Nice to see there are some influential figures within the world of the Internet who have a different view about net neutrality. George Gilder and Bret Swanson had an article in the Wall Street Journal this week about their views on net neutrality and they closely mirror my own.

Some key quotes:

We need a dramatic expansion in raw capacity, or bandwidth, and also fine-grained traffic management capabilities to ensure robust service for increasingly demanding consumers. But none of this can happen if we regulate complex network traffic engineering and experimental business plans.

…
Capacious, big-bandwidth networks will transcend many of today’s specific complaints. As raw capacity expands, more and more applications and users can peacefully coexist. But inevitably, sophisticated network users with innovative applications will find creative ways to push the boundaries of capacity on certain network links, and some bits will be shuffled and queued.

The network is now a global computer made up of hardware, software and human minds. But this new, fast-changing and highly organic computer is no more easily regulated than were the circuits, storage, memory and protocols of a mainframe or PC. Leaving it to Washington agencies and committees to engineer the exaflood would be an act of unimaginable folly.

This nicely mixes the practical reasons for avoiding total net neutrality (the present and ongoing need for traffic management to deal with bandwidth-intensive applications) and the philosophical idea that government and legislation is the wrong solution for almost anything having to do with the way the Internet runs. It’s simply too fast moving, as the 1996 Telecom Act has abundantly proven.

Several major wireless carriers this week announced unlimited wireless plans for $99 - Verizon kicked things off, AT&T followed suit, T-Mobile joined the crowd, then US Cellular finished off the week with its own announcement.

The Verizon and AT&T deals are pretty much identical - $99 per month for unlimited calling. T-Mobile threw in unlimited texting, which makes sense since its user base tends to skew young and therefore is more prone to communication via thumb than mouth. US Cellular’s is a national offering too but its user base is more regional.

Financial analysts and investors have largely seen all of this as a bad thing, either because it will start a price war, or because it will take everyone spending over $100 on voice currently and bring their spending down to $100, by definition decreasing their spending (Om Malik would appear to be a case in point).

There is already speculation that Sprint will attempt to undercut all of the above, which it could do by simply charging less than $99 for its unlimited voice plan, or presumably by charging $99 or slightly more for a plan that would include unlimited voice and messaging and/or data usage. Certainly, Dan Hesse has suggested that he has what have variously been described as “nukes” or simply “missiles” he can fire off to kick-start the turnaround at Sprint, and one of these is presumed to be a dramatic move on prices. With the other carriers having now stolen a march on that particular idea, he may need something new.

However, it’s not clear that it would have made a huge difference even if Sprint wasn’t playing “me too” at this point. Think about it. Wireless churn stands at somewhere between 1 and 3% for the larger US carriers. That means that in any given month, only 3% (or fewer) subscribers switch carriers, or put another way the average lifetime of a subscriber is between 3 and 8 years. Even the most dramatic move on pricing would be unlikely to loosen up more than a small number of additional subscribers in any given period. Look at the iPhone - growth appears to have slowed, and there are doubtless several reasons. But one is the simple fact that many people are locked into 2-year contracts (which by themselves would limit churn to just over 4% if everyone stayed in them) and over three quarters of US wireless subscribers are currently with a carrier other than AT&T.

Given that Sprint currently has negative “flow share” towards the other three big carriers, just turning that trend around would be something. But simply reducing prices will not likely do the trick on its own, especially when competitors are making similar moves. Forrester has a survey which has been used by Morgan Stanley to look at brand loyalty, and it illustrates where Sprint’s problem really lies:

Verizon scored an average response of 7.7 out of a maximum score of 10, AT&T and T-Mobile scored 7.2 each, with Sprint Nextel averaging 6.1 among their customers. Factors such as reliability, trust and prior experience
were rated as key factors in making a carrier choice.

Sprint has by far the lowest rating of any of the main carriers (Nextel’s independent rating is even lower), and this ties in directly with its churn. It needs to be doing a better job of keeping existing customers happy at least as much as it needs to win new ones.

