It’s not often that I can credit my mother with getting me to use new technology (it usually works the other way) but she gave me an article in reference to something unrelated to this. One of the conclusions of the article was that we need to use new technology to understand it. That is a requirement of my job and I’ve slipped a little in fulfilling my job requirements lately (too many long stories to get into).

Hmmm, I didn’t get why anyone would tweet or what @, RT and # were all about. I could read about it but that wouldn’t do it. No toe in the water for me. I decided to dive in head first.

There was another big change in my life that made this possible. My fourth and final Sidekick (the old LX) was on the fritz. Worse yet, it wouldn’t sync with Vista (no discussions on Vista, please). I require a spacious thumbpad so I tested out the Android G1. (Yes, it has flaws but it suits my needs better than any phone on the market. I am happy to write about my phone journey but don’t want to go down that path here).

After a few weeks, here’s what I have found about Twitter:

1. It helps to know people personally. At least I found it to be a lot more fun knowing people and interacting with them as opposed to writing to the Tweetosphere.
2. You need to be able to take it wherever you go that you probably have dry hands (see phone change above).
3. 140 characters is perfect for my sense of humor. (My first apology to @wporter.)
4. As always, don’t believe everything you read. Just ask Jeff Goldblum I might have picked a perfect time to try it out as Twitter was alive with all of the real and fake celebrity deaths.

I’m a convert. I still have some open questions. I watched the tweebate between @samharrelson and @jimkukral over using hashtags (you know, the #’s) for marketing purposes. Sam thinks it is spam and Jim thinks it is great marketing. Jim’s solution to Sam was for Sam to unfollow anyone he thinks abuses them. The problem is, Sam will have to unfollow Jim and not see the rest of what Jim tweets. My question on it is whether people should have personal and work Twitter accounts. I think so for people who believe in unbridled marketing. I’m still not sure how Twitter will be monetized (who among us is) but it will be by someone, it just may not be Twitter.

Experiment gone awry

Every now and then I would search for people I know or want to follow on Twitter. There was one person who I couldn’t find. (Did I mention that people search on Twitter sucks and I was too lazy to find the better solutions?) So I typed in his name.

(My 2nd apology to @wporter) Many of you can see the train wreck that is coming…

You guessed it… I looked up twitter.com/jeffmolander. There was nothing there. If you remember the auction of jeffmolander.com three years ago, you can guess the next part. Yes, I opened an account for Jeff. I am coming clean within days as it is a prank now but would go far beyond that if I kept up the charade.

I gave myself a simple prime directive: Do not put words into Jeff’s mouth (or on his fingers, as it were). I had 5 tweets: 4 were articles written by Jeff himself plus one of “OK, now what?” I really wanted to get into a few debates that sparked but I resisted the urge. The only other thing I did was to follow people. Word had to get out somehow that Jeff Molander was on Twitter, especially since he has written so many articles against Twitter including “There is no such thing as social media”. [There is social media, Jeff. People are social creatures by nature and are demanding that of us. Whether or not one site or another fulfills its own mission or a necessary purpose is a different story.]

The response was incredible. People seem to be torn between hating Jeff and generally liking him while disagreeing with what he says and stands for. It was such a big deal that Jeff Molander finally got on Twitter that Wayne Porter was shaken out of a deep sleep and had to check Twitter.

Protect your brand

Here’s what I don’t get… I bought and auctioned off jeffmolander.com for charity. Jeff uses it now. He also owns jeffreymolander.com which redirects to the other. Why didn’t he have @jeffmolander?

The punchline

Kim Rowley tweeted the following: @jeffmolander Long time no see Mr Molander! Is this account taking over your @jeffreymolander acct? Leading double life? Or experimenting?

Oops…

I sent the password to Jeff for his new account where he is more popular… OK, more notorious.

[Please direct all flames to @TheDavidLewis]

You’ve all read about the Amazon Tax spreading from New York to other states including California, North Carolina, Hawaii and Rhode Island. Here’s the crazy thing… there is little or no revenue behind these bills, only lost revenue for affiliates and lost jobs for employees. Sounds like a great way to generate revenue for the states, eh?

