The lords of the internet (e.g. Google, Facebook, Amazon) are under assault. That’s a good thing. The arrogance of these organizations – particularly that snot-nosed geek in the gray T-shirt, Mark Zuckerberg – richly deserve their comeuppance. Unfortunately it is primarily the governments (federal and state) that are leading the charge. Individually and collectively these entities rival the social media in terms of arrogance but are distinguished from them by their ignorance of technology or the actual offenses being committed by the media giants. And it isn’t the first time that the governments have undertaken such investigations, seized upon the wrong elements and fashioned a solution that departed widely from the problem.
AT&T (the Bell system) was broken up via a consent decree announced on January 8, 1982. I had accepted a position as an attorney with Mountain Bell – one of the local operating companies for the Bell system – the day before. The decree required AT&T to divest its local operating companies into seven independent Regional Bell Operating Companies and thereafter to retain their long distance business, Bell Labs (the premier innovators in telecommunications) and Western Union (the largest manufacturer of telecommunications equipment). These areas represented the most competitive elements of telecommunications. Unfortunately, it was led by career managers who had operated under regulation for their entire business lives and they proved to be quite inept in a competitive environment. Eventually AT&T, on the verge of bankruptcy, was acquired by SWB (Southwest Bell – one of the seven divested Regional Bell Operating Companies) in 2005.
Meanwhile, the seven Regional Bell Operating Companies remained subject to stifling state and federal regulation overlain by a consent decree administered by a federal district court judge (Harold Greene) who knew even less about telecommunications, competition, and technology than did the state and federal regulators. It was a mess.
And here was the problem. Would be competitors for long distance service complained that the local operating companies refused to interconnect their local distribution networks (the last mile) to their long distance networks (composed mostly of digital microwave towers). They were right. They argued that AT&T charged unreasonably high rates for long distance service because they controlled that “last mile” and could charge whatever they wanted. In other words, consumers were denied lower long distance rates because of AT&T’s control of the local distribution networks. They were wrong and that wrong-headed presumption guided the most bizarre policies that government has ever imposed.
First, AT&T’s long distance rates were driven by regulators who used the high profits from long distance service (high rates, low costs) to subsidize local exchanges service (high costs, low rates). It was a proposition that was meritorious at the inception of telecommunications but had long since faded into market distortions due to innovations in telecommunications – most notably the use of microwaves to transport electronic signals and digital switching reducing manpower demands and providing greater efficiency at lower costs. It continued out of inertia because both AT&T management and state and federal regulators had “always done it that way.”
Second, regulators set the price of the various telecommunications services based upon an economic theory that allowed AT&T to recover its actual costs plus a reasonable return on its investments. They distributed that revenue recovery through the various services not based on the underlying cost but rather on the social concept that local service for individuals needed to be heavily subsidized – an unsupported assumption that has been given the lie by the heavily competitive wireless business which charges much higher rates for the exact same service without any dislocation of usage by individuals. Long distance service and discretionary services (voicemail, call forwarding, caller ID, etc.) were priced well above their underlying costs so as to subsidize individual local service.
But that wasn’t enough. These federal and state regulators also deployed a series of accounting tricks that were used to artificially suppress the “actual costs” in order to reduce the revenue required to be recovered. The most important one was the assigning of elongated amortization schedules for costly switching and distribution equipment. (For those of you forced to suffer a teachers union led education in the Portland public school system, by stretching out the period over which you can deduct the cost of equipment you reduce the amount of costs recovered annually.) Basically the regulators took the position that amortization should match the useful life rather than the economic life of the equipment. As a result the deployment of generations of innovation in switching technology (a real cost savings) and distribution technology (a real maintenance savings) were delayed. Thus you had local service offices using mechanical switching technology (requiring workers to regularly sand the copper contacts to ensure good connections) along side digital switching technology. Because the mechanical switching still functioned (no matter how inefficiently) it was deemed to still have a “useful life.” Innovation and efficiency delayed at the altar of government no-necks.
In other words it was innovation that was delayed, not low long distance rates. And in the aftermath of the breakup, it was innovation that accelerated, not low cost long distance.