As to the question of whether the impact of unlimited pricing plans will be good or bad, it’s hard to argue they’ll be good. The answer really depends on which of four resulting trends is strongest:

• existing customers of a carrier switching to a higher-priced plan (i.e. going from limited to unlimited), which would have a positive ARPU and revenue impact
• existing customers of a carrier switching to a lower priced plan (i.e. because they currently spend more than $99 either because their plan costs more or because of overages), which would have negative ARPU impact
• customers switching from other carriers, which would have positive subscriber and ARPU impact, but which seems relatively unlikely on the whole because the model has swept all but one of the major carriers in the space of a week
• new customers signing up with the carrier because of the new plan (which seems least likely of all, since current wireless non-subscribers tend to be poorer, with poor credit scores, and are therefore much more likely to adopt pre-paid or at least low-priced postpaid offerings.

Given that the fourth trend is likely to be negligible, and third also small, that leaves the first two. There is an argument for switching from a lower-priced to a higher priced plan if it allows you to make another simultaneous change - i.e. to switch your calling from another network to your wireless carrier. If people cut the cord either at home or in business as they make this change, they may save money overall while increasing spend with their wireless carrier. The premium on top of more modest allowances of minutes is likely to be at most $50 and probably considerably less, so it would be competitive with unlimited wireline calling plans. However, it seems likely that the percentage of subscribers currently paying more than $100 for their voice services who will switch to the $99 plan will be close to 100% within the first few months. While providing some goodwill benefits similar to those enjoyed by Sprint with its Fair & Flexible plans and AT&T/Cingular with its Rollover minutes, it’s not clear those will translate to sufficient churn reductions to offset the loss in ARPU / revenue.

Had Verizon been alone in making this move, the picture would look very different, even if it only had a few months of lead time over the other carriers. But because the others have responded - or are likely to respond - very quickly the overall impact seems likely to be at least slightly negative.

On the other hand, it’s also worth asking what would have happened to voice ARPU over the next year anyway. It has been stable for some time, and with most growth coming from prepaid and family plans at present it is likely to drop considerably in the coming years. Per-minute pricing has been dropping for some time, since that ARPU has been buying ever larger numbers of minutes over time. The current model for consumer communications has flat-rate pricing as its endgame every time (see broadband, wireline voice, TV), and although it has taken a very long time to get there with wireless, we’ve arguably had several baby steps already - the “bucket of minutes concept” and the elimination of long-distance and roaming charges being among the most obvious. This will doubtless accelerate the decline in ARPU somewhat, but overall it may simply cap voice ARPU at a nice high rate (about twice current ARPU), freeing consumers to increase spending on data, which is where all the growth is today regardless. It may not be as bad as some people think.

Note: the image used in this post is a picture I took myself a while back on a walk through NYC. Unaccountably, a huge inflatable rat was sitting on the back of an unattended trailer outside a Verizon Wireless store. Seems somehow strangely apt for this story. Original can be viewed here.

Comcast on Tuesday filed with the FCC its response to complaints by Vuze and Free Press about its traffic and network management practices. It’s an 80-page document, with the first 60 pages or so outlining Comcast’s arguments and the last 20 pages attaching its latest acceptable use policy and FAQs regarding excessive use and network management.

It’s worth looking at in detail because Comcast makes some good arguments and some which are a little flimsier.

At root, Comcast’s argument is that:

• it has (so far) restricted its network management activities to the following narrowly-defined set of circumstances: uploads by BitTorrent users who are not simultaneously downloading (and are therefore thought to have left their PCs unattended as peers in the network rather than as active consumers of torrents), when networks are congested
• it has sufficient capacity in its network to avoid congestion when it monitors only this very specific type of traffic, but when these uploads are permitted it faces congestion problems
• network management is therefore the only way to ensure that all other traffic can reach its destination at times of high usage of the network
• the FCC ought to rule that such network management is “reasonable” and in fact the kind of thing that a responsible ISP ought to be doing to provide quality service to customers
• there is no merit in its opponents that it has done something illegal, since the FCC has never actually turned the much-touted net freedoms espoused by Michael Powell into anything with legal authority.

