Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

Lawyers read exciting periodicals such as SEC No-Action Letter Weekly (published by Wolters Kluwer see www.wolterskluwerlb.com.).  Normally, I would not bore you with this stuff, but this week the lead article had the titillating title of “Staff Reverses Position on Net Neutrality Shareholder Proposals.” 

Apparently, the SEC has finally come around to the notition that net neutrality is a really important issue.  I have included three of the salient paragraphs below.

The SEC’s Division of Corporation Finance has advised Sprint Nextel Corporation and AT&T Inc. that they may not omit from their proxy materials shareholder proposals that ask the companies to publicly commit to operate their wireless broadband networks in accordance with network neutrality principles.  The staff explained that, due to the sustained public debate over the last several years about net neutrality and the Internet, and the increasing recognition that the issue raises significant policy consideration, the proposals may not be omitted in reliance on the ordinary business exclusion.

AT&T wrote that the proposal represents an attempt to repackage substantially similar proposals about its network management practices, which the staff, in the past, has concluded were excludable as ordinary business.  In AT&T’s view, the proposal would directly interfere with its network management practices and would seriously impair its ability to provide wireless broadband service to its customers.  AT&T also sought to omit the proposal under Rule 14a-8(i)(2) on the basis that it would impair the company’s ability to comply with federal wireless licensing requirements.

AT&T said the proposal cited the same reports as in a 2011 proposal and that the only substantive addition was a citation to a 2011 survey that presents statistical information similar to that presented in the January 2010 report and cited in the 2011 proposal.  AT&T challenged the notion that net neutrality has emerged as a consistent topic of widespread public debate that would reflect a significant policy issue for purposes of Rule 14a-8(i)(7).

The point is that stockholders of public companies can propose that the stockholders, at the company’s annual meeting, adopt a resolution directing the company to observe principles of net neutrality.  It will be interesting to see how many, if any, companies include this type of resolution and if any of them pass.

I have written a lot about the upcoming regulatory initiatives around protection of consumer privacy from the Federal Trade Commission (FTC) and the Department of Commerce, and one thing I have learned is that there is relatively little awareness about the substance of the proposals in the tech community.  The tone coming our of FTC and Commerce should leave no doubt; there will be regulation, and it will be major.  More than that, as I have noted before, consumer privacy and data protection are one of the few things that both Republicans and Democrats can agree upon.  Legislation in this area will be one of the few places where we will see bipartisan consensus in the next Congress.

 The FTC has this to say in its proposal:

For every business, privacy should be a basic consideration – similar to keeping track of costs and revenues, or strategic planning. To further this goal, this report proposes a normative framework for how companies should protect consumers’ privacy. This proposal is intended to inform policymakers, including Congress, as they develop solutions, policies, and potential laws governing privacy, and guide and motivate industry as it develops more robust and effective best practices and self-regulatory guidelines.

Commerce Secretary Gary Locke has this to say about the Commerce proposal:

America needs a robust privacy framework that preserves consumer trust in the evolving Internet economy while ensuring the Web remains a platform for innovation, jobs, and economic growth. Self-regulation without stronger enforcement is not enough. Consumers must trust the Internet in order for businesses to succeed online.

I believe that the “big boys” (Microsoft, Google, Facebook et. al.) are on top of the issues and have, doubtless, retained armies of lobbyists to influence whatever regulation comes out of the FTC and Commerce.  Having said that, I don’t think that smaller tech companies that could be affected by the upcoming regulations or their investors have given this topic much thought.  Perhaps, that is not really fair.  It is more probable that they have not focused on the substantive provisions that are up for consideration or how those provisions (if adopted in the forms proposed) could affect them.  Finally, I don’t think small tech companies and their investors think they can do much about any of this, so why spend time on it.

As a result, I (together with a couple of my colleagues here at Foley Hoag, Pat Connolly and Hillary Fitzpatrick) have decided to write a series of posts addressing some of the more material proposals at a pretty granular level.  These posts will appear regularly over the next few weeks.  Actually, I want to put them up before the last week of January because that is when the comment period for the FTC and Commerce proposals runs out. 

The purpose of these posts is to educate about what is actually in the proposals and to build support for outreach to the FTC and Commerce in an effort to limit the potential negative impact of these proposals on early stage and venture financed tech companies.

One theme that will emerge is that there will be some level of regulation protecting consumer privacy.  So, these posts are not really about resisting the inevitable.  To the extent that these posts are about affecting the FTC and Commerce outcomes, they will be about the art of the possible.  It is too late to go back to the relatively unregulated world that we have become used to in the internet.  The status quo is going to change.  But there is some room for influencing the actual outcome.

