The e-G8 Meeting: Internet's Growing Political and Social Role

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by: SoundView Technology Group
French President Nicholas Sarkozy managed to pull together a conference ahead of the recent G8 meeting to discuss the role of technology innovation and the internet on economies and governments. We compliment him on the initiative to get a discussion going even if we have to shield our eyes from the sparks flying up from the ax he is grinding.
Geeks and bureaucrats offer up a curious mix. There’s not much common ground between the two. In fact, the consensus among the geeks was that the government should “do absolutely nothing.” The governments believe the opposite and justify it with a need to ensure that what happens on the internet is “fair” and protects the “public good.”
The politicians have little credibility in terms of motivation, thoughtfulness and execution. They have also come to understand the dramatically increasing political, economic and societal power of the internet. Their mild panic is palpable.
It’s easy to choose sides. And most would opt for the “do nothing” opinion with respect to government rules and “protections.” However, there are areas – like copyright and patent law – that do need reform. In many cases prior regulations are provably damaging our ability to innovate and grow in the new digital context. Although the internet itself can address many reforms needed in consumer goods (see Urban Outfitters v Etsy) governments have to provide regulations and govern industrial business because consumers and market forces are typically absent from these domains.
The attendee list was indeed quite impressive and ranged from the latest internet stars like Mark Zuckerberg of Facebook and Andrew Mason of Groupon to CEOs of large companies [Thomson Reuters (NYSE:TRI), Google (NASDAQ:GOOG), Qualcomm (NASDAQ:QCOM), Blackstone Group (NYSE:BX), Bertelsmann, etc.] to founders of small internet companies to government officials, including President Sarkozy himself and key ministers, including Christine Lagarde.

What follows is an organized collection of content gleaned from presentations and conversations at the event. After attending this event and analyzing some recent trends, it appears that this macro internet topic is going to be an important one. The internet is moving into a phase in which it will have major impacts on culture, society and national identity and determination. For example, the recent realization that a cyber-attack that impairs a country’s resources or military ability may constitute an “act of war” elevates the importance of the rules governing the digital future and our real world.

Sarokozy Enters the Conversation
Sarkozy took the initiative to pull the meeting together, for which he deserves some appreciation (even if he has an ax to grind). His opening speech runs about five pages and had several decent points about how the internet was changing the world and creating growth, wealth and opportunity beyond what we have seen before. He also raised some interesting thoughts about protecting cultural and artistic richness on the internet and the threat of “new monopolies.” He did return several times throughout the speech to his pet issues of protecting copyright and intellectual property on the internet and making sure that trade there is “fair trade.” For many, this is simply a way of protecting national and incumbent interests from the inevitable creative destruction that the internet represents. At least Sarkozy realizes that local discussions and decisions are meaningless in the context of the internet. That’s the impetus behind this meeting and discussion with the hopes to elevate it first to the G8, then the G20 and eventually the UN General Assembly. (Heaven help us all!)
Lessig Nails It
The professor did his homework and came prepared with an entertaining and enlightening presentation (a little hard to find but available). The likening of democratic government to an alcoholic with another addiction may not be the perfect analogy but it’s a useful way to explore the underlying forces that result in changes in our policies and regulations. Lessig points out how the architecture of the internet is totally at odds to the regulation and control that government institutions and incumbent companies would like to exert. In private discussions later on, Lessig and others – including Jeff Jarvis – lamented the sad state of affairs and attitudes around copyright law and intellectual property in France. During the event, a panel held to discuss copyright projection was filled with the exact same narrow-mindedness that characterized such debates in 1998 and 1999. It was as if the French have not paid attention to the last 10 years of licensing, royalty and content distribution evolution in other countries. The fact is that in a digital era almost every useful act involves copying, so adhering to the copyright laws from two hundred years ago doesn’t work. In conclusion, Lessig made a strong case for governments to do as close to nothing as possible because their efforts were much more likely to stifle innovation and the next generation of internet leaders rather than accelerate and enable them.