If you assume (which some of its opponents won’t) that Comcast is being honest and open, this seems to me to be entirely reasonable. If one very narrow and specific category of traffic is causing all the problems, and temporarily blocking that form of traffic during peak times solves the congestion problem, it is absolutely the right thing to do. It is the least intrusive way of managing the problem, and affects only traffic which users generally have no real interest in anyway (since the content is flowing away from users, usually in an automated fashion, and therefore is not content they are consuming). Certainly, there is no indication that the content which is being blocked in any way directly competes with any service offered by Comcast, since it is not blocking downloads.

Is there anything to object to at all here, then? Well, yes. Comcast has taken a very long time to release this data about its network management activities, and arguably has obfuscated the truth throughout the process. Now, in this it is no different from other ISPs out there, none of whom provided detailed information about their network management practices either. As Comcast itself says in its filing, requiring such a level of detail to be filed would have two adverse effects: (1) it would require significant manpower to always have the latest policies posted somewhere, (2) it would provide information to both legitimate service providers and those with nefarious motives about how to bypass its controls, defeating the object of network management and only increasing the burden on Comcast.

What are the alternatives to network management? It seems to me there are essentially two of them:

• allow degradation to take place at busy times
• massive investment in additional bandwidth.

The former would cause a worsening experience for all customers and applications at peak periods, which would likely lead to complaints against Comcast and customer desertions. It would technically be “neutral” and “non-discriminatory”, but wouldn’t really be in the best interests of any particular party - consumers or application or service providers. The latter would be hugely expensive in the first place, and up to a certain point any additional bandwidth would likely be scooped up by P2P activity anyway, which means it wouldn’t solve the problem.

All of this leads me to wonder whether the ISPs - Comcast included - wouldn’t be better off simply banning the use of P2P software (or at least P2P uploads) in their acceptable use policies. Here are some excerpts from other AUPs:

You agree that the Service is not to be used to host peer-to-peer applications that you are not actively using [from AT&T's terms of service]

You may NOT use the Service as follows: … (x) to install “auto-responders,” “cancel-bots” or similar automated or manual routines which generate excessive amounts of net traffic… You may not use the Broadband Service to host any type of server whether personal or commercial in nature. [from Verizon's series of tubes” analogy. Speaking of which, Comcast relies on a quote attributed to Congresswoman Mary Bono Mack (widow of Sonny Bono and inheritor of his House seat) in describing BitTorrent:

As Congresswoman Mary Bono Mack recently explained:

The service providers are watching more and more of their network monopolized by P2P bandwidth hogs who command a disproportionate amount of their network resources. . . .

You might be asking yourself, why don’t the broadband service providers invest more into their networks and add more capacity? For the record, broadband service providers are investing in their networks, but simply adding more bandwidth does not solve [the P2P problem. The reason for this is P2P applications are designed to consume as much bandwidth as is available, thus more capacity only results in more consumption.

As others have pointed out, Congresspeople are never the strongest authorities on such topics and it probably could have found better ones. An article quoted later cites this snippet from Bram Cohen, the founder of BitTorrent, and actually does the job just fine:

Cohen agrees. In fact, it's something he predicted when he first thought up BitTorrent. "My whole idea was, 'Let's use up a lot of bandwidth,'" he laughs. "I had a friend who said, 'Well, ISPs won't like that.' And I said, 'Why should I care?'"