AB178 couldn’t get out of committee

AB178 was California’s version. It stalled in the State Assembly’s Revenue and Tax sub-committee. There weren’t enough votes for passage. In fact, there weren’t enough votes for it to be heard in committee and it was pulled by the bills author (Assemblymember Nancy Skinner from Berkeley) the day it was to be heard.

What’s the democratic solution? Instead of debating it and hearing public opinion, the Budget Conference Committee snuck it into the budget at the last minute (that is, after 6pm on the last day of weeks of budget negotiations).

Both the State Assembly and Senate passed budgets yesterday and today that included changes to nexus. Governor Schwarzenegger has promised to veto any budget that has an increase that is passed by a simple majority instead of the 2/3 required for tax increases. Whether a game or not, legally he is correct.

$150,000,000 is a lot of money!

I can see why the state legislators are drooling at lobbyists promise of $150,000,000 in revenue for the state. That’s a lot of money! I’d go after that too if I could.

The problem is that the number doesn’t look at the downside, only at all of the upside potential. Here are the assumptions:

1. All stores with affiliate programs maintain their programs and their California affiliates and decide to collect California sales tax.
2. Oops, there isn’t a second assumption. Just the one.

What if the assumption is wrong?

I’m glad you asked. If the assumption is wrong, retailers like Amazon, Overstock.com and Zappos will terminate California affiliates. Amazon has already notified California’s leadership in the state house that it will do so and has been terminating affiliates in North Carolina and Rhode Island when their legislatures pass similar bills. It’s safe to assume that will happen here as well.

That means a decrease in income tax revenue as we will generate less revenue. That will be compounded by our sites being less competitive and losing more sales thus more income tax revenue for the state. That will be compounded by layoffs, or at a minimum less hiring, which will result in both less income tax revenue and an increase in unemployment payments by the state.

NY collected $50 million after it passed the Amazon Tax last year

Maybe there was a first mover advantage. Amazon collected NY sales tax. It has clearly stated that it will not collect from any other states unless there is a national solution. That’s what the US Supreme Court stated in Quill v. North Dakota: Only the US Congress can force collection of sales tax where nexus does not exist.

I’ve heard rumors that Amazon accounts for 30% of that increase. Assuming that is correct for California, that’s $45 million that comes off the top before anything else happens. If you think $105 million is still a big number, what happens when other retailers terminate as well? It’s not looking so good, is it?

Why should you care about California

On this one, I think that as California goes, so goes the rest of the country. With the Silicon Valley here and companies like Google, Yahoo and eBay in opposition, you have no hopes of fighting this in your own state if if passes here.

What’s my solution?

This post has gotten too long so I am going to split it into 2. Please read the next one for my way to climb back through legislators’ loophole.

In the study, PWC admits to “a period of broad decline” in global ad revenues, but at the same time, there will be “a profound structural shift” towards digitally-based advertising models. While non-digital will still represent the bulk of ad spending by 2013, digital ad spending will increase 10 percent from 2008 to 2013. PWC says “digital spending will be the [Entertainment and Media] industry’s main engine of growth, making further major inroads into all segments.” The study indicates that mobile and digital newspapers will enjoy the largest advertising revenue growth in that period.

The three primary reasons for the growth of digital revenues, according to PWC, are the economy, consumer behavior, and advertising. The economy is obvious – companies will migrate more rapidly to less expensive, more efficient digital technologies during the widespread economic downturn. In the area of consumer behavior, PWC says consumers are demanding “more control over where, when, and how they consume content,” as well as higher value from media choices.

As for advertising, PWC predicts:

“a new generation of ad-funded revenue models” will emerge, emphasizing “more accurate targeting and relevance of ads to the specific consumer.” The firm says the key to success in the digital future will be the use of technology to “exploit consumer data to the fullest extent possible.”

