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Wednesday, February 22, 2012

Online Privacy Mudslinging Between Internet Giants

First appeared in USA Today
Mudslinging between tech rivals is nothing new. But the red hot issue of online privacy has pushed it to another level.

Last week, Google scrambled to deflect criticism that it tracked the online activities of users' of Apple's Safari Web browser against their wishes, by circumventing an anti-tracking mechanism.

Tuesday, Google lashed out at Microsoft in response to allegations that the search giant has been doing much the same to users of Windows Internet Explorer browser. Google and Facebook are under pressure from Congress and the Federal Trade Commission to disclose more about their tracking techniques.

Ironically, this latest tempest, stirred up by Microsoft, could widen the spotlight and invite scrutiny of Microsoft's own tracking practices, and those of Apple, Twitter, Amazon and thousands of Web companies in the hunt for online advertising revenue, says Al Hilwa, software applications analyst at IDC. "The Web industry has gravitated towards advertising as the primary source of income, and (tracking) data is the fuel the industry runs on," Hilwa says.

In a blog posting on Monday, Microsoft corporate vice president Dean Hachamovitch accused Google of issuing tracking mechanisms designed to bypass technology called P3P. Internet Explorer uses P3P to screen the privacy policies of any entity engaged in online tracking — to determine if they're up to snuff.

Google senior vice president Rachel Whetstone responded by blasting P3P as "largely non-operational." As proof, she pointed to a 2010 Carnegie Mellon research report finding 11,000 websites that routinely bypass P3P.

The professor who ran that study, Lorrie Faith Cranor, says many website operators bypass P3P by mistake, while others do it on purpose to circumvent Microsoft's attempt at grading their privacy policies.

Google and Facebook, Cranor says, are in the latter group. Each uses tracking mechanisms that bypass P3P so that popular features, such Facebook's "Like" button and Google Gmail logon services, work.

Whetstone contends that channeling tracking mechanisms through P3P makes little sense. "It is impractical to comply with Microsoft's request while providing modern Web functionality," she says.

Hachamovitch, meanwhile, insists that Google should "commit to honoring P3P." Yet, the Carnegie Mellon study found even some Microsoft websites bypass P3P, as do sites from Godaddy, Hulu and Amazon. "My students and I discovered that Google, Facebook and thousands of others essentially have bogus privacy policies," Cranor says.

Thursday, February 16, 2012

Alibaba Bypasses Negotiates in Yahoo Deal

First appeared in Associated Press
Alibaba Group and Japan's Softbank will go directly to Yahoo's chief executive, bypassing negotiators from the U.S. Internet company, after talks over the sale of Yahoo's Asian holdings broke down, a person familiar with the negotiations said Wednesday.

The struggling Internet company has been in discussions to sell its stakes in Chinese e-commerce company Alibaba Group Holding Ltd. and Yahoo Japan back to Alibaba and Yahoo Japan shareholder Softbank Corp.

But the person, who declined to be identified because the talks are confidential, said that Softbank and Alibaba will go directly to Yahoo Inc. CEO Scott Thompson for more clarity after talks broke down over the terms. The person said Yahoo's negotiating team seemed to have different ideas from the company's leaders.

"Softbank and Alibaba will be reaching out to Scott Thompson to get clarity on what the heck is going on," said the person, adding that the two Asian companies are still "very much in alignment."

The fate of Yahoo's Asian holdings remains in limbo after negotiations abruptly broke off. It's the latest twist in the drama that has been swirling around Yahoo since it fired Carol Bartz as CEO five months ago.

Yahoo wants to appease shareholders by selling its two most valuable assets - the stakes in Alibaba and Yahoo Japan - to raise money for dividends or possible acquisitions. But a complicated deal that would have enabled Yahoo to escape taxes fell apart.

The person said the talks broke down over unreasonable terms but wouldn't specify what that meant, except to say that it wasn't over price.

"The strategic leaders were saying: We want to unlock some value here so we can free up some cash and focus on the core," said the person of Yahoo's top management. "Based on the behavior of the most recent negotiation session (in Hong Kong), it was clear that somebody else had a different idea."

On Tuesday, another person familiar with the matter said negotiations broke off in a disagreement over the sales price and the best way to get the complex deal done. And a third person also familiar with talks said Yahoo had second thoughts after agreeing to a price outlined in late December.

All Things D, a technology blog affiliated with The Wall Street Journal, reported earlier that the talks had collapsed.

Analysts have differed on how much Yahoo could fetch from selling its stakes, with estimates ranging from $11 billion to $18 billion. Yahoo owns about 40 percent of Alibaba.

Adding to turmoil at Yahoo, a major shareholder outlined plans Tuesday to wage a campaign to win a board seat for himself and three of his allies. New York hedge fund manager Daniel Loeb said in a regulatory filing that the company needs more directors with media experience and turnaround know-how.

msnNOW as Digital “Water Cooler”

First appeared in Associated Press
Microsoft is hooking up with a hipper sidekick to broaden its appeal and stay on top of the Internet's hottest topics.

The trend-tracking service, called "msnNOW," tunes into the buzz by sifting through millions of Internet searches and links circulating among the hordes on Facebook and Twitter. The chatter is then distilled into the equivalent of a digital water cooler - a place where people can go to keep in touch without taking up a lot of their time.

After months of development, the new feature debuts Thursday.

The service is primarily aimed at college-age teenagers and young adults who are increasingly relying on smartphones and other mobile devices to remain plugged into what everyone is talking about from one hour to the next. It's an "information-snacking" addiction that msnNOW is looking to feed with a smorgasbord of morsels served up a team of about 20 editors who will write 100-word summaries of the stories driving online conversations, said Bob Visse, MSN's general manager.

Although it's tailor made for people on the go, msnNOW isn't offering an app for smartphones or computer tablets. It can be reached on all mobile Web browsers. The service alsol includes tools to make it easy to share on Facebook, Twitter and email.