At the end of the day, the salient fact is that a small number of BitTorrent streams (Comcast suggests as few as 10 or 15) in a single node can start to cause problems, and a single user can easily be responsible for most or even all of those. Strangely, Comcast offers no evidence of its own to support any of its claims. It must have masses of data on the amount of P2P traffic in its network and so on, from the Sandvine servers which it uses to filter traffic in the first place. Perhaps it assumed that no-one would take its word for it.

One trap Comcast doesn't fall into is using the illegality of much of the file sharing that BitTorrent enables as an excuse. It doesn't mention this once, to its credit, thereby negating the obvious counter-argument that not all BitTorrent uses are illegal. It is, however, guilty of making statements which are stronger than the supporting evidence cited in the filing itself entitles them to be:

In no event does Comcast prevent, restrict, or limit the use of applications and services using P2P protocols

Given that the most logical meaning of this statement is clearly untrue from everything it says earlier in its filing, this is again disingenuous to say the least. The following statements are somewhat more accurate, in that Comcast doesn't prevent consumers from using certain applications altogether.

Comcast’s customers have unfettered access to any lawful content they choose, including content that is delivered via P2P protocols. Comcast’s customers’ P2P downloads are utterly unaffected by its network
management practices, and the limited network management measures applied to certain P2P uploads in certain circumstances are entirely content-agnostic [my emphasis]

All of this makes you wonder at what point Comcast’s management kicks in. Based on the figures it quotes about 15 or even 10 BitTorrent streams in a single node causing problems, it might be restricting the number of unidirectional uploads to less than 10 in any given node at any given time. Of course, some streams are bigger than others, and there are also bidirectional uploads (i.e. people uploading while downloading) which Comcast claims not to be managing, so it’s entirely possible that networks could become congested anyway (Comcast seems to suggest this is not the case).

At the end of the day, I’m inclined to agree with Comcast’s reasoning, but it’s undeniable that its handling of this whole issue has been clumsy from start to finish and this filing in particular could have been a lot tighter. Hopefully the FCC will see it the same way, although it may all become moot if Markey’s latest effort gets the go-ahead.

As of right now, I am unable to view the Wordpress.com website (Wordpress.org is up just fine). Strangely, blogs hosted on Wordpress, with .wordpress.com addresses, are still up, at least from the look of a couple I checked.

Doesn’t downtime with major websites seem to be becoming more and more regular? Twitter has been notorious of late for its frequent outages, Amazon’s cloud-based computing servers went down last week for several hours (and see here for an unfortunate combination of the two), Flickr had a nasty outage around a month ago… So far, there seems to be no connection between all these outages, but at some point you have to wonder - is there some kind of bug going around that people haven’t cottoned onto, or is it just that traffic has become so spiky that it’s almost impossible to predict peak load anymore?

Either way, it’s a reminder of how fragile online services can still be. Although I’m not an Amazon cloud computing customer, the outages at Twitter and Flickr were bad enough that I experienced both of them as a user just by needing to use the services at times when they were unavailable. Wordpress.com is similar - I never use it since I use the hosted version on my own domain, but I wanted to set up the Akismet comment spam fighting plugin and that requires my Wordpress API key, which, of course, I can only get by going to wordpress.com…

Here’s to more uptime later in 2008.

After failed attempts to get net neutrality legislation passed in 2006, Ed Markey and friends are at it again. This time, the bill has been softened a bit, with the language toned down and the focus on giving the FCC more authority and a mandate to enforce three of Michael Powell’s Four Net Freedoms as drawn from an official policy document of the FCC.

The Bill is actually presented as an amendment to the Communications Act of 1934, as was the 1996 Telecom Act. The preamble lays out the purpose of the Bill, which seems inocuous enough:

The importance of the broadband marketplace to citizens, communities, and commerce warrants a thorough inquiry to obtain input and ideas for a variety of broadband policies that will promote openness, competition, innovation, and affordable, ubiquitous broadband service for all individuals in the United States.

