The term Branch Plant Economy is not a new one, and gained specific relevance for Canada in the early 20th Century, when US Companies began to build factories in Canada to circumvent pricey tariffs on importing their wares to the Canadian market. One example where this really took hold is the automobile manufacturing industry, centered in Ontario, that has churned out Chevys and Chryslers, among other makes, for both Canadian and foreign markets. While NAFTA destroyed the tariffs that caused these plants to be set up in the first place, Big Auto successfully lobbied the Ontario and Federal governments for subsidies and tax credits that helped their north-of-the-border plants remain cost-effective, and in some ways cheaper to operate, than their US counterparts. That lobbying strategy has been highly successful, and while it was overshadowed by the US auto industry bailout, the Ontario and Federal Government bailout of Canada’s auto industry was $3.3Billion, nearly 20% of the proposed US bailout package in 1998.

The Canadian auto industry typifies the modern idea of the branch plant economy. The term really grew legs in the 1960s and 1970s during a rise in Canadian economic nationalism, and fears that our country was becoming a U.S. Protectorate as a cause célébre during Trudeaumania. Most of the rhetoric around this idea is centred on the not-so-great visage of a nation whose factories (literal and metaphorical) and workforce are wholly owned and commanded by foreign companies, with the profits and fruits of their labour remaining largely overseas. For economists, this is tantamount to the surrender of the nation’s sovereignty. If your paycheque in Canadian dollars is signed by a US-based company you are likely keenly aware how much command and control of your company’s destiny resides this side of the border.

In a white paper from the Canadian Advanced Technology Alliance, the organization argues that our country’s philosophy on innovation is all wrong. On that point I couldn’t agree more. The CATA argues that while we have many programs in place to fund R&D, whether it’s the soon-to-be-reformed SR&ED or the NRC’s IRAP program, we have none in place which explicitly helps our countrymen reap the benefits of this R&D through commercialization. The white paper suggests that the effect of this more than $7Bn/year in R&D subsidy spending is for taxpayers’ money to act as a stimulant to profitability outside of Canada’s borders.

Why? Because funding the research without funding commercialization leads to a familiar story for those of us in the technology scene: the flip. Canada’s venture financing having been aenemic as it has during the past ten years, Canadian companies chasing great ideas have had to bootstrap, scrape, and starve their way forward — typically leading early investors and founders to the mutual desire to sell the business early.

Many of us, myself included, bemoan that while some great products and technologies have emerged from Canada (such as Flickr or BumpTop or Radian6) we typically fail to commercialize these in scale until they are purchased by a US entity. Certainly these companies’ (mostly Canadian) investors are happy — since Flickr went to Yahoo!, BumpTop to Google, and Radian6 to Salesforce at sizeable bumps in valuation — but the profits generated from these innovations will be realized by a US entity, and in most cases the workforces don’t even remain in Canada.

A pessimist’s way to evaluate those three deals, presuming that they all claimed SR&ED / IRAP / CNMF money at some point in their evolution, is as the Canadian taxpayers in effect assuming R&D risk to the benefit of US companies and, arguably, a handful of investors. In other words, much like the film and video game industries, not to mention the automobile manufacturing business, Canada’s tech industry functions as a Branch Plant Economy at worst, or as the equivalent of a Junior A hockey league at best.

The CATA advocates that the SR&ED program be reformed in a few trivial ways and, using the savings, that the subsidy be expanded to support commercialization activities associated with innovation. This is an interesting idea and worth the read. On the other hand, having read the tea leaves I believe that the government’s position is that if it’s supporting the R&D component, the investment community is incentivized to fuel commercialization.

However, this is clearly not how things are going down in practise. Next to RIM, or previously Nortel, Canada can boast very few large-scale domestic tech industry successes. Anecdotally there are as many examples of global companies, such as Lululemon, which were built in Canada without any form of subsidy as there have been tech giants facilitated by giant R&D grants. Across the border programs like SR&ED and IRAP are unheard of, though the US Government has subsidized a great many technologies via DARPA and NASA.

And startup veterans such as myself frequently argue that Canada’s SR&ED, IRAP, and CNMF funding strategies represent a rare advantage over founding and operating a technology company in Silicon Valley — so long as they are well-run programs and do not overburden startups with oversight and administrivia.

As for our neighbours to the south, it may simply be that proximity to their more free-flowing investment economy and greater density of large tech-oriented businesses (not to mention a market 10x the size) is too much of a temptation to resist for fledgling Canadian tech ventures. Perhaps our nationalistic pride is a whimsical relic of the past, and we should instead just stop worrying and learn to love the bomb.

