The role of net neutrality in shaping the telecommunications market continues to grow, both in the US and abroad, and the FCC ruling on Comcast’s network management practices has only amplified its importance. In this Yankee Group podcast, David Vorhaus, Vince Vittore and Josh Martin discuss the issue and how operators are responding.

Net Neutrality podcast (mp3 / 11.3 MB / 12:22)

Not my own prom, but not far from it

OK, so it didn’t involve limos, corsages, and crepe paper, but thirty years after my last prom, last week I went to another one.

At least that’s what Kevin Krupky, legislative counsel for Alcatel-Lucent and my date for the evening, called it. What it really was, was the annual dinner hosted by the FCBA for the chairman of the FCC. Just Kevin, me, a head table stacked with FCC commissioners and former chairmen, and about 1500 D.C.-based telecom lawyers and lobbyists.

What a scene — as full of potential for sociological dissection as any real prom. Given the outgoing status of FCC chair Kevin Martin, the table-hopping was less pronounced around him and more noticeable among the big K Street lobbying firms. In the frantic card exchanges, you could see signs of the game of musical chairs now underway with the likely shift of direction in U.S. telecommunications policy.

Martin’s after-dinner remarks had the anticipated roast feel; he claimed sponsorship of the ‘No Lawyer Left Behind’ Act due to his salvos at the cable industry’s bundling practices, and bemoaned the worsening economics in the sector, suggesting that “Comcast couldn’t even afford to hire seatwarmers to not laugh at my jokes.”

Underneath the jocularity, worries bubbled up at every table. “It took an economic meltdown and an election to do it, but in a few short weeks, ‘regulation’ has gone from a bad word to a good word,” rued one lobbyist. Another observed the reduction in the number of tables hosted by troubled firms like Motorola and Sprint Nextel. But the big worry, which I heard all evening as well as in meetings earlier that day at the USTA: Will the new administration’s support for expanding broadband access be twinned with ‘net neutral’ regulation?

Fair question. If that worry is realized, it will punish every network operator that has depended on lobbying to solve that threat rather than service differentiation. The answer that will skirt this trap while paying bigger financial dividends than lobbying bills is investing in the tools to create tiered connectivity services to consumers.

I enjoyed the dinner, though, even if I didn’t stay long enough to see who the prom King and Queen were.

No, not those results…

Yesterday the FCC voted unanimously to resolve three issues which have been hanging like so many chads before the commission:

• the merger of Sprint and Clearwire to clear the way for the new, WiMAX Clearwire
• Alltel’s acquisition by Verizon Wireless
• the unlicensed use of “white spaces” between TV channels

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Lately, Carl Howe has been getting cranky every time anyone (namely me) brings up the expression “Over The Top.” I wouldn’t say that it’s pure crankiness but more like qualified clarity. Carl likes clear definitions and telling stories from the beginning — in other words, he’s a consummate analyst who prefers for us to not use ambiguous shorthand such as over the top.

And the reason for this is simple. If you have a color — say, green — then the color blue falls equally in the categories “not green” as well as “not red” and so on and so forth. “Over the top” is another such slippery slope. By defining “over the top” businesses as any business that runs across a communications network but that isn’t monetized as a transaction on that network, we quickly reach the simple ideas such as online advertising, internet video, and iTunes as over-the-top businesses that somehow manage to escape monetization from the network itself — the Anywhere Network of yore.

But what about transactions? If I buy a car online, is that a transaction that goes over the top? Or is that just the nature of telecommunications?

At some point, we no longer expect that the network will participate in revenues. If we transact a billion-dollar deal over a combination of airplanes, hotels, conference rooms, rental cars, e-mail, mobile telephones and conference bridge lines — we clearly don’t count the deal as accruing to those companies involved in the delivery of the underlying services.

Most of our economy consists of over-the-top transactions. Which makes it ambiguous to define some digital media as being “over the top.” Someone is making money off of these activities, it’s just not the same set of companies each and every time.

There has to be a better way to talk about this, and as analysts, it’s our job to develop new terminology while speaking in language that makes sense to everyone. This means that we can’t invent new terms every day and expect everyone to step to our new rhythm.

But with that in mind, it’s time for us to get to work.

Maybe you were a little shocked when you found out that your ISP was trying out some behavioral targeting technology. But more likely than not, your eyes glazed over at the whole discussion of online privacy. Surely, you want your online behavior to be private, but what’s private in this world anyway? And the kids. Yes. The kids. They’re different because of that whole Facebook thing.

