POLITICS

FCC Move Spells Trouble for Online Startups

A new proposal threatens 'Net neutrality' and economic growth.
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Imagine that we’re way back in the Stone Age of the Internet, say the summer of 2005. What if then-dominant social networking site MySpace, which had just been snapped up by News Corp. for $580 million, had the opportunity to purchase preferred access to the infrastructure of the Internet, guaranteeing that its (at the time) bandwidth-intensive services would be delivered more smoothly than those of competitors who couldn’t afford the extra charge?

Around that same time, there were a bunch of Harvard students trying to make a go of a thing called Facebook. They had some venture capital backing, but nothing on the order of News Corp.'s deep pockets.

If their main competitor got the red carpet treatment into users' homes while Facebook had to sneak in through the back door, how likely is it that Facebook’s newer--and ultimately much better--product would have had a real chance to compete? 

Related: U.S. Appeals Court Strikes Down FCC Net Neutrality Rule 

Experts who work with Internet startups warn that a new rule expected to be proposed by the Federal Communications Commission threatens to stifle innovation in just that way. Federal courts have twice blocked efforts by the FCC to codify what's commonly known as "Net neutrality." That’s the idea, basically, that Internet Service Providers cannot discriminate against different kinds of traffic on the Internet. On Thursday, some say, the FCC admitted defeat, announcing a plan that would allow ISPs to sell companies who can afford it what amounts to express lane access to consumers' homes. 

"This proposal is a huge step backwards and just must be stopped," says Michael Copps, a former FCC commissioner who advises the Media and Democracy Reform Initiative of liberal advocacy group Common Cause. "If the Commission subverts the Open Internet by creating a fast lane for the 1 percent and slow lanes for the 99 percent, it would be an insult to both citizens and to the promise of the Net."

Opponents of the proposal say it will make it impossible for new Web-based companies to compete against established rivals.

"We know that users will leave a service if it's slow to load, or if it's unreliable," says attorney Marvin Ammori, a fellow with the New America Foundation who advises startups on Net neutrality. “If your competitor is faster, you need to match them.” 

Related: The Real Threat Lurking Behind the Comcast-Time Warner Deal 

For budget-constrained startups, forced to cut deals with multiple ISPs on the same terms as established businesses, that just might be financially impossible. 

Major cable and telecommunications companies have fought hard against Net neutrality, arguing that companies that provide bandwidth-heavy services are getting a free ride from the companies that build and maintain the delivery systems carrying their content. ISPs, they argue, should be able to charge extra for heavy use of their infrastructure. 

Consumer advocates, on the other hand, have said that a person who buys Internet access from an ISP has the right to expect that the ISP won't throttle the content and services they want access to on the basis of arrangements over which the user has no control.

In the end, this comes down to a question of who pays. There's no argument that providing more bandwidth to consumers costs more money. But consumers have become used to home Internet service without usage caps, so ISPs are reluctant to institute them. As a result, instead of charging consumers extra when they use more bandwidth, ISPs would prefer to transfer that cost to the content providers, and make them up their prices instead.

Related: Comcast Makes the Case for Time-Warner Cable Deal 

One way or the other, it's the consumer who will end up paying more. But the option the FCC has chosen, some worry, means consumers will take the hit in their pocketbooks, and Internet startups will take a hit to their ability to compete with established players. 

"When it comes to firms that are up and running, that have cash flow, profits, and cash in the bank, vs. a guy working in the back of his house who has some bandwidth intensive product, this shifts the balance in the favor of established groups with deep pockets vs. innovation," says Tom Salonek, founder and CEO of Intertech, an Eagan, Minnesota company that offers consulting services to Internet startups.

FCC Chairman Tom Wheeler said that critics of the proposal that he introduced Thursday were "flat-out wrong." He issued a statement saying that the proposal was consistent with the agency’s previous Net neutrality proposals but would withstand a court challenge. "As with the original Open Internet rules, and consistent with the court's decision, behavior that harms consumers or competition will not be permitted,” he said.

Industry advocates, though, say the language made public at this point--the final proposal won’t be available until next month--suggests that how the rules govern what an ISP can and cannot do will be subject to interpretation.

Related: Comcast Adds Video Subscribers, Beats Street 

"There are a lot of unanswered questions, even about what was decided," says Salonek. "They are going to avoid 'commercially unreasonable' practices but they don't define what that means. There are so many variables that aren't defined that it's kind of scary."

For a startup company operating on a shoestring budget, though, that presents a pair of problems. First of all, few will have the resources to mount a court challenge if they believe a major ISP's practices are "commercially unreasonable." But even if they do have the ability to mount a court challenge, there's the problem of time. Startups generally have a limited amount of time before their money, and their investors' patience, wears out. 

"Unless you've got a rich uncle, or believe in Santa," says Salonek, its likely that many startups would go under before they could complete even a successful legal challenge. 

To be sure, the FCC proposal is at this point just that--a proposal. It will have to go through the convoluted federal rulemaking process before it goes into effect, and advocates like Salonek hope that during the federally mandated public comment period there will be some pushback from consumers. 

"My hope is there is going to be some ire," he says, "and that people are going to become aware." 

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Last updated: Apr 25, 2014




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