Capital Markets

The EU's penchant for price regulation is a big reason why the EU is falling behind the US in broadband.

See my Forbes Tech Capitalist post here: "Why the EU is Falling Behind the US in Broadband."

The DOJ lawsuit against the AT&T/TMobile merger has many serious flaws that will make it difficult for the DOJ to meet its burden of proof in court that this merger is anti-competitive.

• Court cases are precedent, fact, and merit driven, and DOJ's case is much weaker in those critical dimensions than most appreciate or reports indicate.
• (See DOJ's release here and the DOJ's complaint here.)

Importantly, if the DOJ ultimately cannot prove this merger is anti-competitive in a court of law, that official legal decision would make it legally difficult for the FCC to block the merger on competition grounds under the FCC's public interest standard, especially given that the merger would bring more broadband speed more quickly to more Americans, and create jobs, which the FCC's claims are their top public interest priorities.

• Simply, the precedents, facts, and merits are friends of the proposed AT&T-T-Mobile deal.

I.   Summary of Top Ten Flaws in DOJ's Case

Expect privacy concerns to be the eventual catalyst that ultimately bursts the Internet investment Bubble 2.0. It is rare when there is a profound disconnect and suspension of reality between industry behavior/investment expectations and customer wants, needs and expectations, but that is precisely what is at work in Bubble 2.0.

• Almost by definition, investment bubbles are unsustainable; what goes up must come down, it is only a matter of how and when -- not if.
• Simply what fuels Bubble 2.0  is the patently false core assumption that the current unfettered, widespread, and largely clandestine data mining of individuals private information in order to target specific individuals with personalized online advertising:
  • Is aligned with real user interests;
  • Is a forthright business practice consumers are aware of and have meaningfully consented to;
  • Will not be legally constrained in the future; and
  • Will become the accepted norm -- meaning that the populace and governments will adapt to the wishes and desires of the online-ad- industry and not the other way around.
• In a word, is online tracking, profiling and data mining a consumer-driven model? -- or a consumer-dragged model?

This is deja vu for me. I've seen this movie before when I had a front row seat as the original dotcom Bubble 1.0 wiped away $4 trillion in market valuation in a few weeks.

Google announced it is working on an economy-wide Google Price Index, but has not decided whether to make it public, per Google Chief Economist, Hal Varian, who spoke at the National Association of Business Economists conference this week.

• This development has under-appreciated implications for insider trading and also spotlights how Google's online dominance of market-relevant information suggests market failure and a new potential systemic vulnerability to the integrity of global capital markets.

I.  Insider Trading

In March, Google CEO Eric Schmidt said: "One day we had a conversation where we figured out we could just try and predict the stock market... and then we decided it was illegal. So we stopped doing that."

Now any hedge fund (or market regulator not born yesterday) understands that if Google is actively working on a Google Price Index, Google has not stopped trying to use its uniquely comprehensive and timely, repository of sensitive market information to predict information highly useful to predicting the stock market.

The SEC/CFTC report on the May 6th "Flash Crash" helps confirm that automated index trading technology was a contributing cause of the 2008 Financial Crisis and why recent financial reforms are not enough to address the ongoing destructive systemic vulnerability that automated index trading technology increasingly poses for financial markets going forward.

Is the market, or the FCC, the problem in "timely and reasonable" broadband deployment? 

• The FCC's just released 706 broadband report, like the wireless competition report that preceded it in May, again indicts the broadband industry for not meeting the FCC's new arbitrary, subjective, and after-the-fact expectations of where the nation should be at this particular point in time, despite the FCC's own facts that 95% of Americans have access to broadband and that Americans have more broadband competitive choices than any country in the world.

To see if the FCC is more interested in actually getting broadband deployment to all Americans fastest or in micromanaging broadband access, economics and providers -- look at how the FCC has burdened LightSquared, the start-up that seeks to be the EIGHTH national U.S. broadband competitor!

• (To count: 1. cable, 2. DSL/Fiber, 3. Verizon Wireless, 4. AT&T Mobility, 5. Sprint, 6. T-Mobile, 7. Clear (WiMax); & 8. LightSquared.)    

Some context is needed here.

The FCC is vastly understating the systemic risk involved in the FCC's radical "third way" regulatory surgery to the Internet, the communications sector and the economy.

• The FCC's proposed "third way" is an elaborate public relations facade that disguises huge problems and fatal conceptual/practical flaws that will become painfully obvious over time.
• The FCC's proposal is long on politics and soothing rhetoric, but short on real world practicality or legitimacy; it predictably will ultimately collapse under its own weight, complexity and hubris -- unfortunately leaving exceptional carnage in its wake.
• Simply, this proposal is too inherently contradictory and mind-numbingly complex, and too big not to fail.
• This analysis will explain why it is a disaster waiting to happen; it's not a matter of if, but when the "third way" will collapse on itself.

I.  Why this "third way" is a disaster waiting to happen:

The best way to understand what is going on here is to think of the Internet as a brain and the FCC's "third way" proposal as brain surgery to fundamentally rewire how the Internet brain operates at its most basic level.

Investors understandably have focused first on whether or not the FCC will upend the broadband Internet sector by deeming broadband a Title II common carrier service for the first time, and second whether or not the FCC actually has the legal/constitutional  authority to do so.

• However, as a result of that political and legal focus, what has been almost completely ignored is the potential multi-billion dollar impact of such an FCC decision, that by definition, would make all currently unregulated and un-metered Internet traffic bits, regulated and metered "telecommunications" tele-bits for the first time. 

Simply, deeming broadband Title II legally could compel bit metering and bit payments in the U.S. for the first time.

Google's unprecedented mass-accumulation of material non-public information may force a re-thinking and broader definition of the concept of insider information/trading and related securities laws/regulations, in order to continue to ensure the integrity of public markets.

• Public statements by Google's CEO Eric Schmidt last week unwittingly unveiled a new and potentially very serious material weakness in the oversight and integrity of public markets, that should trouble those responsible for policing insider trading and other public securities laws at the SEC, CFTC, FERC, Treasury and the DOJ.
• From Jon Fortt's outstanding not-to-be-missed post in Fortune: "Top 5 moments from Eric Schmidt's talk in Abu Dhabi:"
  • Google CEO Eric Schmidt: "One day we had a conversation where we figured we could just try and predict the stock market..." "and then we decided it was illegal. So we stopped doing that."

Public market regulators responsible for protecting the integrity of public markets are likely to be concerned by this public admission by a publicly-traded Fortune 200 CEO, especially when the statements are put in a broader perspective by connecting the relevant dots.