PWC sees new opportunities in digital technology areas such as personalized online video advertising, with the objective of more effectively and accurately targeting audiences.

PWC predicts the highest ad spending growth from 2001 – 2013 to come generally from Internet access, and specifically from Internet advertising. Global spending on Internet access, including wired and mobile, will reach $334 billion in 2013, up from $215 billion in 2008.
“TV subscriptions” (paid television such as cable) and video games are the next highest growth segments, according to the study. Filmed entertainment will also grow significantly. But recorded music, business-to-business publishing, newspaper publishing, and consumer magazine publishing, says PWC, will all see declines in total global revenues. Basically, growth in digital revenue will not be able to stem losses from traditional, non-digital revenue sources.

PWC concludes that companies involved in advertising “will have no place to hide from the remorseless digital advance.” It is interesting to note this unrelated but relevant story: Last week, Kodak announced it is discontinuing Kodachrome film after 74 years, indicating that 70 percent of revenues now come from the company’s digital business.

This is more compelling evidence of the sea change upon us – that what we read, see, hear, and respond to will increasingly be digital in nature.

From a practical perspective, it’s not hard to understand the current financial mess the states are in. The federal government has all but abandoned them. When businesses aren’t making money and consumers are keeping their cash instead of spending it, tax revenues dry up. It’s simple: States need to find new and creative ways to get money in their coffers. Never mind the fact that they may waste funds on questionable projects or allocate dollars for politically motivated reasons.

But here’s the problem: The Internet is not merely a sales channel – it has become the repository of our nation’s and the world’s information, and the engine of our nation’s and the world’s economy. As such, its value must be recognized as above and beyond something a state should be able to arbitrarily tax.

Harvard Business School Professors John Deighton and John Quelch, writing in AdAge, offer some startling statistics from a study they prepared with Hamilton Consultants for the Interactive Advertising Bureau:

• Roughly two percent of Americans are directly or indirectly employed in jobs that support the Internet. The dollar value of their wages is about $300 billion.
• The Internet directly pours about $175 billion into the U.S. economy – but it influences economic activity that creates an annual value of $444 billion.
• About 190 million people in the United States use the Internet an average of 68 hours per month. The value of this time, conservatively speaking, is about $680 billion.

Deighton and Quelch also discuss the Internet’s impact on job creation, telecommuting, and society through social networks and online communities. The implications go far beyond the economic impact of the Internet.bDeighton and Quelch conclude with this point:

“When regulators start trying to constrain the Internet, let’s be aware of its enormous and ever-increasing economic and social impact. The Internet is an economic powerhouse that drives U.S. competitiveness and productivity.”

Each state and the federal government should think long and hard before they mess with that.

This shows that Net Neutrality is not some impossible to understand arcane rules that are anti-consumer like the opponents try to make you think. Opponents talk about extra government regulation, bureaucracy, and confusion because nobody really knows what it means. If the government can explain it in a few sentences in a 121 page document, then how hard can this concept really be to understand?

These rules are specifically called out and described in the Interconnection and Non-Discrimination Requirements section (Page 113) where they require applicants to commit to five obligations (page 114):

1. Adhere to the principles contained in the FCC’s Broadband Policy Statement (FCC 05-151 adopted Aug. 5, 2005).
2. Not favor any lawful Internet applications or content over others.
3. Display network management policies in a prominent location on the service provider’s web page and provide notice to customers of changes to these policies (awardees must describe any business practices or technical mechanisms they employ, other than standard best efforts Internet delivery, to allocate capacity. They must differentiate among applications, providers, or sources,  limit usage; and manage or block access to illegal or harmful content).
4. Connect to the public Internet directly or indirectly, such that the project is not an entirely private closed network.
5. Offer interconnection, where technically-feasible, on reasonable rates and terms to be negotiated with requesting parties. This includes both the ability to connect to the public Internet and physical interconnection for the exchange of traffic.

