Imagine waking up one morning to an inbox flooded with upset client emails. They write that they couldn’t access your site and perform functions essential to their operations. You’ve cost them significant monetary loss, so they’re leaving for your competitors. Your website analytics confirm the story: your website visits plunged and thousands of dollars were lost overnight.
You check the website: is it down? Has the server failed at some point? Is this an April Fools’ prank? No, no and no. Rather, it’s because your internet service providers decided it would be so.
Welcome to the dystopian future of no net neutrality.
Let’s back up: what is net neutrality?
Net neutrality is a principle as old as internet itself. Coined as a term by law academic Tim Wu, net neutrality states that Internet Service Providers (ISPs) “should enable access to all content and applications regardless of the source, and without favoring or blocking particular products or websites.” Simply put, it means that the Time Warner Cables and Verizons of the world don’t get to play gatekeepers of internet traffic. They can’t dictate what people do with their data, nor can they restrict, favor or slow down any legal traffic.
Sounds fair, right? Most people agree: from world wide web inventor Tim Berners Lee, to civil rights groups, consumer advocates and technology companies. They hold net neutrality to be a core value of the open internet:
- It is pro-consumer. Net neutrality protects consumers’ freedom of choice by granting them equal access to all legal content. In today’s digital age, protection of this right is considered “the First Amendment issue of our time.”
- It is pro-free market. Net neutrality benefits businesses because it allows for free competition without automatically favoring incumbents. The effect of a potential ISP intervention on business outcomes is not to be underestimated: mere (milli)seconds of delay can make a world of difference in how people interact with a site. For example, if a site takes more than 3 seconds to load, 40% customers will abandon it. Another interesting statistic:
If an e-commerce site is making $100,000 per day, a 1 second page delay could potentially cost the business $2.5 million in lost sales every year.
All this means that, as an entrepreneur, net neutrality is your friend. Protection of net neutrality means that you don’t face any extraneous barriers when connecting with your end users online. In terms of competition, net neutrality is the great equalizer, putting your business on an equal footing to success as your competitors.
Why would they want to take net neutrality away?
Who’s then arguing against net neutrality? You’ve probably guessed it: ISPs. Also, some big corporations (read: incumbents that do not wish to be dethroned by newcomers) and a few technologists. Essentially they’re making two main points:
- Killing net neutrality will advance internet technology. The ability to prioritize bandwidth gives incentive to ISPs to innovate on internet infrastructure such as with advanced fiber-optics.
- It may also make internet cheaper for consumers. Charging companies that create a lot of internet traffic may allow ISPs to give some internet access to the public for free.
Both arguments are highly contestable.
Is net neutrality inhibiting innovation?
While advanced infrastructure that provides a faster, more reliable internet service is widely beneficial, this shouldn’t mean that slashing net neutrality is necessary to create the economic incentives for ISPs and other tech companies to innovate. Internet is not a luxury; it is an ubiquitous mode of information, communication and economic transaction. This powerful status already provides all the necessary incentives for improving its quality.
This is exactly what drove Alphabet Inc. to create Google Fiber, its fiber optic business. Since launching in 2010, Fiber has laid the groundwork to offer, in an increasing number of locations, internet access of up to 1 gigabit per second, which is about 100 times faster than what most people in the US have access to today. Some argue that it’s exactly Google Fiber that prompted ISPs such as AT&T to react swiftly and roll out their fiber networks to more locations than Fiber has reached so far. The bottom line here is that, if ISPs refuse to innovate, they’ll be driven out of business—net neutrality or no net neutrality.
Will eliminating net neutrality make the internet cheaper?
As for the second argument, the thought of getting (some) internet access for free as a consumer may sound compelling, but only at the outset. Macroeconomics teaches us that tax incidence—where the burden of the tax falls—does not depend on which side of the transaction is taxed. Instead, it depends on the elasticity of supply and demand—the degree at which buyers or sellers will change their demand or supply of a good in response to price changes.
This means that even if consumers don’t have to pay for internet access upfront, they will probably have to pay down the line for the increased cost that their preferred content providers would face. For instance, if my demand for Netflix is inelastic (I need Netflix in my life!), this means that I will probably be paying higher Netflix rates due to Netflix’s additional operating costs since now they have to pay ISPs more than they did before. The bottom line is that both companies and consumers have to shoulder the increased cost—regardless which side gets visibly charged—while ISPs benefit.
Economics offers an important (albeit inaptly-named) term for the behavior that ISPs display by seeking to become gatekeepers of internet traffic: rent-seeking. This simply refers to lobbying for policies that give certain groups special privileges and wealth, without creating new wealth. Robert Shiller, Nobel Laureate in Economics, offers a classic example of rent-seeking behavior.
“The classic example of rent-seeking is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free. If enough lords along the river follow suit, its use may be severely curtailed.”
In this analogy, the feudal lords named Comcast and TWC are trying to impose higher rates on broadband traffic without creating any new value to any of the parties involved besides themselves. This is not simply a zero-sum game in which ISPs win what the consumers and businesses lose; rent-seeking behavior creates a high cost on the whole economy by hampering potential innovation that would have occurred had these anti-business policies not been in place.
What are the current laws and regulations?
