Sometimes it is good to be reminded of the past -- even if you lived through it.  Here is a link to a lengthy, but thoughtful, blog post on the "bubble" of the late '90s.  Peter Thiel's Startup Class Notes.  My favorite quote from this post is "Bubbles arise when there is (1) widespread, intense belief that’s (2) not true."  This is, of course, in different words what Mr. Mackay might have said about Dutch Tulips or witches in Salem.

It seems to me that bubbles (good, bad or indifferent) airse when there is a lot of money hanging around with the result that people do irrational things with it.  The recent $646 million lottery is a good example.  As the pot got bigger the odds got smaller, but the rate at which money poured in increase.  More money chasing smaller odds?  Go figure.

Congress has just passed, and the President has just signed, a new law that is supposed to support capital raising by smaller companies.  It contains the so-called crowd-sourcing provisions that have gotten so much press.  It will be seen if this does something or nothing for small companies, but one thing it might do is send a lot of small investor money chasing every smaller odds of success. 

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.

As I have done each quarter for some time, this blog presents a comparison of the published statistics relating to venture deals from my firm, Foley Hoag LLP, and the west coast firm, Fenwick & West LLP.  This time I am not including Cooley LLP because their year end edition has not yet been published. 

Here are some general thoughts:

Foley Hoag, in our publication Venture Perspectives, reported on a total of 46 deals in New England.  Fenwick reported on 95 deals in the Valley.  This puts the New England market at about half the size of the Silicon Valley market  -- entirely consistent with historical norms (at least for so long as I have been observing the scene).  The new comer, of course, is New York, where, according to Crain’s New York business.com, there were 51 financings in Q4 in New York in the following industries 20 in software, 17 in media and 14 in IT (for sure there were other in other industries). 

On the one hand, this might suggest that New England is losing ground to NYC.  On the other hand, it suggests that the north east (New England plus New York) is now as big a market as the Valley and is probably growing faster given the velocity in NYC.  (I can hear the Valley folks saying you’ve gotta include Seattle and San Diego – whatever.  If that is where they take it, they have in effect conceded the point.)

Even more interesting, is that most of the New York deals are software, digital media and IT related.  Based on anecdotal evidence there were a significant number of digital media deals in New England (unfortunately, our survey lumps media in with software so I don’t have precise number).  According to Fenwick, the most active sectors in the Valley were software followed by cleantech and hardware then came internet and media followed last by biotech.

If I had to pick something hot today, it would be internet and digital media – and the epicenter is not in the Valley!  The reasons for this are almost certainly that the advertising industry is headquartered in New York, there are lots of digital and data infrastructure companies in New England, and there is lots of money in New England and New York to fund these businesses.  It is efficient to be near the relevant infrastructure (the advertising world).  Apologies to Nivi and all the other “you have to move to the Valley” proponents, but if you are working on a digital media company – don’t relo to the Valley quite yet.

So, with that as a background, below is my usual table comparing actual deal terms.

Comparison of Terms for Q4 2010 Venture Deals from Foley Hoag and Fenwick & West

(some percentages are approximate)

It pains me every time I write this, but there is a persistent and consistent difference in terms between New England and Valley deals.  Look at cumulative dividends and redemption.  The numbers are consistent quarter after quarter.  At least as to these terms (and painful as it is to admit, I suspect as to others), entrepreneurs get a better deal in the Valley than they do in New England.

            By now, readers have seen by now the preliminary FTC Staff Report, Protecting Consumer Privacy in an Era of Rapid Change (the “FTC Report”) recommending implementation of a “Do Not Track” mechanism available to all Internet users.  The Staff envisions “a uniform and comprehensive way for consumers to choose to block online tracking and targeted advertising” accomplished by legislation or potentially through robust, enforceable self-regulation.  Media outlets have heralded the ill-defined mechanism as a simple and powerful tool to aid Internet users in their losing battle to elude an ever more complex and technologically sophisticated tracking bogeyman.  Sounds great!  “Where do I sign up?” ask the masses.  Slow down masses.  As with most sweeping government regulations, the devil is in the details.  More bedeviling is that there are no, or very few, details.  The Staff merely suggests that a “persistent browser cookie” might be the most practical means of implementing “Do Not Track.”  Serious technical and other challenges to implementation, and uncertainty as to whether legislation or “robust, enforceable self-regulation” would be sufficient are then acknowledged.