Taking the Internet's pulse isn't new. The main page on Yahoo Inc.'s website has highlighted the top trends for years and Internet search leader Google Inc. calls out the top queries each day. Twitter regularly updates its rankings of the most-tweeted topics.

But MSN believes its new service will prove to be even more effective because it is drawing upon Microsoft Corp.'s expertise in data management and relying on human editors to ensure the real-time site is more compelling than a list of words and links.

Facebook Inc. and Twitter also have negotiated deals that make more of their data available to Microsoft's Bing search engine than to Google, but msnNOW isn't relying on that privileged access, Visse said. Instead, msnNOW is conducting its analysis through the public entryways that Facebook and Twitter offers to all websites. MsnNOW is also leaning on, a part of MSNBC that also pores through a variety of social media to find interesting stories as they unfold.

MsnNOW's reliance on Bing to monitor online search activity could be a drawback because it processes far fewer requests than Google. But Bing is picking up more cues now that it's powering Yahoo's search engine as part of a 10-year partnership. Combined, Bing and Yahoo have a roughly 30 percent share of U.S. search volume compared to 66 percent at Google.

Bing's second-banana status in search is a big reason why Microsoft's online division has been a financial albatross. The software maker's online operations have lost about $8 billion since June 2008. remains one of the Internet's top destinations with about 520 million users. In comparison Facebook boasts 845 million users, Yahoo has about 700 million and Twitter has more than 100 million.

Tuesday, February 14, 2012

Google is One Step Closer With Motorola Mobility

First appeared in Associated Press
Google's $12.5 billion bid to buy cellphone maker Motorola Mobility has won approvals from U.S. and European antitrust regulators, moving Google a major step closer to completing the biggest deal in its 13-year history.

Monday's blessings mean Google Inc. just needs to clear regulatory hurdles in China, Taiwan and Israel before it can take control of Motorola Mobility Holdings Inc. and expand into manufacturing phones, tablet computers and other consumer devices for the first time.

Getting government approval in China looms as the biggest stumbling block remaining. Google's relationship with China's ruling party has been on shaky ground since the company blamed hackers in that country for breaking into its computers two years ago. The breach prompted Google to move its Internet search engine from mainland China in protest of laws requiring some results to be censored.

Google prizes Motorola Mobility's more than 17,000 patents - a crucial weapon in an intellectual arms race with Apple, Microsoft and other rivals maneuvering to gain more control over smartphones, tablets and other mobile devices. Google announced the deal six months ago.

The deal will "enhance competition and offer consumers faster innovation, greater choice and wonderful user experiences," Don Harrison, Google's deputy general counsel wrote in a blog post.

Besides signing off on the Motorola Mobility deal, the Justice Department also approved two other moves in the mobile patent battles. The approvals cover the $4.5 billion purchase of Nortel Networks patents by a group including Apple, Microsoft and BlackBerry maker Research in Motion Ltd. and a separate Apple acquisition of Novell Inc. patents.

The Justice Department ended its investigations after concluding the new patent owners won't try to drive up the prices of competing mobile devices by demanding exorbitant licensing fees. The agency said it was particularly concerned about key patents held by Motorola Mobility and Nortel.

Apple Inc. and Microsoft promised to license the Nortel patents on reasonable terms while Google's commitments on the Motorola Mobility patents were "more ambiguous," according to a statement from the Justice Department's antitrust division.

Nevertheless, the Justice Department didn't find any evidence that Google's ownership of Motorola Mobility would lessen competition in a mobile device market that is becoming increasingly important as more people connect to the Internet on smartphones and tablet computers instead of desktop and laptop computers.

In granting its approval, the European Union also raised concerns about Motorola's aggressive enforcement of its patents. EU Competition Commissioner Joaquin Almunia said regulators will "keep a close eye on the behavior of all market players in the sector, particularly the increasingly strategic use of patents."

In its statement, the Justice Department also vowed to crack down on any sign that mobile patents are being used to throttle competition. Microsoft said it was encouraged by the regulatory commitments.

Other key concerns centered on Google's Android operating system, free software that now powers more than 250 million mobile devices made by a variety of manufacturers, including Motorola Mobility. Competition could be hurt if Google gives Motorola Mobility the most advanced versions of Android or withholds the mobile software from other cellphone makers.

Google, though, has pledged to make Android available to all its mobile partners. Even if Google were to discriminate, cellphone makers still could rely on mobile software from Microsoft Corp., Research in Motion and Hewlett-Packard Co., among others.

The European regulators see no danger that Google will prevent other device makers from using its popular Android operating system after the takeover.

"Android helps to drive the spread of Google's other services," the Commission said. "Given that Google's core business model is to push its online and mobile services and software to the widest possible audience, it is unlikely that Google would restrict the use of Android solely to Motorola," which only has a small market share in Europe.

The government reviews in U.S. and Europe have come as regulators also have been conducting a broader inquiry into whether Google has been abusing its dominance in Internet search to hobble its rivals. Those investigations are still ongoing.

Assuming Google eventually takes over Motorola Mobility, the union will open new opportunities and pose potentially troublesome challenges for a management team that so far has concentrated on Internet search, ad sales and other software-driven online services.

Motorola Mobility's expertise in mobile devices and set-top boxes for cable TV will allow Google to play an even more influential role in shaping the future of hand-held computing and home entertainment. Even as it navigates the regulatory gauntlet, Google has begun testing a device for connecting electronic components within homes, according to a filing with the Federal Communications Commission.

Absorbing Motorola Mobility also threatens to crimp Google's earnings growth and drag down its stock price. That's because Motorola Mobility has been struggling on its own as Apple's iPhone and other smartphones made by rivals such as Samsung Electronics undercut sales of its products. Google SEO is curious what the change could bring.

