By contrast, the regulator’s rule book for deciding what is permissible on the internet – its content, behaviour and performance – couldn’t be simpler. There isn’t one.

And that’s the case for most countries in the world. Of course, there are established state laws on business, copyright, and defamation that have been extended to the internet, but that’s not the same thing. So the evolution of the technology is the consequence of the private agreements we enter into, between ourselves and the network operator, as the consenting adults we are.

So today’s internet is an anarchy, where users can drive what they like. And despite the fact that bad, anti-social applications can run riot – and they do – people seem to like it this way. It’s an anarchy which carries the overwhelming consensus of internet users. No one (actually, almost no one) is Marching With Placards demanding that some state agency protect us from ourselves, and write a book of rules specifically for what should be technically permissible.

For almost twenty years, internet engineers have persuaded regulators not to intervene in this network of networks, and phenomenal growth has been the result. Because data revenues boomed, telecoms companies which had initially regarded packet data networking with hostility, preferred to sit back and enjoy the returns.

But that’s changing fast. Two months ago the US regulator, which scrupulously monitors public radio for profanity, and which spent months investigating a glimpse of Janet Jackson’s nipples, decided it needed to start writing technical mandates. And so off it went.

Unnoticed by almost everyone, so did the EU.

“It’s the revenge of the unemployed Telecomms Regulator”, one seasoned observer in Brussels told us this week. “The internet really put them out of business. Now they’re back.”

Here’s a glimpse into the hitherto unreported politics going on in Brussels. The decisions being made are historic: the consequences dictate the future architecture of our networks, with implications worth billions of Euros.

A whole new rule book

The driving force behind the new rules is surprising. It’s not the business world’s natural bureaucracies, the telecoms companies with their ancestry as state-owned or state-regulated monopolies. It’s actually Google.

The power play is over how data intensive, high quality services such as video will be delivered. Only a handful of large US companies make any significant revenue from the web. In Web 2.0 land, start-ups talk of being in the “pre revenue phase”.

While Google monopolises the “web economy”, effectively setting the price of doing business on the web, it’s a small pot compared to incumbent operators, either mobile or fixed, who send almost every household at least one utility bill a month. Even with the turnover, or “churn” of the mobile business, that’s a stream of income web companies such as Amazon.com and eBay can only dream about.

Google’s plan is simple. It will simply remove the ability of infrastructure companies to make money. Google can avoid competing with access networks, because it doesn’t need to. By pouring billions into content networks instead – its own private internet – it can stand by and watch those last mile businesses become increasingly unprofitable.

Today, providing an access network for the consumer to use data is not a profitable business: there just aren’t enough people willing to pay for it. But TV and mobile telephony have proven demand. So the operator can use the profits from cable TV or mobile to invest in the data capacity. We’re seeing the fruits of this cross-subsidy model in the UK, with fast wireless broadband now available on pay-as-you-go for under a tenner a month. These national data networks couldn’t have been built if the operator didn’t have the prospect of steady income from telephony – only a fool or a gambler would have have invested the capital.

Google’s strategy was in evidence in its “bidding” for a chunk of wireless spectrum in the US this year. Google tabled a bid not to win the auction, but so it could enforce rules on the eventual winner, Verizon. And these rules (eventually watered down in a compromise) made it much harder for the winner to cross subsidize data using those traditionally profitable voice revenues.

It’s under the flags of “open access” and “net neutrality” that the battle is being conducted – and now neutrality has arrived in Europe.
What’s on the table

Last year the Commission formally proposed the establishment of a new pan-European watchdog, the ETMA or European Telecom Market Authority, taking over many of the powers of the 27 member states’ national regulators such as OFCOM. This year, discussions on telecommunications reform (“The Telecoms Package”) began in earnest, and this included the establishment of a super-regulator.

In September, the Commission published an amendment to the Universal Service Directive, or to give its official title, Directive 2002/22/EC of the European Parliament and of the Council.

A new Article, 22.3, proposes:

In order to prevent degradation of service and slowing of traffic over networks, the Commission may, having consulted the Authority, adopt technical implementing measures concerning minimum quality of service requirements to be set by the national regulatory authority on undertakings providing public communications networks.

This establishes a role for the new super-quango: deciding what’s acceptable performance. It’s a benign-sounding intervention, but nevertheless it’s a precedent – the draft of the first chapter of a book that has never before been written.