            In a nod to the FTC report, the recent Department of Commerce green paper: Commercial Data Privacy and Innovation in the Internet Economy (the “Commerce Green Paper”) asks how the Commerce Department can best “encourage the discussion and development” of technologies such as “Do Not Track.”  In general, the Commerce Green Paper reflects greater support for cooperative industry self-regulation regimes than does the FTC Report.  Commerce acknowledges that the rate at which new technologies and services develop, and the pace at which consumers form expectations about acceptable and unacceptable uses of personal information, is measured in weeks or months, while a rulemaking can take years and result in rules addressing long-since abandoned services.  As such, Commerce suggests engaging multi- stakeholder groups, and employing a “Dynamic Privacy Framework” as the best means of enabling Internet users to take advantage of “Do Not Track” in whatever form it emerges.  The Commerce Green Paper mentions in a footnote testimony that goes to the heart of what every stakeholder should have in mind:  “[A]greement on what is meant by the ‘do-not-track’ sign on, say, the user’s browser, is a . . . complex task, requiring agreement on policy and best practices among a number of players including users, advertisers, marketers, technology companies, and other intermediaries.”

         FTC states that the most practical method of providing uniform choice for online behavioral advertising would involve placing a setting similar to a persistent cookie on an Internet-user’s browser and conveying that setting to sites that the browser visits, to signal whether or not the consumer wants to be tracked or receive targeted advertisements.  “Do Not Track” boosters, media and the FTC trumpet the success of FTC’s popular and successful Do Not Call registry as a bellwether of what life in a “Do Not Track” world will look like.  Some have stated that the complexity of implementing “Do Not Track” would be similar to that involved with implementing Do Not Call. Unlike Do Not Call, however, it would be unnecessary, impossible, futile and kind of ironic for the government to set up a centrally administered database of people who have elected to take shelter under any FTC-enforced “Do Not Track” umbrella.  FTC’s envisioned “uniform and persistent choice” browser setting would instead send a universally recognized message to deactivate tracking technologies.

Although a “Do Not Track” mechanism could be simple to implement from a technical standpoint, to the extent that it takes the form of a simple on/off switch such a mechanism could amount to an innovation-stifling, business-model killing command and control regime enforced by bureaucrats.  The Commerce Department Green Paper recognizes that this is the worst-case scenario.  The Green Paper states that any “Do Not Track” mechanism needs to be colored by stakeholder input and ultimately more nuanced than simply allowing consumers to flip a switch to turn off all tracking technologies.  Commentators point out that this is because most Internet users like using the free stuff available on the Internet and are willing to pay for it by way of receiving certain targeted advertisements.  The question for stakeholders, then, becomes what constitutes “tracking” and what filter will users will be able to apply to tracking activities so as to personalize their experience? For example, a user may be happy to receive targeted marketing from businesses relevant to his profession, but opposed to the collection and sharing of any information concerning that rash he picked up in the hotel spa.  Stakes are high concerning the answer to the question of what tracking is, as countless innovative business models rely on monetizing information about Internet users in one way or another.

Do Not Track makes a lot of sense as a normative principle.  If an Internet user feels uncomfortable with a certain behavior, that user should be able to opt out of being subject to that behavior, whether the behavior is accomplished by way of a cookie, a flash cookie, or some other method either he or his browser has not learned how to fend off.  The problem is in figuring out how to attack the behavior (collecting and sharing information and Internet browsing behavior concerning that rash) without creating a bright-line rule against innovative, useful and responsible ways of collecting and using information in the context of informed consent.   Content providers use the information they collect to do lots of stuff that Snidely Whiplash would find downright mundane and in many cases benevolent (e.g., debugging and personalizing user experiences). 