It then moves into rather shakier territory:

It is the policy of the United States… to maintain the freedom to use for lawful purposes broadband telecommunications networks, including the Internet, without unreasonable interference from or discrimination by network operators, as has been the policy and history of the Internet and the basis of user expectations since its inception.

Here’s where things get tricky, because in proposing a new set of formal rules for the Internet Markey is relying on a presumed “policy” that has existed hitherto, but this of course is nonsense. Since the Internet is a private enterprise made up of thousands of individuals and companies, it hasn’t had a policy because it hasn’t needed one - it’s been run according to the competing priorities and goals of all those involved in it.

The other crutch for his position is “user expectations” which, of course, is at least as vague, if not more so. And herein lies the problem - rather than allowing the FCC full freedom to determine what future policy around the Internet should be, what user expectations really are, and how to balance those against the real-world economics that underpin the Internet, Markey has taken the first few steps for them and thereby limited their options. So, far from allowing the FCC to undertake “a thorough inquiry to obtain input and ideas for a variety of broadband policies” Markey has provided a much narrower framework than his preamble suggests.

A little lower down in the policy section the Bill states that it should be US policy:

(3) to preserve and promote the open and interconnected nature of broadband networks that enable consumers to reach, and service providers to offer, lawful content, applications, and services of their choosing, using their selection of devices, as long as such devices do not harm the network; and

(4) to safeguard the open marketplace of ideas on the Internet by adopting and enforcing baseline protections to guard against unreasonable discriminatory favoritism for, or degradation of, content by network operators based upon its source, ownership, or destination on the Internet.

Part (3) is merely a summary of the three net freedoms which will be enumerated later on, but note the reference to legality here. Part (4) then goes on to state the simple premise of neutrality, which forbids “unreasonable” treatment based on source, ownership or destination. For starters, we have a conflict between the ownership provision here and the legality provision in part (3) - if a provider was able to conclude that content being shared was not owned by the person sharing it and therefore was being transmitted illegally, would that come under part 3 (where it would be allowed) or part 4 (where it wouldn’t)?

And how do we define “reasonable”? Comcast (the only provider to have openly stated it plans to be non-neutral in its treatment of traffic) would argue that its traffic management and shaping are reasonable because they are necessary to allow its services to all customers to run smoothly without massive additional investment. On what basis will the FCC second guess this judgement if the only criterion is that such action should be “reasonable”?

The specific mandate for the FCC to look into the current state of the market and determine appropriate policies comes a little later:

Within 90 days after the date of the enactment of this Act, the Federal Communications Commission (in this Act referred to as the ‘‘Commission’’) shall commence a proceeding on broadband services and consumer rights.

Specifically, this proceeding needs to determine the following:

• Whether any provider is currently in violation of the three net freedoms (relating to applications, content and devices)
• Whether “broadband network providers add charges for quality of service, or other similar additional fees or surcharges, to certain Internet applications and service providers” in contravention of the net neutrality principles set out earlier. This obviously goes right to the heart of one of the two scenarios which have been laid out by providers under which they would want to be less than neutral - to deliver content at premium speeds and quality for a premium price (the FedEx vs. USPS model), and is therefore worrying. In addition, it’s not clear how this would affect players like Akamai, which specialise in providing such services.
• Whether “broadband network providers offer to consumers parental control protection tools, services to combat unsolicited commercial electronic mail, and other similar consumer services, the manner in which such services are offered, and the extent to which such services are consistent with such policies of the United States”. Most people seem to have read this as a sop to Republican lawmakers but I wonder if it isn’t actually the opposite - since it’s hard to imagine a way in which the lack of parental controls and spam filters could contravene net neutrality, but it’s possible to see how an extreme interpretation of net neutrality principles could lead you to believe the presence of such controls would violate them. At the very least the intent of this paragraph needs to be clarified.
• Network prioritisation practices by providers and their consistency with net neutrality principles
• The relationship between net neutrality principles as applied so far with competition in Internet services
• Whether providing a sufficiently fat pipe could excuse a provider from these rules. This is a particularly interesting one - the whole point is that we’re getting fatter and fatter pipes in the access network, but the backhaul portion is where the bottleneck occurs, and that’s the very reason for wanting to offer QoS enabled services in the first place. Carriers want to avoid building out massive additional bandwidth in that part of the network by more effectively prioritising traffic - few will qualify for this condition as a result, unless the FCC is stupid enough to look at access speeds alone. But it also goes to the heart of the matter - whether prioritising some traffic necessarily degrades all other traffic, including competing traffic. If it does, the argument for neutrality at least has some merit. If it doesn’t, then that argument essentially goes away.