However it was at the European Parliamentary committee stage that Google scored its coup, asking the Socialist delegation to include language almost identical to the requirement that split the FCC down the middle. Here’s the EP’s draft text:

A national regulatory authority may issue guidelines setting minimum quality of services requirements, and if appropriate, take other measures in order to prevent degradation of service and slowing of traffic over networks, and to ensure that the ability of users to access or distribute lawful content or to run lawful applications and services of their choice is not reasonable restricted.

The key change is that Parliament wants local regulators to set the rules, not the Commission. But at a stroke, Europe inserted itself in the role of deciding what content is lawful, and what applications are legal.

The French Presidency has suggested the following compromise:

In order to prevent degradation of service and hindering or slowing of traffic over networks, and to ensure that the ability of users to access or distribute lawful content or to run lawful applications and services of their choice is not unreasonably restricted, Member States shall ensure that national regulatory authorities are able to set minimum quality of service requirements on undertakings providing public communications networks.

The Commission may, having consulted the Authority, adopt technical implementing measures concerning minimum quality of service requirements to be set by the national regulatory authority on undertakings providing public communications networks.

Amazingly, the historic decision to regulate was inserted without any groundswell of support from the public: petitions, or interventions from Google-sponsored law academics, as was the case with “net neutrality” in the US. Judging from our mailbag, users are concerned with mis-selling, peak/off peak throttling and Phorm, rather than the absence of a Rule Book.

One of the paradoxes of regulating freedom is that once it’s written down, we discover we have less than we had before. From the successful anarchy we have today, the scramble is now on to define “Lawful Applications”, and “Non Discriminatory” network management, which open up a Pandora’s Box of issues.

But will it fly?

Thanks to the intervention of a heavyweight, almost certainly.

Last month Viviane Reding, the Commissioner for Information Society & Media, put the issue on the agenda:

“A cynical observer may note that in the end this whole Net Neutrality debate is about hard cash. Dollars and Euros. That it is about trying to use regulation as a means to get a better position around the negotiation table. That this is just about arm wrestling between big network providers and successful providers of internet services,” she said, accurately.

An accurate summary indeed. But observers noted that rather than dispassionately viewing the competing interests, Reding has already anointed one side as the Good Guys.

“Net Neutrality is seen as the Guardian Knight that will allow the proverbial ’2 guys in a garage’ to be able to amaze the world with the next big thing.”

(One of the guys in the garage she referred to was Skype. Last year eBay wrote off over $1bn from its books and admitted that Skype had never been profitable and would never become a significant business.)

What it means for you

Not surprisingly, one of the few voices raised in objection to the change is from the Free Software movement.

The Foundation for a Free Information Infrastructure (FFII) which fights software patents, says “net neutrality” is false marketing. “This is an invasion of the regulator in the software market, and it should be fought back vigorously” the group says in a statement (http://action.ffii.org/telecom_package).

Better no rules, than rules that are decided undemocratically, by powerful lobby groups behind closed doors.

Others fear opening a Pandora’s Box, too.

Pierre Larouche, Professor of Law at Tilberg University, in the Netherlands, is a veteran of legal skirmishes with large telcos in Europe, and remembers the disdain with which they viewed the new internet.

“Edge innovation was disbelieved by the big telcos.”

However he’s skeptical that tentative regulation will help.

“We’re defining it in terms of a regulation: but it’s a nothing.

“There are fears of vertical integration – but if the retail access market is competitive, the people will jump over the Walled Garden.”

Abuses of power that historically have been dealt with by Competition Law, become “consumer issues”, justifying ever-deepening intervention. So the rules become ever more detailed and prescriptive.

“It’s the Dangerous Dogs Act,” thinks Martin Cave, Professor at Warwick Business School and the leading authority on regulation practice.

“The case for legislation is at best not proven.”

But in practical terms, it’s a power play. Richard Bennett, the American engineer, who helped draft the twisted-pair Ethernet and Wi-Fi standards, was also in Brussels this week to discuss the regulation.

He noted that private internets now deliver much of the new video content, by bypassing the public internet. Akamai has 34,000 servers installed at ISPs’ data centres delivering 20 per cent of internet content by volume.

Another is Google, which is investing $1.5bn a year in infrastructure.

“Why is it OK for Google, Akamai and Limelight to build fast lane access but not legitimate for telecom operators to build infrastructure that does the same thing?” he asks.