“Do Not Track” is not like Do Not Call.  When the FTC bars a vinyl siding salesman from calling me at dinner, I am happy.  If FTC inadvertently prevents me from enjoying a personalized experience on Pandora, my utility will likely take a hit.  As such, FTC has proposed a system where users exercise “granular control” over their “Do Not Track” preferences, rather than a crudely fashioned on/off switch.  As technologies and uses of information advance, though, how can such granular control be exercised and enforced without ending up with a tome of regulations the size of the Internal Revenue Code?  This is where it is essential for stakeholders to provide input to FTC and the Commerce Department.  “Do Not Track” was conceived with the best intentions in mind, but I’m afraid with little thought beyond how great everyone thinks Do Not Call is and whether the technology exists to persistently block scary-sounding trackers.  Stakeholders need to give the FTC and Commerce Department some real-world perspective as to what a command and control “Do Not Track” regime would look like in practice and as to what alternatives there are for protecting Internet users’ interest in the responsible, transparent use of their data in the context of informed consent.  To these ends, FTC has asked several very important questions concerning any implementation of an enforceable “Do Not Track” regime.  Among them:

• How should a universal choice mechanism be designed for consumers to control online behavioral advertising?
• How can such a mechanism be designed so that it is clear to consumers what they are choosing and what the limitations of the choice are?
• What are the potential costs and benefits of offering a standardized uniform choice mechanism to control online behavioral advertising?
• How many consumers would likely choose to avoid receiving targeted advertising?
• How many consumers, on an absolute and percentage basis, have utilized the opt-out tools currently provided?
• What is the likely impact if large numbers of consumers elect to opt out? How would it affect online publishers and advertisers, and how would it affect consumers?
• In addition to providing the option to opt out of receiving ads completely, should a universal choice mechanism for online behavioral advertising include an option that allows consumers more granular control over the types of advertising they want to receive and the type of data they are willing to have collected about them?
• Should the concept of a universal choice mechanism be extended beyond online behavioral advertising and include, for example, behavioral advertising for mobile applications?
• If the private sector does not implement an effective uniform choice mechanism voluntarily, should the FTC recommend legislation requiring such a mechanism?

Here is the regulatory proposal: The Commerce Department, in its policy framework, is affirmatively recommending that “the United States Government recognize a full set of Fair Information Practice Principles as a foundation for commercial data privacy.”

As the Commerce Department points out, the Department of Homeland Security (DHS) has adopted a set of FIPPs to govern its use of personally identifiable information (PII).  Just so you get a flavor of what FIPPs look like, here are three FIPPs taken from DHS (and cited in the Commerce Department’s framework):

• Transparency:  Organizations should be transparent and notify individuals regarding collection, use, dissemination, and maintenance of personally identifiable information (PII).
• Individual Participation:  Organizations should involve the individual in the process of using PII and, to the extent practicable, seek individual consent for the collection, use, dissemination, and maintenance of PII.  Organizations should also provide mechanisms for appropriate access, correction, and redress regarding the use of PII.
• Data Minimization:  Organizations should only collect PII that is directly relevant and necessary to accomplish the specified purpose(s) and only retain PII as long as necessary to fulfill the specified purpose(s).

These FIPPs are broad, unobjectionable principles in the “mom and apple pie” category.  They also lack the specificity to provide much guidance for compliance and enforcement.  For example, how much transparency is enough to meet the standard?  How much individual participation is practicable? 

As a result of these kinds of ambiguities, Commerce is proposing that the FIPPs sit on top of “voluntary, enforceable codes of conduct” developed through a multi-stakeholder input process.  In Commerce’s proposal, compliance with an approved voluntary code of conduct would operate as a safe harbor from enforcement action.  To be eligible for the safe harbor, a voluntary code of conduct would have to be developed through an open, multi-stakeholder process and approved by the FTC for sufficiency.  As Commerce sees it, FTC approval might be obtained as a result of a request from a party or as a result of the resolution of a specific dispute. 

In the absence of a voluntary code of conduct, Commerce is, apparently, prepared to recommend FTC rulemaking or actual legislation.  Commerce clearly prefers the use of FIPPs with codes of conduct because they appear to be more flexible than either rulemaking or legislation.  Commerce may be right about the flexibility, but, flexible or not, Commerce does not seem to consider the potentially differing effect of any of these processes on differently situated groups.

