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Will the information and delivery services industry like data minimization?

Posted January 27th, 2015 in knowledge economy, knowledge market, privacy and tagged , by Alton Drew

Today the Federal Trade Commission released a report on the Internet of Things and the best practices companies could put in place to protect consumer privacy.  The scope of the report was limited to IoT devices that consumers use to access other devices via the internet.  In addition, one of the best practices for securing consumer privacy mentioned in the report was the concept of data minimization.

How would data minimization impact firms within the information and delivery services industry who rely on large amounts of data in order to analyze consumption behavior?  The FTC defines data minimization as limiting the collection of consumer data, and retaining that information only for a set period of time and not indefinitely.  By minimizing collected data, tyhe FTC believes that larger data storers may make themselves less attractive to thieves and that the risk that data will be used in a way departing from consumer expectations will be reduced.

What the report overlooks are firms that consumers may not have face-to-face exposure to.  Take for example Broadridge Financial Solutions.  Broadridge processes and transfers sensitive personal information provided to them by their clients.  These clients include financial institutions, public companies, and mutual funds.  Under certain circumstances Broadridge’s own vendors may have access to the personal information Broadridge receives.  According to the company, they maintain systems and procedures to protect consumer data including encryption, authentication technology, data loss technology, and the transmission of data over private networks.

Even with their own protections in place, would information and delivery services firms like Broadridge see a decrease in volume if their clients are forced via additonal best practices to collect a limited field of data?  I’ve read nothing in the financials of a number of companies that tell me that they are concerned about additional regulations from the FTC indirectly impacting them.  Bear in mind that the clients for these information firms are other business firms, but since the information they analyze is collected by firms with direct exposure to consumers, information and delivery services firms and their investors should be aware of these developments in the regulation of the internet of things.

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Paid prioritization would get the GOP bill closer to ideal

Today the hashtags, #openinternet and #netneutrality were used extensively as the Senate Committee on Commerce, Science and Transportation and the House Sub-committee on Communications and Technology listened to testimony that they hope will help refine draft legislation designed to rein in the Federal Communications Commission while bringing clarity on paid prioritization, unreasonable network management, discrimination against network traffic, and access to legal websites.

The bill expressly prohibits paid prioritization, which allows content providers to enter agreements with broadband providers that allow traffic higher priority for certain traffic to end-users.  The argument against paid prioritization has been that smaller content providers would not be able to compete with the big dogs who have deeper pockets and can afford to pay to get their traffic placed before the rest of the dog pile.  But what this view fails to consider is that firms willing to pay for priority treatment of their traffic recognize the value to their subscribers that their traffic has and paying to get that traffic to content subscribers is a cost that will generate benefits.

Content providers are not shy about the how failure to get traffic to subscribers in a timely fashion might impact their business models.  Take for eample the investment information firm, Morningstar.

Morningstar is in the information and services delivery industry.  The Chicago-based firm provides independent investment research to subscribers around the globe.  It relies on internet technology to deliver its services, thus an ability to upgrade to the newest technology is necessary if content providers like Morningstar are to remain competitive.  Outages of their network data centers can result in lost customers and lost revenues.  According to Morningstar:

“Many of our client contracts contain service-level agreements that require us to meet certain obligations for delivering time-sensitive, up-to-date data and information. We may not be able to meet these obligations in the event of failure or downtime in our information systems. Our operations and those of our suppliers and customers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures or disruptions, computer viruses, and other events beyond our control. Our database and network facilities may also be vulnerable to external attacks that misappropriate our data, corrupt our databases, or limit access to our information systems.

Most of our products and services depend heavily on our electronic delivery systems and the Internet. Our ability to deliver information using the Internet may be impaired because of infrastructure failures, service outages at third-party Internet providers, malicious attacks, or other factors. If disruptions, failures, or slowdowns of our electronic delivery systems or the Internet occur, our ability to distribute our products and services effectively and to serve our customers may be impaired.”

Question is, would a statutory ban on paid prioritization benefit Morningstar or other firms in the information delivery services industry where, again, timeliness ois of the essence?  If contracts with their clients call for liabilities where data is not delivered in a timely manner or where quality is eroded, can Morningstar afford prohibition from entering priority contracts?