Monopolies & Incumbents
The only enduring monopoly has been the governments and their right to tax. Even this one has been weakened and, in some cases, circumvented by the internet. (It was also pointed out that very large and very profitable companies like General Electric (NYSE:GE) and Microsoft (NASDAQ:MSFT) were paying very little tax by exploiting loopholes in the EU and US tax systems.) But governments misunderstand monopoly on the internet. They point out that one monopoly like Microsoft can just be replaced with a new one like Google (GOOG). But the half-life of a technology monopoly is getting shorter all the time. Facebook now threatens Google. GroupOn and Zynga are emerging as even newer disruptors on the internet. Some knowledgeable industry observers like Ray Kurzweil expect these trends to continue to accelerate and for change and disruption to happen at an increasing pace, well above our ability to absorb it and even far outstripping governments’ ability to even understand what is going on. This makes it clear that any successful policy and regulatory decisions have to be based on fundamental principles rather than detailed rules.
Content: Doing More for Less
Many large publishers and traditional content providers spoke at the event, including the New York Times, the BBC, Wall Street Journal, Bloomberg, Simon & Schuster and Der Spiegel. Sifting through all the numbers, comments and notes, one meme stands out: more work for less money. The internet makes distribution free and creates more convenience and utility than physical paper and books. Because these traditional firms have large fixed cost bases and distribution assets it’s going to take time to rationalize it. Only a handful of executives really seem to get it. One example is Carolyn Reidy, President and CEO of Simon & Schuster, who clearly stated that authors now had options and publishers need to find ways to provide value that is worth paying for and not rely on the old rules, which gave them far more power and control. They have exercised their rights to control pricing, but just after that battle was won Amazon (NASDAQ:AMZN) created its own publishing arm. The fun continues.
Entrepreneurs Use Humor to Cope
A panel of successful entrepreneurs from Europe was filled with more humor than constructive ideas, but their comments and jokes are illustrative of how disruptive innovators inside the European system view it. The stage was set by Jacques-Antoine Granjon of when he characterized the French as a people who “hate working, expect to be well paid while not really working and demand to be paid when they stop working.”

Their humor felt like a coping mechanism for dealing with a massive regulatory burden and distributed and ineffective intellectual property law. Most of the executives on this panel epitomize intelligence, innovation, risk taking and hard work. They most want to see a dismantling of existing regulations rather than the introduction of new ones.

The GroupOn Spaceship Lands in Paris

For many this was the first opportunity to see Andrew Mason, the Founder & CEO of Groupon. Through no fault of his own, Mason looked and sounded like an alien to the French establishment and they struggled to understand him and his company.

The funniest exchange occurred when the interviewer was puzzled and surprised by a company that focuses “on the happiness of their customers.” Mason had to ask “what would you put at the top of your list then?” The French interviewer just looked out at the audience and blinked. (If you haven’t experienced the oxymoron of “French customer service” then you might not fully appreciate the humor.)

As an aside, guys like Mason make it clear that an event like this needs to include far more youth on stage. As Professor Lessig said “the future isn’t here.” The best panel would probably have been populated by a group of 17 year olds from different backgrounds instead of a bunch of 50 year old white guys who have their emails printed out.

Groupon has done some things very differently, and its recent filing for an IPO (NASDAQ:GRPN) will focus an intense amount of interest on the business. Groupon has had fun and much success so far. In some ways it is reminiscent of Zappos, which defied the odds to create a very successful online company (selling shoes no less!) that was acquired by Amazon. So what’s interesting about Groupon?

Instead of decrying the unreasonable expectations of “Gen Y” Groupon has embraced them in unorthodox ways and found great success. For example, unlike other “special deals” they are refundable. Even after a consumer has taken advantage of the experience if they are somehow unhappy or dissatisfied they can still get a full refund. This is an established practice at the high end of retailing where clients pay for the privilege but it’s been rare or absent in deep discount models.

Groupon channels a culture and attitude that is a new opportunity with the young demographic. The value proposition is influenced more by “why get out of bed today?” than “how can we make your life simpler, better, easier, or cheaper.” It’s directed toward people who are bored and unsure of what to do but up for trying something new. A “Groupon” for rock climbing, horseback riding, a cooking class or an hour of cello instruction are examples of deals that provide a unique discovery aspect with a heavily discounted price. For the company providing the product or service it’s a way to acquire new customers that has major advantages over traditional marketing and advertising.