Here is the rub:  Google’s ability to develop a voluntary code of conduct through “an open, multi-stakeholder process” is completely different from that of an early stage company that just got five million dollars of venture money, let alone a start-up with few hundred thousand dollars of angel money.  The internet is still evolving at an astonishing rate.  Companies that were once tiny have become titans (look at Google or Facebook).  There remain many of these stories to come.  The Commerce Department itself points out that “Between 1998 and 2008, the number of domestic IT jobs grew by 26%, four times faster than US employment as a whole…By 2018, IT employment is expected to grow by another 22 percent.”  This growth is driven by innovation.  Innovation, in turn, is driven by small tech companies.  Burdening these companies with rules and regulations that might make sense for Microsoft, Google and Facebook is tantamount to slamming the breaks on progress in one of the US economy’s few potential bright spots.

 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.

The recent FTC report envisions a do-not-track mechanism that lets consumers opt out of third party tracking for behavioral advertising, which is one of the most common forms of online tracking. If companies wish to share personal information with third parties for purposes other than online behavioral advertising, we think some greater form of user consent should be obtained. The system as currently envisioned would not apply to ordinary first party tracking or to a first party's use of a service provider for website analytics, assuming the service provider makes no additional use of the collected data.

It is important to keep in mind that the FTC is not proposing a blanket ban on all tracking.  Having said that, it is still not clear to me that the proposal is not based upon the perceived creepiness of tracking and the emotional response of many people to the idea that they are being tracked. 

The reason that third party tracking is “one of the most common forms of online tracking” is that there are substantial economic benefits to it.  No one has really answered the question:  What happens if do-not-track actually results in many people opting out?

One thing is likely, the people who make money as a result of this kind of tracking wont any more.  So, whatever “free” content is being supported this way will either disappear or will be paid for some other way.

Another thing that might happen was suggested to me by a well known entrepreneur and investor here in Boston.  A great deal of effort and ingenuity will be expended getting people to opt in.  If this happens, it could have a lot of ramifications.  One consequence that he suggested is that once people opt in, they will have expressly agreed to the use of their information and there is likely to be much more far reaching and free ranging use of their information compared to the current system in which abusers are likely to be outed unpleasantly one way or another.  A second consequence that he suggested is that businesses will try to position themselves as first party providers in various ways and thereby evade the ban.  Finally, he suggested that the cost getting people to opt in will simply be added to the cost of innovation.

One thing is for sure, there is significant money to be made through behavioral advertising.  Until the cost of getting to good quality behavioral advertising becomes so high that it become uneconomical to go there, the money will be seeking ways to get there. 

This is the time of year when pundits look forward and make predictions.  So, I decided to do the same.  Here are ten predictions for next year:

 1)     The Pats will beat the Eagles in the Superbowl

 2)     Angels will continue to invest at a torrid rate.

 3)     There will be continued modest improvement in numbers of VC financings (but not enough to get back to 2007 levels).

 4)     Cleantech and renewable energy start-ups will continue to have difficulty raising venture money.

 5)     There will be continued modest improvement in M&A exits (but not enough to get back to 2007 levels).

 6)     There will be approximately 50 IPOs of venture financed companies (more than half of t he 86 that happened in 2007).

 7)     VC fund formation will also be slower than 2007 (both in amount raised and new funds raised).

 8)     The west coast will continue to provide better terms and valuations to entrepreneurs than the east coast.

 9)     Consumer web privacy rules will be promulgated and they will not have a material impact on tracking.

 10)   Net neutrality rules will be promulgated, and they will allow differential pricing of some sort.

So we will not be seeing 2007 levels of activity, but the entrepreneurial ecosystem will be livelier than last year.  So, I am predicting cold, but with a chance of fun.

As WiredPrNews.com puts it, “If the Do Not Track plan is approved and implemented, the repercussions for the online ad industry could be catastrophic.”

You can think it is creepy, you can think it is an invasion of your privacy, whatever.  But, make no mistake about it.  If the Feds actually do away with tracking (by having a super easy opt out or in some other way), the basic business models that bring you (an everyone else) all that cool free stuff, will have to change.

It will have to be paid for some other way.  Subscription fees and pay per use are my bets.  Maybe that is OK because it protects privacy.  But, have no illusions about it, such a change would favor those who have the means to pay and make the internet a difficult place for those who do not.  It will change the fundamental egalitarian nature of the web and will make it a less robust less valuable place.