So you can imagine the head-scratching that has gone into the online advertising industry’s softest launch so far. A few weeks ago, content delivery network, Akamai, purchased acerno and sneaked in an announcement of their Advertising Decision Solutions group. I don’t quite see how an online shopping network suddenly translates into a behavioral targeting platform, but the gratuitous Flash landing page at acerno.com announces quite subtly that “Akamai Acquires acerno and Gets Into Behavioral Targeting.”

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“Can competition kill innovation?”

Sounds like a silly question, right?

Common thinking suggests that competition forces you to innovate so the two are not opposed.

Economic theory is not quite so optimistic. The argument - in a nutshell - is that innovation investment is motivated by the guarantee of a return, and competition can diminish that return. Hence competition kills the investment incentive. This is hugely relevant to the emergence of the Anywhere Network because on the mobile, and especially on the fixed side, the technologies that form the Anywhere Network and enable Anywhere Services (and associated revenues) require very significant amounts of investment.

I was at an event on ultra-broadband (aka fixed Next Generation Access) organised by French regulator ARCEP yesterday (minutes and audio here), and this conundrum seemed to pervade every topic that was touched on. In a nutshell, the French regulator and others in Europe don’t believe that competition will kill innovation, but they can’t deny that the threat of competition deters incumbents from the investment. Their answer is to favor infrastructure competition by eliminating the bottleneck of access to ducts (which in turn lowers deployment costs) that confers an unfair advantage to incumbents (they own a lot of ducts).

This explains recent decisions in France and Spain to open the duct market and not regulate the network itself. In this way, the European model is moving closer to the US model of platform competition. European regulators acknowledge that these choices lead to an instituted oligopoly, but believe that any more competition will kill the incentive to invest.

What confuses me in this analysis is “which competition are we talking about?”

After all, the consumer doesn’t really care whose fiber strand delivers services. The consumer would like to have a choice of service providers, and a greater variety of services no matter who brings the fiber to his home. A lot has been written lately about mobile open access and Yankee Group has taken a stance that Open Access is a key enabler of Anywhere. That, of course, applies just as much to the fixed network (and we need to write more about this, which falls squarely on my shoulders, I’m afraid…)

But of course, we’re back to the argument I spelt out at the top. Most wireline operators are convinced that vertically integrated walled gardens are more profitable and therefore more likely to pay back for a new infrastructure they know they will have to roll out sooner or later. Forget that unbundling of their old (copper) network has largely proven to be extremely profitable to them. Forget that Open Access fiber networks in Sweden have higher penetration rates than closed ones. This is more dogma than economic analysis. The fact of the matter is they’ve been doing walled gardens for so long they no longer appreciate the virtues of an open field.

But it’s a paradoxical position. Because at the same time they’re complaining that they can’t get a share of from whatever revenues happen “over the top”. The Internet (barring any rash political decision on Net Neutrality) is open by definition and infrastructure owners see the Googles, Salesforces and Skypes of this world making money leveraging what they consider to be their infrastructure. They want a piece of that pie.

You can’t have it both ways, guys. An Open Access approach will allow you to develop the business models that leverage the infrastructure because you’ll be providing a key function to service providers as a distributor. But if you frame the debate in an “us vs. them” way, if you say the pipe business is dumb, if you decide that Google is your competitor, Google has no incentive to work with you. Hence no business model. You’re literally pushing these guys into disintermediating you.

We all agree that a key component of the Anywhere experience is the richness of services available, but it’s high time vertically integrated operators accepted that they’re not the best positioned to deliver most of these services. That doesn’t mean there isn’t money to be made there, on the contrary. It just requires an open mind.

So let’s focus less on getting several hugely expensive fibers to every home and instead on getting more than one service to every customer!

As a language dork, I have certain itches that needs scratching. I’ve found that multiple incantations of the same words or phrases, after a while, cause me to scratch my head and take notice. This time, that word is “rich,” used in a developer context. Allow me to get all Andy Rooney on you, then:

• “Rich internet applications,” or RIAs for short, denote new multimedia-focused technologies delivered over the internet. These include Microsoft SilverLight, Adobe AIR, Flex, Flash, and the ever-vaprous JavaFX.
• “Rich user experience” denotes the sighs of gratitude coming from ordinary end-users as they blissfully navigate through said RIAs. Just Google this phrase and you’ll see this phrase sprinkled like parmesan cheese into lots of keynotes.
• The Rich Web Experience is a new developer conference focused on getting developers to… deliver rich user experences and develop Rich Internet Applications, but using web standards too. Speakers include my buddy Alex Russell (of Dojo Foundation fame) and Douglas Crockford (inventor of JSON, and one of the Yahoo! Paranoids)