Google is making a huge bet that Motorola Mobility can do better. The $12.5 billion price is more than the combined amount that Google has paid for the 185 other acquisitions that it has completed since going public in 2004.

Google's stock rose $6.29, or 1 percent, to close Monday at $612.20. Motorola Mobility's gained 18 cents to $39.63, just below the proposed sale price of $40 per share. Google is based in Mountain View, California, while Motorola Mobility has its headquarters in Libertyville, Illinois.

Monday, February 13, 2012

Google’s Good to Know Campaign

First appeared in LA Times
In its Good to Know effort, Google will spend tens of millions on ads in U.S. newspapers and magazines and in public places such as subways to urge people to protect their personal information online.

Reporting from San Francisco — Google Inc., under scrutiny from privacy watchdogs for changes it made to its search engine, is launching a splashy ad campaign designed to alleviate privacy concerns.

Google is rolling out the Good to Know campaign in two dozen U.S. newspapers and magazines, including the Los Angeles Times, and in public places such as the subways in New York and Washington to encourage people to protect themselves and their information on the Web. The campaign offers practical advice and tips, including how to manage what kind of data people share with Google and websites.

Google, whose success depends on users feeling comfortable enough to spend huge chunks of their time online, originally launched the campaign in Britain in October.

The Internet search giant is trying to drum up publicity stateside as discomfort spreads with its new search feature called Search plus Your World, in which photos, updates and other private information from its Google+ social network are blended with search results.

Last week, the U.S. Federal Trade Commission widened its antitrust probe of the search engine to include Google+, according to a person who is familiar with the investigation but requested anonymity because the person was not authorized to speak on the matter. The agency is examining whether the company is giving preferential treatment to its own services in violation of antitrust laws. The FTC made the move after the Electronic Privacy Information Center, a Washington advocacy group, filed a complaint about the search changes on privacy and antitrust grounds. Twitter Inc. has also complained that the new search feature harms competitors.

Google, which handles about two-thirds of all search queries in the U.S., is looking to blunt competition from social networking giant Facebook Inc., which has an alliance with Microsoft Corp.'s Bing search engine. Bing began displaying information from Facebook last year. Facebook has more than 800 million members, compared with more than 40 million for Google+ as of October.

Google's director of privacy, Alma Whitten, called the Good to Know privacy campaign "quite ambitious."

"Given who we are, we have a strong incentive to make the Internet a place that people feel safe to do interesting things," Whitten said.

Google, one of the world's biggest advertising companies, is increasingly using advertising on television and elsewhere to promote its powerful online brand offline. With the Good to Know campaign, it's spending tens of millions of dollars to connect with users over privacy and security as regulatory storm clouds gather.

Google, which has come under fire for privacy blunders in the U.S. and Europe, is wrestling with heightened government scrutiny around the world.

Last year it agreed to settle FTC claims that it used deceptive tactics and violated its own privacy policies when it introduced the Buzz social networking service. The settlement is in effect for 20 years and covers future situations such as Google's collection of Wi-Fi data. Google agreed to an independent audit of privacy procedures every other year. The Electronic Privacy Information Center asked the FTC to investigate whether consumers were harmed when users of Google's Gmail service had private email contact information automatically displayed when they enrolled in Buzz, which Google has since shut down.

Google is banking that the campaign will cast it in a positive light and help it sidestep some of the regulatory issues that stymied Microsoft's ability to innovate, said Danny Sullivan, editor of the website SearchEngineLand.

"Google is thinking, 'We had better do a better job explaining this or we will have Congress stepping in to regulate us in a way that might be harmful to our business,' " he said.

Google Is Moving Toward Consumer Electronics?

First appeared in LA Times
Sounds like Google is changing its tune.

The company behind the Web’s most popular search engine is working on a home entertainment device, according to a filing with the Federal Communications Commission. And reports say that device will stream music wirelessly in people's homes.

Google plans to test 252 of the devices in its employees’ homes in Mountain View, Calif., where it has its headquarters; in Los Angeles; in New York; and in Cambridge, Mass. The device uses wireless home networks and “requires testing outside the laboratory environment,” the filing said.

The device isn’t ready to ship yet. The company says it’s still in the “prototyping phase.”

Google is looking for promising gushers other than its gangbusters search advertising business, which accounts for nearly all its revenue.

It may be targeting consumer electronics, which would bring Google into closer competition with Apple.

Last May at its annual Google I/O developers conference, Google showed off Android@Home devices that played music. Android@Home enables Android apps to connect with devices in the home. Late last year, Google launched a music service that sells songs through the Android market.

Google is also trying to close its $12.5-billion acquisition of Motorola Mobility Holdings Inc., which makes set-top boxes and mobile handsets.

The Wall Street Journal reported Thursday that the new device would stream music wirelessly in the home and would be marketed as a Google product. According to the report, the device has been in the works for years and will be out this year.

That would be a departure for Google, which has created the Android operating system for other companies to use in devices such as smartphones, tablets and televisions.

Testing of the device was first reported by technology blog GigaOm.

A Google spokeswoman declined to comment.

Friday, February 10, 2012

New Yahoo CEO Has Plans for Ads and Revenue

First appeared in Wall Street Journal
New Chief Executive Scott Thompson's plan for turning around Yahoo Inc. is beginning to take shape: He wants to push the Internet company away from its advertising roots and get more of its revenue from fees and commissions, according to people familiar with the matter.

The 54-year-old executive, who was hired last month, hasn't mentioned specifics during meetings with employees and business associates.

He has made clear, however, that Yahoo's nearly single-minded focus on its existing websites and online-advertising sales hasn't worked, and that the "market" places little value on the company's core online-ad business, these people said.

Yahoo's online-ad sales have been flat in recent years while those of rivals like Facebook Inc. and Google Inc. have charged ahead.