The second one is very specific here in the description where they say that:

This requirement ensures neutral traffic routing. Without a non-discrimination condition, network operators could give preferential treatment to affiliated services, or charge some application and content providers for “fast lanes” that would put others at a competitive disadvantage.

The document continues with text about the AT&T/Bell South merger requirements and notes that this is a more general version, allowing the carriers more room to cache, manage spam, deal with DNS attacks, etc.

Go a few more pages and on page 118 they continue with the justification:

Overall, these five requirements ensure that public funds will support the public goal of open networks. The standards chosen echo established FCC rules, but avoid detailed regulation and allow for flexibility when network management requires differential treatment or exclusivity.

The section concludes by noting that the rules apply for the life of the facilities and that failure to comply would likely be considered breach of their loan or grant agreements at which point one would assume the money would have to be repaid.

This really is great news. If the government is going to be spending our own tax dollars (stimulus funds) to improve broadband coverage across the country, then access should be equal to all for all content.

Following Overstock.com’s announcement that it will pull its affiliate advertising from California due to the legislature’s proposal to increase taxes and the announcements of other companies such as Amazon.com threatening to follow suit, Governor Schwarzenegger today reiterated his deep commitment to not raising taxes to solve our state’s budget deficit and announced Overstock.com will reinstate California-based internet affiliate advertisers:

“After passing the largest tax increase in California history, it makes absolutely no sense to go back to the taxpayers to solve the current shortfall – that’s why yesterday I vetoed the majority vote tax increase passed by the legislature. With unemployment at an all time high, we should be doing everything we can to - keep jobs and create jobs - in California. That is why my Administration immediately contacted Overstock.com when we learned of this news and, I am pleased to announce Overstock.com has reversed its decision and will continue to do business with affiliates here in California. I will continue to fight to keep jobs and businesses in California.”

California lawmakers proposed a tax on affiliate advertising and sent legislation to the Governor, but as promised he vetoed it because we cannot solve our budget deficit by raising taxes and driving businesses out of the state.

Overstock.com estimates its internet affiliate advertisers in California create millions of dollars in revenue.

I applaud Governor Schwarzenegger and his staff for taking a stance in favor of small businesses and fairness. While this is a step in the right direction, we still face this serious issue in multiple states, including California.

The simple truth is that they are based on a loophole left by the Supreme Court. In Quill Corp v. North Dakota (1992), the Supreme Court ruled that only the US Congress can force companies without nexus in a state to collect sales tax for that state. The loophole was that having a salesperson in the state created nexus.

Who is a salesperson?

A smart lobbyist figured out that the states can expand the definition of a salesperson to include anyone who is paid commission for advertising on its site. They neglected to realize that this is advertising and can be cut off with the click of a mouse, just as Amazon has done in several states and promised to do in several more. That means no increase in sales tax revenue.

The real equation is: AB178 = a decrease in income tax revenue + a decrease capital gains tax revenue + an increase in unemployment payments. In other words, it equals less revenue!

Let’s end the debate

Enough on what is constitutional or fair. Enough talking about how there is no revenue because affiliates will be terminated by the retailers or affiliates will move to other states. No one in state government is interested in that. They want another solution. (I’ve told them that doing nothing is a better solution. That resonates about as well as talking about a solution from Congress.)

My solution: Climb through the looking glass

My solution is climbing back through the same loophole the states are using. It’ll kill loyalty sites (including my own) but it will keep many more around and suck all of the revenue from bills like AB178.

Enter Shopzilla, our white knight

The Shopzilla Publisher Program is perfect for this. Not only does Shopzilla pay on a CPC basis, it has a quality filter to protect retailers. That means that any sites that have questionable practices or low-quality traffic, will be paid less or will not be able to survive.

Shopzilla is where you can find many of the stores who terminated NY affiliates. I did a quick search and here is the list that I found. I’m sure there are more but I wanted to get this out today. I think that any retailers who want to keep their affiliates in all 50 states should consider using Shopzilla. In addition, I am guessing that some of the other comparison shopping networks have similar programs to compensate publishers using CPC and systems to protect retailers against low-converting traffic. I’d also bet that the affiliate networks will join in with their own CPC compensation structures.

