Privacy Will Burst Bubble 2.0

February 25, 2011

Expect privacy concerns to be the eventual catalyst that ultimately bursts the Internet investment Bubble 2.0. It is rare when there is a profound disconnect and suspension of reality between industry behavior/investment expectations and customer wants, needs and expectations, but that is precisely what is at work in Bubble 2.0.

  • Almost by definition, investment bubbles are unsustainable; what goes up must come down, it is only a matter of how and when — not if.
  • Simply what fuels Bubble 2.0 is the patently false core assumption that the current unfettered, widespread, and largely clandestine data mining of individuals private information in order to target specific individuals with personalized online advertising:
    • Is aligned with real user interests;
    • Is a forthright business practice consumers are aware of and have meaningfully consented to;
    • Will not be legally constrained in the future; and
    • Will become the accepted norm — meaning that the populace and governments will adapt to the wishes and desires of the online-ad- industry and not the other way around.
  • In a word, is online tracking, profiling and data mining a consumer-driven model? — or a consumer-dragged model?

This is deja vu for me. I’ve seen this movie before when I had a front row seat as the original dotcom Bubble 1.0 wiped away $4 trillion in market valuation in a few weeks.

  • In 2001 in my previous career, I was the first investment analyst to warn investors that Internet traffic was in fact growing sixteen times slower than the market assumed, protecting investors by debunking the bogus dotcom hyper-growth story months before the dotcom bubble burst in 2002.
  • Back then everybody assumed there were no real limits or constraints on the growth potential for Internet advertising dotcoms — sound familiar?

Let’s drill down on the key assumptions of my thesis to test if it is valid.

1. Is there a Bubble 2.0?

There is wide recognition we are experiencing Internet investment Bubble 2.0 given that:

  • Private markets are valuing private Internet startups at post-successful-IPO-like valuations like Groupon at $6-10b, Twitter around $10B, and Facebook at $50b; and
  • Venture money is flooding the space per the WSJ’s outstanding Scott Thurm piece: “Online Trackers Rake in Funding,” which spotlights that “since 2007, venture firms have invested $4.7 billion in 356 online-ad firms.”

2. Is the bubble predicated on data mining?

Per Jafco Ventures’ Nick Sturiale who described the online-ad game: “They’re trying to find better slices of data on individuals… Advertisers want to buy individuals. They don’t want to buy [web] pages.” [bold added]

  • The holy grail here that has everybody so excited in the online-ad industry is that they understand that the more private details they can secretly learn about an individual user, they have a vastly higher chance of influencing them to do what they want them to do.
  • That’s why “advertisers want to buy individuals,” they want to own and control that individual from a marketing standpoint.

3. Do consumers want, need, or expect privacy?

They certainly do! All the recent national polling (see here, here, here, & here) show very consistent results that are in stark contrast to the online-ad industry’s representations, model and practices, i.e.

  • Consumers want privacy online, think they have it, and believe they should be the ones that really control it; and
  • Consumers don’t like online advertising and are not clamoring for the purported “benefits” on personalized advertising.

Moreover, respect for privacy and privacy protections are bipartisan political values; for example the Precursor-Zogby poll found 3/4 of conservatives and 4/5 of independents and liberals want a Do Not Track privacy option like Do Not Call.

Online-ad industry — you have a problem. A big problem. The whole predicate on which online-ad growth is based, is at odds with what consumers need, want and expect.

  • The industry and investors are willfully suspending awareness and belief, assuming that what they have done largely secretly and without meaningful consent, they will be able to continue to do the same way when consumers and government come to realize what is being done massively, pervasively, and invasively against their interests, needs, wants and expectations.
  • This is an obvious collision we are witnessing; the only questions in my mind are when the collision occurs and what entity damages the other more when they collide.

In addition, you know the online-ad industry has a serious problem with Government on privacy when their main argument against privacy legislation or Do Not Track, is that it would put the industry out of business.

  • The obvious problem with this tactic is that the industry is essentially admitting it is currently seriously violating consumers’ expectations of privacy.
  • Moreover, that tacit confession is also like throwing themselves at the mercy of Congress by claiming the online-ad companies are the real victims of their industry’s victimization of consumers’ privacy.

In sum, privacy will burst Bubble 2.0. Investment valuations in online-ad companies are based on the fantasy of unfettered future growth in online advertising.

  • The online-ad industry and its investors imagine themselves as an irresistible force, but they are deluding themselves about the immovable object they are careening towards, the clear needs, wants, expectations, and will of the vast majority of American citizens.

Let me be clear, I am not saying the bubble will be burst by privacy concerns anytime soon, only that they eventually will.