In the past few weeks, Mr. Thompson has held intimate lunches and large-scale gatherings with Yahoo employees in which he has told attendees that he plans to divert more time and resources to Web services aimed at capturing future revenue, rather than trying to manage the profit margins of the company's current services, the people said.

Mr. Thompson hasn't ignored the online-ad business entirely. He has met with several top executives of Yahoo's major advertising-agency partners since his tenure began, people familiar with the matter said.

He appeared to make a minor gaffe last month during a brief appearance at a regularly scheduled meeting between Yahoo executives and one such ad agency, Interpublic Group of Cos., which controls hundreds of millions of dollars in digital-ad spending by big marketers.

When asked for his views about ad agencies, he said he prefers to be "as close to the customer as possible," and that "I don't like intermediaries that add no value," the people familiar with the matter said.

While Mr. Thompson added that good intermediaries "can change the equation," his comments surprised some attendees because ad agencies have previously clashed with Yahoo and other Internet companies that have tried to work directly with marketers, effectively cutting them out, these people said.

A spokeswoman for Yahoo declined to comment or to make Mr. Thompson available for comment. An Interpublic Group spokesman didn't respond to requests for comment.

While Mr. Thompson's tenure at Yahoo remains in its early days, his remarks provide clues as to the direction that he plans to take the company.

The executive, who was previously president of eBay Inc.'s PayPal unit and has no online-ad experience, faces an enormous task in trying to make Yahoo relevant again.
Some Yahoo employees, however, said they have been encouraged by Mr. Thompson's words and enthusiasm for changing the company.

His predecessor, former CEO Carol Bartz, was fired late last year after failing to rev up Yahoo's revenues. The company has since explored a sale of all or parts of itself and has revamped its board.

On Tuesday, Yahoo Chairman Roy Bostock said he was stepping down, along with three other board members; last month Yahoo co-founder Jerry Yang resigned from the board.

Looking beyond Yahoo's online-ad business might not produce quick results for the Sunnyvale, Calif., company. In 2011, it derived $3.4 billion, or 78% of its net revenue, from online ads.

Yahoo also generated nearly $1 billion from transaction-related fees on its auto, travel, shopping and other sites, where it takes a commission from the sale of products or services. Profit margins in e-commerce tend to be lower than those for online ads.

Mr. Thompson appears to have set his sights on non-ad revenue sources early on. Last month, he said publicly that he plans to exploit the data that Yahoo has collected on the hundreds of millions of people who visit its email, news, sports, and other websites every month.

Such information is the "single most underrated, underappreciated and underused asset" at the company, he said in a conference call with analysts.

Sameet Sinha, an Internet analyst at B. Riley & Co., said one way for Yahoo to get closer to people's "purchase decisions" and take a cut of transactions would be to acquire a company such as Bankrate Inc., which helps consumers find mortgages or other investments; Angie's List Inc., which publishes reviews of contractors, doctors and other service providers; Yelp Inc., which also provides information on local businesses; or Trulia Inc., which helps people search for real estate.

Among his other efforts, Mr. Thompson has invited private-equity firms Silver Lake Partners and TPG—which had expressed interest in taking a minority stake in Yahoo—as well as McKinsey & Co. and Boston Consulting Group, to company headquarters to hear their views about the company's direction, said a person familiar with the matter.

Representatives of Silver Lake, TPG, McKinsey and BCG all declined to comment.

Mr. Thompson may shake up Yahoo in other ways. He is considering potential candidates to join his executive team.

And he has indicated that the company could make layoffs, people familiar with the matter said. Yahoo had 14,100 employees at the end of 2011, up 4% from a year earlier, though it has weathered years of brain drain.

As he digs into the company, Mr. Thompson may have to make some more tough decisions.

People familiar with the situation said he is evaluating whether to continue buying up advertising-technology companies to compete with Google in selling graphical online ads through automated systems, a field in which Yahoo has lagged behind.

Mr. Thompson and Yahoo's board also are continuing to grapple with Yahoo's valuable stakes in two Asian companies, Alibaba Group Holding Ltd. of China and Yahoo Japan, and are negotiating with its partners in those companies to shed some of its holdings as part of a complex asset-swap deal valued at roughly $17 billion, people familiar with the matter have said.

Thursday, February 09, 2012

More Uproar About New Google Privacy Policies

First appeared in USA Today
An advocacy group went to court on Wednesday to block Google from making a policy change that could lead to the search giant assembling richer behavior profiles of people who use more than one of its popular online services.

The Electronic Privacy Information Center filed a complaint asking a Washington, D.C., district court judge to restrain Google from making the policy change on March 1. EPIC also asked the judge to order the Federal Trade Commission to enforce a standing court order that prohibits Google from misrepresenting its privacy policies.

"We believe Google went way over the line in a variety of ways," says Marc Rotenberg, EPIC's executive director.

Google spokesman Chris Gaither indicated the company has not seen the court filings. "We welcome discussions about our approach," he says.

Google recently announced that it would institute a new privacy policy applicable to anyone using any of its popular online services. The new policy would make it easier for Google to cross-reference users' activity data culled from its most popular services, including search, Gmail, Google Apps, Google+, Picasa and YouTube.

Rotenberg contends that Google is repeating deceptive practices that got the company into hot water in early 2010 when it launched Buzz, a new social network that was intended to be part Facebook, part Twitter.
Google piggy-backed Buzz onto the Gmail accounts of 176 million users of its free online e-mail service without asking their permission. To instantly establish a list of Facebook-like friends, a Google algorithm selected up to 50 of each Gmail user's contacts and designated them as Buzz followers, akin to how Twitter users follow each other's postings.

A lengthy FTC deceptive practices probe of Buzz, sparked by an EPIC complaint, resulted in Google agreeing to a consent order that prohibits the company from misrepresenting its privacy practices. The company also agreed to obtain users' consent before disclosing personal data and to comply with a comprehensive privacy program, subject to audit for 20 years.