Sign up: Shopzilla Publisher Program.

The list

Here’s what I have so far:

For those unfamiliar with this hidden economy, “gold farming” is a term that refers to performing tasks that allow you to level up in games. Such “farming” includes actually digging for gold, building characters for sale, lurking to kill players who regenerate in the same place, and other actions which may save time and effort for would be game players.

There is a sizable business in MMORPGs for gold farming especially in World of Warcraft. One report suggests gold farming is worth between $200M and $1B in real money. Yes, it’s a virtual good story, and there are hundreds of companies, mostly in poor areas and third-world countries, who “farm gold” to sell to buyers in the US and other western countries.

While this may sound enterprising, the buying and selling of characters, goods, and services in the real world for virtual world benefit, could have dire consequences - at least the Chinese government believes so.  From the official press release:

“Since 2007, virtual money trading has drawn official attention, with the government demanding tighter controls as such trading became an avenue for gambling and illicit trade.”

Can these virtual economies with virtual goods be such a big deal? Is there really that much criminal behavior around it?

The Chinese government thinks so and is attempting regulation through their Ministry of Commerce. From my own experiences I agree there is a high potential for illicit activity. Back in 2004, I personally saw enough fraudulent activity attempts at buying, selling, and trading virtual currency vehicles, my employer at the time, BitPass, put a high security watch and filter on one of the retailers of the Lineage MMORPG cards for one overseas partner who was using BitPass as a micropayment instrument. To them, at the time, micropayments really did add up to a genuine source of income.

I recommend you read the press release and the earlier discussion on virtual goods, if you have the chance. There’s a potentially enormous volume of transactions in China alone for virtual goods and online payments, big enough that the Chinese government has noticed and taken action.

Before I start, I am going to ask that you sign the petition I started. It is all explained below. To sign, just tweet the following on Twitter:

petition @nmevans to Stop the #affiliatetax. Don’t hurt small biz in CA! http://act.ly/q retweet to sign

From the beginning… AB178

Brook Schaaf has a good write up on the California Affiliate Tax.

act.ly and my petition

My friend Clay Johnson told me about a new website, act.ly that launched this week. It is a brilliant idea. You can read the inspiration for it here. It is a service to post petitions that get signed when people retweet on Twitter. It requires that the person starting the petition select a single Twitter account to receive all of the votes.

I decided to give it a try. I found the account for Noreen Evans, the chair of the California Legislature’s Budget Conference Committee (or an account that appears to be hers). I hope that she reads the petition, the e-mails she is getting and this blog post. I hope that she sees that the bill, while well-intentioned, does not achieve it’s goals and will hurt some of California’s small businesses.

As you know, changes to the definition for nexus were proposed in February as AB178 by Assembly member Nancy Skinner. She was unable to get the votes required to send the bill to the full Assembly so she tabled it (made it a so-called two-year bill which gave her until January, 2010 to get it through the Revenue and Tax Committee). There wasn’t a hearing on the bill. I know that because I received an e-mail telling me that the bill would not be heard as my cab pulled up to the state capital when I was going to testify.

It’s baaaaaaaaaaaaaaaack!

Things work differently in government than in business. The Budget Conference Committee spent the better part of a month working out the details of the budget. At 6pm on the last day of negotiations, a trailer bill was introduced with 9 provisions, one of which was AB178. There was little or no debate and no opportunity for public comment. It was passed along party lines.

Amazon says “NO!”

This week, Amazon sent a letter to state leaders letting them know that Amazon would terminate its California Associates (affiliates) should the definition of nexus change. Many other online retailers will follow suit and terminate affiliates.

Failure to achieve its goals

Lawmakers state 2 goals in AB178:

1. Increase the State’s revenue
2. Help brick-and-mortars

Should retailers terminate affiliates, neither goal will be achieved. Affiliates from other states and abroad will find ways to pick up the sales as those of us hurt by the bill see our user bases disappear and our revenues decline. That means that there may be a net decrease in revenue for the state.