  • From an investment perspective, the original private investors in online advertising are encouraging and pumping up a frothy market in private shares of online ad companies so they can cash out and take money off the table because they know this story and bubble is unsustainable.
    • They are taking advantage of the well-known “greater fool theory.”
  • Unfortunately it will probably take some of these Bubble 2.0 private companies to go public in an IPO in order to drive these sky-high valuations from the stratosphere into deep space.
  • Sadly it could be public shareholders who eventually will be left burned when the online-ad fantasy growth thesis eventually falls to earth; that’s the way these things too often play out.

Lastly, as privacy rights are to property rights, a couple of the current online ad companies enjoying great success based on abusing people’s privacy without their meaningful consent, eventually could turn out to be the privacy version of high-flying Napster or Grokster, if they continue to ignore the privacy needs, wants and expectations of consumers.


The abrupt change, that Google’s CEO Eric Schmidt will no longer be accountable to shareholders on Google’s earnings calls, should prompt investors to ask why?

  • Google claimed that they wanted to put more focus on Google’s strong financials, but they did not disclose any more than Google’s usual barest of minimum of information to investors.
  • The most obvious reason for this abrupt change is the literal explosion of real franchise liabilities and risk overhangs to Google that reared their ugly heads this past quarter.
    • Had CEO Schmidt been available to answer investor questions, Google’s exploding liabilities could have dominated the Q&A and the investment narrative coming out of the earnings call.

What has changed, and what Google has been not been open about, is the very serious ripening of three different types of going-forward franchise risks (antitrust, privacy/security, and intellectual property) that cumulatively herald a de facto change in Google eras: from the roaring “Growth Decade” of 2000-2009, to the more unpredictable “Liability Decade” of 2010- 2019.

  • Long-postponed simmering problems are now beginning to boil over and threaten to potentially burn Google shareholders periodically going forward. The result for:
    • Opportunistic Google investors is recurring and intensifying headline risk overhang; and
    • Longer-term Google investors is the increasing need to discount for the growing and uncertain franchise liabililities/risks emerging from multiple directions.

What franchise liabilities now overhang Google?

I. Antitrust

The speed, breadth and depth of Google’s growing antitrust liability is unprecedented. And where there is this much smoke there’s fire.

  • FTC: The FTC is preparing to litigate to block Google’s acquisition of AdMob arguing that Google, the #2 mobile app advertiser with 25% share is attempting to monopolize over 70% of the relevant market by buying #1 Admob, which has 50% share.
    • If Google chooses to fight the U.S. Government in court it would put Google’s antitrust liabilities on the front page and also cause the FTC, DOJ and the EU to circle Government wagons for a broader antitrust war with Google.
    • If Google walks away, it suggests to investors that Google has acquiesced to the notion that Google has hit an antitrust wall and that Google may no longer rely on acquisitions as a source for: preemptive competitive defense against first-movers, growth or innovation.
    • The FTC appears to be making good on its promise in approving Google-DoubleClick 4-1:
      • We want to be clear, however, that we will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the Commission intends to act quickly.”
    • On a separate but related antitrust matter, the FTC has forced Google CEO Eric Schmidt to resign from Apple’s board and Google Director John Doerr to resign from Amazon’s board.
  • DOJ: According to Sandy Litvack, the DOJ’s special counsel on the Google-Yahoo ad agreement, the DOJ was literally hours away from filing a Sherman Section 1 & 2 monopolization case against Google if it did not stop attempting to collude with Yahoo to corner the search advertising and search advertising syndication markets.
    • The DOJ has now twice opposed (here and here) Google’s proposed book settlement as a violation of three different areas of law: antitrust, copyright, and class action. The most likely outcomes are Google agrees to a court decree with permanent DOJ supervsion of the settlement’s market mechanism in order to gain court approval, or the settlement is disapproved and DOJ eventually sues in a broader Google monopolization case.
    • Evidence of the building clamor in D.C. for a DOJ Section 1 & 2 monopolization case against Google is a Consumer Watchdog Google antitrust panel hosted by John Simpson at the National Press Club (at 10:00 EST 4-21-10.) The panel features:
      • Gary Reback of the Open Book Alliance and Microsoft antitrust fame;
      • Simon Buckingham, a mobile advertising entrepreneur who believes Google-AdMob is anti-competitive; and
      • Joseph Bial, the Cadwalader, Wickersham and Taft counsel representing TradeComet and MyTriggers in two different private antitrust lawsuits against Google.
  • EU: What may be the most dangerous antitrust threat to Google may come from the recently announced EU preliminary inquiry into Google. It is likely to bloom into a broader formal investigation of Google because the EU has a much lower legal and policy threshold to bring an antitrust action than the U.S, and because the EU has never been shy about using its power to bring a dominant American firm to heel.
    • Three companies, the UK’s Foundem, France’s Ejustice.FR, and Germany’s Ciao, have all alleged that Google punishes niche search competitors, by discriminating against them in Google’s search results and anti-competitively favoring Google-owned content with top search rankings.
    • Foundem’s filing to the FCC is the best source of evidence of Google’s anti-competitive behavior and it is compelling.

