July 25th, 2024



George Gilder

By George Gilder

Published July 1, 2015

All hail Arianna Stassinopoulos Huffington, well on her way to becoming the reigning queen of Network Neutrality, as her Huffington Post soars ever higher as part of the $4.4 billion Verizon buyout of AOL.

The purchase represents an obvious response to the FCC move to enforce a "level playing field" on the Internet while ruling it as a public utility under Title 2 of the Telecom Act of 1934. As author-investor Andy Kessler puts it: "VZ is saying loud and clear that under Title 2, better returns will come from milking their network than from updating it. Thanks FCC." While AT&Ts response seems to be investments in Latin America, Verizon is putting its bet on advertising and content platforms.

Comments Dan Berninger, the voice-over-Internet protocol pioneer now leading an "Internet Independence" legal appeal against the government takeover: "In 1995, when they removed Title 2, the Internet took off like a rocket. Now as Title 2 comes back, all that is stopping; it is sinking into a morass."

While network neutrality requires a price lid for everything, Internet service is non-neutral at every point. Content differs vastly, from 3D games to Skype calls to Netflix to email to telepresence to instant messaging to the coming era of holographic hockey games and other sports events, all requiring sharply varying channel accommodations, content delivery networks, delay limits, service level agreements, security guarantees, and ever-changing experiments in business plans.

If you can't charge more for better and more costly service, you can't make money off it so you don't build it. Instead you try to exploit existing assets through the familiar PIMP and BASH strategy (Pop-up and Interrupt Media Protocol and Bait and Switch Hustles). That's where Arianna comes in.

Verizon paid its $4.4 billion for AOL, as CEO Lowell McAdam explains, to gain access to "AOL's ad platform." With roughly five times the ad minutes of YouTube on one tenth the videos viewed, AOL's ad platform is regarded big "winner," with a cherished industry-leading ads-to-content or "noise-to-signal" ratio.

As part of the package, Verizon takes on the Huffington Post, with its aggregate and advertise business model, exploiting journalists and other free content suppliers and collecting money chiefly through pop-ups and banners. In the process AOL has been keeping Arianna in decaf soy cappucinos at La Colombe and primed for her 3 and a half hour "Nirvana Indulgence" Shirodhara massages at Pratima Spa near her headquarters in Greenwich Village. Maybe Verizon is up for their new duty.

But once they contemplate the real prospects of their new broadband assets, they may need Arianna's "de-stress and reenergize" Thrive course on Oprah.

The problem is that absolutely no one wants to see any of those ads. Not on their smart phones nor on their video players nor on their tablets. Not popping up in the midst of their news briefs or infiltrating their email or blocking off key porn angles or New York Times paragraphs or bursting in with urgent ad voices during music streams or waving for attention on YouTube.

The current ad model on the Internet is nearly always minus—meaning value-subtracted. Thus the AOL numbers can be interpreted as suggesting that AOL is fifty times more annoying than Google and 50 times more vulnerable to the collapse of the minuses model.

Maybe McAdams' plan is to dump Arianna on some greater fool, possibly a rich Harvard professor or a liberal vanity investor like the guy who bought the New Republic. But that doesn't solve Verizon's fundamental problem on a neutralized net: When the government neutralizes and nationalizes the net, the key players disinvest from the ensuing Eunuchnet and try to fill it up with a glut of unwanted ads.

Now, however, no one will have to look at the clutter. With new hassle-free payment systems proliferating—from Apple-pay to Google wallet to Bitcoin's blockchain—the aggregate and advertise strategy is doomed. The content slaves are about to bolt the plantation and collect their own payments. The customer gulls are about to flee to ad suppression tools and alternate payment modes. As I wrote prematurely twenty five years ago in Life After Television, "In the digital age, nobody will watch any ads they don't want to see."

Even Google will suffer. It still receives some 95 percent of its revenues from ads connected to its search engine and is attempting to monetize YouTube with pop-ups (when trying to watch a video we are all eager to learn about Volvo trucks, or Viagra, right?). Facebook too seems to be joining the aggregate and advertise parade, including pop-up mobile ads with Instagram and its other services. Such ads are usually massive value vandals, reducing Internet utility more than they enhance net revenues. As a result video usage on the net has actually been shrinking over the last two years.

The absence of seamless hassle-free micropayments is the only reason people tolerate jerk-in-the-box popups with their news and leechware with their sports and sticky ad-hesives with their videos and ad-noxious bait-and-switch subscription schemes with their journalism.

But if the Bitcoin and alternative currency movement has its way, the next generation of Internet infrastructure will contain an automated payments layer in the network software stack.

Internet technology is undergoing a radical transition, predicted more than two decades ago by Eric Schmidt, then a Sun microsystems engineer, now Google Chairman, in Schmidt's Law: "When the network runs faster than the computer backplanes and 'busses' attached to it, the computer hollows out and its functions spread out across the network." He added a fateful codicil: "Profits in the industry will migrate to 'search and sort.'" Google has shown the power of search and sort.

But what the change now means is cloud computing, enhanced by two costly major innovations that enable the new generation broadband Internet. Network Function Virtualization obsoletes giant computerized cell towers and other cumbersome network gear. Enabled instead are ubiquitous almost invisible broadband antennas, achieved by moving much of the processing of smart-phone voice signals from the cell tower to the data center.

Meanwhile Software Defined Networking augments the efficiency of those data-centers through load balancing and network administration in software.

The result is integrated data centers that can provide an array of new services to computers on the network's edge. Within radically more efficient and capacious networks, micropayments and bitcoin block chains will be a natural step forward. With seamless and hassle-free automated payment schemes, the old bait-and-switch hustles and aggregation strategies become obsolete.

On the next generation Internet, no one will have to see any advertisements they don't want to see. Advertisements will have to become value-added or they will disappear. Arianna and Verizon beware.

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George Gilder is an American investor, writer, economist, techno-utopian advocate, Republican Party activist, and co-founder of the Discovery Institute. His 1981 international bestseller Wealth and Poverty advanced a practical and moral case for supply-side economics and capitalism during the early months of the Reagan Administration and made him President Reagan's most quoted living author.