Brick-and-mortar, if they have been hurt by stores such as Amazon not collecting sales/use tax, would see no benefit as Amazon will continue to not collect sales/use tax from Californians. So the B&Ms aren’t helped and businesses that use affiliate marketing are hurt.

Or are we?

I try to run my business in a way that is good for our store partners and our shoppers. I spend time looking for ways to build sites that add value, not looking for loopholes. Should this bill pass and we get terminated by the likes of Amazon and Overstock and others, there is a HUGE loophole that was created in the latest draft of the bill.

If we are terminated by stores for using commission-based compensation, why not switch to using links from comparison shopping engines? Of course, this solution works for some business models and not others. We can’t offer cash back from those links but we can maintain the relationships until we see some rationalization in the market.

Budget Vote Crisis

The state legislature voted on parts of the budget yesterday and did not pass them. The change in nexus for out-of-state retailers is in a separate trailer bill. So there is still time. Please sign the petition by tweeting the following:

Sign the petition!

petition @nmevans to Stop the #affiliatetax. Don’t hurt small biz in CA! http://act.ly/q retweet to sign

• Karen Garcia, My Co-Organizer, GTO Management
• Rebecca Madigan, Performance Marketing Alliance
• Rob Smahl, eBates (Rob has come to be recognized as our own “Great Communicator” for his knack with legislative staffers.)
  
• Lisa Picarille, Independent Consultant
• Alan Gray, NewsBlaze.com
• Ryan Owen, Savings.com
• Jennifer Arnold, Commission Junction
• Nicole Williams, Commission Junction

At the end of April we thought that we had killed California’s affiliate tax bill when AB 178 was moved to a two year bill. Unfortunately,  “nothing ever dies in Sacramento,” as they say. Last week the nexus language returned through the state budget committee, which included it in a grab bag of “acceleration provisions.” The new language, inspired by AB 178, reads:

Extends sales tax “nexus.” Requires out-of-state sellers, such as Amazon, that pay commissions to California firms or residents for sales referrals (often through a website link) to collect sales tax on their sales to California residents. This provision improves compliance, but does not change tax liability. Existing law requires Californians to pay equivalent use tax on these purchases, but compliance is low. Provisions reflect AB 178 (Skinner). The estimated General Fund revenue gain is $48 million in 2009-10 and $110 million annually, with additional revenue increases in local sales tax revenues.

This is being voted on this week but most people seemed to feel more negotiation will push things out at least until next week. Our goal today was to press our point on the negative economic consequences this legislation would have. We split into three groups and met with about 45 legislative staffers. We advanced the same main argument as before: this legislation will harm small businesses in California by discriminating against a specific type of advertising. New since last time were:

• The documented 50% drop in New York publisher revenue, attributed to New York’s nexus law.
• Amazon’s pledge to sever relationships with California affiliates if the legislation passes.

The short of the long is that no one is sure where this is going to end up. I think our argument on the damage to small businesses has started to penetrate and I personally felt better about this trip than the last time I was up. Governor Schwarzenegger has pledged to veto any tax increases. This may or may not count as a tax increase (as opposed to a collection effort) but we definitely have some allies who want to strike this language. Moreover, there are two other proposals, 711 and 469, that would bring in sales tax revenue without harming affiliates.

Earlier today Google Affiliate Network, Commission Junction, and LinkShare all dropped emails to their California affiliates. These efforts, along with all the Tweets, posts, and smaller email blasts, are VERY helpful to our cause. We definitely heard that we were making our presence known. If you are a California affiliate and you have not yet written your representative regarding this issue, please do so ASAP. We are having an impact and we have a realistic chance to derail this destructive measure. Huge props to everyone doing their part.

UPDATE 6/24/09:

Not sure where this will lead: <a href=”http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/24/BA5G18D621.DTL”>Democratic plan to fix budget headed for defeat</a>