Internet Business Models: Regulatory Impact

A couple of recent events have caused me to think more deeply about Internet Business  Models: the first was the FCC’s Open Internet Proposal (Ref. Chairman Genachowski’s Remarks on Preserving Internet Freedom and Openness, December 1, 2010) which establishes separate rules for wireless (where access has a technical bottleneck) and for wired (where fiber optics, properly managed can remove access bottlenecks) broadband network management.  The second is a Federal Trade Commission’s proposal for a browser-based “button” to opt out of targeted advertising as part of a general review of internet privacy.

In the beginning the Internet was wild and free and not very useful.  Then along came browsers with secure modes that allowed on-line payment and the subscription model was born.  This model requires a sophisticated subscriber who knows their willingness to pay for specific content or is rich enough not to care.  Advertising comes along for the ride in this business model, however, the advertiser operates with about the same level instrumentation that broadcast television had in the 1960’s.  The upshot is that neither the subscriber nor the advertisers is willing to contribute much money to the content provider because the connection between the advertisement and the act of spending money are indirect.

Then along came the Internet business model that I will call the behavioral micro-segmented model pioneered by Google.  By using cookies and other tracking technology, the users can be micro-segmented by their searching and browsing behavior into groups that are “strongly inclined to buy” specific products and services.  This information can be sold to companies that want to sell these items in the form of targeted advertising or position in search lists.  This model has been highly successful and is the basis for most of Google’s incredible market cap.

Subsequent evolution of this model involve creating content (e.g., YouTube) and activities (e.g., social networking) that further micro-segment Internet users in multiple dimensions that are even more attractive and specific to commercial interests.  Much of the attractive content is very bandwidth intensive and all of it involves tracking behavior and targeting advertising to close the loop in this business model.

So, the FCC proposal reinforces this business model for wired access, but creates potential problems for this business model for wireless access (where much of the growth is concentrated.)  The FTC proposal attempts to make the business model more transparent to users by allowing the user to opt out of the targeted advertising and potentially breaking the closed loop between browsing, advertising and purchasing.  These two proposals, taken together, could weaken the behavioral micro-segmented model by introducing bandwidth bias for wireless users and allowing important targeted groups to opt out of the targeting advertising.  My personal view is that the impact will not be great for most users and businesses, however, I’d like your thoughts on this.

What do you think the impact of these two proposals would be on the Internet experience and the Internet economy?