So you might be asking, what’s with everybody’s fixation on “rich?” Positioning, positioning, positioning. Adobe and Microsoft would have you believe that web standards (HTML, CSS, JavaScript) deliver a relatively poverty-stricken experience (so to speak) compared  to what you can get if you, you know, use their spiffy developer tools. Which cost lots of money. Sun, not to be left behind, weakly warbles on about how they’ve got JavaFX and that it’s really great, and “rich” too. Meanwhile, CSS devotees are using free-as-in-beer tools like the FireFox 3 and WebKit-based browsers, and low-cost editing tools, to crank out astounding, interactive web applications. If you’ve seen what ACID3 calls for, for example, you know what I’m talking about. Modern web standards (particularly CSS3) can deliver experiences that are every bit as immersive, flashy and (cough) rich as vendor-based tools.

Cynics (like me) might suggest that what “rich” really denotes is the future state of certain software publishers, should developers adopt their tools en masse. But in reality, I think that “rich” is turning into a catch-all for applications that exhibit any of these qualities:

• Application programming and markup languages that aren’t JavaScript, CSS, HTML
• Downloadable runtime environments
• Interactivity
• Back-channel asynchronous communications (a la AJAX, JSON)
• Multimedia presentation

Some parts of this definition of “rich” make sense. AJAX and JSON, for example, have unquestionably reinvigorated the web as a platform in its own right. If you look job markets for developers, the hottest jobs are for AJAX developers. Postings for older languages like Visual Basic and C are a fraction of the number.

But the problem is that most of the time “rich” is used, it’s not obvious what the context is. Are we talking about 1) a Flash application, 2) something that runs under SilverLight, 3) an interactive website like Kayak that uses JavaScript and CSS in inventive ways, or 4) an exhortation to chain developers to yet another proprietary programming language? Because of the lack of clarity, I’ve concluded that “rich” is a lit like “synergy” — an empty word that means nothing in particular.

In the late 90s, it became fashionable for CEOs to inject the word “synergy” into conversations to justify corporate mergers. In reality, this just meant that the boss could not enumerate any particular benefits of the merger, and preferred to hand-wave and say “synergy” instead. ”Rich” is going the same way. Developers and vendors would do well to eliminate it from their vocabularies, and focus on specific properties of the things they are pitching.

The Wall Street Journal yesterday raised a few Anywhere eyebrows with this paragraph at the end of an article titled Firms Hitch Wagons to iPhone. The paragraph that caused this fuss was as follows:

And those that have been sanctioned by Apple are finding out too late that they have guessed wrong about the depth to which Apple is willing to help them. Makers of location-based software expected to benefit from the new iPhone’s global-positioning system. Yet they are finding out that Apple won’t support “applications designed or marketed for real-time route guidance.” The clause in the iPhone developer tool-kit agreement essentially voids months of work by TomTom NV and other navigation providers.

Could this be? Could Apple be an Anywhere spoilsport and refuse to allow location-based applications?

Now, being a registered developer, I have the software development kits (SDK) for both the Apple iPhone and Google Android [shameless research plug: Yankee Group clients should look for a Decision Note comparison of the two SDKs and how developers should choose between them to be published soon]. Unfortunately, the Apple SDK license terms are confidental so I can’t quote chapter and verse here (software license restrictions and end user license agreements are a rant for another post). However, I can provide my personal interpretation of Apple’s legaleze, which luckily isn’t too tricky. Full disclosure: I am not a lawyer, and this opinion should not be construed as legal advice. Always consult your own attorney on legal matters.

