FTC

Those who oppose state and local taxation of the Internet are happy that Sen. Lott (MS) won (25-24) the post of Senate Republican Minority Whip today. Â I blogged on Monday why this leadership race was an important precursor on Internet tax and net neutrality. Senator Lott's opponent in the whip race was Lamar Alexander of Tennessee, the Senate's biggest proponent of ending the Internet Tax Moratorium and allowing state and localities to tax the Internet.  

"On search, you want to be on that first page," Leonsis said. "You don't exist from Page 3 on." This is what Ted Leonsis, a co-founder of AOL, said in the Washington Post this week.

This is very relevant to the online giants and their call for a fifth non-discrimination net neutrality principle in legislation and on the AT&T-Bell South merger. What Leonsis is saying is what we all know. It doesn't matter that Google or Yahoo give a hundreds of thousands of links in our search results, virtually everyone only has the time or inclination to check the first or maybe second page of search results. "You don't exist from Page 3 on."

The Sunday NYT had a great piece on Google by Richard Siklos "A Struggle Over Dominance and Definition." The crux of the analysis is Google: mate or menace? friend or foe? to media players and others?

My favorite quote was Microsoft CEO Steve Balmer: "The truth is, what Google is doing now is transferring the wealth out of the hands of rights holders into Google."

• Duh. Google is getting sued for different kinds of theft by a very wide range of property owners.

However, what I really love is how Google keeps self-redefining themselves in a way that makes net neutrality regulation more likely to apply to them in the future.

While everyone is understandably focused on the changes in Congressional leadership on the Democratic side, arguably one of the most significant potential changes that directly affects the bottom lines of all Internet-related companies and the future of the Internet could be the ascension of Republican Senator Lamar Alexander (TN) to be the Senate Minority Whip, because he is one of Congress' biggest proponents of ending the Internet Tax Moratorium when it expires in 2007.

Why am I flagging this as potentially a very big deal for the Internet world?

First, Senator Alexander, a former Governor of Tennessee, disagrees with the bipartisan and Republican consensus of the last decade that the Internet is inter-state commerce and as such should not be subject to state and local taxes. Sen. Alexander has worked harder than just about anyone in Congress to authorize States and localities to tax the Internet. Why this matters is that any Washington insider knows that tax issues are generally negotiated at the Congressional leadership level and the interests and knowledge of particular leaders can have a very big impact on the policy outcome -- that's why they are leaders. 

Second, adding a new Senate leader, whose pet issue is to end the Internet Tax Moratorium, with the already combusible mix for the Internet of the Democratic takeover of Congress and Democratic support of net neutrality, and one gets a potentially very volatile environment for future taxation and regulation of the Internet. Given the importance of the Internet and broadband to the U.S. economy, and that there is a wide open race for the White House in 2008, this is a potentially very big deal indeed.

With power comes responsibility and with responsibility comes tough choices. Both Speaker-elect Pelosi and Majority Leader-elect Reid have pledged to "govern from the center." The operative word here is "govern." While net neutrality may have been a good "political" issue for the Democrats, it is not a good "governing issue" for them.

With control of Congress, the Democrats can now make policy and pass legislation, which means, very practically, that they have to live with the real world consequences of their legislative rhetoric and decisions -- because Wall Street, markets and voters are taking them very seriously.

 

Conventional wisdom among net neutrality proponents is that a new Democratic Congress is good for net neutrality. Proponents point to the fact that the Senate Commerce Committee vote was 11-11 and two of the Senators that voted “noâ€? (Allen VA and Burns MT) were defeated in the election. They also point to the fact that Ed Markey, a big net neutrality supporter, is now Chairman of the Telecom Subcommittee the subcommittee that defeated his net neutrality amendment last year. They also point to the fact that Speaker-elect Pelosi and Senate Majority Leader elect Reid are also big net neutrality supporters. Those are the positives and they are real and significant, but are they enough?   

FCC Democratic Commissioner Copps editorial in the Washington Post, America's Internet Disconnect" is a very good guide to how the debate over communications policy and net neutrality will shift with Democratic asendancy in Congress.  

I have the utmost respect for Commissioner Copps personally even though I generally disagree with his conclusions when we look at the same set of facts or analysis. It probably results from his greater trust in government than markets and my greate trust in markets than government.

When financial types describe Google's growth juggernaut they routinely say that 99% of Google's revenues come from search advertising. Remarkably they have turned search advertising from nothing 8 years ago to a roughly $10 billion a year business. Truly extraordinary. But how did they do it? Through economic discrimination, the highest bidder wins. Basic market forces.

So what's my point? Google's entire business model is based on discriminating against websites -- what they say net neutrality is needed to prevent. 

• Google implores Congress to not allow broadband companies to discriminate against any website or content based on how much they pay.
• Google's highly successful economic discrimination business model should be illegal for Google's potential broadband competitiors. 
• Does the little guy have a chance to outbid the big guys to get their business on Google's  first page of search results or will they be relegated to the "second tier" page where few ever tread?
• Google's hypocrisy and competition double standard is especially galling, becuase Google has comparable market share in their market as DSL or cable providers have in their market.

Kudos to the FCC for unanimously ruling that the promising "third pipe" into the home, Broadband over Powerlines (BPL) is an unregulated information service.

• The import of this decision is that it means no net neutrality for BPL.
• The FCC now has ruled all major intermodal broadband compeitors, cable modem, DSL, wireless broadband, and BPL to be information services and not subject to net neutrality regulation. Hooray! You go regulators!
• It is ironic and incongruous however, that the FCC Democratic commissioners who voted no net neutrality for BPL, are reportedly still holding up the AT&T-Bell South deal in part over wanting to add more net neutrality conditions to that merger.

Please also make note of Chairman Martin's clever use of the word "neutrality" in his statement:

• "I believe that it is the Commission’s responsibility to help ensure technological and competitive neutrality in communications markets."
• The Chairman is dead right to remind everyone that net "neutrality:"
• is not technologically neutral -- it would pick edge technologies over network intelligence technologies
• Nor is it competitively neutral since it effectively would pick tech competitors over communications competitors.

Every now an then someone comes up with a new great analogy that really helps us get to the heart of a matter. Canadian Mark Goldberg's telecom trends blog really hit the nail on the head in this post. 

Let's go right to his analogy:

• Videotron boss Robert Depatie: "also spoke from his past business experience.

Before I worked at Videotron, I was in the food business – we were a 'content producer' in the parlance of today's communications business. To reach our customers, we dealt with a distribution channel, in our case, grocery stores.

To reach our customers we needed to convince our distribution channels to place our product in advantageous positions (end of aisles, eye-to-shoulder height on shelves – too high, or too low and sales suffered), and to help promote our product. We paid for that service. We compensated the distributor for his 'help' in making our product more successful.

• Not all producers pay stores for product placement. And I have noticed that my neighbourhood grocery stores and drug stores give preferred placement to their house brands. But I don't see people shouting about food neutrality. There is no 'Save the soft drinks' movement. Although with winter approaching I would like to find Red River cereal more prominently displayed, I shop around until I find it. I'm not calling for a federal inquiry as to why Sugar Zombies are easier to find at every store.

There is limited shelf space next to the cash registers or at the end of each aisle. How do you think the decisions get made as to which products get displayed there?" [bold added for emphasis]