Saturday, October 25, 2008

Internet entrepreneurs should answer some tough conceptual questions, given this economy

As I noted on my TV blog, Oprah Winfrey has introduced a number of young entrepreneurs on her show, even in the face of this global financial meltdown and recession. The questions comes up, how well will technology hold up in the climate we have now? Technology companies, despite their high PE’s, seem, in many cases, to be weathering this financial storm better than a lot of other industries.

I think this would be a good question to pose to some of the “serial entrepreneurs” on a show like Larry King Live. A few of them have developed a series of Internet businesses, operated them for a year or so, and sold them to larger companies (for “economies of scale”) for huge profits. A logical question is whether any of the businesses are “sustainable.”

So, here we get to the pouring cold water part, or the hangover, maybe. There are a number of clouds passing over, visible at least to the naysayers.

For example, the most obvious question is, will advertisers spend less in a recession with Internet sites? But a deeper question is whether technologies will encourage web surfers to bypass ads altogether. As a principle, this is a serious question for the entire “free content” offering of the Web, and the ability of companies to make essentially free entry possible for newbies. Websites that don’t advertise benefit indirectly from the revenue provided by those that do. There is some unsettling litigation in the works about the way trademark law and domain names and even search engine works operate together.

ISP’s and web-hosting companies seem to have become more generous with bandwidth and disk space in recent years as it got cheaper, and it’s not immediately clear if financial turmoil would affect that (or the “network neutrality’ debate, for that matter). Some companies seem to be more interested in dedicated web hosting, with shared hosting a sideshow. But dedicated hosting depends on the idea that e-commerce and various other medium-sized business ventures make sense. The enormous number of problems with consumer data security in recent years argues against the idea that hosting for this sort of business would be that profitable. Instead, more small businesses would outsource their retail to really large companies.

We’ve talked a lot here about “amateur” self-publishing (with essentially “free entry”) and social networking, which are related but not synonymous activities. Related to that are sites for video and photo posting. These can come under legal pressure if current firewalls against downstream liability to service providers (like safe harbor in the DMCA – however controversial – or section 230 in the CDA of 1996) come down because of litigation (like Viacom) or future legislation driven by social or personal tragedies. Speaker or publisher liability could be affected by some ongoing controversies regarding fair use (such as Viacom and AP issues) and even problems like determining exactly what is academic plagiarism. The idea of mandatory education and perhaps mandatory insurance for bloggers and amateur speakers could grow and become controversial (if potentially unworkable); this concerns comes out of comparison to other areas (auto insurance, perhaps health care, and now financial markets) where the tort system is not enough to protect the public against sudden unquantifiable perils, and more "regulation" (such as mandatory insurance) becomes a required.

Or consider the potential legal exposures related to hackers, spam, viruses, and various forms of illegal content. Industry has done a lot about these problems (with anti-virus products and Microsoft’s improving security), but there is more that it could do, such as introducing microcharges for email or blog postings to counter spam.

But the most controversial area may be “online reputation.” Both the broadcast media and the industry that supports self-publishing and social networking have been caught by surprise by the severity of this problem and the suddenness with which it started getting reported in the media, despite the fact that some of it could have been anticipated in the late 1990s when search engines became so efficient. Legally, the problem is obscure and it invokes the murky area of “implicit content” where the circumstances (and imputed motives) of the speaker become as important as the objective content entity in question. (The Oct. 27, 2008 issue of Newsweek carries a story on p. 51, "When Words Kill", by B. J. Lee, about reputation slamming in South Korea, link here.) A related issue is just how employers should view their responsibilities as they ponder checking job applicants or employees with search engines. For most of the past ten years, the media had been focused on censorship (the CDA and COPA cases) as if it depended on content alone, and now we have to deal with the fact that surrounding external circumstances can magnify the significance of some kinds of content.

All of these issues can intersect in various ways. They are problems to be addressed and solved, with some intellectual integrity. Entrepreneurs play a role (such as companies that offer reputation defense) but we have to step back and talk about these problems from a policy level, too.

Update: Oct. 27, 2008

Check out the article on p B1 of Business Day, The New York Times today, by Brad Stone and Claire Cain Miller, "To Survive, Net Start-Ups Slow Their Metabolism," linl here.

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