II. Privacy/Security

Now that it is public that Google’s vociferous indignance over China’s censorship of its search results was clever PR misdirection from the real story, that Google’s main password system was hacked and breached, Google now has an incalculable liability to all its users and business, government, and foreign government customers whose personal information and secrets have been made available to who knows who — and those users who have had no ability to protect themselves for the last few months since Google became aware of the breach.

As John Markoff of the New York Times reported:

  • “…the losses included one of Google’s crown jewels, a password system that controls access by millions of users worldwide to almost all of the company’s Web services, including e-mail and business applications.”

Google could be liable for the largest identity theft in history, and/or one of the largest corporate breaches ever. And Google does not believe it material for the CEO to disclose to shareholders in the quarterly call that covers it? This is precisely the type of new material adverse information that SEC rules mandate that shareholders be informed of so they can protect themselves. This extended lack of disclosure to people and businesses at risk is also an invitation for class action lawsuits by shareholders and users.

  • Google has particularly large liability here to its users because, as I have written extensively in my “security is Google’s Achilles heelresearch series, security has not been, and is still not a high public corporate and engineering priority for Google. Moreover, Google’s “publicacy” business model means that Google has collected much more private information on users than most any of them appreciate. (See my House testimony on Google privacy weaknesses.)
    • Simply, Google has huge potential liability now because of Google’s longstanding low priority for security and Google’s anti-privacy “publicacy” business model characterized by CEO Schmidt’s cavalier statement on CNBC: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Google’s CEO also ducked disclosing the new massive liability and threat to Google’s international business, which represents 53% of Google’s revenues. The Washington Post lead story that Google was working with the National Security Agency (NSA) on the China cyaber-security issue will make foreign governments and foreigners much less comfortable using Google’s products and services going forward.

  • The liability for Google’s pervasive invasion of privacy norms around the world coupled with the news that Google is working with America’s top spy agency, means that nations around the world will be cracking down on Google more, or blocking their products, services and monetization more.
  • This backlash is not hypothetical:
    • Google blogged today that: “Google products — from search and Blogger to YouTube and Google Docs — have been blocked in 25 of the 100 countries where we offer our services.”
    • Today a broad group of the data protection heads from many major countries have written an open letter to Google and other online companies asking that Google better safeguard private information. The countries included, Canada, France, Israel, Netherlands, Spain, Germany, Italy, Ireland, New Zealand, and the UK.
  • Google’s privacy-security liabilty is real, material and growing/spreading fast. It is material and should be discussed in an open investor forum so shareholders can hear from Google the extent of Google’s liabilities. It will be interesting to what extent Google discloses these new exploding liabilities and risks to the SEC in their quarterly filings. (It should be of no surprise that the forensic accounting firm Audit Integrity characterizes Google’s accounting and governance as “very aggressive” and ranked in the top 3% for most risk.)

All these new privacy-security risks/liabilities are on top of:

  • The disastrous launch and consumer privacy breach of Google Buzz that:
  • The FTC’s potential mandate of new consumer privacy safeguards for behavioral advertising that could hem in Google’s very aggressive tracking of most all Internet users web behavior. (See Google’s reply to the FTC urging they go slow.)
  • The increasing potential for bipartisan comprehensive privacy legislation in the House that for the first time would give consumers more control over what private information Google could collect on them without their meaningful consent.

III. Intellectual Property

Viacom: Now that key documents have been made public in the Viacom vs. Google-YouTube copyright infringement trial, it is clear that Google has employed a deliberate business model/strategy to infringe copyrights to dominate traffic share.

  • Anyone that reads the key Google documents in the case will come away with the concern that Google has deep legal, monetary and brand liabilities for serially infringing copyright to grow its business to dominance. Read the quote summary first here, then review the copious evidence/history in the 86 page Viacom Statement of Facts here, then review Viacom’s Summary Judgement memo of law here, and finally see the several new Google documents here.
  • Google’s copyright infringement liablities will not end with Viacom. If Viacom prevails, which is likely, it will embolden all the other IP owners to redouble their efforts to gain restitution and a changed business model from Google. Those include, but are not limited to, news wires, newspapers, publishers, authors, songrwriters, studios, programmers, photographers, etc. (See Googleopoly IV at

Apple’s Trade Secrets Suit against HTC (Google):

Apple’s patent infringement suit against Google Nexus One manufacturer HTC, puts Google CEO Eric Schmidt, a former long time Apple Director, in potentially very hot water with Government officials. The suit looks like a very clever “carom shot” at Google CEO Schmidt as it allows Apple to legitimately discover CEO Schmidt’s emails involving any communication that Schmidt had with his mobile team concerning the development of Google’s Android operating system and Nexus One handset, especially after Schmidt returned from Apple board meetings. It is apparent that Apple believes that Google stole its intellectual property and trade secrets involving the iPhone and iPad, especially the multi-finger screen pinch control patent.