The Bill further requires eight additional broadband summits to be held around the country within one year of the passage of the Bill into law. These summits will exist

to assess competition, consumer protection, and consumer choice issues related to broadband Internet access services.

Note no mention of current limitations of the Internet, the economics associated with the current business model and any future business models either in keeping with or in contravention of net neutrality. And the “technology sector” is the last group mentioned in the list of individuals and entities to be invited to such summits, and presumably includes providers, though that’s not explicit. The focus is very much on consumers and their “rights” and views rather than on a balanced evaluation of the competing interests of consumers and providers.

The output of all this is a report back to Congress with recommendations, which is the kicker here. Representative Chip Pickering (R) has signed on for this Bill but had opposed previous attempts, on the basis that this one was rather softer than previous attempts in its aims and prescriptiveness. However, the idea that the ball is going to be back in Congress’s court rather than remaining with the FCC at the end of the process suggests this may just be a smokescreen to get a net neutrality Act into the statute books and then follow up in a year’s time with a much harsher version based on all the work done by the FCC. The Bill has largely been described in blogs and articles as giving the FCC more teeth to deal with abuses of the net freedoms but there’s actually nothing in here that does that. It merely asks the FCC to go and do the legwork and then hand the results over to Congress for a solution. At a time when Democrats (who largely strongly favour net neutrality) are likely to increase their majority in Congress and also appoint a Democrat-led FCC, this is particularly worrying.

My own position on net neutrality has always been this: that those willing to pay a premium for premium delivery (whether they be content owners or end users) should be able to do so, and that the best way to architect such a delivery system is to do it in parallel with the existing Internet infrastructure such that other traffic is not degraded by it. To the extent that there is a bottleneck in traffic, all remaining traffic would be degraded equally by virtue of its volume, not because of any discriminatory measures. I also think it would be reasonable within that broad flow of content to prioritise real-time traffic (primarily voice and video) and allow non-real-time traffic such as website data and emails to be processed slightly more slowly. I don’t think the Bill as currently written would allow that model to exist, and I therefore believe it’s deeply flawed.

Blanket coverage everywhere this week of the Yahoo! Microsoft saga, and specifically on Yahoo!’s rejection of the offer this morning. Lots of coverage too of Yahoo!’s perceived alternatives, which include outsourcing search to Google, merging with AOL or News Corp, or being bought out by private equity funds.

At this point it’s beginning to look like Yahoo! is adopting an “anyone but Microsoft” strategy, in much the way some voters were described to be keen to vote for “anyone but Bush” in the 2004 elections. But the problem with that strategy, in politics as well as business, is that there’s no guarantee the alternatives are any better. The kind of blindness that comes from making negative decisions - not to do something rather than to do something - can lead to worse decisions than the very thing they’re trying to avoid.

No-one in their right mind believes merging with AOL is the answer (AOL Time Warner is of course itself the ultimate example of why such mega-mergers are a terrible idea), and no-one really believes News Corp is interested. Outsourcing search to Google would only provide a temporary benefit in terms of revenues but wouldn’t solve any of the long-term structural issues at Yahoo!. Perhaps the perception of giving Microsoft one in the eye is the biggest attraction to that strategy, but of course that goes back to my original premise.

