Privatizing the Internet

The Internet started as a government project, and then became an education tool. Later, corporations were allowed to join. Ever since then, corporations have been trying to take control of the Internet. Today, a number of sites such as FaceBook, are working hard to build a system where people can spend their time on the Internet solely within their site. They are trying to privatize the Internet.

In the early days of the Internet, CompuServe, AOL, and others tried to do the same. The lessons of the earlier attempts may help us understand the future of the current efforts.

The benefit of such sites is that they can try to protect the user from much of the dangers of the Internet while offering a new way to interact with friends.

Every such "safe system" requires significant effort. Someone will have to pay for it. If you, as a user, are not paying for the services provided, then somebody else is. These "free" services are providing your attention, data on your habits, or access to you for pay to some third party.

These systems are successful for a while. Each new technology has a period of time where helpers are successful. For example, gas stations needed attendants when auto technology was new and changing rapidly. But when the buying public has to pay for the service, they keep choosing self service at a lower cost.

The key value to these services is how much their users trust them. Unfortunately, service providers keep making mistakes that cost them that "Public Trust". After enough such mistakes, either competitors come in to take over the market or government regulators step in.

In a steady market, generally speaking there will be one main provider, a secondary provider, and then a multitude of much smaller providers. However, on the Internet, markets do not stay steady for very long.

Governments love to have a small number of providers. In that way, they can force secret monitoring of the users, force where the data is stored, or impose restrictions on topics or content that can be transmitted over such systems. Google already restricts search results based on US government action (See Chilling Effects). iTunes has a "back door" that allows governments to snoop through your files.

Competition is the "wild card". Competition will generate value outside of those systems that users will eventually want to connect to. CompuServe and AOL did quite well until they had to cooperate with their competitors with email and web surfing. Similarly, the instant messenger services did quite well by themselves until they had to open up to each other. On the Internet, any dominant service is quite vulnerable to a new technology or social "climate" changes.

When the services have to open up to each other, it destroys their unique value proposition to users as well as to advertisers. Investors should take note.

Dangerous Instincts

Every manager knows that we make decisions on "gut feel". In other words, we make decisions based on instinct. That is not a bad thing. However, when we do not "educate our gut" before we make that decision, often it is a wrong decision.

One of the most telling examples is how so many orchestras were all male for a while. It wasn't because females couldn't play. It was only when auditions for the orchestra changed from face to face to playing behind a curtain that women started to get such jobs. The orchestras had been missing out on better quality people when the instincts rejected them before hearing them play.

The same thing happens with computer companies in their hiring and when people are selecting platforms on which to build their next system. Repeatedly, managers are making gut based decisions without taking the time to educate their guts.

Part of the reason for this is that managers make so many decisions that they get used to their ability to "read a situation". However, the structure of situations changes and there are "professional liars" out there who know how to make a situation appear different than it really is.

When we do not "educate our guts", we make decisions based on what our peers do. That is "group think". Thus, we see how bankers follow fads - first over lending and then over tightening. We see stock prices go in waves where crowds stampede for the bargains and then flee from all stocks. John Templeton, Warren Buffet, and others made a lot of money by looking for the stocks people were fleeing and buying up the quality ones. The "wisdom of crowds" is not always right.

Risky World

Mobile devices are the next frontier in ads and many programs now contain ads. Developers are trying to make money from their efforts by using such ads. One ad company claims that 800,000 people a day are downloading software containing their ads.