I have not addressed the free rider problem.  That is can you (as an individual) opt out and still get all the goodies from Google that require that all the rest of us agree to be tracked?  The problem with this is, of course, that each person is likely to be incentivized to opt out because they will not pay the cost in “lost” privacy but will get the benefit of “free” stuff.  If enough people opt out, the goodies wont be there for anyone.  And, by the way, the rate of development of new “goodies” will slow to a crawl.

So, what should the Feds do?  Perhaps, the Feds should consider a regulatory structure along these lines: (1) promulgate rules that protect populations that need protections (such as children) with specific substantive rules around what information can be gathered, stored and monetized about these populations, (2) promulgate rules that protect specific types of information that are rife with the possibility for abuse (such as social security numbers or personal medical information), and (3) for everyone and everything else promulgate rules that require full and fair disclosure around what is and is not being tracked.  Other than these three things, the FEDs should consider doing nothing at all.

If you really want to opt out, you will be able to do so by simply not using Google, Facebook, MapQuest or any of the others.  You won’t be free riding, and, frankly, the value each of us gets from all these “free” online services is so great that few, if any, will opt out when the direct choice is not to have these “free” services.

The other day at Mass TLC’s Mobility Summit I had a brief conversation with Mark Herrmann (an entrepreneur here in Boston) that touched on the FTC’s recent proposal for protecting consumer privacy online.  We were talking about the “do not track” proposal and the consensus in the tech industry that it just won’t fly. 

Mark’s comment:

“It is creepy that ‘they’ can and do track you out in the net, but ‘creepy is the new cool.’”

There is just no question that some people accept the fact that they are being tracked and fed targeted online advertising.  It is not just OK by them; it’s a value add.  I don’t disagree. 

But, for anyone who has read “1984” (and even a lot of people who haven’t) the notion of being tracked is creepy.  There are a lot of these folks – perhaps a significant majority of the U.S. population – that feel this way.

In 2011 the FTC and Congress are going to pay attention to these concerns. It is good politics. 

Prediction #1:  Legislation in this area will be one of the few places where we will see bipartisan consensus in the next Congress. 

Why: No Congressperson wants to be opposed to consumer privacy, and they all want to have supported some legislation that passed, when running in the next election.

Mark (and others) made the point that if you really end tracking, you will end Facebook.  So, whatever happens it won’t be that.  However, the political snowball is rolling down the mountain - there will be regulatory activity around consumer privacy. 

The only question is: What will be the nature and scope of the activity?

The big boys (those with well established businesses that either make money or have ready access to capital) are going to be lobbying hard for a regulatory framework that does not dent their current business model. 

Prediction #2:  The big boys will fight anything that disrupts tracking and they are going to win this battle – no one in Congress wants to run on the platform that they put Facebook (or others) out of business.

But the big boys are going to have to trade something.  The easy things for them to trade are procedural protections for the consumer. 

• The FTC wants the industry to adopt “privacy by design” principles.  This means that companies should adopt internal processes to promote consumer privacy and security protections into their daily practices and to consider privacy issues at every stage of design and development of products and services.
• The FTC wants the industry to make consumer data more available to consumers.  This means allowing for increased consumer access to data collected. 

Prediction #3:  The big boys will trade lots of procedural protections for the consumer to prevent substantive regulation that will directly affect their business models. 

Why:  The big boys can afford the administrative burden implicit in procedural protections.  It is just a matter of more money, more people and more oversight.  A company that is well established and profitable or that has easy access to capital can afford to write the code, hire an army of new engineers, consultants, lawyers etc. and create an entire Department of Privacy Compliance and Protection. 

In fact, to the extent that having to do all that makes it harder for start-ups, it may even be helpful to the established companies.

Some folks I talk to have expressed real concern about this looming regulatory push and how it might affect the entire ecosystem for digital media start-ups.

There is still a chance to influence the inevitable regulation that is upcoming and I am working on assembling a group of industry leaders to do just that.  I recently sent out a letter (here’s a link) to people I thought might be concerned enough to actually do something.

Read it and let me know what you think.

