Venture Bytes #9 – Net Neutrality – The Debate Rages On

Posted May 20, 2015

Net Neutrality – The Debate Rages On

Net neutrality attention is back in mainstream headlines and newscasts. The FCC proposed new rules for broadband access and politicians are up in arms on both sides of the divide. There is an election super cycle coming. The lawyers are getting ready for long battles, some fought in the spotlight. The legal process aside, we believe the principle of net neutrality based on a free and open Internet should be guaranteed and enforced. It has served us well and unleashed a spate of innovations that have uplifted our lives. The vitality and innovation that we should and need to nurture and celebrate could vanish, and will decline, if the “economics” of net neutrality takes precedence over the “larger good” of net neutrality. We support the FCC’s new proposal and expect the courts to approve it.

The FCC voted 3-2 in February to reclassify broadband as a regulated public utility, invoking Title II of the Communications Act. This provision prevents connectivity providers from selectively blocking, throttling or offering paid prioritization of Internet traffic. Title II was historically applied to telephone companies. These firms were regulated as public utilities and subject to government scrutiny regarding every aspect of service, including pricing and universal service obligations. Since the mid-1990s, the Internet has been classified as an “information service,” which is subject to much less regulation under Title I. The new FCC rule findings apply to both fixed and mobile broadband Internet access services. The FCC aims to regulate both services along the lines of traditional telephone companies, which are required to deliver service at “just and reasonable” rates and interconnect with each other. The new net neutrality rules will officially go into effect June 12, 2015.

As expected, the order was met with strong opposition. The United States Telecom Association, which represents Verizon, AT&T and others, and Alamo Broadband have sued to block the implementation of the new regulation, setting the stage for long legal battles. Proponents of net neutrality have drawn public attention and opinion to their case for neutrality as “freedom of speech” and “stifling of competition”. Service providers, if left unchecked, will create a two-tier system that funnels Internet traffic into fast and slow lanes. Only the richest companies will be able to pay the extra tolls to ensure their online content is accessible through these fast lanes. Critics of the new classification state that it will stifle the innovation that has characterized the Internet during its first decades of development. Failure to keep and extend Internet user protections will occur and providers may subject customers to new taxes, such as the Universal Service fee cell phone users must pay, as well as state and local utility taxes.

Without neutrality, courts won’t give the FCC the flexibility it needs to save broadband providers from the most onerous of these requirements. While both sides have reasonable arguments, we believe protecting the principle of net neutrality trumps all carrier concerns. This is all the more important given a number of factors including the rise of over-the-top video (OTT) and cord cutting, secular decline in pay-tv subscribers, and the growing share of broadband revenues for ISPs.

The compulsions for the ISPs to breach the long-held presumption of net neutrality has never been bigger. It won’t be long before the ISPs start engaging in preferential or discriminatory treatment as a stated policy. Our hyper fast evolving, economically essential and fragile start-up ecosystem will suffer absent codified legal protection for net neutrality.

The bursts of innovation in the last 20 years need to be sustained and built upon. One cannot imagine a life without companies such as Google, Amazon, eBay, Skype, Priceline, Zipcar and Kayak…. We all rely on present and future innovation for innumerable life changing applications based on a free and unfettered Internet. All these companies start/started with venture capitalists backing the vision of innovators. They continue to invest in new and disruptive companies. In 2013 for instance, the venture community invested nearly $30 billion into more than 3,000 emerging companies. Of that total investment, $19 billion went toward Internet-related companies and a record $7.1 billion went towards companies which exist specifically because of the Internet. Annual investments into the software industry also reached new heights in 2013 with $11 billion flowing to software companies whose products and business models depend on the Internet, including Uber and Pinterest.

Similarly in 2014, venture capitalists invested $48.3 billion in 4,356 deals in 2014, an increase of 61 percent in dollars and a 4 percent increase in deals over the prior year, according to the data from National Venture Capital Association. Internet-specific companies captured $11.9 billion in 2014, marking the highest level of Internet-
specific investments since 2000.

Will these investments continue if net neutrality is not codified and enforced? We don’t think so. In order for venture capital investment to continue to flow into the Internet economy, entrepreneurs must maintain their ability to develop products and services and reach the global markets through equitable access to the Internet. The principle of net neutrality should be guarded at all costs.

Also featured in this edition is our news section containing  articles from CNET, Economic Times, and Wired