Google later also agreed to pay $8.5 million to settle privacy invasion claims stemming from the launch of Buzz.

Rotenberg contends the same general privacy concerns sparked by Buzz apply to Google's new privacy policy, which opens the door to the systematic cross-referencing of users' behaviors across all of the company's most popular consumer services.

"Buzz involved the combining of data from discrete services and it gave rise to the consent order," Rotenberg says. "This is about combining data across the entire Google platform, even after they were made subject to the consent order. As a legal matter we think it is far more serious."

Gaither counters that the company is not changing the visibility of users' information, nor how it shares that information with others parties.

He emphasizes that the company has undertaken "the most extensive notification effort in Google's history to ensure that users have many opportunities to learn about the changes." He insists that the new policy "will make it easier to understand our privacy commitments."

Two Google executives made those same points in a closed door briefing last week with 10 members of Congress.

Rep. Joe Barton, R-Texas, said he was disturbed by the executives' answers to questions about users' inability to delete data from sensitive e-mails or data that reveals visits to certain websites, such as one with information about cervical cancer.

"It was obvious to me, as I left the room, that this company has established this policy so instead of the consumer being the master of the Internet, Google is the master of the consumer," Barton says. "I think that is just wrong."

Rep. Mary Bono Mack, D-Calif., said Google's explanations during the briefing lacked clarity. Bono Mack said she intends to convene full hearings on Internet privacy this spring.

The FTC on Wednesday acknowledged being aware of EPIC's court filing, but declined to comment specifically on it.

"The FTC takes compliance with our consent orders very seriously and always looks carefully at any evidence that they are being violated," says spokeswoman Cecelia Prewett.

Online Tax Rules

First appeared in USA Today
Attention, online shoppers. The days of tax-free online shopping may be coming to an end.

More than a dozen states have enacted legislation or rules to force online retailers to collect sales taxes on purchases, according to tax publisher CCH.

Similar legislation is pending in 10 states.

Reasons for the spread of online sales tax laws:
  • Budget shortfalls. The National Conference of State Legislatures estimates that uncollected state sales taxes will cost states $23 billion this year. Residents of sales-tax states are supposed to pay taxes on online purchases, but because retailers don't collect them, they rarely do.
  • Heavy lobbying from retailers. Retailers have long argued that exempting online purchases from sales taxes gives online retailers an unfair advantage over brick-and-mortar stores. The pressure escalated in December after online giant Amazon offered customers a one-day 5% discount if they used its Price Check app to make a purchase while in a physical store, says Jason Brewer of the Retail Industry Leaders Association, which supports taxing online purchases.
  • "A store manager has the power to say, 'I'll match that price,' but they don't have the power to say, 'I won't charge you a sales tax,' " he says. "They go to jail if they do that."
  •  Gridlock. Legislation has been introduced in the House and Senate that would give states broad authority to require online retailers to collect state sales taxes, as long as they streamline the collection process.

Amazon supports the legislation, says spokesman Ty Rogers. Federal legislation to permit interstate collection of sales tax "is the only way to level the playing field for all sellers and provide states the right to obtain more than a fraction of the revenue already owed," he says.

Despite bipartisan support, though, the bill has languished in Congress. "Many of the states have gotten somewhat frustrated waiting for Congress to act," Brewer says.

In 1992, the Supreme Court ruled that states couldn't require retailers to collect sales taxes unless the retailers had a physical presence in the state.

Increasingly, though, states have interpreted that requirement to include subsidiaries or affiliates of online retailers, or online retailers with a warehouse or distribution center in the state.

Critics say the measures would force online retailers to collect sales taxes in dozens of states and jurisdictions, with different rates and definitions of which products are taxable.

"A brick-and-mortar retailer only has to keep track of one sales tax rate," says Joseph Henchman, vice president for the Tax Foundation, a non-profit tax research group. "An online retailer would have to collect tax based on where their customer is located."

The administrative burden would be particularly difficult for small businesses that sell their products online, says Jerry Cerasale, senior vice president for the Direct Marketing Association.

These merchants could be forced to raise prices to cover the added compliance costs, Cerasale says.
"That's going to harm e-commerce, which is one of the few promising growth spots in this somewhat stagnant economy."

Monday, February 06, 2012

Investors Don’t Know Companies Were Hacked

First appeared in Reuters
At least a half-dozen major U.S. companies whose computers have been infiltrated by cyber criminals or international spies have not admitted to the incidents despite new guidance from securities regulators urging such disclosures.

Top U.S. cybersecurity officials believe corporate hacking is widespread, and the Securities and Exchange Commission issued a lengthy "guidance" document on October 13 outlining how and when publicly traded companies should report hacking incidents and cybersecurity risk.

But with one full quarter having elapsed since the SEC request, some major companies that are known to have had significant digital security breaches have said nothing about the incidents in their regulatory filings.
Defense contractor Lockheed Martin Corp, for example, said last May that it had fended off a "significant and tenacious" cyber attack on its networks. But Lockheed's most recent 10-Q quarterly filing, like its filing for the period that included the attack, does not even list hacking as a generic risk, let alone state that it has been targeted.

A Reuters review of more than 2,000 filings since the SEC guidance found some companies, including Internet infrastructure company VeriSign Inc and credit card and debit card transaction processor VeriFone Systems Inc, revealed significant new information about hacking incidents.

Yet the vast majority of companies addressing the issue only used new boilerplate language to describe a general risk. Some hacking victims did not even do that.

"It's completely confusing to me why companies aren't reporting cyber risks" if only to avoid SEC enforcement or private lawsuits, said Jacob Olcott, former counsel for the Senate Commerce committee. The chair of that committee, John D. Rockefeller, urged the SEC to act last year.

