Yahoo! Brought To Earth

Financial Times

A chorus of sky-is-falling rhetoric greeted the French court order requiring Yahoo! to block French users from accessing Nazi memorabilia on its US website. France’s action, we are told, constitutes illegitimate extraterritorial regulation. Every internet content provider will now be subject to the conflicting laws of every nation. Electronic commerce will be stifled; the internet itself may be in jeopardy.

None of this is true. Confusion on this issue begins with the metaphor of the internet as a “borderless medium.” It is no more a borderless medium than the telephone, telegraph, postal service, facsimile or smoke signal. All of these media facilitate transactions by someone in “real space” in one nation with someone in “real space” in another nation. When French citizens are on the receiving end of an offshore communication that their government deems harmful, France has every right to take steps within its territory to check and redress the harm.

France’s action is not unusual. Nations have long applied local law to regulate broadcasts from abroad, pollution from offshore sources, local crimes initiated elsewhere, the harmful local consequences of out-of-state monopolistic behaviour and the like.

Moreover, France’s action to protect its citizens does not imply that all internet transactions can be regulated by all nations. A country can enforce its regulations only against companies with assets in its territory. The vast majority of internet users – e-commerce buyers and sellers, porn purveyors and consumers, chat room participants, web-page owners and the rest – need worry only about local regulations in places where they have some physical presence such as assets, bank accounts or employees.

Nor is it remarkable that internet companies with a presence in several countries face potentially conflicting national regulatory requirements; all multinational companies face multiple regulatory burdens. Companies that find local regulations oppressive can choose between changing their local behaviour or not doing business there. Why should Yahoo! be different?

The conventional answer is that internet companies are different from “real space” multinationals because internet architecture precludes them from knowing where in the world their content goes, making it impossible for them to comply with all local laws. Many worry that, as a result, internet companies will bow to the most restrictive national law to avoid liability.

The French decision explodes this argument. Filtering technology allows web operators to identify recipients of information by geography and screen out content to them.

True, the technology at the moment is not perfect. But no border control technology is perfect – and it need not be perfect to achieve the desired regulatory effect. Moreover, the French decision imposed only modest restrictions on Yahoo! It did not penalise the company for all Nazi content that appeared in France but only for that content that Yahoo! could, through best efforts, keep out of France.

The implication of the decision is that small internet content providers need not worry about complying with the laws of every nation but large sites with a presence in many nations must comply with local laws and, thanks to technological developments, can do so.

The French decision found a reasonable middle ground. France can go after companies in France that facilitate violations of French law but it can do nothing directly against offshore content providers that have no presence there. Against this latter class of internet users, the country must employ different strategies, such as regulating French end-users, French ISPs or financial intermediaries based in France.

Some critics worry that the geographical filtering relied on in the French case will be the death of the internet and, especially, of e-commerce. This is ironic, because the technology was developed for e-commerce sites that demand the ability to market and price-discriminate by geography. In any event, worries about a filtered internet are exaggerated. Geographical filtering will marginally raise the cost of doing e-business but the many efficiencies of the internet will in the long run make this seem trivial.

Moreover, the costs of geographical filtering are perfectly legitimate and perhaps even efficient. Yahoo!’s auction of Nazi goods through its servers in the US created damage in France that, until the French decision, Yahoo! ignored. Geographical filters force Yahoo! to take account of the true social cost of its auction activities.

Five years ago the internet appeared to be a corporation’s dream: a medium that facilitated unlimited and inexpensive access to consumers without any regulatory restrictions. The French decision marks the beginning of the end of that dream. When corporate activity causes cross-border harm, nations can, and will, assert their regulatory authority.