Another theme that will emerge is that the interests of the internet big boys are not necessarily the same as that of early stage companies.  For example, the ability of companies that are profitable or have relatively easy access to capital to comply with regulatory requirements is very different from that of a start up or a company with angel or venture financing.  For this reason, smaller companies and their investors should not just assume that the big boys will make sure things come out OK.

A final theme that will come out is that you have to speak to be heard.  As of last Monday, there were 177 comments to the FTC proposal and almost all of them supported do-not-track.  None of the ones I looked at recognized any special adverse impact that the proposals are likely to have on small companies.  If the comment period closes and there is nothing from the early stage tech community in the docket, the FTC and Commerce will be in a position to address the concerns of all the other constituents and ignore the entrepreneurial world.

Businesses with advertising revenue underlying them are all the rage.  According to Andy Payne, Groupon is raising a next round at a $3 billion valuation.  That seems frothy to Andy, and it seems frothy to me.  But, who would have thought Twitter would be what it is today?

Here is a simple thought.  The value of advertising has to bear some relation to the value of the things it is selling.  If the gross value of all goods you are trying to sell is $X billion, then all the advertising has to be something less than $X billion.  There is some upper limit on the value of advertising based businesses.

The value of all these businesses in the aggregate can’t increase all that dramatically from year to year, unless the underlying market for the goods they are selling is also increasing.  That has not been the case in the past few years, yet there has been a boom in advertising driven businesses.  It may be that there has been a shift in value from old style ad based businesses (like print ads) to new interactive ad based businesses like Four Square.  But, I will venture a guess that it is not dramatic enough to account for the vast increase in valuations for these types of businesses. 

If the two trend lines, growth in valuation of ad based businesses and growth in the underlying businesses that use ads, diverge greatly there is evidence that there is a bubble and there will be a correction.  Here is a link to a short video on Richard Dale’s blog Venture Cyclist that kind of makes this point.

Here is a link to an article by Wendy Davis on the ongoing issues around the use of Flash cookies.  This article is sort of about a law suit against Specific Media for “allegedly violating Web users' privacy by using Flash cookies for tracking purposes.” 

According to Wendy Davis, the point about Flash cookies is this, “Flash cookies can be used to reconstruct HTTP cookies, even when consumers have deliberately deleted their HTTP cookies to avoid tracking. Because Flash cookies are stored in a different place from HTTP cookies, users who delete the latter don't also shed the former. People can trash Flash cookies via Adobe's online controls, but many users don't appear to be aware of the cookies.”

Two things caught my eye about this law suit.  First, apparently, the law suit claims that Specific Media’s privacy policy is sufficiently opaque and hard to understand as to be misleading.  Here is what the article says, “The company's "privacy documents require college-level reading skills for comprehension and include substantial legalese, ambiguous and obfuscated language designed to confuse, disenfranchise, and mislead the users," the lawsuit asserts. “

Can you imagine, privacy policy documents written in legalese – there is a shock and a surprise.  Can you imagine that “ordinary” users don’t really understand all that legalese – another shock and surprise.  Furthermore, when was the last time anyone really read all that stuff.  When did you last read the “terms of use” for anything?

Any setting of standards in this area (privacy) to be fair has to take into account actual behaviors.  Writing a bunch of policy disclosures that are not easily understood and are not read (at least in part because everyone has figured out that they will take for ever to read and even longer to understand), does not cut it.

Another article, also by Wendy Davis, quotes Joe Barton (R-Texas) as follows, “There is now a small army of companies collecting, analyzing, trading, and using information about consumers' habits, purchases, and private data, while some of these practices may be entirely legitimate -- some, in fact, ultimately beneficial to the consumer -- I do worry that not only are many Americans unaware of these practices, but those who seek out information in privacy policies often come up against complicated legalese."

Just in case anyone is wondering what might be ultimately beneficial to the consumer, again from the second Wendy Davis article, here is how John Morse, President of Merriam Webster put it, “We know that the twenty million people who use our site want it to remain free, and we work hard to balance the needs of advertisers, which is what allows the site to remain free, with the privacy needs of our users,"

As I have written before, this is an area that just cries out for some principled basis on which to set expectations about what information can be gathered and how it can be gathered.  Abuses in this area will ultimately undermine usage and adoption thereby undermining the value of the network.  Fair and respectful gathering and use of data will increase usage and adoption and therefore the value of the network.  My proposal is that the regulatory argument should be about where that line is – that is what maximizes the value of the network.  I think this law suit and others like it makes it pretty clear that there are limits beyond which confidence will be eroded and real costs will be incurred.  The costs are hard to measure because they are costs that all of us pay in the form of diminished value in the network.