Does the CATA solution of “subsidizing” the commercialization, and not just the R&D component, of new technologies carry water for Canadian tech startups?  Maybe. Does it open up SR&ED to even greater abuse by recipients who do not require it? Probably. Is there anything we can do to mitigate the prevailing trend of Canada’s tech industry as a Branch Plant Economy? You tell me.

During this time the practise of Policy by Press Release rose to prominence as ill-founded concepts like the “Bomber Gap“, “Missile Gap“, and “Submarine Gap” were leveraged to justify a massive expansion in military spending.  U.S. Doctrine from the end of the Vietnam era to the collapse of the Soviet Union in 1991 was to essentially outspend the Soviets while engaging them in proxy guerilla wars in weak communist ally states and financing developing countries through the World Bank.  It is thought by many (mostly Pro-Reagan) historians that it was indeed the US Military-Industrial Complex that won the Cold War and bankrupted the Soviet Union by simply outspending them.

Nowadays, we live under the spectre of far more benign [perceived] enemies.  Most of us in the technology industry fear Microsoft’s Goliath and align with Google’s David more meaningfully than any political discourse, though we only rarely cower under our desks in fear of a Vodka-soaked phone call between Steve Ballmer and Eric Schmidt (which I am positive has happened).

Google only stumbled its way into Microsoft’s crosshairs nine years ago, whereas Microsoft’s founder Bill Gates has long sought to get in on the action on the Internet and the Web in particular.  The two are presently in a pitched battle on a number of fronts, including Search (Microsoft recently launched Bing), Mobile (Google’s Android is a pattern-cut copy of MSFT’s Windows Mobile strategy), The Browser (Chrome versus the dreaded IE), Email (Google is making inroads into institutional and corporate email services), and Productivity Applications (Microsoft Office as an app and a hosted service versus a number of nascent Google Apps).

Most recently, Google responded to the Bing launch by going after MSFT’s supposed crown jewels with an announcement about Chrome OS.  Microsoft then parried with its own vapourware announcement about Web Office.  Engaging Microsoft on another front on an increasingly expansive battlefield might seem like the smart thing to do, but as Kevin wrote, Spite is not a business strategy. This is akin to pissing in your neighbour’s yard just because he took a whiz in yours.

The Soviets, like our more modern evil empire whose Kremlin sleeps in the dales just outside Seattle, were more cagey than we might have thought in those days.  They didn’t match the US and NATO move-for-move in force expansion, and rather than counter Reagan’s famous SDI initiative with a Star Wars system of its own, they simply rejiggered their ICBMs to penetrate airspace using different methods and geared fighters up to be able to shoot down satellites from within the mundane confines of our atmosphere.

No … the Soviets didn’t join in the arms race — instead they were quite content to watch their enemy blow its own brains out, expanding US debt in leaps and bounds (US debt doubled under Reagan in a single year, mostly on the back of military spending) while their own programs pursued less lofty goals, financing battlefield weaponry and troops on the ground in Afghanistan and elsewhere.

We didn’t know it at the time, thanks to a lot of propaganda from our own leaders, but the Commies were actually the underdog.  And like any underdog, the Soviets capitalized on American fear and loathing to nurture an inflated perception of its own militarism and level of armament, hoping that the US would collapse under its own weight trying to keep up — and it nearly worked.  Some would argue that it has — and that our current and previous economic hiccups, heaped atop rampant social problems in the US, are the reckoning for decades of rampant Cold War spending — and may not be remedied anytime soon.

Google is apparently trying to match Microsoft on every front in the technology industry — but it too is an underdog.  It’s attempting to do so with far fewer employees (Google has 20K employees – Microsoft has 90K), far fewer financial resources, and no apparent profit model associated with many of these businesses.  Microsoft has also had the benefit of nearly 30 years — all supported by revenue growth in the rising tide of the PC revolution — to expand its business aspirations from its core business of supplying Operating Systems.  Furthermore I would argue that the core of Microsoft is no longer Windows, and has instead long been its much more expensive product offering, Office.

If Google is attempting to parlay its underdog status into some sort of puffer fish role, in forcing Microsoft to compete on many more fronts than search, then the insincerity of these efforts is pretty transparent to most of us.  And it will fail.  I use MS Word and Apple’s Pages, but would not even consider using Google Docs.  As a web app, it delivers a far poorer user experience at the point of my absolute maximum requirement for efficiency and dexterity.  Google’s Chrome browser isn’t much better than Firefox, and as I’ve pointed out frequently, Android is a duplicate of Microsoft’s own floundering efforts in the mobile space with little improvement.