The tech community seems to think this is no big deal because industry will prevail.  By "prevail" tech folks seem to mean that the regs, whatever they are, will be so watered down that the regs will be meaningless.  Their position is that anything else is unthinkable because the really big boys, Facebook and Google –as well as many others, depend upon tracking and targeted advertising.  To put a damper on them would create massive disruption.  Also, traditional carriers have huge value in the data they have, so Verizon, ATT and etc. will not let it happen.

At some level you have to agree with these observations. 

But, the counterpoint to them is that the FTC has now come out with a proposal.  There is great political pressure on Congress to do something. There is wide bipartisan support in Congress for regulatory activity to protect personal privacy.  Finally, among the non-tech world (which is most of the population) is creeped out by the notion that they are tracked onthe web.

I am concerned that the tech world just does not recognize that the non-tech population really does not like tracking 9and other data gathering).  I think the tech world also underestimates the appeal of giving people a choice not to be tracked.  Strangely, Fred Wilson’s blog makes this clear.  He refers to the “silent majority” who are not troubled by the data collection practices of most web companies and the “vocal minority” that are.  My concern is that he may just be wrong. 

So, it is predictable that some compromise will be reached between the FTC and the large companies who are already alerted to the issues and are working on changes that will be OK for them.

One problem: large companies have different interest from early stage and smaller companies.  For example, large companies will have far greater resources to deal with and comply with all sorts of regulation.  If they are required to incorporate specific privacy based procedures into their product development and other activities, they have the financial and other resources to do this.  If they are required to make the gathered information available to consumers or place restrictions on “new” uses of such data they can carry the cost of doing these things.  In fact, big companies may support this type of regulation, in part, as a trade for leniency on tracking and, in part, because it will form a barrier to entry for little companies.

If this happens, regulation could go a long way to undermining the economics of some start-ups.  So, you can’t rely on Facebook, Google, Microsoft et. al. to carry the ball for early stage companies.

The FTC has a process by which interested parties can comment on and influence the outcome of proposed regulation.  The resulting regulation will reflect this input.  The problem that arises for small companies is that it (the process) is expensive and time consuming.  it takes time and money to write comments, track proceedings, contact congressmen etc.  Google, Facebook, Verizon, and ATT will be hiring armies of lobbyists to do this (they may already ahve the armies deployed) – but they will not be lobbying for changes that work for start-ups.  Smaller companies just will not be able to compete in the fight to influence regulation and may end up with a regulatory scheme that is not hostile to them.

Small companies and the people who invest in them need to find a way to participate in the process.  If they do not, they could be looking at a pretty bleak future.

Public sensibilities on privacy will evolve. Over time, Web users will recognize that the Internet is a public space, not unlike public malls or streets. You may surf the Web from your bedroom, but your surfing takes you out of that private, protected place. Just as people can be recognized when they walk through public malls or streets, they will be recognized online if they haven't taken steps to prevent that recognition, which will probably mean that there will be many parts of the Web where they won't be able to go if they want to remain cloaked.

This does seem like where we are going and good common sense to me.

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.

Chris Dixon had a great post on this topic some time ago and I just caught up to it.  Here is the key passage:

It is widely believed that a flourishing democracy requires an independent, diverse, and financially solvent press.  With print newspapers set to disappear in the next few years, the future of quality journalism is highly uncertain. This year, the online version of the New York Times will generate about $200M in revenue, a number that will need to approximately triple to support the current Times newsroom.

Without sufficient advertising quality journalism will likely disappear.  It could be sacrificed on the alter of paranoia about protection of privacy to the detriment of all other values.  It could be sacrificed on the alter of permitting the “market” to regulate itself.  All the abuses including deceptive, misleading and hard to understand privacy policies hidden in a mountain of legal disclaimers, can seriously undermine confidence and therefore use leading to lower values for advertisers.

This is an area that cries out for a sensible debate and a sensible regulatory framework.

The article makes for excellent reading, and I will not rehash its contents.  Rather, I’m going to focus on the efforts by lawyers like myself to curb the ability of holders of stock of emerging companies to resell their founder’s stock or vested options to third parties in a private transaction before the company’s stock is available on the public market.  Why do we do this?   To control your shareholder base, after all, as an emerging company the last thing you want (as the founding/executive team) is to be dealing with a belligerent activist shareholder.  There are some other side benefits to this as well.  Keep reading for more...

