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The net non-neutrality crowd is not only wrong; they're not being straight with us
November 28, 2014 — 7:09 PM UTC by Guest Columnist Mike Golaszewski
Brooke’s Note: The net neutrality debate can tie your mind in knots. The very term smacks of a Marxist euphemism for the mass production of mediocrity, right? Cisco CEO John Chambers sure sounds convincing when he says that essentially we’ll get what we pay for when it comes to receiving the physical Internet for “free.” Profit drives investment. Non-investors drive in the slow lane. Go free market! So you need someone who breathes Internet to explain why standard-issue, free-market arguments may not apply in this case or why both sides have equal claim to the moral authority afforded by Adam Smith’s Invisible Hand. Mike Golaszewski, with a sure hand, goes for it here and addresses Chambers’ thoughts head-on about halfway down.
What if you could subscribe to cable television the same way you currently subscribe to the Internet? You’d pay one flat rate for “television access,” and any channel you wanted to watch—Comedy Central, CNBC, Fox Business—could be accessed with a simple click of the remote. You might have to pay a few extra dollars directly to certain channels to view them (premium content providers like HBO), but at least you’d only be buying content that you were actually consuming.
Now, imagine if you had to pay for Internet services the same way you currently subscribe to cable TV. Your ISP (Internet service provider) would first offer you a “basic package,” providing you with high-speed access to Google and a bunch of other crappy websites that you weren’t really interested in. For an extra $30 a month, though, you could upgrade to the “social networking package,” providing the same high-speed access to sites such as Twitter, Facebook, and Instagram. Movie watchers could get the “Hollywood access package,” another premium tier providing high-speed connections to Netflix and the iTunes store, while small business users—RIAs, for example—could be forced to upgrade to a “small business VOIP package” to ensure that they had enough bandwidth to run telephony applications like Skype, FaceTime, or Vonage. See: How Google Love can put an RIA onto an equal marketing footing with BlackRock.
Ones and zeroes
Sound absurd? Well, it’s one possible future of the Internet if Federal Communications Commission commissioner Tom Wheeler decides to reject President Obama’s call to preserve network neutrality and moves forward with his own plan to introduce “Internet fast lanes.” Wheeler’s proposal would upend the Internet as we know it, instantly negating the bedrock principles that have governed the transport of data across the Internet since it was created in the late 1960s.
A quick primer: The Internet was founded on the basic tenet that all data is the same, and, as such, should be treated the same. As an engineer, this isn’t a hard concept to grasp: data—whether it’s part of a picture, a movie, or a spreadsheet—is fundamentally a string of ones and zeros. The network’s responsibility is to simply pass these ones and zeros from one place to another as quickly, efficiently, and accurately as possible. It doesn’t favor certain ones and zeros ahead of others; rather, all these ones and zeros are treated and prioritized equally. This neutral and decentralized method of prioritizing data flow has been dubbed “network neutrality.”
For small businesses, network neutrality has been an economic boon. It’s the reason why a college kid with a good idea—Mark Zuckerberg—could take on an international conglomerate like Rupert Murdoch’s News Corporation — and win (Murdoch acquired the social networking site MySpace in 2005 for $580 million and sold it in 2011 for $35 million; today, Facebook has a market cap of over $207 billion). Network neutrality has given also rise to innovative companies like Netflix, Amazon, and Salesforce. See: Salesforce rolls out giant product, pricing changes — a virtual doubling for the direct-sold version that could price out some mainstream RIA practices.
In our own vertical, network neutrality was the catalyst for an explosion of new and innovative companies providing web-based solutions for accounting, rebalancing, financial planning, risk management and advice delivery. The Internet is the ultimate democratizer of information; a platform that allows for, as Michael Beckerman, CEO and president of the Internet Association puts it, “innovation without permission.”
Wheeler’s “Internet fast lane” proposal would upend all that, turning the Internet into a pay-to-play scheme. For the first time ever, a concentrated number of large corporations—the handful of ISPs that provide “last mile” Internet service to consumers—would be able to dictate the prioritization terms for your Internet content. They would be incentivized to segment their networks, providing high-speed access to content providers with deep pockets while relegating everybody else to a digital ghetto. Costs of Internet services would rise, and “innovation without permission” would vanish as new startup companies are forced to pay ISPs a tax to ensure that their data is given the same priority as larger, entrenched competitors.
This is what the network neutrality debate is about, and why a broad coalition of consumers—over one million Americans of varying political affiliations—have petitioned the FCC to reclassify ISPs as “common carriers” under Title II of the 1934 Telecommunications Act. This reclassification would effectively treat the ISPs as a utility, and provide the FCC with the ability to ensure that cable companies couldn’t change how the Internet has always worked.