Microsoft is likely snickering (I know I am) as it watches Google’s many flailing attempts to strike it in different arenas.  Particularly so in Operating Systems.  Slapping a GUI onto Linux, particularly when said GUI developer is Google — a company apparently bereft of UX designers — is a cynical, me-too play that will alienate the Linux Community and pale in comparison to OSX.

According to Yahoo Finance! on MSFT and GOOG, Microsoft has 3x the revenue and 20% more cash reserves than Google.  That’s an amiable war chest and revenue stream that means it’s unlikely that Google can cause Microsoft to spend itself into oblivion.  Google, on the other hand, is moving in too many areas and executing poorly in most of them.

If Google truly wants to hurt Microsoft it needs to double-down on a sincere effort to unseat Microsoft Office and Exchange and thereby dominate the ways in which we communicate at work.   Otherwise, much as the Soviet Union really collapsed due to radical downward shifts in the price of oil and lack of access to credit, Google may suffer from a decline in CPC advertising and all of the air will spew out from its puffer fish act.

In May Day parades, the Soviets would invite Western leaders to the review stand, as bombers and missile launchers would run circles past the parade ground.  These Westerners would return to their peers wide-eyed with parables of impressive arrays of weaponry and massively inflated estimates of actual force sizes.  Unlike during the real Cold War, Google’s foe is not self-invested in grandiose estimates of its enemy’s fortitude and the rest of us are quite aware that in many cases, such as the ill-fated Orkut and other flailing products, Google’s emperor has no clothes.

And unlike our former evil empire’s round-faced leader, Ballmer is under no pressure for Perestroika.

Here’s a question:  Where do you host your email?

Gersham and I are rather well-known for a business we started in 2002 called Geekmail.  By 2003, we were on the cutting-edge of IMAP-based email hosting and ran thousands of mail accounts on a cluster of 9 servers hosted at Peer1 Network in Vancouver.  We pushed the envelope in anti-spam technologies: combining advanced whitelisting techniques with behavioural, bayesian and heuristic anti-spam technologies and using our own common-sense approaches to deliver very high anti-spam effectiveness with a too-low-to-track false positive rate.

What we achieved, in essence, was a sort of email nirvana.  In those days, giving someone 1GB to store their email on your server was unheard of… but we did it.  Hosting catch-all email accounts was a novel concept … but we did it.  Hosting custom email domains was tough stuff too, even, but we did it.  We also had a hell of a launch party. 

A couple of things conspired to force us to close Geekmail… a situation which I will always regret:  1)  We were taken to court by a fool fellow whom we’d (our mistake) taken on as a business partner, and whose sole objective was to kill the company; and 2)  Google launched Gmail.  The latter was far more significant since it was A)  Free and B)  From the web’s hottest property.

Now, this all is the long way of explaining that I am perhaps something of an email geek.  I’ve used one form of computer-based electronic mail or another since 1985.  I co-founded Geekmail, of course, and also did a considerable amount of strategic work for FrontBridge — the world’s #2 message management service provider before its acquisition by Microsoft in 2005.  BuzMe and RingCentral, two Unified Communications services I helped bring to market, were among the first to deliver voicemail to their users via email (believe me, a novel concept in 1999/2000).

Be that as it may, it rather surprises me that even today GMail (which has been in Beta for 5 years) still pales in a number of key features (including anti-spam) to the technologies and quality of services we provided with Geekmail.  While we didn’t have nearly the scaling issues that Gmail has to deal with (except for in our very early days) we never experienced the kind of multi-hour outages that Gmail regularly hands to its users.  We also focused the users’ experience on Secure IMAP, not a web-based interface (though we had one of those too) and offered lots and lots of storage to go with it.  And in our later version of Geekmail, the anti-spam functions were tweakable: if you didn’t like the default settings, you could turn on and off different techniques that were used to combat spam on your inbox.

When we were forced to let Geekmail die a rapid death, we scrambled around to find a company who could take our subscribers and whose service closely mirrored our own.  The short answer was:  there weren’t any.

It wasn’t until a couple of years later that I began talking with John Capo; founder and operator of Tuffmail.  In addition to being a pretty nice guy, John runs a service that is the closest analog to Geekmail that I can find anywhere.  In my view this ranks Tuffmail as the very best email service provider for email geeks anywhere.  And so it has been for about 4 years that I have blissfully run my personal email address at ianbell.com on this service — and am now at a point where it is so critical to how I do my daily business and live my life that I would be miserable without it.

As these screen shots should reveal, Tuffmail is literally like having your own mail server cluster up in the sky somewhere.  By that I mean practically every aspect of its functioning is customizable to your whims and needs.  I can change how it responds to spam, I can block certain servers from sending me mail, I can blacklist any email sender from connecting to the server, and so much more.  I can also have a catch-all, which many email hosts hate to do because it creates spam honeypots, but which has become a critical means for managing my accounts online.