A right of first refusal gives the company the ability to buy back the shares that a seller is contemplating selling to a third party.  The process usually involves the seller of the private stock approaching the company once he/she has received a good faith offer for his/her shares from a third party.  The potential seller must divulge the identity of the third party, the number of shares offered for sale and the price offered for such shares.  The company then has a set period to decide if it wants to purchase the shares at the price offered.  The company also has additional time to raise/arrange for the funds if it does decide to make the repurchase.  To top it all off, the shares that are transferred to the third party might STILL subject to the right of first refusal and potentially even further restrictions that the original shares might have been subject to, for example if the stock was initially granted subject to a voting rights agreement. 

It might be an understatement to say that all of this has a chilling effect on any transactions in the private company stock market.  For one, any potential outside buyer would have to be aware, or would quickly be aware of the company’s right of refusal and right to match any offer made by them.  Imagine for a second you make an offer on interesting stock only to be told that not only does the company  have the right to match that offer once all the particulars of your offer have been divulged but also that they have 30 days to consider if they want to match such an offer.  Unless we are talking about a Facebook or Zynga, chances are most suitors would probably say, “Forget I ever made an offer.”

Why make this process of selling the company’s private stock so difficult?  As hinted before, we don’t want the company to lose its ability to control its stockholder base while the stock is not publicly listed.  Sure, the stock was offered in consideration of work or investments of some sort, but they still have strings attached.  Directors answer to shareholders and in effect shareholders (in the majority) influence the direction of the company.  Activist shareholders, even those with minority stakes, that have goals for the company that are at odds with those of the founding team can be a giant pain to deal with (read: expensive in terms of time, money and distraction).  The right of first refusalin effect gives the company some control on whom its shareholders are.  Equally important, it allows the company to control the number of shareholders it has since having more than 500 shareholders might require registration as a Public company under the 1934 Securities Act.  The rights of first refusal also facilitates two signaling factors that might be valuable to the company: a) the identity of a potential suitor (you want to know who is interested in purchasing stock in your company) and b) the perceived value of the shares of the company in the market (and hence by some extrapolation the perceived value of the company, though only in the eyes of one potential suitor).  As the old adage goes – “something is only worth what someone else is willing to pay for it.”  Having someone make a bid for the private stock of a company can help determine what the value of the company to an external player, which can be invaluable when considering corporate strategy decisions (read: expansion, mergers, acquisitions etc.)

The right of first refusal, one could argue, helps balance the desire of stockholders for liquidity with the company’s desire to control its stockholder base, while still delivering some fringe benefits to the company.

Increased internet use and broadband capacity has allowed private companies to collect vast amounts of data on users – information that is being used to create detailed profiles of their movements, interests and activities online.  This harms consumers by invading their privacy and curbs innovation and adoption of new technologies by making consumers hesitant to use them. In order to address consumer fears, the Plan calls on Congress, the Federal Trade Commission, and the FCC to improve the relationship between users and the entities that create these online profiles.  In order for the FCC to meet its obligations, it requires the legal authority to enact privacy protections for broadband service under Section 222.  Without that authority the Commission will be unable to quell invasive practices like deep packet inspection.  If such routine privacy invasions are permitted to take place, the value of Internet communications will decrease as a social good, contrary to the mission of the FCC and our national interest. 

I guess privacy regulation is a left wing issue because the right wing is paranoid about that big government will go too far in imposing constraints on corporate invasion of privacy, but is the right wing OK with what big corporations will do in the absence of constraints? 

The concern about “[harming] innovation and adoption of new technologies by making consumers hesitant to use them” is right on the money – whether the consumer is right, left or center.

Subscribers aren't keen on reading through the fine print at the bottom, and they'll feel betrayed if they click through to your site only to learn that the special offer isn't valid on what they want to buy. (from Exceptions* Apply: Keeping Your Legal Text Quick and Cool, an article in Email Insider).

Actually it is a pretty good article which makes a number of common sense points about legal disclaimers in various special offers. 