“Preserving the value of that infrastucture is important to Google. If a telco introduces QoS (quality of service), that nullifies it.”

He describes pre-emptive legislation as “the prohibition of a sale”. Examples of services prohibited by the neutrality legislation including Gaming ISPs which guarantee low ping times for gamers. Leave it to the customers and they’ll decide which network architecture works best for them: Google’s, a Telco’s or some combination.

“The consumer is the ultimate regulator.”

What happens next?

EU politics is always more complicated than it appears. Pierre Alexander, a lawyer at Gibson Dunn and Crutcher and editor of European Intellectual Property Law Review, explained that the Commission has no real power here, and may not actually want it. Then again, he points out, its sometimes hides behind the “mandate” of Parliament, and its apparent reluctance to intervene is not always sincere.

The move heads to the Council of 27 members, which can approve it with a Qualified Majority, or reject it with a unanimous vote. The latter is unlikely, he predicts.

The strongest opposition is likely to come from OFCOM, which regards explicit neutrality legislation as unnecessary. Like all NRAs, OFCOM would prefer not to engage in a turf war with a super-quango.

So why did Google blink first?

Left unregulated, we’re likely to see the mutual dependence between content providers like Google and telcos continue. Yet there’s no doubt Google feels the pressure more urgently. While the web advertising market is now comparable to TV in the UK, Google, unlike others, needs to maintain the spectacular growth of the early years, and it has no particular advantages in serving brand advertisers. Given the general difficulty of monetizing web content, you can see how Google feels it needs a helping hand from bureaucrats.

By posing as the consumer’s champion, Google can start to implement its plan for the destruction of value in European telecoms.

First published at The Register. © Situation Publishing 2008

MySpace Music is billed as the biggest music retail launch of the year. It’s a one-stop shop backed by the cross-media muscle of Rupert Murdoch’s media empire, with the three biggest record labels. The site promises to offer everything from downloads to ringtones to concert tickets, backed by the “street” cred of the MySpace brand, and a blockbuster launch is expected this week. Astronomical valuations – $2bn – have already been placed on the service, which MySpace insiders want to become the ‘internet’s MTV’.

The problem? Not everyone can play. Independents say they’re being frozen out of the new venture. No independent music company has inked a deal with the News Corp, and independent labels report that they’ve been blocked from uploading their music. And since MySpace Music is a joint equity venture between News Corp and the three biggest labels, which control 70 per cent of the US recorded music business, the trouble might only be starting.

Twice this decade, the independent labels have successfully challenged big music mergers. In 2006, the European Court of the First Instance kicked back the merger between Sony and BMG mooted two years before, as a result of a request by the independent music association Impala. Earlier, independent concerns had scuppered a proposed merger between Warner and EMI, and the indies won guarantees when the merger proposal was briefly revived last year.

There’s also an ominous precedent for News Corp. and the major labels in the shape of the digital TV company, Project Kangaroo. The Office of Fair Trading has already referred the joint venture between the BBC, ITV and Channel 4 for antitrust scrutiny – even though it hasn’t yet launched. Ironically, the noisiest petitioner against Kangaroo happens to be … News Corporation.
Indies: Where did our uploads go?

MySpace Music offers a service, using technology from Audible Magic, which allows indie labels to upload their own music. But scores of labels have reported they’ve been blocked from uploading their catalogs, even though they own the rights. A stumbling block appears to be the metadata database administered for MySpace by Audible Magic. If, as is commonplace, a major label owns territorial rights to a piece of indie music somewhere in the world, then the “ownership” is assumed to belong to the major label, not the independent. Which means that a US major pockets the royalty revenue for a British indie label.

“The MySpace brand is built on artists uploading their own music, particularly indies,” a source familiar with digital rights licensing told us.

So why wasn’t the system working? Audible Magic’s manager for EMEA Mike Edwards stressed that the Audible Magic’s database covers every global territory.

“We simply record what the rights holders register with us, and give it back to the people who use the database. We can register territorial rights in great detail.”

He couldn’t comment on this or any other specific instance, as the company is obliged to honour NDAs, but added:

“We have asked for more details about these issues and offered to help AIM [the Association for Independent Music] and [independent licensing body] Merlin resolve these quickly.”