Stewart Baker, a corporate attorney and former assistant secretary of the Department of Homeland Security, said the SEC guidance was detailed enough that companies that know they have been hacked will "have to work pretty hard not to disclose something about the scope and risk of the intrusion."

Otherwise, "this is an opportunity for enforcement that practically hands the case to the SEC on a platter," Baker said.

Lockheed spokesman Chris Williams said hacking was covered under the company's most recent annual securities filing, which has as one of many risk factors "security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, threats to physical security of our facilities and employees, and terrorist acts."

Williams said the May attack had "no material effect on our business."

Mantech International Corp, CACI International Inc and other defense and technology firms that have been reported by security researchers as hacking victims were likewise silent in their most recent filings. Neither Mantech nor CACI responded to interview requests.

"It's common knowledge" that most large defense contractors have been penetrated, said Olcott.
Sikorsky Aircraft, mindful of a strict New Hampshire law warning individuals at risk of identity theft, wrote to that state's attorney general in August that hackers had gotten into its system and could have accessed Social Security numbers of 55 employees who lived in the state.

Sikorsky said the employee data likely was not the hackers' target, which suggests that they might have been after designs or other trade secrets. But Sikorsky parent United Technologies Corp did not mention the May intrusion in subsequent SEC filings.

"Like other companies, our businesses are subject to (information technology) security attacks at times. We monitor systems and cooperate closely with the government when appropriate," said United Technologies spokesman John Moran.


Melissa Hathaway, a former intelligence official who led U.S. President Barack Obama's initial cybersecurity policy review and helped push the SEC to enact a disclosure policy, said she was "surprised" at the dearth of new confessions.

"The SEC division of corporate finance has an obligation to ask these companies why they didn't disclose," she said. "We need to have transparency on the state of the situation, and we need to have a national conversation regarding the near-term impact of economic espionage and the long-term health of the nation."

The SEC declined to comment. The agency's guidance officially clarifies previous policy instead of establishing a new rule, a process that takes longer and requires a vote of the commissioners. A person close to the agency said it expects fuller disclosures in annual 10-K filings that will begin appearing in volume this month.

Cybersecurity has been an increasing concern in Washington, and Obama asked during his State of the Union speech for action on legislative proposals. Security experts believe hackers are frequently targeting valuable digital information including strategic plans, blueprints and secret formulas.

But security experts in and out of government have complained for years that most companies don't disclose even very successful hacking attacks, because they never find out about them or simply don't want to spook investors, customers or business partners.

The U.S. National Counterintelligence Executive, in a landmark November report that openly accused China of sponsoring military and economic cyber espionage, said that it is hard for companies to estimate the impact of losses that might not be apparent for years.

One Pentagon contractor that did go into some detail recently about the threat was Northrop Grumman Corp, which warned: "Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability."

A few technology companies gave even more specific warnings, including Juniper Networks Inc, which makes gear for routing Internet traffic, and chip-maker Intel Corp. Intel had been one of the few to disclose a successful breach in the past, along with Google Inc, which has complained of attacks originating in China.

In a November filing, Intel repeated that hackers had gotten inside and warned that "the theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our products."

Some companies asserted that they had not been hacked, or at least averred that they had not been subject to a "material" or "catastrophic" intrusion.

Others confessed to breaches for the first time, including VeriSign and VeriFone Systems, which said it had experienced "security breaches or fraudulent activities related to unauthorized access to sensitive customer information."

The company did not respond to requests for elaboration. Point-of-sale terminals including VeriFone's models are popular targets for criminal hackers, who can tamper with them in order to record passwords and card numbers.

VeriFone has been reported as a supplier of machines to Michaels Stores Inc, a retail chain of hobbyist stores that had to replace more than 7,000 terminals last year after discovering tampering in 20 states.
Two other companies said they disclosed breaches because of the SEC guidance. Tumi Holdings, the luggage maker that is pursuing an initial public offering, said in a stock prospectus that security systems in some of its retail stores had been compromised in the past.

In an interview, Tumi Chief Financial Officer Michael Mardy said there had been no theft of a database or other massive breach. Instead, he said there had been occasions where store employees had conspired with outsiders on a small scale, for example by giving refunds to people who had not made purchases.

"We felt it was necessary to list as a risk factor because it actually is a risk factor," Mardy said.

University of Phoenix parent Apollo Group Inc, which in the past had noted attempted breaches, for the first time said some attempts had succeeded.

"We are facing an increasing number of threats to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber attacks and other system disruptions and security breaches, and from time to time we experience such disruptions and breaches," it wrote in a 10-Q.

Apollo spokesman Rick Castellano declined to say how extensive the breaches had been. "Cybersecurity is an area of growing area of concern for all companies", Castellano said. "We devote significant resources to manage any potential threat."

EU Wants Changes in Google Privacy Policy to Stop

First appeared on Reuters
A group of European regulators has written to Google Inc calling on it to halt the introduction of its new privacy policy, saying it needs to investigate whether the proposals sufficiently protect users' personal data.

Google said in January it was simplifying its privacy regulations, consolidating 60 guidelines into a single policy that will function across all its services, including YouTube, Gmail and Google+, its social network site.

The Article 29 Working Party, an independent body that brings together data protection authorities from each of the EU's 27 countries and the EU's executive European Commission, said it needed to examine Google's plans more thoroughly before the search group's policy comes into effect on March 1.

"Given the wide range of services you offer, and the popularity of these services, changes in your privacy policy may affect many citizens in most or all of the EU member states," the group wrote to Google Chief Executive Larry Page on Feb. 2.

"We wish to check the possible consequences for the protection of the personal data of these citizens in a coordinated way," it said, explaining that France's data protection authority would be in charge of the investigation.

"In light of the above, we call for a pause in the interests of ensuring that there can be no misunderstanding about Google's commitments to information rights of their users and EU citizens, until we have completed our analysis."

