Innovation on the web lives and dies with Net Neutrality

Net Neutrality was terminated by a Federal Court of Appeals decision in an action brought by Verizon, making it harder for breakthrough startup internet streaming companies to get off the ground.

Internet routers have the built-in capability to classify traffic. With the U.S. Appeals Court’s decision, nothing is stopping network operators from charging more for certain classes of internet traffic. At peak periods, unpaid traffic could be interrupted.

Internet transport on the terrestrial (land-based) internet was supposed to be free under the Federal Communications Commission’s (FCC) Net Neutrality doctrine. The FCC believed that it had the jurisdiction to regulate the internet and enforce Net Neutrality. Verizon prevailed in winning the U.S. Court of Appeals’ decision that although the FCC had jurisdiction to regulate the internet, it did not have the authority to enforce Net Neutrality, aka the Open Internet Order.

The court reversed Net Neutrality, deciding that network operators such as Verizon can sell faster and lower-latency internet streaming services to content providers, such as Hulu and Netflix, to increase speed and service quality of this paid data traffic compared to free traffic. If innovators like Netflix had to pay higher fees for internet transport when they were young, they may not have succeeded, to the detriment of all the consumers who enjoy their services. Now streamed media companies may have to pay Verizon for premium internet services and pass the cost on to their subscribers so traffic doesn’t suffer slowdowns and interruptions.

Verizon argued that it should be able to charge for differentiated services. Verizon and a handful of cable and communications companies have built most of the backbone infrastructure that supports internet traffic. Internet service providers exchange traffic through Internet Exchange Points, referred to as IXs throughout the country and around the world. An IX is a building where network operators interconnect core routers to one another and to the outside internet with very large fiber-optic connections. These network operators, also known as tier 1 networks, are vital to the efficient use of the internet. Based on this ruling, the IX points could become choke points to a free and open internet.

According to telecommunications policy expert Tim Obermier, Ph.D of the University of Nebraska:

"Internet access has similarities to the fledgling days of the telephone industry. Customers have limited service provider choice for connection to the Internet due to geography. There are striking similarities which may arise due to the court’s decision. We could potentially be looking at a situation where individuals using one particular Internet service provider cannot access specific services which individuals can access using other internet service providers. This is particularly problematic and similar to the early history of the telephone industry when the lack of interconnection of telephone exchanges was a competitive tool."

Tier 1 operators were motivated to interconnect to provide seamless internet service to their downstream retail and tier 2 and tier 3 network customers. Now they are also motivated to interconnect to charge more as they discriminate between paid and unpaid classes of service. As network demand grows, the Tier 1 networks could simply dedicate more existing capacity to customers paying for differentiated services instead of adding capacity and letting the free and open internet volumes and speeds drop to unacceptable levels, or even stop altogether.

Fearing this, the Independent Telephone & Telecommunications Alliance (ITTA) representing 10 midsized tier 2 and tier 3 networks, joined the FCC in opposing Verizon.

This comes on the heels of AT&T’s announcement of sponsored mobile data plans at the Consumer Electronics show. Under a sponsored data plan, a streamed content provider can pay AT&T in advance so a user can download without the data counting against his or her monthly data plan limit. This is just a sugar-coated version of the court ruling. If Verizon Wireless, Sprint and T-Mobile follow suit, a mobile streaming service company started today, like Pandora, Spotify and SnapChat, might not survive.

AT&T said that it won’t differentiate service between media and content companies that subscribe and don’t subscribe to its sponsored data plan. But after yesterday’s ruling, AT&T may follow Verizon’s lead, making faster mobile network speed another line item on its sponsored data plan price list.

This new environment favors big companies to the detriment of innovators. The internet is disruptive by nature. It has brought tremendous productivity and is becoming a major entertainment platform. The disruption of incumbent television and music attributable to streaming by Netflix, Spotify and Slacker Radio is thrilling for the industry. The direction that the appeals court, Verizon and AT&T is taking the internet will tame these disruptive qualities and ultimately hamper innovation.

Although the ruling against Net Neutrality is overwhelming, Obermier says there could be a bright side to this ruling.

"The authority of the FCC under section 706 of the Telecommunications Act of 1996 to promulgate rules regarding the deployment of broadband services was apparently upheld. This means the FCC could consider alternative rules which may yet protect consumers by providing open access to their favorite services over the Internet. However, if tier 1 networks all play fair, and keep the public happy, the FCC may not pursue additional control."

It will be very challenging for a small innovator to remedy unequal transport form a tier 1 network. It will be even more challenging for the FCC and courts to administer, hear and remedy the complaints of small innovators. The New York Times reported that FCC chairman Tom Wheeler was considering an appeal. Reversing this decision would eliminate a lot of bureaucracy, along with the many challenges of fairly administering internet pricing based on the class of internet traffic.

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