I don’t do any filtering or routing of email at the client level.  This would be impossible, since I access email from four different devices on a day-to-day basis.  Instead, I have input a complex set of rules into Tuffmail’s extremely robust email rules interface (sorry I can’t show you this — classified!) and all incoming mail is stored in the appropriate folder when I check it from my MacBook Pro, my iPhone, my Mac Pro, or whatever.  Microsoft Exchange, Gmail, yahOo! Mail, your ISP’s Mail Server — they all wither by comparison because they don’t allow this sort of granularity — and because they don’t fully embrace standards-based IMAP email messaging.

I keep all my mail, as well, nearly 5GB at the moment.  So if you said something in 2005, it’s pretty easy for me to find that message in my email clients (this could be the reason why mail.app sucks up most of the free memory on my MacBook Pro) and regurgitate it.  This is extremely handy and it reaffirms email’s rightful place at the fulcrum of my life (sad but true).  This is only possible because I have an enlightened email hosting provider who A) embraces large mailboxes and B) embraces large message sizes, which means I can send around presentations and big graphics files without fear of them bouncing back (unless the receiver’s mail server is a dunce, of course).

I don’t ever receive spam in my InBox anymore, because I have the settings and filters perfectly tweaked to my needs on Tuffmail.  But blocking spam is easy these days.  The real problem is blocking it without also blocking legitimate messages — this is much much harder.  And this is where GMail, which uses the Postini service (which is not directly integrated to GMail), tends to fall over.

Have you ever heard the excuse “Oh, I sent you the email, but maybe it got caught in your spam filter….” before?  Sure you have.  That doesn’t happen to me.  The benefit of the Realtime Reports (screen shot above) is that I can go in to the server logs  and actually see when a message flew through or was rejected by the Tuffmail server hierarchy.  I just view the page, do a Firefox search for the person’s email address, and if they sent a message it’ll be there.  I’ve caught anyone who’s ever made that excuse to me in a white lie… not that I hold it against them.  🙂

There is one downside to all of this, of course… with Tuffmail, I have created a monster.  I have so many settings and tweaks, and I have the spam filters so well-trained, that the pain of moving to another provider would be excruciating.  Most likely, I never will.

I don’t endorse products very frequently (and I never do it for any sort of remuneration) — but Tuffmail is one of those rare birds that truly deserves the kudos.  Email hosting is a tough business and in many ways I’m glad I’m no longer in it.  On the other hand, when I use Tuffmail I get pangs of jealousy and nostalgia.  Ah, what could have been!

Of course, Microsoft can afford to write these cheques practically ad infinitum, but if your tools are so lacking in perceived utility that you need to bribe people to use them (even if the graft is partially subsidized by affiliate fees), perhaps this is not really the best you could hope for from your marketing team.

You can’t take on Google by trying to buy, or even out-feature, your way into the blank-text-box Search Engine arena. Except for some regional players, like Russia’s Yandex, they’ve won and will not soon be replaced.

What Ballmer, and lots of other people, are missing is that the Search marketplace as we know it is poised for a change. Much of this change emerges from the fact that Google fundamentally owns the global Search Market, but much of the opportunity extant in this space comes from the fact that the technology behind search, and how people will make use of search engines in the future, will be a whole lot different than what you see when you type in www.google.com today.

…. but, there is light at the end of the tunnel for folks who are on the outside looking in at Google’s substantial (and impossible to dislodge) market share:

For most people, web search is a kludge.

Think about how you use Google today. Think about why you type things into that blank text space beckoning to you on your Firefox browser, or why you surf over to Google.com and enter a few snippets of text into that empty area amidst the sea of clutter-free Google whiteness ten, twenty, or maybe many more times per day.

In some cases, you overheard something being discussed in a coffee shop. Or you saw a billboard ad. Something offline motivated you to head to the blank text box and ask it to do your bidding. That is Google’s fundamental market opportunity and has remained largely unchanged since the first search engines began emerging in 1995.

This is, however, just a fraction of the reasons why many of us head to search engines. Often the reasons are as much motivated by inadequate information at one site as by anything else. An example: You’re reading an article from a wire service like Reuters, which rarely include photos, about a car or a submarine or a mountain. You’d like to see what that looks like, so off to Google you go. Or you’re looking at a new LCD on eBay, but the seller hasn’t listed the number and type of inputs that come with it; so off to Google you go to try and find the specifications.

In short, most often we go to Google to search for things because our browsers aren’t good at building pathways between like objects on the web. These types of Searches are what I call context-driven. You shouldn’t need to do this. You shouldn’t need to interrupt your surfing to drop off to a third-party site in order to add flavour to the web objects which have already garnered your interest.