While the bill is a good start toward bringing clarity and closure to the net neutrality debate, Congress needs to focus on the commercial aspects of the internet and keep in mind that speed and capacity are the characteristics that make the exchange of information over the internet far more superior, productive, and profitable than any other medium.  Paid prioritization is about meeting customer needs and recognizing the value certain content brings not only to the subscribing end users but to the economy as a whole.

 

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What regulators say about the internet of things

For the past two or three days the chairmen of the Federal Communications Commission and the Federal Trade Commission have been clarifying their regulatory agendas for and approaches to the Internet.  FCC chairman Tom Wheeler plans to issue net neutrality rules around 5 February with the full FCC voting on those rules on 26 February.  Media reports have Mr. Wheeler outlining what he believes the benefits consumers would enjoy from reclassifying broadband as an old school, run-of-the-mill telephone company.  For example at the Consumer Electronics Show in Las Vegas Mr. Wheeler reportedly said the following:

“So, there is a way to do Title II right, that says there are many parts of Title II that are inappropriate, and would thwart investment, but that a model has been set in the wireless business.”

CTIA-The Wireless Association has taken the position that given the level of competition for mobile broadband that net neutrality rules should be “mobile broadband specific” and that mobile broadband has never been regulated under Title II.

Mr. Wheeler, in an attempt to keep net neutrality advocates happy, appears to be willing to use Title II regulation to strike down deals between content providers and broadband operators where content providers pay to have their traffic given higher priority over other providers.  Mr. Wheeler wants the role of determining which transactions and agreements are commercially reasonable and how that traffic should be moved from content provider to broadband provider to ultimate end user.

FTC chairman Edith Ramirez’s approach appears to focus more on transparency of participants in information markets.  Her concern, as shared with CES participants, is about privacy and the Internet of Things. As more devices connect to each other via the internet, more devices become subject to hacking and a wealth of data, thought by consumers to be private, becomes subject to misuse, theft, or fraud.

Ms. Ramirez’s focus on the consumer is not surprising given the nature of her agency’s work, but it also seems the slightly, and I mean slightly, better approach to overseeing market behavior versus individual business behavior.  The internet is a platform for information exchange between information generators and information seekers.  The more information that a provider has on how her information is going to be used in the markets helps her make better decisions not only on whether she should make it available but also on its value and how best to monetize her data. Information gatherers will simply have to provide better incentives to information providers to get them to give up their data.

What kind of growth does the market see for the Internet of Things?  According to Cisco’s Internet Business Solutions Group, some 25 billion devices will be connected to the internet by the end of 2015.  That number will climb to 50 billion connected devices by the end of 2020.  That’s a lot of broadband infrastructure for the FCC to oversee and more hacking access points for the FTC to worry about in five short years.

Investors will see the biggest gains in the infrastructure space of the Internet of Things.  Leading growth in this space will be manufacturers of processor chips, wifi networks, sensors, and software.  Investors should also be concerned with factors that impact demand for devices that talk to each other and I believe the factor that has the heaviest weight is the consumer privacy factor.  Devices aren’t just talking to each other but are gathering information on consumer likes and habits and storing this data for the information gatherer’s future use.  Privacy is an immediate and long term issue because it concerns one half of the parties involved in the information market transaction: the consumer.

As for the FCC’s open access approach it is too short-sighted.  Mr. Wheeler’s focus on competition for broadband service and equal treatment of traffic may have a nice sounding populist ring, but in the internet eco-system what matters is the consumer’s choice of product obtained through broadband.  That product is content and the price the consumer pays in exchange for that content is, ironically, content in the form of personal data.  Consumers already have wireless and wireline choices for broadband access.  The value play for consumers lies in the quality of content available online and consumers are more than capable of deciding that for themselves.

What the government can do is what it does best (albeit it is not the best at it, but work with me); government should adjudicate privacy and other consumer disputes and make available to consumers information that they may not be able to gleen readily from the private sector.  The FTC’s focus on privacy and consumer protection does a better job at this than the FCC.