But the point that it really makes, although the article does not say it, is that you need quantity of disclosure (that is all the right disclosures) and quality of disclosure (that is the disclosure has to be user friendly).  Quality of disclosure is really important because it generates confidence in, and comfort with, the site.

I have written about this sort of thing before.  In my post, More on Privacy and Flash Cookies, I noted that one of the claims in the law suit against Specific Media was that their disclosures are opaque.  Here is what the article I was discussing actually 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. “

This sort of obfuscation goes a long way to creating that creepy feeling of being used and undermining confidence in the system. 

As many people have pointed out, if you want a “free” internet, providers of content have to be able to make money somehow, and (as in broadcast TV) advertising is the easy answer.  The more people participate in the system and the better information advertisers have about the participants, the more value there is in the system and the more robust a set of “free” offerings the system will support. 

That does not mean turning big brother loose and creeping everybody out.  To the contrary, it argues for a clear set of well articulated and well understood standards that give users confidence in the sites they visit. 

“Lets apply this to existing services clearly covered by Title II. Verizon offers me a choice of two Title II voice services on my landline, analog voice and digital voice. Digital voice is a higher level of service and costs more, in that (Verizon tells me) the sound quality is better and it comes with many more exciting features. That’s clearly a “higher level of service” in the same way that buying a 5 mbps down pipe is a “higher level of service” than buying a 1 mbps down pipe, and Verizon may properly charge me more for it. That hardly counts as precedent for Verizon to start selling me Domino’s Pizza “priority service” so that my calls to them go through 100% of the time crystal clear, while my calls to Joe’s Local Pizzeria drop on occasion and when they go through, the line has all kinds of annoying static. Similarly, it doesn’t count as precedent for AT&T selling me super swift access to Hulu while (comparatively) degrading my access to Youtube -- whether they are charging me, charging Hulu, or charging both of us the "QoS fee."”

 The whole argument around paid prioritization revolves around whether the carriers can maximize individual profits at the expense of the network as a whole and the consequential effects on innovation and growth. 

As many people have noted, the internet, social media, mobile web etc. are all near their infancy.  Nobody knows what forms they will take in the future.  Would you have predicted Twitter just a few years ago?  But, there is no arguing that Twitter has created a lot of new real estate and added a lot of value to the web.  If paid prioritization would have created an impediment to the creation of Twitter, Foursquare, or many others, we would all be the poorer for it. 

The paid prioritization debate needs to revolve around Metcalf’s law: the power of networks expands [exponentially] with the number users [sort of].  The FCC (and Congress) needs to look at paid prioritization through this lens.  Only then can they decide if paid prioritization (or some version of it) is good, bad or indifferent.

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 buzz around double dip recession seems to have declined a bit in the last several weeks.  But it still does not feel like a robust economy.  To the extent that retail is a key indicator of where we are (or really where we were), here is what comScore Data Mine has on retail e-commerce in the U.S.:

According to comScore Data Mine, U.S. retail e-commerce actually declined in 2009 compared to 2008.  They are predicting a “a return to solidly positive growth rates” in 2010.  I don’t know what they think “solidly positive” is, but the increase from 2007 to 2008 was approximately 20%.  If that is “solidly positive” the sector should be on fire.

Travel is another indicator of the health of the economy.  Here is some good news from the Data Mine:

Here is another little gem from comScore’ data mine, “Online travel spending grew 9% in July, representing the seventh consecutive month of gains. This is quite an achievement, considering this streak comes on the heels of eleven consecutive months of negative growth rates in 2009. At its nadir, which came in September 2009, growth rates had fallen to -11%.”

Where is the wealth in the U.S – by age group, I mean?  Probably in the 50+ group.  After all they have been working for a while.  They have the savings (such as savings are in the U.S.).  As has been the case for so long in the U.S., it is all about the boomers.  But where is smart phone usage?  According the data mine, “Smartphone penetration is highest among persons age 25-34 with 36.2% of mobile owners in this segment using a smartphone device.”  Once you get to the age group over 45, smart phone usage declines pretty rapidly. 

If you combine this fact, with the prior two, it is easy to confirm (what I think everyone imagines) that retail e-commerce will continue to grow smartly for the next couple of decades.  It also tells you how deep the recession was – that in the face of these compelling demographics, this sector flattened.