The European commissioner in charge of data protection, Viviane Reding, welcomed the move, saying it was a necessary to establish that EU data rules were being firmly applied.

"The Commission therefore calls on Europe's data protection authorities to ensure that EU law is fully complied with in Google's new privacy policy," she said in a statement.

Google said the raising of concerns came as a surprise.

"We briefed most of the members of the working party in the weeks leading up to our announcement," said Al Verney, Google's spokesman in Brussels.

"None of them expressed substantial concerns at the time, but of course we're happy to speak with any data protection authority that has questions."

Google's director of public policy has explained the new policy as a commitment to simplicity, with the company trying to explain its guidelines far more concisely.

"We're explaining our privacy commitments to users of those products in 85 percent fewer words," Pablo Chavez wrote on his blog on Jan. 31.

The new policy explains what information Google collects from the millions of people who use its services every day, why the information is collected, how it is used and what choices are then offered to limit how it is accessed and updated.

While Google is not obliged to wait for the conclusion of the Article 29 Working Group's investigation before adopting its new policy, the company has tended in the past to be as cooperative as possible with European authorities.

The move by the EU regulators comes days after the European Commission set out legislative plans to overhaul its 17-year-old data protection rules, putting in place much more stringent policies on the protection of individual's data.

Under the new rules, internet companies such as Google, Facebook and Yahoo would have to ask users whether they can store and sell their data to other businesses, such as advertisers, which is source of almost all their income.

Internet users can also ask for their data to be deleted from websites for good, the so-called "right to be forgotten."

Separately, Google remains the subject of an inquiry by both the EU's competition authority and the U.S. Federal Trade Commission into how the company ranks its search results. The inquiries are based in part on complaints from French rivals.

The FTC expanded its probe on Jan. 13 to include Google's social networking site Google+.

Thursday, February 02, 2012

Facebook IPO Is Unheard Of

First appeared in Wall Street Journal
Facebook Inc. filed for an initial public offering Wednesday that could value the social network between $75 billion and $100 billion, putting the company on track for one of the biggest U.S. stock-market debuts of all time.

The company hopes to raise as much as $10 billion when it begins selling shares this spring, said people familiar with the matter. Potential buyers got their first look at its financials Wednesday, which showed the company produced a $1 billion profit last year from $3.71 billion in revenues. The company derives 85% of those revenues from advertising, with the rest from social gaming and other fees.

In just eight years, Facebook has become the world's social bazaar, where friends gossip, play games and swap 250 million photos per day. It has also emerged as a potent political tool, helping to topple regimes across the Middle East last year.

But for all its success, the question remains just how Facebook will manage its growth into a mature, global business, keeping both advertisers and subscribers happy while balancing demands of privacy and profits. The filing left a few clues that Facebook's founder, 27-year-old Mark Zuckerberg, is worried about how wealth and public scrutiny may change the company's culture.

At Facebook's offices, employees went about business as usual Wednesday, said one person, enjoying a lunch of lobster bisque, braised beef, Moroccan couscous and apple, cream and honey galette for dessert, said another. A stack of giveaway posters left in a kitchenette at Facebook headquarters read "Stay Focused & Keep Shipping," according to a photo shared by Facebook employees. Mr. Zuckerberg shared a photo on Facebook of the flyer on his desk.

Looming a few months away is Facebook's giant offering, which would top rival Google Inc.'s 2004 IPO. It holds the record for the largest U.S. Internet IPO by raising $1.9 billion at a valuation of $23 billion. Among U.S. companies, only Visa Inc., General Motors Co. and AT&T Wireless have held larger offerings than $10 billion. In the filing with the Securities and Exchange Commission, Facebook said it is seeking to raise $5 billion, but that figure is a placeholder and will likely grow.

While Facebook is growing fast—revenue grew 88% from a year earlier—the sales figures it released were lighter than some had expected. One widely cited outside estimate from research firm eMarketer pegged Facebook's revenue for 2011 at $4.27 billion.

Still, Facebook's membership growth has been staggering. The company said in its filing that it has 845 million users globally, up 39% from a year earlier.

The IPO is set to unleash a wave of wealth across Silicon Valley and yield potentially $100 million or more in fees for Wall Street banks managing the offering, including Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc.

The company chose "FB" as its ticker symbol but hasn't decided whether it will trade on the New York Stock Exchange or Nasdaq Stock Market.

Mr. Zuckerberg had been famously reluctant to push forward with an IPO. In early 2010, he told The Wall Street Journal that he was in "no rush" for Facebook to go public.

The CEO owns around 28% of the company and holds 57% of its voting share power, according to the filing. Mr. Zuckerberg will sell shares in the IPO and will use the proceeds to pay taxes, it said. The filing doesn't say how many shares the CEO intends to sell.

People familiar with Mr. Zuckerberg's thinking said he has long been fearful of the damage an IPO could do to the company's culture. He wants employees focused on making great products, not the stock price, they said.

Mr. Zuckerberg's thinking began changing when Facebook realized in 2010 that it would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that the company start publicly reporting financials. Mr. Zuckerberg decided it made more sense for Facebook to go public and reap some financial benefit from an IPO.

Facebook also still faces questions about its commitment to its users' privacy, an issue that had dogged it since its earliest days. Despite a settlement last year with the Federal Trade Commission in which the company agreed to independent privacy audits for 20 years, privacy advocates worry about the vast trove of user data it owns. Mr. Zuckerberg has promised users he is committed to protecting their privacy.

Facebook takes pains to mention the importance of privacy, mentioning the word 35 times in the filing, and even listing its "privacy and sharing settings" as one of the ways the company creates value.

In a letter to potential shareholders, Mr. Zuckerberg—who has long eschewed the business side of Facebook—said he plans to continue focusing on building products, rather than sales growth. "We don't build services to make money; we make money to build better services," Mr. Zuckerberg wrote. "These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits."