The fact is, we all know Microsoft taking over Yahoo! will be a disaster in many ways - especially for employees of the acquired company. But it’s not at all clear that any of the alternatives are any better, and certainly many shareholders reasonably believe that this is their best hope of getting out of the current mess at Yahoo! with a reasonable price for their shares.

Yang & Co. have demonstrated that they’re not able to turn the business around, treading too gingerly at a time when the company needs some major changes. There is - I think - a close parallel here with Gary Forsee’s last few months at Sprint: the man who had been behind much of its success in previous years was unable to remove himself far enough from the strategy of yesterday to make the right moves for today and tomorrow. Yang is arguably too similar to Semel in this way, and of course has an even longer history with the company than Semel did. Yahoo! needs a Dan Hesse type who’s far enough removed from Yahoo!’s recent history to be able to make the tough choices and really make a difference. But all this is likely too late at this point. Microsoft’s latest salvo suggests it’s not going to back down and offer the higher price Yahoo! is suggesting it should, but leaves the door open with the following sentence, which may of course merely be threatening a more hostile approach over the heads of the board and directly to shareholders:

Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal. 

Ultimately, though, Yahoo! is fighting a losing battle in seeking alternatives where none really exist. The last hope is for Yang to make a convincing plea to shareholders, detailing his plan for turning the business around and providing clear milestones and metrics he wants to be measured by, as a way of buying more time. But he arguably already bungled that chance in the call which took place immediately before the offer was received. Much as Yang and the rest of the Yahoos might want anyone but Microsoft, it’s hard to imagine their future resting with anyone but Microsoft at this point.

I was planning on doing a post about the mystery of the damaged undersea telecom cables, summarising the various conspiracy theories and weighing in with my own views. But GigaOM has beaten me to it (irritatingly, something’s wrong with the permalink structure over there and I can’t link to it, but as of right now the URL is theoretically http://gigaom.com/2008/02/06/ choose-your-own-conspiracy-undersea-cable-edition/). At any rate, fascinating stuff and I really have no idea what the real explanation is - there seems to be remarkably little information out there about how unlikely or unusual such an occurrence is, and the conspiracy theories, though entertaining, all have major flaws in their credibility. The kraken is starting to look like a pretty good alternative…

I attended a couple of hours of the Money:Tech conference organised by O’Reilly Media in New York today. Tim O’Reilly himself - originator of the phrase Web 2.0 - was the keynote speaker, and was followed by a chat with Jim Cramer, host of Mad Money, founder of TheStreet.com, etc. etc. The conference was about Web 2.0 and financial services, and O’Reilly started out by talking about Web 2.0 and what it means to him. Ovum certainly has a definition of it, which revolves around four parts - social, business, content and technology models which define Web 2.0 services and sites. However, O’Reilly has a simpler definition, which stays away from specific technologies and services, and is simply this:

Web 2.0 is really about harnessing collective intelligence. It’s about creating a network-effects driven data lock-in with accelerating results to the winners. [I'm paraphrasing based on my notes but that was the gist]

In this way, O’Reilly says, it’s similar to Sun CEO Scott McNealy’s “red-shift” concept - that is, as you start to successfully differentiate yourself in something, your lead over the competition begins to grow ever more quickly. It’s all about creating business models which thrive off network effects - examples, according to O’Reilly, include Google (where the network effects come from the number of links people make), eBay (where the critical mass of buyers and sellers is the biggest barrier to competitive entry), Amazon (where he suggests the reviews are the key network effect) and so on. The value lies in accumulating data which leverages network effects in such a way that it is very hard for competitors to emulate what you have done.

Another major theme at the conference was open source software, and a debate during a panel session focused on whether open source adds or destroys value from a market. There were arguments on both sides, but it’s pretty clear to me that it destroys value for existing players, since it replaces proprietary products priced at a premium with free open source products. At the same time, it creates new opportunities for players which didn’t have the in-house resources to develop their own software, and it reduces the cost of doing business for everyone, which increases liquidity and therefore provides broader benefits.