It’s been an interesting few years for net neutrality in the United States.
The basic legal question is: should the internet be regulated as telecommunication (that is, a utility) or as information?
Proponents of net neutrality claim the former. If internet is considered a utility, then the simplest analogy is with telephone calls: telecom providers are not allowed to block, favor, slow down or affect the service based on the content of the phone conversation.
Opponents of net neutrality claim that the internet should be regulated as information. Similarly to television networks, which have full control over their programming and the liberty to pick and choose the ads and content that are broadcasted, ISPs would be able to regulate the content of the internet traffic they allow access to.
The battle between the two sides has been a veritable tennis match spanning over 2 decades. Without getting too much into the weeds, here are the highlights:
- In 2002, ISPs were classified as information providers, therefore regulated differently than telecom.
- In 2007, however, it became evident that ISPs had become too powerful. For instance, Comcast got in trouble for intentionally slowing down (also known as throttling) the peer-to-peer file transfer protocol BitTorrent.
- Under Obama’s pro-net neutrality administration, the Federal Communications Commission (FCC) approved in 2010 the Open Internet Rules: Transparency; No Blocking; No Discrimination.
- In 2014, the Open Internet Rules were struck down with an unexpected ruling in favor of ISPs and fast-lanes. Cue protests and the Internet Slowdown Day, a dark time for the internet when some major internet companies, such as Netflix, Tumblr and Reddit, coordinated to slow down their pages in protest of the ruling.
- In 2015, the FCC rules in favor of net neutrality by reclassifying broadband as a utility. This was a big victory for net neutrality advocates, as it was the first time there were clear legal restrictions against impending net neutrality.
Trump is now President. Where does that put net neutrality?
The GOP establishment has historically sided with corporations and has opposed net neutrality regulation. Trump has already taken the first step in that direction by tapping Ajit Pai, an outspoken critic of net neutrality and former lawyer at Verizon, to chair the FCC. Pai has denounced of the classification of broadband as a utility. Within mere days from appointment, he took the first few stabs at net neutrality, such as by closing investigations into zero-rating practices of major ISPs.
While it’s clear that the GOP-led FCC will keep deregulating net neutrality laws, it is not yet clear what form this would take and how much freedom it would grant to ISPs.
Could ISPs charge consumers tiered access to the web, with the highest-paying customers accessing everything and the lowest-paying ones accessing only the web content that ISPs choose to promote?
Could ISPs zero-rate some traffic, which means allowing consumers to access for free specific content of the ISP’s choosing, e.g. Comcast giving NBC content for free?
More likely, could ISPs charge websites in turn for accessibility and high speed (also known as traffic prioritization), such as Netflix paying Comcast 75-100 million dollars to essentially preserve the same access and quality as now?
Further, a big question concerns the web traffic characteristics by which ISPs will be price-discriminating: is it simply by traffic and bandwidth, or are we talking discrimination based on the actual content? The latter would be especially cause for concern.
What does net neutrality deregulation mean for small businesses?
While there are unknown variables such as FCC ruling and the actual ISP behavior in response to it, it is clear that a threat to net neutrality is essentially a threat to small businesses.
As an entrepreneur in a world of no net neutrality, you need to be aware that if things change:
A change in net neutrality rules may be a serious impediment to startups’ ability to grow and compete.
- Operating costs of building and maintaining a business will increase. You (or your customers) may have to pay ISPs to keep your website accessible and operating at a satisfactory quality. This will make it harder to launch and grow a new business and to compete with established companies.
- The funding environment may sour. A change in net neutrality rules may be a serious impediment to startups’ ability to grow and compete. For instance, Snap Inc. included losing net neutrality as a potential risk in its February 2nd IPO filing. If net neutrality rules are to change, this may give investors pause in funding startups due to their potential disadvantage in competing with incumbents.
- You may have to rethink the channels that you use to drive traffic and conversion, particularly video-based ones. Why? Because videos, especially high definition ones, take up a lot of bandwidth. This puts digital video advertising, which in 2016 accounted for 9.9 billion spending in the US alone, at considerable risk of being slashed due to potentially high associated costs imposed by ISPs. It’s not impossible that ISPs may use this as a chance to create and promote their own video streaming products.
- You may have to consider moving towards offline channels if the cost becomes too prohibitive. For small businesses, the new and most important factor in marketing decisions may become bandwidth, as in: what consumes the least of it? High costs may start pushing these businesses towards offline marketing methods.
- Because of how much is still undetermined and changing, you have to stay vigilant and informed on the topic. And more likely than not, you will have to push back (write to and call the FCC and your representatives), and so will the consumers, to not allow net neutrality to be dismantled.
The bottom line
Businesses and consumers are faced with the grim, highly consequential possibility of no net neutrality protection and broadband price-discrimination.
In layman’s terms, this means a corporate-controlled internet.
The main beneficiaries are internet providers whose profitability would surge. In the long-term, other beneficiaries may be big corporations which, after shelling out large sums to ISPs to keep their traffic intact and prioritized, would reap the benefits of diminished competition.
All of this is to the detriment of consumers, by restricting their choices and rights, and to the detriment of business, by harming free competition and crushing disruption and innovation.
So if you like the internet free and open, make your voice heard.