Take-Aways From the Yahoo Network-wide Scan

            Yahoo appears to have provided the U.S government with key word scanning of each and every email message traversing the Yahoo network for a limited time period.  See http://www.reuters.com/article/us-yahoo-nsa-exclusive-idUSKCN1241YT.  There are significant legal and technological issues triggered by this news. 

            On the legal side, it appears that the national intelligence community can and will make a case for email carrier scans of an entire user population when a narrower set of suspects and email accounts cannot be identified.  The Foreign Intelligence Surveillance Act imposes no cap on the number of scanned email accounts, nor does it impose a requirement that government agencies first exhaust all internal options before seeking industry cooperation, or compliance with a court order.

            On the technological side, it appears that only Yahoo could have executed the scans on short notice, because Yahoo email subscribers can opt to encrypt their messages.  Having written or at least installed the encryption technology, Yahoo may be the only one able to deencrypt and conduct deep packet inspection of massive traffic volume on a real time basis.

            As to the impact on Verizon’s acquisition of the company, I suspect this news will not have any effect.  It seems like Yahoo had no basis to contest the order (if there was one) in light of the short notice, limited duration and likely assertion by government officials that the company alone could achieve the desired outcome.

            On matters of national security, even at the risk of abuse and overuse, government assertions about the potential for imminent harm trumps individual privacy concerns.

Make Versus Buy in Telecommunications—Verizon/Yahoo

        In a matter of days, Verizon will likely add to its inventory of content by acquiring much of Yahoo.  This deal and the earlier acquisition of America Online confirms the trend that deep-pocketed incumbents see the benefit in acquiring content, rather than growing their own.

            Many years ago, soon after divestiture from the Bell System several Regional Bello Operating Companies threw millions of dollars at becoming content creators, with little to show for it (pun intended).  Now incumbent telephone and cable television companies see the benefit in overnight vertical integration.  You can call it defensive, in light of declining margins and revenues for core, “legacy” business lines.  Alternatively, you can call it prudent recognition that in-house talent might not have necessary mindset and creative skills to flourish in Hollywood.

            The billions of dollars recently invested by companies such as Comcast, Verizon and AT&T confirm that regulatory uncertainty and the “scourge” of network neutrality have not and will not stop investment and capital expenditures.  No company will invest in content if its managers conclude that they should not also make the necessary, concomitant investment in the physical plant needed to deliver content to consumers.  The new, or upgraded infrastructure will exploit technological innovations, such as the fifth generation cellular radio.  Some desirable technologies will not become ubiquitous simply because a profitable business case cannot be made for rural market penetration.

            Let us put to rest the red herring that today’s regulatory wingspan stymies investment in telecommunications.  Ask any senior executive—off the record—and she or he will acknowledge that the regulatory climate falls well below key financial and marketplace variables.  When regulation enters the calculus, too often incumbents use it as a vehicle to stymie innovation and competition. 

            I still do not understand how choice in set top box interfaces with broadband networks somehow hurts consumers and competition.  It does not, but incumbents can cast themselves as victims of bullies like Google and throw sand in the works.  Meanwhile managers at these very same companies proceed with multi-billion dollar acquisitions.  They seem quite optimistic about their staying power and ability to identify and capture new revenue streams.