What if you could press a button and instantly be delivered relevant information that is contextual to that which you are/were looking at? What if sites displaying articles from wire services (notable for their sparseness) were able to draw in information – in realtime – which added relevant photos, videos, or related stories?

Some of this is already happening, albeit rather jerkily. One of the leaders which started doing this some time ago was Sphere, which was recently acquired by AOL. It took them some time to draw the same conclusions as I have, and they had a difficult time monetizing these services. But on a great enough scale the same technologies which make relevant content possible also make relevant advertising possible. And while click-thrus will be fewer in quantity they can be greater in quality and therefore infinitely more valuable, thanks to much more accurate targeting.

Being accurate in driving these sorts of searches is hard. Whereas Google relies on its users to sift through its top 30 or so recommendations to find the most relevant information, contextual search engines need to be able to do that with high accuracy on the first few matches with little to no meatware — sorry, Mahalo. Many of the current buzzwordy trends such as the Semantic Web initiatives, Social Search, the shift from RSS to Atom, and API-accessible semantic processing are key enablers to make this easier, but there’s still a considerable amount of R&D necessary to beat Google’s current level of accuracy in this regard.

As a result, you need a long lead to get there, and few of the companies dabbling in the Vertical Search space have raised enough capital or have investors who have committed to developing these opportunities. But in the long run, this will augment Web Search and replace much of the traffic that is today driven by Google’s simple, primitive, empty text box.

What’s clear is that Microsoft’s desperate attempts to lure users to its essentially equivalent service to Google’s can only cost its shareholders. A new paradigm is necessary and, fortunately, the opportunity is ripe for the picking, right in front of us all.

This is a rare opportunity where the solution lies in good, solid R&D and product realization — not in leveraging semi-monopolistic product integration or in brute force advertising spending. Is Microsoft bold enough to understand, and embrace, the fact that Search is shifting? Do they have the product and engineering people to make this happen?

These days, solving the search problem is just one step on a long path to building valuable services that people enjoy and make use of every day. Deep nerds like tackling these issues because they have all the hallmarks of geek chic. They are difficult algorithmically, require massive planning from a scaling perspective, and require constant tweaking. Google was successful at attracting people to its search engine for two reasons: it had a cleaner interface (they hadn’t decided to become a Portal) and it had more accurate results (the other engines had become gamed). I’m sure Google has tons of patents around their search capability however I am too lazy to search for them because sifting through the results separating wheat from chaff would take way too much time.

And that, dear reader, is precisely the point. Google, too, has been gamed — as will every search engine that comes into common use. So what am I on about? Well, Jimmy Wales wants to open-source the search engine… and for the record I think it’s a great idea, and one that threatens GoOgle substantially.

My logic is this: If the value of a search engine is no longer the search engine itself, but instead the application to which it is applied, then why not accept its value as a generic must-have and open-source the thing? We can all benefit from the assumption that the search engine itself will always be gamed by spammers and sploggers and search engine marketers. Once we do that, creating a community that is invested in the efficacy of the search engine (because they’re making money from it) also creates a system by which that community is incentivized to keep the thing working properly as it’s gamed by persistent SEO gremlins. This is far more effectively done by a collective of companies than it is by a bunch of companies tweaking their own engines independently, pursuing near-term, interim, proximate advantages.

Wikia Search is nudging closer to existence, but I think it’s applying the brute-force labour at the wrong end. As Jimmy Wales becomes more and more assertive and aggressive with his crusade to fix search using an army of lemmings using the Wikipedia recipe, which means he’ll use the community at large to determine the merit of matches found by his search engine, he’s extending the Wikipedia model to searching. Users will “vote” matches to the top of the rankings.

interesting notion, but I think he has the right idea but might be missing the mark on execution. As anyone who’s watched Sanjaya on American Idol can attest, user-voting is not always the most expeditious method of ensuring quality. Wikipedia uses a broken-source (have I just coined this term?) publishing model: it achieves one thing very well (aggregating information and content from diverse sources) at the expense of the other (ensuring that information is trustworthy, balanced or factually correct is problematic). Applying this model for Search is therefore solving the easy problem (search engines already aggregate and index things quite well) with the wrong method (envision Wikia Search gaming teams in Bangladesh sweat shops “voting up” rankings for their customers on the engine).