So, how does all this apply to the OpenSocial program, the Social Graph API and efforts to create data portability? Do these effectively do to value in the Web 2.0 world what open source is doing in the software world? Does Facebook’s value proposition go away? Part of the answer may lie in something else O’Reilly talked about, which is Clayton Christensen’s “law of conservation of attractive profits,” which states:

When attractive profits disappear at one stage in the value chain because a product becomes commoditized, the opportunity to earn attractive profits with proprietary products usually emerges at an adjacent stage.

This would suggest that when open source enters a market, the value flees to the adjacent markets. And when data portability enters the Web 2.0 market, value will flee away from the Facebooks and MySpaces and to - where?

I would argue, as I’ve suggested in other entries, it flows to those best able to make use of the new technology - data portability - to create new services which thrive off it. I think this is the logical conclusion, and it’s another reason why Facebook, MySpace and others need to create value in something other than the information they hold about their users, because that will soon become commoditised and easily duplicated. They need to leverage that data in ways others can’t because of special sauce they themselves have concocted. It’s not clear to me that they have figured this out yet, hence (perhaps) their resistance to full data portability. But they’d better figure it out quick or that value really will go to someone else (and who would bet against Google here?).

Apple has finally announced higher-storage versions of the iPhone and iPod Touch. Irritatingly, whereas some people were expecting them to allow the iPhone to catch up with the iPod Touch on the storage front, they simply maintained the 2x difference between the two (the new iPhone has 16GB, but the new Touch has 32GB). And of course still no sign of a 3G iPhone any time soon.

The storage and WWAN speed are the two biggest barriers to adoption for me personally, and combined with the high price (16GB for $500 plus a two-year contract) are still, I suspect, the biggest barriers to adoption for the iPhone in general. Add to that the carrier tie-in and anyone not on AT&T but in a two-year contract with another carrier is also unlikely to switch unless they have money to throw away. 30GB would just about cover me for storage since I’m a current 30GB iPod user.

One assumes this will just keep those “missing” iPhones sitting on stock room shelves for even longer, since few people are going to want to buy the lower-storage versions now - perhaps the price will come down to shift the inventory.

We also checked out the Mac Book Air in our local Apple store a few days ago - it is indeed impressive, and has that elusive cross-the-chasm charm that appeals to complete non-technophiles like my wife. But she was also able to quickly grasp its shortcomings when I explained the lack of optical drive, more than one USB port and so on. A niche product for sure, but an awfully good looking one.

I’ve just started reading Googler Brad Fitzpatrick’s essay on the Social Graph problem and his accompanying slides. While I agree with a lot of what he says, I find that one of his big assumptions (as stated in the slides) is

some edges/nodes secret (but most public!)

This remains one of my biggest beefs with social networking - that the assumption is we want everything public. I sound unfairly old when I say this, but I’m just not comfortable with the younger generation’s tendency to put everything in the public domain. I have very separate groups of acquaintances (they’re not all “friends” in either sense) in real life and would like to maintain the same distinction online. I will put some of it in the public domain (like this blog), allow Google’s bots to crawl it and so on, but just as I have a personal blog which isn’t linked to here (or crawled by Google), I want to control access to my information, even to the extent that “most” would be “private” in the sense of being shared with certain people but not everyone. And I think this is a key feature of the endgame of social networking I discussed in an earlier post. I also wonder how Google will participate when some of the data is password protected. I think we still need the current model of providing behind the scenes authorisations for one application to access another to download key data, and I don’t want all that going through Google.

Update: looks like I’m not the only one with this concern. Although this article takes a slightly different tack, the problem it points out is essentially the same - not everyone wants all data tracked and searchable by Google. Having said that, there are ways to put up stop signs respected by the Google search bots, but not everyone knows about them and certainly not everyone would have thought it necessary before the Social Graph API came along.