Christopher Mims reports in the Wall Street Journal:
The real risk isn’t that deep-pocketed internet giants would be unable to pay for telecom play. Rather, it’s that any would-be next big thing will instead be smothered in the cradle. In Snapchat’s IPO filing, the company listed the end of net neutrality as a potential threat to its long term prospects. Imagine what these changes might mean to a startup at the seed stage, with only a few million in investment.
One of the most basic principles of the internet is, depending on whom you ask, either in mortal peril or undergoing a rapid evolution.
Advocates for “net neutrality”—the principle that all data transmitted through the internet should be treated equally—argue it is needed for America to cultivate innovative web-focused startups. Critics say that alternatives to net neutrality could lead to innovation and competition in the country’s communications infrastructure, where they are badly needed.
This is a battle of titans. Major internet companies—if not the hardware manufacturers that enable them—have vocally supported the prerogative of the Federal Communications Commission to enforce strict net neutrality, while most telecommunications companies have opposed regulation that preserves it. As President Donald Trump’s FCC appointees appear set to target current net neutrality rules, companies on both sides may be taking a wait-and-see approach. Microsoft Corp., Alphabet Inc.’s Google, Netflix Inc., Verizon Communications Inc. and Amazon.com Inc. declined to comment. AT&T Inc. didn’t respond. This debate is likely to persist, but in the near term it looks like advocates of net neutrality will be dealt a major blow. That’s because consumers are going to love the Trump administration’s potential first steps at dismantling net neutrality. It starts with an ever-widening array of services that are “zero-rated.”
Zero-rating involves internet service providers giving customers free data services, such as unlimited video streaming.
Big carriers including AT&T, Verizon, T-Mobile, Comcast and Sprint already offer some forms of zero-rated services. T-Mobile’s Binge On program allows customers to stream Netflix, for instance, and AT&T lets subscribers stream its own DirecTV Now service, each without eating into their monthly data allowances.
The FCC appeared to be in the process of banning the practice in some instances, on the grounds that it could unfairly privilege carriers’ own services. The agency had flagged the zero-rated services from both AT&T and Verizon for further review, says Commissioner Mignon Clyburn. Then on Feb. 3, Trump-appointed FCC Chairman Ajit Pai closed the agency’s investigation of all zero-rating practices.
Critics of zero-rating say it presents consumers with a choice they can’t refuse. Who would say no to video they can stream free or for a flat fee when the alternative is video from competing services that may eat up all their expensive data? This is the reason zero-rating was banned in India, a country that viewed Facebook’s attempts to give free data to its users as tantamount to colonialism.
Zero-rating resembles “paid prioritization,” in which companies pay to have their data delivered first, a practice that is prohibited under the FCC’s current rules. Net-neutrality proponents also argue that carriers shouldn’t block any content or throttle its delivery speed. Whether they’re promoting one service or blocking another, all these moves potentially hurt competition by favoring services in which the carrier has an interest. The real risk isn’t that deep-pocketed internet giants would be unable to pay for telecom play. Rather, it’s that any would-be next big thing will instead be smothered in the cradle.
In Snapchat creator Snap Inc.’s IPO filing, the company listed the end of net neutrality as a potential threat to its long term prospects. If a company potentially valued at $25 billion is worried about having to pay carriers to be competitive with other zero-rated peers, imagine what these changes might mean to a startup at the seed stage, with only a few million in investment.
Headlines and news conferences aside, even most opponents of net neutrality don’t believe we should do away with it completely.
Based on Mr. Pai’s public statements and recent actions, the FCC chairman appears to oppose the Obama-era FCC judgment that the commission has the power to regulate internet service providers the way it regulates telecoms more broadly. Mr. Pai’s office declined to make him available for comment.
Roslyn Layton, a visiting fellow at the American Enterprise Institute who studied net-neutrality practices in other countries, was part of Mr. Trump’s transition team. She believes we need what she calls “soft net neutrality,” where multiple stakeholders, including both big internet companies and carriers come together and make the rules together. (Our current reality actually represents some of this compromise already.)
In Ms. Layton’s view, the rules should be set by Congress, not the FCC. This is a likely scenario. There are bills in the works from members of both the House and the Senate that would restore to the FCC some limited authority to regulate net neutrality, but would limit its powers.
Investors are proceeding with caution. “We’re assuming that net neutrality in its wired and wireless fashion is gone,” says Andy Weissman, a venture capitalist at Union Square Ventures who has been an outspoken defender of net neutrality. He’s investing in Tucows, an internet service provider that is beginning to roll out fiber in some areas. Tucows will be “pure pipes” he says, which means in the future, it could differentiate from incumbent carriers by committing to equal treatment for all data.
The consumer impact is much more difficult to predict. The pace at which the U.S. turns out new internet startups could slow. With new cash flow opportunities, competition among internet service providers could increase, lowering prices.
What makes it so hard to calculate is that we’ve never really lived in a world without net neutrality. Even before the FCC’s 2015 rules on net neutrality, fear of those regulations kept internet service providers in check, says Michael Cheah, general counsel at video streaming company VHX and its parent company Vimeo. Video-intense businesses such as his are most threatened, since they tend to require more bandwidth than other kinds of internet-dependent firms.
Doing away with the FCC’s current power to enforce net neutrality is, he says, like lawmakers tossing away an umbrella just because it’s not raining outside, forgetting that big carriers have every incentive to make it rain—for themselves.
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