So, right idea — wrong solution. Let’s create an engine that everyone can (and does) use, that everyone can tweak and repair, and that is policed by a foundation which has as its only goal the efficacy of the product. The Deep Thinker Nerds who like to fiddle with these kinds of problems will be attracted naturally to the project, and their incomes could easily be supported by the companies benefiting from the expansion of the technology. Jimmy’s in a position to lead this, to some degree, but he doesn’t evidently understand that the strength of Wikipedia will be the achilles heel of this project. He has claimed the high ground but I fear that he will inevitably fail.

-Ian.

-Ian.

Online Music Broadcasters Sue RIAA 36 minutes ago

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By RON HARRIS, Associated Press Writer

SAN FRANCISCO – An alliance of online music broadcasters sued the recording industry in federal court Wednesday, alleging major record labels have unlawfully inflated webcasting royalty rates to keep independent operators out of the market.

Webcaster Alliance, an organization claiming some 400 members, filed the suit in U.S. District Court for the Northern District of California, claiming the major labels and the Recording Industry Association of America ( news -web sites ) have maintained a monopoly over their music.

The suit alleges the negotiations for arriving at royalty rates to broadcast songs over the Internet violated federal antitrust laws and seeks an injunction that would prevent the major labels from enforcing their intellectual property rights and collecting royalty payments.

The current royalty rate for broadcasting music over the Internet is 7 cents per performance for each listener accounted for, a rate that has kept small webcasters from entering the market, said Ann Gabriel, president of Webcaster Alliance.

Gabriel’s organization would like to see the per performance royalties eliminated. Instead, a flat percentage of commercial webcaster revenues, somewhere between 3 and 5 percent, would be a fair fee to pay, she said.

The RIAA called the suit a “publicity stunt that has no merit.”

“Record companies and artists have worked earnestly and diligently to negotiate a variety of agreements with a host of new types of radio services, including commercial and noncommercial webcasters,” the RIAA said in a statement.

The major labels have struck a variety of agreements for webcasting that go beyond the behemoths of the industry, such as AOL, and deal with smaller commercial and noncommercial operations.

SoundExchange, the organization that collects payments on behalf of the music industry and artists, recently struck licensing agreements with satellite radio stations, college Internet radio stations and background music services that send tunes to retail stores.

___

– Is AOL getting the right to offer Video and other advanced features, or – Is AOL no longer obligated to work toward allowing competitors to use their network? – Or both?

Frankly I have no problem with AOL innovating on top of their service.. I think it’s good for the industry and this limitation has caused them to lose market (such as it is) to other folks like EyeBallChat. But AOL, MSN, Yahoo et al should be mandated to interoperate as it benefits all parties to have a massive, interoperable network of networks.

The FCC shouldn’t have singled out AOL, but unfortunately AOL were the only guys who were merging at the time and this gave the FCC a lever.

-Ian.

—— http://story.news.yahoo.com/news?tmpl=story&cidX2&ncidX2&e=1&u=/nm/ 20030819/wr_nm/tech_aol_dc

Source: FCC to Lift AOL Instant Messaging Condition 2 hours, 7 minutes ago

NEW YORK (Reuters) – U.S. regulators are expected to allow AOL Time Warner Inc. (NYSE: AOL -news ) to offer advanced instant messaging ( news -web sites ) services without opening its systems to rivals, a source familiar with the matter said on Tuesday.

The Federal Communications Commission ( news -web sites )’s expected decision would lift a condition imposed on the 2001 merger of America Online and Time Warner.

AOL Time Warner, operator of the world’s biggest online service, in April asked the FCC ( news -web sites ) to lift the condition that precludes it from offering advanced services such as live streaming video.

FCC officials were not immediately available for comment.

Another source familiar with the decision said the FCC vote is 3-2 in favor of lifting the condition.

AOL Time Warner has said the instant messaging market had become more competitive.

“We think we made a compelling case,” said company spokeswoman Tricia Primrose. “We hope the FCC decision will be out soon and that we get a favorable result.”

Instant messaging is a popular Internet function that allows individuals or groups to have real-time text discussions, but providers have been developing more advanced services to lure more customers.

Possible offerings include live video and audio while chatting in real time.

AOL has already planned to offer the ability to send recorded video clips and have voice conversations through instant messaging in the next version of its online service, AOL 9.0.

The software will not feature live streaming video at its September launch.

When the FCC approved America Online’s purchase of media conglomerate Time Warner in 2001, the agency barred the new company from offering advanced instant messaging services like live streaming video until they work with other services or AOL Time Warner proves the ban is no longer necessary.

-Ian.

—– http://story.news.yahoo.com/news?tmpl=story&cid04&ncids8&e=6&u=/ washpost/20030724/tc_washpost/a32817_2003jul23 AOL Subscribers Down by 846,000 Thu Jul 24,12:23 AM ET

Add Technology – washingtonpost.com to My Yahoo!