The other point in the Wendy Davis article on the Specific Media law suit that caught my eye was right at the end she mentions the attorneys bringing the suits and says this, “All of the Flash-cookie suits were filed by lawyers David Parisi and Joseph Malley [who I could not find easily on the web], both of whom are among the attorneys suing defunct behavioral targeting company NebuAd for allegedly violating users' privacy.”  The fact that these cases have not attracted more lawyers and more action may indicate that the bar doesn’t think there is much there or it may indicate that it is early on in a game where the potential damages are poorly understood.

The EchoMetrix settlement (with the NY Attorney General – Andrew Cuomo no less) is a case where the equities (and the law:  Children's Online Privacy Protection Act of 1998) seem so clear that the outcome was inevitable, but I wonder if in the end this augers poorly for the marketing industry.  The gist of the case is that EchoMetrix sells software that helps parents monitor their children's use of the Internet.  In the course of providing this service, EchoMetrix gathered data from the children's Internet use.  They then sold the data to companies who, apparently, used it for marketing.  The data may have been anonymous but may not have been.  See the original complaint filed by the Electronic Privacy Information Center, and they did all this without consent (or probably, knowledge) of the parents. 

Certainly the case is sympathetic -- using information gathered from children without parental consent!  What were they thinking?  Shades of big brother.  On these facts, it is hard to imagine anything other than a fine and a cease and desist.

Having said that and at the risk of stating the obvious, there is a vast universe of this kind of data in the stored world of social media, old emails, old searches and whatnot.  That universe has huge value to advertisers and marketers (to say nothing about all other manner of research).  To the extent that that value can be tapped it will pay for a lot of net content and services. 

My guess is that there are many people who have a negative visceral reaction to the use of this kind of online data.  My guess is also that there are a lot of companies that are not capitalizing on this kind of information (at least to the extent that they could) for fear of what Andrew Cuomo (or his equivalent) will do about it.  All this may be good so far because it causes people to tread lightly in a sensitive space. 

Then there is the other perspective:  Better quality marketing and advertising has a value to the marketer/advertiser (no doubt) but also to the recipient.  Again, at the risk of stating the obvious, they inform me about products and services that I might actually want instead of taking time and mindshare plugging things I could care less about.

And here is another perspective:  To the extent that this kind of information creates value (and profits) it supports the free internet.  For this reason alone, I think this kind of data will become generally available to anyone who wants it.  That does not make the big brother aspect less scary.  And this leads to the point I really want to make:  Clear sensible rules that protect online identity and set appropriate standards for mining online data will make people comfortable (I hope) with the scary big brother aspect of all this and will create real value that will redound to everyone’s benefit. 

Clear rules will expand the network and, per Metcalfe’s law, generate real value for everyone.

I attended a presentation at the Mass Technology Leadership Council a while back on the subject of measuring the effects of social media. I have been thinking about it ever since. Mostly because I sometimes wonder why I am writing a legal related blog. After all, who wants to read legal stuff? (Lawyers? Foley’s marketing department? My daughter, Megan, who reads it religiously but admits she understands little of the legal stuff? The good folks at Lexblog who host this blog?)

The speaker was K. D. Paine, whose business is consulting in this area. Without question she made many many interesting points. But, and I suspect I will make a complete hash of this, her main point was that the effectiveness of social media (such as blogs) is in fact measureable and not by counting eyeballs. Here is a link to the slides from the speech.

Her point is that the effectiveness of social media revolves around engagement. So, it does not really matter how many people read your blog or follow you on Twitter. What matters is how many of them are "engaged" and how many act on this engagement. You can have a million people hitting your site, but if none comment and none forward a link to someone who they think might have an interest, then so what? A recommendation from trusted source is far better than a random hit from a Google search. If you have engagement, you are more likely to get referrals and valuable positive buzz with people who care about your product, service or message.

There are lots of ways to measure engagement. One might be how many times you are re-Tweeted or how many comments you get or how many times your blog is cited by others. If you are staying on message and readers are commenting, citing and retweeting, they you are likely to be impacting your market in a much more direct and powerful way than with mass spamming or just mountains of passive traffic.

So measuring effectiveness begins with measuring engagement and ends with calculating an ROI from the people who took action based on the engagement.

None of this, of course, tells you how to create engagement, and that is where the magic ultimately lies. Now I am on the trail looking for insights into how engagement is created (not just how it is measured). One site that seems to be focused on this aspect of web marketing is pistachioconsulting.com. A f riend at Valley View Ventures turned me on to this site.  There is currently a guest post on "Presenting with Twitter" that has some strategies for creating engagement. I am sure there are others. I will try to note them as I find them.