  • This is a serious liability for Google’s CEO. Mr. Schmidt had a fiduciary duty to Apple shareholders not to harm them by lifting trade secrets for Google’s and Mr. Schmidt’s financial benefit.
  • It also creates a strategic pincer situation/problem concerning Mr. Schmidt’s email practices. The Viacom case unearthed that Mr. Schmidt has a Quatrone-esque, “clean-up-those-emails” personal practice of deleting all his personal emails. This is particularly ironic and ineffective with a company that copies and stores most everything and deletes hardly nothing that it collects on people.
  • It is also a big red flag for any investigator, because it strongly suggests that one knows they have something to hide, encouraging the investigators to examine everyone else’s emails that communicated with Mr. Schmidt at those times. At a minimum, Mr. Schmidt’s email deletion practices preventing any discovery creates a serious perception problem for Google as it goes before multiple court and policy fora.

In sum, the litany of exploding major liabilities to Google’s business model, growth and value — from the slew of real and worsening antitrust, privacy-security, and intellectual property problems — are not going away.

  • These liabilities will increasingly overhang Google’s stock and brand, especially if Google continues to “turtle” and avoid public accountability to Google shareholders.
  • Uncertainty and distrust are bad company attributes to allow to fester and grow.
  • This past quarter certainly has been a fast start to “Google’s Liability Decade.”


For more information on these issues, see PrecursorBlog’s sister sites: and




April 6, 2010  

Contact: Scott Cleland 703-217-2407 



NetCompetition Comments on Impact of D.C. Circuit Vacating FCC Comcast Order


“If the FCC believes it needs Internet authority it should seek it from Congress, not just assert it.”  


WASHINGTON – Chairman Scott Cleland offered the following insights on the implications of the D.C. Circuit Court of Appeals vacating the FCC Comcast Order on network management.


“In light of today’s D.C. Circuit decision that bounds the FCC’s Internet authority to only where Congress has granted it express authority, the FCC should strongly resist clarion calls by FreePress and Public Knowledge for the FCC to effectively end-run the D.C. Circuit Court and Congress by reclassifying broadband as a regulated telephone service.” 


“FCC Title II reclassification of broadband would be the most convoluted, unworkable, Rube Goldberg-ian, action imaginable for the FCC to take when the simple, right, and productive thing to do is just ask Congress for the authority the FCC believes it needs.”


“The surest way for the FCC to ensure that companies dutifully respect the FCC’s authority is for the FCC to dutifully respect the law, Congress and the U.S. Constitution.” is a pro-competition e-forum representing broadband interests. See


Don’t miss Digital Society’s Bret Swanson’s outstanding op-ed in the Huffington Post that spotlights the huge disconnect between the White House’s top priority of creating jobs, and the FCC’s Open Internet regulation plans that are obviously big net job killers.

Common sense dictates that heavily regulating a healthy and economic broadband sector with unnecessary and intrusive restrictions and red tape will destroy profits, investment and tens of thousands of good-paying jobs.


In one of the best, most strongly-worded and serious letters to the FCC that I have read in my 18 years following FCC issues closely, the united broadband industry’s letter to FCC Chairman Genachowski is simply a must-read; it explains why the FCC’s serious interest in reclassifying unregulated broadband information services as regulated telecom services is among the worst and most destructive ideas the FCC has ever seriously considered.

The letter characterized Title II reclassification as:

  • “a radical new direction,”
  • “regulating the Internet,”
  • “a profound mistake,”
  • “betraying decades of bipartisan support for keeping the Internet unregulated,”
  • “misguided regulatory overreach,” and a
  • “Pandora’s Box.”

A particularly strong summary statement was:

  • It is difficult to imagine a proposal more at odds with the Commission’s historical committment to keeping the Internet unregulated, to our national prospects for economic recovery, and to your own committment to “common sense” solutions and to “private enterprise, the indispensible engine of economic growth.”

The letter also copiously documents why the FCC has no basis, evidentiary record or authority to reclassify broadband as Title II common carriers and explains how such a reclassification would endanger the entire Internet ecosystem with harm and uncertainty where “no issue would ever be settled.”

In a nutshell, the letter strongly communicates that rather than a wise “do no harm” policy in a fragile economy dependent on the broadband sector for stability and growth, the FCC is nonsensically considering a policy which would do the exact opposite — do the most harm to the most people in the most places in the most ways.