By David A. Vise, Washington Post Staff Writer

America Online’s subscriber base plunged by 846,000 in the second quarter, as hundreds of thousands left for cheaper or faster Internet connections and a similar number were dropped because they had been mistakenly counted in the past, AOL Time Warner Inc. disclosed yesterday.

In addition, new disclosures about a federal investigation into improper accounting at Northern Virginia-based America Online Inc. showed that the division’s legal problems are hurting other parts of the AOL Time Warner media empire.

AOL Time Warner said yesterday that the Securities and Exchange Commission ( news -web sites ) would not allow it to spin off a portion of its cable television unit until it resolves a dispute over how to account for hundreds of millions of dollars in questionable revenue from a complex deal with German media firm Bertelsmann AG ( news -web sites ).

AOL Time Warner also said it may restate previously reported profits and sales linked to the Bertelsmann transaction. And the company indicated that it could not determine how long the SEC and Justice Department ( news -web sites ) investigations into its bookkeeping practices will last.

The company said its profit increased to $1.1 billion (23 cents per share) in the second quarter, from $396 million (9 cents) in the second quarter of 2002. Revenue increased about 6 percent, to $10.8 billion. The profit figure included a number of substantial one-time gains from the settlement of a lawsuit with Microsoft Corp. and the sale of various businesses.

Despite solid results in divisions other than America Online, AOL Time Warner shares fell yesterday by $1.14, or 6.8 percent, to $15.71, as analysts and major investors reacted to the continuing uncertainty caused by the SEC investigation, the threat of increasingly costly shareholder lawsuits, the deterioration in America Online’s performance, and disappointment that the strength of AOL Time Warner’s film, publishing and cable television operations did not prompt the company to substantially increase its financial projections.

“Our goal for the remainder of this year is to keep laying the foundation that will enable us to exit 2003 with more momentum than we had when we entered it, with an eye toward achieving, strong sustainable growth next year and beyond,” said Richard D. Parsons, chairman and chief executive of AOL Time Warner.

AOL, the nation’s biggest Internet service provider, has shed a total of 1.2 million subscribers over the past year and now has 25.3 million subscribers in the United States.

The company said the total includes 2.2 million high-speed subscribers, an increase of 300,000 over the past three months. During that period, AOL launched an enhanced high-speed offering and promoted it with an advertising campaign titled, “AOL for Broadband: Welcome to the World Wide Wow.”

In addition to losing dial-up subscribers faster than expected, AOL is predicting that its online advertising revenue will drop about 40 percent in 2003. The decline is occurring even though the total dollars spent on advertising online is growing nationally, a trend that can be seen in the financial results of some of America Online’s competitors, including search engines Yahoo and Google and many specialized Web sites.

AOL Time Warner had sought to persuade SEC investigators that they were mistakenly challenging the accounting for the two-part Bertelsmann deal. But the company said yesterday that the commission has refused to back down.

“The company and its auditors continue to believe the accounting for those transactions is appropriate, but it is possible that the company may learn additional information as a result of its own review, discussions with the SEC and/or the SEC’s ongoing investigation that would lead [AOL Time Warner] to reconsider its views,” the firm disclosed.

The Bertelsmann deal involved AOL’s sale of roughly $400 million in advertising to Bertelsmann in connection with the purchase of Bertelsmann’s stake in AOL Europe.

AOL Time Warner released its second-quarter results prior to the opening of stock trading yesterday morning. Although it cut its projections for America Online, the company beat Wall Street estimates as its cable television, motion picture and publishing businesses thrived.

“Our solid results in this quarter and the first half of the year give us confidence that we can deliver on all of our 2003 financial objectives,” Parsons said. He added that the company is continuing to reduce its hefty debt through the sale of businesses and the spending of billions of dollars of excess cash generated by operations.

The Warner Brothers and New Line Cinema movie units generated $572 million and $239 million, respectively, at the box office in the United States. “The Matrix Reloaded” led the way among new releases, while “Harry Potter ( news -web sites ) and the Chamber of Secrets” boosted DVD and CD sales.

“On balance,” said Deutsche Bank, “we think this report is good news.”

In a conference call with analysts, Parsons said he was no longer counting on the sale of stock in Time Warner Cable to generate cash for debt reduction this year. Instead, he said, the handling of any cable spinoff will be determined by broader issues, including the best way to help that subsidiary grow.

“The specific timetable for executing an IPO will depend on strategic considerations, not balance sheet imperatives, as well as the status of our SEC investigations,” Parsons said.

Add Technology – AP to My Yahoo!