I’ll go out on a limb and say that the private sector is taking care of the FCC’s mandate of ensuring a nationwide communications network.  The FCC’s focus given the growth in the mobile market and the increasing need for devices to wirelessly connect should remain on allocating spectrum and assuring the reliability and safety of wired and wireless communications infrastructure.  Any other endeavor is waste.

 

 

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Value of content grows without net neutrality or Title II regulation

Pew Research Center’s Internet and American Life Project today shared some results from a survey of online adults about the benefits they receive from the information obtained via the internet.  According to Pew, 81% of online adults say that the internet and cell phones help them become better informed about products and services.  Seventy-five percent and 74% of online adults feel better informed about national news and international news respectively, while 72% feel better informed about Kim Kardashian, Paris Hilton and the rest of American pop culture via the internet and cell phones.

The vast majority of survey respondents, Pew found, believe that their use of the world wide web helps them learn new things, stay better informed about topics of personal importance, and increases their capacity to share their ideas and creations with others.

In terms of traffic generated, all this appreciation for information at the swipe of a finger or click of a mouse also means that the United States is a leader in digital traffic generation.  This is what Bret Swanson, visiting fellow at the American Enterprise Institute, described in a piece for The Wall Street Journal.  According to Mr. Swanson’s findings, the U.S. generates far more traffic per capita and per internet user than any other major nation except South Korea.  The U.S. generates 18.6 billion gigabytes of traffic per month and U.S. traffic is 2.1 times that of Japan and 2.7 times that of Western Europe.  Per capita consumption of digital goods is up 48% since 2007.  With only four percent of the world’s population, the U.S. consumes 32% of consumer internet traffic.

All this consumption and growth in the digital content marketplace happened without Title II or net neutrality regulation.  I have yet to hear an argument that says Title II increases consumer demand for data or even increases the delivery of additional infrastructure.  .

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Random thoughts on consumer choice of content

Progressives have expressed concerns about consumer access to content of their choice; that decisions to access lawful content not be undermined by the end-user’s broadband access provider.   Consumer choice implies that the consumer has placed some value on the content he or she wants to receive.  One consumer may place a greater value on using their bandwidth to reading up-to-the-minute press releases on PR Newswire and business news content.  Another consumer in Florida may place greater value on gaming with his friends in Wisconsin.  Should net neutrality proponents be concerned about a consumer’s value-maximizing decision where the very small websites that net neutrality proponents claim to advocate for are not accessed as a result of consumer versus broadband provider “blocking?”

Utility or value maximization is nary mentioned by net neutrality proponents.  They have beaten around the bush by discussing it indirectly in the guise of non-discrimination or non-blocking principles.  Saying non-blocking or non-discrimination provides a false sense of speaking truth to power by putting the “bad guy” taint on broadband providers.  It also helps to embolden their status with their constituency, the consumers who believe that a handful of documented net neutrality violations is indicative of how broadband providers will behave even when millions if not billions of transactions occur every day without a net neutrality hitch.

But highlighting actual consumer choice, a consumer’s ability to place higher priority of certain websites over other content doesn’t seem to be the progressives’ cup of tea.  An enhanced analysis of the content markets should have as an issue whether consumers can make this type of choice and whether public policy should encourage it.  My bet is that progressives prefer consumer choice light versus strong, robust consumer choice.

The reason why this proper market analysis won’t be entertained by net neutrality proponents goes back to the “V” word; value.  Small content providers don’t have much in capital or time to garner the traction and eyeballs that larger, more entrenched content providers have.  It’s the economics of net neutrality.  Larger content providers have sunk millions into the marketing necessary to gain traffic.  Some are merely leveraging their legacy infrastructure.  For example, I’m a fan of The Economist.  Not only do I subscribe online, but I also get the print version so that I can read it on the plane or MARTA rail.  The Economist leverages its print reputation to attract readers online.  Online magazines that can establish pay walls and maintain loyalty with superior content will make revenues, hopefully have profits, and maintain barriers to entry.

Unfortunately for the smaller content providers progressives are so concerned about, energy is being directed toward a public policy initiative that won’t do anything for their marketing or their profit.  It’s also unfortunate that nary one of the grass roots advocacy groups pushing net neutrality have made a cogent economic argument that could give the Commission any proper guidance.