So what did the state and local regulators due in the aftermath of the breakup of the Bell system and introduction of competition. Well the state and federal regulators continued the same old heavily subsidized pricing model for the local Bell operating companies because “they had always done it that way.” And the federal district judge delayed investment in other avenues based upon wild assumptions that could only exist in the minds of someone who had never been west of the Ohio River. One of my favorite stories was a meeting with Justice Department lawyers and a select group of lawyers for U S WEST – the Regional Bell Operating Company for whom I worked. We had a request to enter the real estate business pending before Judge Greene’s court and a decision was being delayed because the Justice Department had not yet blessed it.) I asked one of the Justice Department lawyers – some smug prig from an Ivy League law school – why the Justice Department objected to our request. He replied that he was concerned that we would use the buildings we built or acquired to erect microwave towers so we could get back in the long distance business. I was incredulous. I said, “Do you really think we are going to spend $100 Million on a high rise building so we can put a $100,000 microwave transmitter on it?”
So I relate those stories to you because the exact same thing is happening in the investigation of the social media and internet search engines. Congress and the federal agencies are focused on the wrong thing again. The social media giants (Facebook, Twitter, etc.) and the internet search engines (Google, Yahoo, etc) derive their revenue not from the services they provide to individuals but from using data they derive from those individuals to target advertising to individuals or groups on behalf of merchants of goods and services. In the process they gather and manipulate information from largely unwitting consumers. Amazon not only uses its vast online shopping service to gather information but even deploys devices such as the Echo Dot (Alexis) to basically listen to everything said in a household and mine and store the commercially valuable information. Google not only uses data mined from internet searches but it has the capability to monitor every stroke of your keyboard as well as emails sent and delivered – Google’s Gmail is the most widely used email system in the world. Facebook not only mines users’ posts but also buys additional data from a whole host of companies and thereafter creates data profiles that may or may not represent the individual Facebook users.
The real danger of these media giants is the invasion of privacy and the storing and manipulation of personal data of its users. Would you trust the United State Postal Service to open your letters, scan their contents and store the information contained therein? Of course not, but then why would you trust Facebook, Google, Amazon, and others to do precisely the same thing?
Granted there is a form of monopoly with Google that dominates the internet search function. You cannot use the internet without using Google. But Google does not charge for the use of the network – it just collects all of your personal information. In contrast Amazon is being challenged by Walmart for online merchandizing. Facebook is withering because of its own – read Mark Zuckerberg’s – inability to tell the truth and changing attitudes about social media in general.
But Congress and the state and federal regulators are stuck on traditional remedies – break up the companies – and are ignoring the easiest and simplest solutions. Solutions that do not require another body of regulators or years of senseless litigation in front of judges that don’t know their bytes from their behinds. Solutions that actually address the real problem – the invasion of privacy.
Congress should adopt laws that prohibit the acquisition, storage, manipulation and/or use of customer information without the informed annual recorded consent of the user. That does not mean “negative” or “implied” consent – the fact that you use the service should not constitute consent. It must be informed consent which requires the provider to detail to what uses the information would be applied, including any such information that would be used by the government. It should allow providers to gather and use information necessary to maintain their systems but specifically prohibit the use of such information for any other purpose without user consent. (For instance, Google should be allowed to gather information relative to searches so as to provide maximum efficiency for “paths” to the requested search.) The law should allow customers to delete all information gathered by providers at least annually.
And here is what will happen. The vast majority of users will simply sign the annual consent and proceed as if nothing has changed. Good for them since they have made a knowing choice – that is not what is occurring today. A smaller group will annually ask that information gathered to date be deleted – I would probably fit into that group. And a still smaller group would refuse to give consent and the provider could then charge for the use of service. (Providers could not refuse service in such instances if the customer in fact pays for the usage.)
Because providers would have to fully disclose the purposes for which information would be used and by whom, providers will be more discreet as to whom they allow access to the information. For instance, I do a lot of research online to write this column. The research takes me occasionally to some unusual websites. The algorithms used by providers such as Amazon, Google and Facebook do not distinguish between research inquiries and commercial inquiries and thus I am often inundated with ads for a whole series of products that I neither want nor would ever use – particularly with regard to groups soliciting membership or contributions.
Breaking up Google does not cure the underlying problem – the collection, manipulation and storage of personal data. Neither does breaking up Facebook, Twitter, or other social media services. The best solution is simply to limit the collection and use of personal data and then let the competitive market take care of the rest. Competition and arrogance are going to crush that snot-nosed little Geek in a gray T-shirt – trust me.