Groupon is serving a concentrated demographic with 70% of its customers being urban females. Its expansion plans include more merchants and better personalization so that its targeting improves and more consumers and merchants can find each other. The newest element, Groupon Now, combines location with desire in what is basically a “pull” model. So asking about getting a meal, a coffee or a concert ticket can be answered with a combination of where you are and offers that fit your request. It’s just rolling out now but certainly reflects a common model of how people operate and taps into the power of the mobile internet.

Zuckerberg Holds Court

Zuckerberg and Sarkozy didn’t appear together, but Zuckerberg was invited to have lunch with the French President. During his talk, Zuckerberg harped on the role of Facebook as platform rather than a content company providing games, music, movies or other forms of content. However, he was quick to point out that Facebook users have high affinity for entertainment, particularly music and movies.

It was an interview filled with softballs from a fawning Maurice Levy who didn’t push Zuckerberg on any topic but instead just set up opportunities for him to riff on whatever he wanted to. One important observation was made though in that the disruptive architecture of the internet enables a broad range of new things to happen. Some are clearly good but others are ambiguous. You need to welcome both the good and the bad since most attempts to regulate will end up stifling both.

Innovating Education

Rupert Murdoch delivered a soliloquy at the event. Given how much the 15 minute slot cost him it was much to his credit that he focused on a topic of great importance. The quality of his message was far better than I expected. Murdoch focused on education and the ability for innovation to improve what he sees as the most important segment of our civilization and economy. He’s right on the mark with his views of how antiquated and silly the system has become while the entire world has grown up and adopted technologies and methods that are unrecognizable from what was mainstream 50 years ago. Another interesting effort to look at in this context is the Khan Academy.

McKinsey Discovers the Internet
Although it provided some useful context, the commissioning of McKinsey to produce a presentation and report on “why the internet matters” felt a bit silly and staged. Some government officials, like Eric Besson, even referenced the figures during their comments as if to suggest that before the study came out they had no clue that “there is a strong link between innovation and growth.” McKinsey didn’t provide the underlying data so there remain some open questions about a few of their conclusions.
Some French Success

Many cited the success of broadband growth in France as an example of an area in which the country has done an excellent job. Beyond that, structural changes like the new self-employed designation have also been a big step forward. Over 1/2 million people in France have signed up for the new program in the last two years. This has enabled far more people to forge their own path in France and not rely on big companies or government jobs for their livelihood. Startups are more abundant thanks to this and also to the new wealth tax provisions that allow the rich to offset these tax payments with investments in French startup companies.

Companies that find initial success in Europe still suffer from many obstacles as they try to transition into their expansion phase. Markets, language, culture and regulatory regimes still vary considerably from country to country. This structural disadvantage is part of what government leaders are concerned about.

The most important implication of all these discussions is that the internet is entering a phase where it will be much more of a social, cultural and political force. Large and fundamentally broken systems in healthcare, education and government will face an increasingly potent set of challenges to their institutional knowledge and methods.

It will be more fun to watch the next generation of “hackers” and innovators on the internet who will be experts in culture, art, music, food, and other liberal arts. Although the internet was the big story of the event we expect mobile to accentuate and accelerate many of the things discussed at this conference. As long as the internet stays mostly unimpeded it will drive globalization of content, services and economics for the next several decades.

Governments and established companies will do all that they can to try and control and shape this wave of innovation and growth so that it doesn’t wash them away. It’s possible that we will see some very dumb and detrimental regulations put in place to help incumbent and local companies succeed. It’s just too early to know what the governments are going to come up with.

There’s a paradox in the fact that large incumbent organizations are often very international and, in the words of Steve Schwarzman from Blackstone Group, “to be important is to be international and to be international is to be on the internet.” Yet these companies are often unable to exploit their position effectively, which is why they have turned to government regulators as a way to help.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.