One source familiar with the complexities of licensing pointed out that the blame should be placed with the meta data customer, not the intermediary:

“If MySpace doesn’t have the territorial rights data, it’s because MySpace hasn’t asked for it, or has asked for a specific set that doesn’t contain territorial rights,” he said. “Audible Magic do what the client asks.”

In some ways this is a hangover from the traditional way of dealing with rights:

“Most majors are not set up to do territorial rights. By default, they do ‘world’, and if they find you own it, they go ‘Oops…’”.

But the broader concern is that MySpace Music is a party to which the independents haven’t been invited – an arrangement which strengthens the major labels’ dwindling control over music distribution in a digital era.

In the shadow of the Commission

“We’ve asked the EC to look into the development of the online market,” Helen Smith, Impala’s secretary general, told us from Brussels.

“There appears to be a fair degree of parallelism in the deals – similar deals with similar timing – across a number of different services, which is normally a bit suspicious. This raises the question of whether there is some co-ordination or collective approach which may have the effect of excluding the rest of the competition.”

The Commission has been asked whether to consider whether the market is as diverse as it could be, she added.

Charles Caldas, head of Merlin – rights licensing body for independents – said negotiations with MySpace were ongoing, but expressed his disappointment.

“For all of the PR about how much they loved independent music, and how it was the lifeblood of MySpace, when they went to commercialise it only three major labels were invited to take equity,” he told us.

“We want MySpace to treat independent rights according to the value it brings their business,” said Caldas.

He said MySpace will find it hard to fulfil its promise of offering ‘all the music in the world’ without the independents on board.

Indeed, it’s hard to imagine the much-hyped launch of MySpace Music gathering such attention without the participation of the MySpace brand, and the eyeballs that the world’s biggest social networking site can bring. Would anyone care if the headline was merely, ‘Universal Sony and Warners do another download store’ – or compare it to MTV?

MySpace’s UK PR company declined to comment.

©Situation Publishing 2008.

The US Senate today embarks on what could become years of antitrust investigations into Google by the IT, telecoms and media industries.

The hearing today is just that – a piece of political showboating ordered by antitrust subcommittee chairman Herb Kohl. It’s not a formal investigation, let alone a lawsuit. Yet with the destiny of much more than today’s precious “Web 2.0 economy” now in one company’s hands – 90 per cent of paid search advertising goes through Google – it’s surely just the start.

Whether regulation will be able to put but a dimple in Google’s ascendance remains to be seen. Google’s vast data centres and its own private networks promise to give it de facto control over the delivery of content. A parallel business strategy is to squeeze the life out of access networks, the one area where it shrewdly doesn’t want to play. Google is content to leave “last-mile” and wireless operators as unprofitable, commodity conveyors of bits. If the strategy is successful, it will ensure that no one will be able to make money from the internet except Google itself – leaving the public internet effectively in one company’s hands. (Forget about the TV, newspaper, movie and music industries. By the time they wake up to the Google threat, they will by then be smoking ruins…)

So Google has been readying itself for regulatory intervention for several years. It lobbies extensively, and thanks to its reach-out program to politicians and wonks, now owns a fair chunk of mindshare among the political elites. With its private “Zeitgeist” conference – an annual orgy of self-glorification – it reaches over the heads of representatives and and hacks to the political leaders and media owners themselves. In the UK, there’s a revolving door between the two major parties and Google.

Politicians can sprinkle a little of the future on themselves just by rubbing up against the web giant.

As Microsoft discovered, fortuitously, this is money well-spent. A sympathetic Bush administration dissolved the DoJ’s will to impose tough penalties against Microsoft more effectively than any lawyer or economist.

And as Microsoft demonstrated, too, regulatory scrutiny is no obstacle to the real business at hand of winning large state IT contracts. Microsoft remained a favoured supplier, despite the years of antitrust litigation in the US and Europe. Google is well-placed to bid for giant IT projects such as health and data integration.

Google also pays careful attention to academia and think-tanks. A $2m donation to Lawrence Lessig’s Stanford University law centre saw him swing into battle for the internet giant in its litigation against copyright holders, with snidey bloggers dubbing him “Professor Google”. (Google’s cost of business falls when the awkward business of paying creators goes away). And Lessig’s cohort, Berkman co-founder Jonathan Zittrain recently offered a very romantic view of network innovation, with the threats to this blissfully happy landscape coming from consumer electronics and telecoms companies. Google’s threat wasn’t mentioned once. But perhaps this isn’t surprising when you look at who sponsors Zittrain’s Berkman Center. In each case, the puppetmaster calls the tune.