By MICHAEL LIEDTKE, AP Business Writer

SAN FRANCISCO – Yahoo! Inc (NasdaqNM: YHOO -news ). on Monday snapped up Overture Services Inc. (NasdaqNM: OVER -news ), the pioneer of pay-for-placement online search results, in a $1.6 billion deal that fortifies the Internet powerhouse for a looming showdown with Google and Microsoft.

The cash-and-stock acquisition valued Overture at $24.82 per share — a 15 percent premium over the stock’s closing price last week. The price consists of $312 million in cash and 0.6108 Yahoo shares for each of Overture’s 65.7 million outstanding shares.

The deal’s value will fluctuate with Yahoo’s stock until its expected closing date in the fourth quarter.

Overture’s shares rose $2.54 to close at $24.05 Monday on the Nasdaq Stock Market, where Yahoo’s shares gained 1 cent to close at $32.20.

The acquisition continues a recent flurry of dealmaking in the lucrative business of online searching, a crucial axis on which much of the Internet’s utility depends.

By buying Pasadena, Calif.-based Overture, Yahoo gains control of one of its most important business partners and strikes a blow against Google and Microsoft.

A fierce rival of Google, which offers ad-based results distinct from its popularity-based search rankings, Overture now threatens to become more formidable by tapping into Yahoo’s greater resources, which included $1.1 billion in cash as of June 30.

Privately held Google, which provides some search results to Yahoo, declined to comment on Monday’s deal. Microsoft, whose MSN service, like Yahoo, has been collecting steady profits from Overture, was circumspect.

Lisa Gurry, MSN’s group product manager, said the software giant will make its next move after examining how Yahoo’s deal might affect its relationship with Overture.

Although Yahoo executives said they hope to maintain Overture’s existing alliances with partners such as MSN, it seems improbable that the rivals will want to subsidize each other, said Danny Sullivan, editor of the industry newsletter Search Engine Watch.

“This hurts MSN because Overture had been one of its best buddies,” Sullivan said.

MSN has been pouring more resources into online searching in an effort to become less reliant on services provided by outsiders. Besides relying on Overture for some of its search results, MSN also draws upon Inktomi, a search engine service that Yahoo acquired earlier this year for $279.5 million.

During the past 18 months, Overture has become increasingly valuable to Yahoo, prompting predictions that the two companies eventually would unite.

Overture has played a pivotal role in Yahoo’s recent financial revival, accounting for roughly 20 percent of Yahoo’s revenue of $604 million during the first half of this year.

Conceived by dot-com entrepreneur Bill Gross in 1997, Overture developed a search engine that sorts its results based on how much advertisers are willing to pay to be ranked under specific words.

Overture’s commercial database feeds search engines at popular Web sites such as Yahoo and MSN, which display the advertising links along with results generated by objective, algorithmic formulas.

Ridiculed just a few years ago, the so-called “pay-for-performance” concept has turned into an online gold mine. Pay-for-performance search is expected to generate $2 billion in revenue this year and U.S. Bancorp Piper Jaffray expects the lucrative niche will reach $5 billion in 2006.

Overture has cashed in on pay-for-perfmorance’s popularity, attracting 88,000 advertisers while generating earnings of $114 million since it first became profitable in the summer of 2001.

But the company’s success attracted more competition, most notably from Mountain View, Calif.-based Google, which has lured away pivotal partners such as AOL and EarthLink and spurred pricing concessions that have lowered Overture’s profit margins.

Although it followed in Overture’s footsteps, Google now has a slight edge over its rival in the United States. Domestically, Google’s network generated about 54 percent of all paid search results compared to 45 percent for Overture, according to market research compiled by comScore qSearch.

The competitive pressures prompted Overture’s management to lower its profit projections earlier this year and contributed to a downturn in the company’s stock, opening the door for Yahoo’s offer.

The deal supplements Yahoo’s recent acquisition of Inktomi with two other search engine services, AltaVista and Alltheweb.com, that Overture bought earlier this year for a total of $207 million.

Putting all those search engine tools under one roof is likely to create overlap, Sullivan said.

Yahoo executives believe all the services will help further its quest to overtake Google as the Web’s most popular search engine.

“We now own all the crucial elements of an end-to-end search offering,” Yahoo CEO Terry Semel said during an analyst call Monday.

Google continues to provide some of Yahoo’s search results. Semel declined to comment how the Overture acquisition will affect Yahoo’s relationship with Google. “I didn’t lay awake last night wondering about that,” Semel said in an interview Monday.

As a counter-punch to Yahoo’s moves, Microsoft seems more likely to acquire a search engine company, Sullivan said.

Potential candidates include Ask Jeeves Inc., FindWhat.com Inc. and, perhaps even Google.

MSN’s Gurry declined to comment on the company’s possible interest in Google.