Why It's Time to Bail on Many Internet Businesses
First, let me just say that I hate extreme stances, as they seldom leave you with the flexibility to modify strategy to meet changing situations. But the recent signs that net neutrality is as dead as a dial-up modem business qualify as an extreme circumstance. It's time for entrepreneurs to consider whether a consumer-oriented Internet service business is still a wise way to spend their time.
A quick review: Net neutrality, also known as Open Internet, is a policy that would have Internet service providers treat all traffic the same--whether users are simply clicking on a link or streaming video, which requires a lot more bandwidth. The high tech industry has publicly supported the concept and its importance to innovation and the ability of new companies to develop disruptive technology. Carriers have opposed it because they claim that traffic growth is out of control and that they need to spend a lot to keep upgrading equipment, and so want to charge more for companies to get high speed access to their customers.
Net Neutrality Gets Hosed
In reality, carriers have all along charged traffic at each end, whether the consumer or the company creates the traffic. The carriers see healthy profits and have with their continued large investments in infrastructure investment, so crying poor doesn't ring true.
The FCC has been fighting a losing battle for a few years as it has tried to regulate control over Internet access, even though, as courts have repeatedly pointed out, it had not categorized ISPs in such a way to let them legally do this. After getting its administrative head repeatedly handed over on a platter of legal briefs, the agency finally caved and planned to permit an Internet fast lane, so ISPs could charge companies additional amounts for access at the highest traffic speeds and qualities to customers.
The upshot? For many thinking of starting an Internet-based service company, at least one targeting consumers, it is time to consider walking away and doing something else.
That may sound defeatist, but this is business and you have to consider whether you want to wage a war of idealism, with dim prospects of winning, or find a way to build a solid business and make money.
Unless the FCC changes its mind, it has effectively killed net neutrality already. There is no real difference between saying a small group of companies pays more gets regular service while all other companies see slowed traffic, or a small group of companies pays more for speedier service and all other companies see regular traffic. The effect will be the same, particularly as you don't know (but can reasonably guess) the quality of that "regular" traffic.
Some lawmakers have begun to talk about legislation that might offer a workaround, but let's get real. Democrats have zero chance of passing such a bill given the antagonism that Republicans have shown toward the net neutrality concept.
Why Play a Rigged Game?
You also have to wonder how supportive the high tech giants actually are beyond their statements. Companies such as Google and Facebook pay at least some broadband carriers for faster access and others--Netflix in particular--are joining in.
They don't like it, but can afford the extra money, unlike startups. Even with all the protests, stripping away net neutrality would help the tech giants against potential disruptive startups, and the carriers don't want competition in the service areas they've expanded into, like television distribution.
Should all Internet-based companies give up? No. If you've got a service that doesn't require high total bandwidth or if you've focused on B2B sales, you might be able to make do without paying extra. Or, if you are trying to get acquired and you have unique technology, the additional speed might not be important. You might even have massive funding that lets you keep the carriers happy.
But if you want to scale up a consumer-oriented service delivered via the Internet and you can't pay the toll, you're looking at an inhospitable environment. Why beat your head against the wall repeatedly? If you knew a casino had rigged roulette tables, would you play? Of course not. You'd find another pastime. And that's exactly what lot of entrepreneurs should do: Find a better business opportunity.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.