Google is able to achieve such mastery over politicians, the media and hackademics not only because they don’t know what they’re doing (that’s a given, these days) but because Google offers to uniquely “know” something that they don’t – a new form of “knowledge”. Google offers to tell them what the cow (at the top of this post) is thinking (The picture is a slide from a Google analyst presentation from 2006).

So what’s the beef?

Well, there are a limited number of ways you can make money on the web. You can take a cut of transactional revenue, as eBay and Amazon do. Or you can opt for advertising. There’s big buck brand advertising – for which you need to hire a sales team and woo large advertising agencies, which means you need scale, and large investment. Or there’s classifieds – and it’s this segment that has powered the growth of Google, Yahoo! and smaller web start-ups in the past five years. And this is what’s under scrutiny.

Regulators should thank Yahoo! co-founder Jerry Yang, for accelerating a process that otherwise might have taken years to come about. Quite incredibly, Yang handed Google dominant market power in paid search advertising a few weeks ago, when he announced Yahoo! would trial Google’s Adsense. It was just a trial, Yahoo! said, but by giving its prime advertising competitor access to its own properties, it couldn’t be making a clearer statement. This destroyed any illusion that paid search advertising was a highly competitive three way market – and almost nobody noticed.

It’s ironic because Yahoo! “owns” the technology responsible for Google’s dominance today, thanks to Yahoo!’s acquisition of Overture five years ago.

Embarrassingly, Google had to license the patents from Yahoo! just before its IPO to avoid a damaging court decision. How Yahoo! owned the future, then threw it away, deserves a story to itself. But all we need to take away here is that Google won fair and square, by executing the same idea better. Yahoo! targeted SMEs and set barriers to entry for its ad program. Google realized that scale was important, and so opened the doors to all. If you merely had a one page website on Chihuahuas, for example, then you could join the market, and potentially get a share of advertising revenue related to Chihuahua products. Google made it a simple self-service model for both advertiser and hoster. Yahoo also failed to leverage its scale, and ran into execution difficulties with Project Panama, its second generation ad program.

Now for the crunch: what harm does it do? Leave aside for a moment that Google’s opponents here – including Microsoft and the telecoms companies – have less-than-fragrant reputations in the marketplace themselves.

And leave aside too the red herring of “Search”. Yes, you can change a search engine with a mouse click. But this isn’t about search engines at all.

Setting the bar

It’s about the cost of doing business on the internet, and if a monopoly exercises its power, then that cost rises. Long-time Google advertisers have already seen prices go up with no explanation. Remember that Google is a “black box” – and Google alone sets the price of advertising through its programs. It does so based on demand – and a magic fudge factor, which critics say represents how much it needs to meet its quarterly numbers.

As Scott Cleland, who represents telecoms clients pointed out this weekend – “there is no competitive substitute for search advertising”. And he’s right.

This is also a market that’s a lot less “dynamic” than many suppose, because of something we heard a lot about in the 1990s, the “network effect”. IBM and Apple offered superior PC products to Microsoft’s Windows – but application developers went for volume, and people went where the applications were, creating a circle that was hard for any competitor to break into. Similarly, advertisers go where the market is. If Yahoo! and Microsoft with their respective scale can’t crack paid search advertising, then who on earth can?

Much like Microsoft, Google’s company ethos leaves no room for competition. Its network strategy is to own the middle tier of the internet, where its large data centers will dominate, while squeezing the profits out of the access networks.

Google’s singular triumph has been one of misdirection. Thanks to “Net Neutrality”, Richard Bennett pointed out in a recent San Francisco Chronicle op-ed, Google’s subtle war on P2P is designed to usher content “consumers” into its datacenters, and away from exchanging material person to person.

Where it differs is that while Microsoft dreamed of dominance, Google succeeds. Microsoft never had the power to change the meaning of words, as Google does today. No media company ever has.

But for now, antitrust regulators need to demonstrate that there’s actual harm. Is the cost of business really increasing? That’s the immediate challenge for the DoJ and State Attorneys. The greater challenge is to wean our political, media and academic elites off their Google addiction.

A good question the regulators may want to ask is – if “Web 2.0″ is everything the politicians, wonks and newspapers hype it up to be – the future of business – then why should only one company be permitted to control it?