareness and a political discussion designed to protect so-called “Net Neutrality”. Among is chief concerns is the notion that consumers and end-users will lose their right to freely access information unencumbered by their service provider.

Typically, we are advocates for free-market reorganization, even in the face of regulation. We expressed just such a view in a previous article about MoveOn’s efforts to stop a pay-per-email scheme introduced by Yahoo and AOL. In that case, while we are not proponents of email tariffs, we expressed that such a scheme could create a differentiation between email service providers that could ultimately be exploited by smaller, more nimble start-ups offering unencumbered email service.

In this instance, however, we believe that the general notion of information availability is at stake. Under this proposed legislation, these same ISPs could elect, for example, to prohibit access to competing service providers that were marketing unencumbered services. That is, in the first instance, the market could reasonably respond to the situation by offering a competitive service. If ISPs were free to control access or charge additional tariffs, it is feasible that they could effectively mute the efforts of competitors and stifle the market’s ability to react to the new paradigm.

The discussions surrounding this legislation have rightly focused on the effect on consumers. Of secondary importance has been the effect on small business, an issue that we would like to address here. So what could we expect, if large service providers were free to charge an additional right of way to net publishers?

• Marketers should expect to pay more at the PPC pump — If Google, Yahoo and MSN are forced to pay higher access fees to ensure speedy and reliable delivery of their packets, we should expect to see higher fees associated with pay-per-click advertising. Such a fee could come in the form of a monthly subscription fee or an upward shift in the minimum bidding for keywords (typically $0.10 today). With larger advertisers the impact would be negligible and likely change their cost structures by only a few percentage points – still competitive with other marketing channels. For small businesses who rely heavily upon the Internet’s lower advertising cost structures, the impact could be significant.
• The potential to stifle innovation — Startups and entrepreneurs with business models that are contrary to the ISPs could be unduly burdened by the tariff. For example, what would stop AT&T from slowing or blocking access to the website’s of Vonage or Packet8. At best, this would only encumber a users access to these telecom competitors. At worst, access could be prevented entirely.
• Unfair competition and fragmented commerce — With its newly acquired lever over net publishers, the ISPs would likely contract with the highest bidders to guarantee premium access. For example, Apple may be in the best position to get an exclusive for music distribution online. What effect would this have on upstarts or the music publishers. Similarly, those ISPs like AOL or Time Warner Cable with interests in content could eliminate or encumber competitors. If such a system were in place previously, the iPod/iTunes market could have been made unavailable to to the millions of AOL users. Consider the wide number of ancillary iPod products and services currently being offered by hundreds of small and medium-sized business. It is possible that much of this business would have never been created. There are countless other products and services that would have met a similar fate.
• The political voice of small business could stymied — In a media age that is already well-positioned to favor its owners, large corporations, the Internet has become the level-playing field for political discussion, including those policy issues that affect small business owners. Consider, for example, that if such legislation were passed, dissenting commentary such as this article could be subject to a fee.
• Virtual companies could become a thing of the past — The Internet has yielded numerous innovations that empower smaller, geographically-diverse organizations to grow despite their size. Previously, for a business to succeed, its key managers had to be in close proximity to one another. Services like online video conferencing, VoIP, and Instant Messaging have created sufficient communication to allow collaboration between entrepreneurs that was previously impossible. All these services could be subject to tariffs and hence higher cost structures.

So what is the common thread here? Ultimately, these tariffs will likely raise costs across the board. Less likely, but still possible, is that such legislation could result in an absolute right to exclude in addition to a right-of-way tariff. The bottom line is that these costs will be passed along to consumers and business alike. And if that’s the case, why don’t the Telcos and ISPs just say so and charge a higher fee for the end-users service?

Plainly, they cannot. They cannot because the Internet encourages competition in pricing and innovation. If higher fees were charged for regular dial-up or broadband, consumers would find an alternative. In truth, this legislation is designed to limit competition and protect the telecom industry as it continues to struggle in this Internet era.

This legislation is especially untimely, as the US continues to trail both Asia and Europe in broadband pricing, speed and penetration. Legislation like this designed to insulate the telecom incumbents, will continue to encumber this nation’s position in the global economy. If you agree, follow this link to MoveOn.org’s petition in favor of preserving net neutrality.

Posted by Taus May 06, 2006

Last week, Amazon announced its contract with Google expired and that it had switched to Microsoft for its search services. The new agreement with Microsoft covers three significant Amazon properties, including Amazon, Alexa and A9. While none of these properites is a high-volume search vehicle when compared to Google, MSN, or Yahoo, this is clearly a big victory for Microsoft’s Live and significant loss for Google.

As we discussed recently in the note about Google’s search algorithm, Google’s business is predicated on maintaining the highest level of demand of for its sponsored listings. A slight shift in the demand for those sponsored listings can have a significant impact on the premium advertisers are willing to pay for the same sponsored listing they can purchase elsewhere. Said differently, the only reason for an advertiser to increase their bidding in Google is to capture a higher percentage of the available volume.

Truth be told, most advertisers, except for the smallest of businesses, alredy use Yahoo in addition to Google. The fact that Google maintains the greatest number of advertisers, i.e., participants in the bidding process, is the direct source for that premium.

So, as search volume moves to Live and MSN’s AdCenter, smaller independent advertisers will find an increasing motivation to add AdCenter to their marketing arsenal. This is not to say that there will be an exodus from Google. But it should be considered that small businesses — a significant segment of the PPC market — do have limited budgets and may find it prudent to lower their bidding in AdWords. This shift over time could wear on Google’s margins and growth rate.