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My colleagues Dan Taylor, Jen Simpson and I just took a briefing with Kent Ertugrul, the CEO of Phorm. As many of our blog readers may know from reading The Economist (my favorite magazine), Phorm provides an interesting twist on online advertising. Phorm does two things that promise to overturn the advertising apple cart:

• Omniscience. Phorm’s traffic analysis servers, sitting on ISP premises, filter (nearly) all end-user web traffic and observe the keywords they are interested in. By “keywords” I mean the most frequently occurring words contained in pages served up by webservers users visit. For example, if you visit the front page of Talking Points Memo, Phorm will associate page keywords “Obama”, “McCain”, “527″ (and the other most frequently used words with that page) with a random unique identifier that represents you. It knows these things because it has read and indexed the page when you read it.
• Disintermediates search engines. As you would expect, because Phorm reads the content of nearly every web page (on port 80 aka normal unencrypted HTTP) the user visits, it has unparalleled visibility to the user’s activity. The system is also “opt-out,” meaning that if the ISP installs it, the user has to take an active step to not be included in the system. These two properties — drastically expanded visibility, and the fact that the user cannot escape unless they opt out — enables ISPs to go “over the top” of the heads of Google and other search engines. It has the effect of disintermediating them entirely by allowing Phorm to claim, “yeah, these other guys know what user 123 has been searching for, but we know about all of their interests, across all of the websites they visit.”

Richard Clayton of Cambridge University has published a highly technical analysis of Phorm’s system on the his website. It makes for excellent reading, and I recommend it highly. The comments are particularly entertaining; one reader notes wryly that “It seems the only way to full opt out of this is to change ISP.” Wikipedia also has an informative article that is, on the whole, fairly hostile to Phorm. To date, the biggest objection to Phorm has come from researchers and observers who feel that the fact that it reads and indexes (nearly) all pages you visit is an unwarranted invasion of privacy.

In the briefing, I learned quite a bit about Phorm’s goals from a corporate perspective. My queasiness about inspection of customer web sessions aside, it seems that continued badgering from the press and from UK observers has forced Phorm to add more privacy-preserving features. Certainly, the point of going “over the top” of Google and the other search engines means that Phorm tracking cookies are accessible by any website who wants to use it. It’s clearly very appealing to ISPs, who desperately want a slice of the Internet advertising pie.

The question is, how bad do they want it? It’s clear that researchers like Clayton are not happy with the way Phorm’s system works. The way the system is set up (forcible inspection of HTTP traffic, cookie forging) seems a lot like a wiretap to me (albeit one to which, according to Phorm, the user consents). Today, the system is trialing in the UK with three carriers, including BT and Virgin Media. What happens when Phorm expands to the US is the real question. I suspect the Electronic Frontier Foundation and the ACLU will be all over this like a fat kid on a Twinkie.

For all of its novelty and potential for disruption, adopting the Phorm platform value proposition is a risky one for ISPs. The issue is not about whether Phorm gathers the right kinds of consent from end-users, anonymizes data it collects, or offers appropriate data protection tools for end-users. Phorm may (or may not) be doing all of the right things; that isn’t the point. The issue is, regardless of what Phorm does, whether opponents can muster enough opposition to poison the reputations of ISP customers who adopt it. Examples from other emotionally-charged consumer fights around genetically modified organisms (GMOs) and environmental issues suggests that aggrieved consumers, when riled up, have rather sharp elbows. “Spying on their customers!” would be one charge. “Big brother” would be another.

Phorm’s response, in our briefing, was essentially, “once consumers understand our system and its benefits, they will like it.” Let’s assume for the sake of argument they are right. It would still be an uphill battle, though, because business models predicated in part on user education usually fail. My vendor customers in the consumer security business know this all too well!

All of this leads me to conclude that ISPs who adopt Phorm would be putting a cyanide capsule in their mouths. The worst-case scenario is suicide-by-public-relations. Enough jostling from consumers and — crack — there’d be the sudden, familiar whiff of almonds in the air.

2.0 is all about comparative advantage and nothing more. Adam Smith would be proud.

In this whole 2.0 world, I just can’t keep things straight. Was I born at 1.0 or 0.1? And where am I today? Am I in my 3.0s or just 1.9.2? Because I’d say that it looks like my 4.0s or my 5.0s are on the horizon, and I definitely feel like I’ve learned lessons from my 2.0s. And what will version 2.1.7b be like when we get there?

Unless I’m in the world of technology…which feels the need to 2.0 everything. Whatever you were doing is 1.0 and whatever you will be doing is 2.0. So according to the recent Advertising 2.0 conference, I’m destined to do tomorrow what I’ve been doing for years, which is going to conferences and looking for cellular signal. Or looking for a way to cram a day’s worth of work into the 30 minutes between sessions.

The biggest take-away from Advertising 2.0 is that, no matter what happens, the best that digital advertising can do is to grow its comparative advantage against other media. This is a difficult concept to grasp, but it’s very important. Everyone looks at Google, and they think that digital advertising is the land of milk and honey where riches abound.

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