Overall, Facebook's annual revenue growth is slower than other tech companies who have staged IPOs recently. Groupon's revenue grew 695% for the nine months ended September 2011 from a year earlier. Zynga's revenue more than doubled for that same time period.

Unlike some other newly public Web companies, Facebook is profitable, with 2011 profit up 65% from the year earlier period. But growth has its costs. The company's research and development expenses ballooned last year to $114 million in 2011 from $9 million in 2010, primarily due to growth in employee head count and equity compensation. Facebook's costs and expenses are going up faster than revenue. It employs 3,200 as of December, up from 2,172 a year earlier.

Debra Williamson, an eMarketer analyst who had estimated Facebook's 2011 revenue at $4.27 billion, called the company's revenue "disappointing."

But Kevin Landis, portfolio manager of Firsthand Technology Value Fund, Inc., which has bought Facebook shares in the secondary market, said he wasn't disappointed and hopes to buy more stock when Facebook goes public. "This is a company that has only just begun to scratch the surface of making money off those hundreds of millions of people getting on Facebook every day," he said.

Social gaming has become an increasingly important part of Facebook's business. The company generated $557 million in revenue from partners such as Zynga who sell virtual goods last year.

Facebook's revenue is still driven by online ads. The number of ads delivered on the site grew 42% and the average price per ad grew 18% over 2011 from 2010, according to the filing.

The company attributed the improvement to a vast trove of information that allows marketers to "show their ads to a subset of our users based on demographic factors such as age, location, gender, education, work history, and specific interests that they have chosen to share with us on Facebook or by using the Like button around the web or on mobile devices."

Amazon is Faltering in Recent Revenue Estimates

First appeared in Bloomberg Inc. (AMZN) fell the most in three months after sales missed estimates, signaling that its investments in media services, Kindle devices and shipping promotions have been slow to pay off.

Amazon shares dropped 7.7 percent to $179.46 after the Seattle-based company said yesterday that fourth-quarter revenue was $17.4 billion, trailing the $18.3 billion estimated by analysts in a Bloomberg survey. It was the biggest one-day stock decline since Oct. 26.

Amazon, the world’s largest Internet retailer, got less revenue from digital media than anticipated, especially in the video-game market. The company also is relying more on third- party sellers, which can bolster profit but generate less revenue than direct sales. Amazon has conditioned investors to expect stronger growth, making the latest results disappointing, said Colin Gillis, an analyst at BGC Partners LP in New York.

“To miss on the top line, that’s what breaks the momentum,” said Gillis, who recommends selling Amazon stock.

Net income fell 57 percent to $177 million, or 38 cents a share, from $416 million, or 91 cents, a year earlier, the company said in a statement.

First-quarter operating income may range from a loss of $200 million to a gain of $100 million, the company said. Analysts were projecting a profit of $268.1 million. Sales will be $12 billion to $13.4 billion, Amazon said, compared with an estimate at the top of that range.

Hard to Explain

Chief Executive Officer Jeff Bezos is squeezing margins in search of growth, looking to add customers by pushing free shipping and offering its Kindle devices at cut-rate prices. While investors were expecting profit to take a hit, the sales slowdown is harder to accept, said Brian Nowak, an analyst at Nomura Securities International Inc. in New York. The reasons outlined by the company don’t seem to fully account for the sluggishness, said Nowak, who rates Amazon shares “neutral.”

Amazon’s third-party sellers use the company’s site to hawk their products and then provide a commission. Unit sales by outside retailers increased 65 percent during the holiday quarter and now make up 36 percent of units sold, Bezos said in the statement. Total sales rose 35 percent.

“Whenever there’s a mix-shift toward third party, it helps margins, but it reduces revenue,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. He has an “outperform” rating on Amazon’s stock.

Earnings Top Estimates

The shift helped earnings top estimates last quarter, even with the sales shortfall. Analysts projected 16 cents a share. Still, the operating margin tightened to 1.5 percent in the period, from 3.7 percent a year earlier.

“Trying to predict during a seasonal Q4 is challenging,” Tom Szkutak, Amazon’s chief financial officer, said on a conference call. “That third-party increase is great for customers, great for sellers and helped our bottom line.”

Amazon’s Prime program, which offers unlimited two-day shipping for $79 a year, boosted expenses over the holiday shopping season, said Jason Helfstein, an analyst at New York- based Oppenheimer & Co.
“With shipping, if you look at that net loss number as a percentage of revenue, it keeps going up,” he said. “They’re trying their best to offset that in other ways.”

The money-losing Kindle Fire tablet also has raised expenses. At $199, the device is less than half the price of Apple Inc. (AAPL)’s cheapest iPad. The expectation is that consumers will spend the money they save on Amazon’s e-books and video content, Jordan Rohan, an analyst at Stifel Nicolaus & Co., said in a note this week. That eventually will more than make up for revenue lost selling the device, he said.

Video-Game Decline

For now, Amazon’s media sales aren’t growing as quickly as anticipated. U.S. media revenue climbed 8.1 percent last quarter, about half the 15 percent that Sebastian was predicting. The decline in video-game sales hurt the unit’s results, Szkutak said.

Investors had speculated that the company would get a bigger boost from a 15 percent gain in industrywide holiday e- commerce spending, which ComScore Inc. (SCOR) pegged at a record $37.2 billion.

Shareholders may now be wondering if the stock has become too expensive, Gillis said. It trades at 141.9 times earnings over the past 12 months, according to data compiled by Bloomberg. By comparison, Apple’s price-to-earnings ratio is 13.

“When you have revenue growth start to stall, then the valuation question marks start to rise,” he said.
The company also elaborated on its potential risks in a filing today. Amazon said it relies on third-party providers for the technologies that encrypt, authenticate and send confidential information, and that a security attack could result in litigation.