One voice opposed to reclassification is John Chambers, the chief executive of networking giant Cisco Systems Inc. Chambers—whose company stands to reap a windfall in equipment sales if the Internet moves to pay-to-play scheme—has been pretty vocal in his opposition to net neutrality, saying “it would be a very disappointing result if we moved back to the regulation of the Internet—like we did with voice, many decades ago.” His company later elaborated, stating that regulating the terms, conditions, and prices set by ISPs was unnecessary and harmful. See: Why sudden wealth at Facebook is gushing into a $17-billion RIA and triggered a merger of two DFA giants.
Not awesome anymore
There’s just one problem with this position: there isn’t a single proponent of net neutrality—not even President Obama—who is looking to implement regulatory price controls on ISPs. Nor are they looking to regulate the types of products or services that ISPs can sell to customers (with the exception, of course, being paid prioritization). Instead, President Obama’s proposal deliberately focuses on preserving the existing rules that govern data transit by disallowing ISPs from blocking content, slowing content, or implementing any type of pay-to-play scheme. Google, the Internet search giant, explained it thusly: “if [ISPs] can block some services and cut special deals that prioritize some companies’ content over others, that would threaten the innovation that makes the Internet awesome.”
As somebody who has been subject to the Securities Act of 1933 and Securities Exchange Act of 1934 for the bulk of my adult life, it’s difficult to argue for regulation. And yet, one of maddening things about this debate is that the proposed regulation seeks to preserve the existing Internet, not change it. This isn’t a socialist plot to take over the Internet. If anything, it’s the opposite: an attempt to keep the largest telecommunications companies in America from controlling what you can see or do online.
In a perfect world, the market would self-regulate. Robust competition would ensure that ISPs couldn’t degrade their service offering since consumers could simply jump to a new provider. In fact, for much of the Internet’s early existence, this is exactly how things worked: consumers could choose from a wide variety of ISPs, all of which had to compete on price, speed and bandwidth. Companies with substandard offers—or companies that dared to slow down a popular web service—were swiftly punished with the loss of revenue.
That time is long gone. After decades of mergers and acquisitions, most consumers have only one or two choices when it comes to selecting a broadband provider—and it’s usually the same company that serves up their television or phone service as well. Without choice, the market’s ability to self-regulate has disappeared, and these companies no longer have any incentive to compete. Instead, most have started to engage in anti-competitive practices designed to squeeze more revenue out of customers and content providers alike.
Take Comcast, for example. Each month, I pay Comcast a fixed fee for a 100Mbps connection to my home in San Francisco. This is bandwidth that I’ve paid for, and I have a reasonable expectation that Comcast will provide me with whatever Internet content I request as quickly as the content provider can ship it to me—at least up to 100Mbps. However, earlier this year, Comcast decided that the money I was paying for bandwidth wasn’t good enough. They insisted that one of my content providers—Netflix—pay them additional “interconnection fees” to deliver video to me. In other words, Comcast demanded additional fees from Netflix to deliver my content over network resources that I’d already paid for. In most other industries, we’d call this double dipping.
Unfortunately, the FCC currently has little power to prevent these kinds of shenanigans. Earlier this year, in deciding a case brought against the FCC by Verizon Communications, the United States Court of Appeals for the District of Columbia ruled that the FCC’s Open Internet Order of 2010 (the Commission’s attempt to codify net neutrality principles) could not be enforced on Internet service providers unless they were reclassified as “common carriers.” Since the FCC had previously classified ISPs as “information services,” the decision effectively eviscerated the FCC’s ability to codify net neutrality. Without these rules, and lacking the moderating effect of market competition, our largest ISPs are set to run wild.
Good for business
The FCC has the opportunity to preserve our current open and free Internet by reclassifying ISPs as common carriers. Additionally, Congress has provided the FCC with the ability to construct a limited and focused regulatory framework through a process known as forbearance. The FCC should exercise that power, creating limited oversight that simply preserves network neutrality but otherwise leaves ISPs alone.
When Brooke originally approached me to write this article, he was emphatic that I “tie this issue to specifics about RIAs.” This is somewhat difficult to do, as it’s akin to arguing that sunlight is only beneficial to a specific genus of flowers. So let me be clear: Preserving the decentralized and neutral prioritization of traffic that has governed the Internet since it was invented isn’t just beneficial to RIAs, it’s beneficial to every single consumer of Internet services in the United States, and every single small business that relies on the Internet to service their customers.
The Internet has been the greatest economic engine of the modern age, a powerful catalyst for innovation that rewards ideas based on their merits, not by the capital that stands behind them. As beneficiaries of this innovation, RIAs—and the companies and individuals that serve them—need to set aside our natural aversion to regulatory bodies and stand with those people who want to preserve a free and open Internet.
Network neutrality is simply good for business.
Mike writes this column in his capacity of managing partner of element-12, a technology consulting firm that provides services to the financial services and software industries. He is also former senior director and head of product for Black Diamond.
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