On January 14, 2014 the D.C. Circuit Court of Appeals struck down two FCC rules that supported "net neutrality."
On January 14, 2014 the D.C. Circuit Court of Appeals struck down two FCC rules that supported “net neutrality.”

On Tuesday the 14th, the U.S. Court of Appeals for the District of Columbia Circuit struck down a huge portion of the FCC’s 2010 Open Internet Order.  The court invalidated two rules, one that prevented discrimination against, or in favor of, websites or services, and another that banned ISPs from completely blocking consumer access to websites or services.

These “net neutrality” rules had been designed by the FCC to ensure that ISPs treat equally all similar content traveling through their networks.  ISPs were not allowed to prioritize or provide better speed to traffic from one site versus another.

Without these rules, ISPs are free to start changing their business and pricing models drastically.  One possibility is that ISPs could change their pricing models with consumers by charging for access to certain types or sources of content. It is also possible that ISPs could begin to charge content providers and websites for access to their subscribers, or for prioritized speed across their network.  One extreme scenario would be that ISPs create walled gardens where customers only have access to sites within their network, and cannot access the larger Internet.  Another scenario, one that many news outlets have been predicting, is that companies like Netflix (which currently accounts for approximately 32% of peak internet usage in North America), will be forced to pay for at least some of the ISP’s bandwidth that they use.  (Currently, websites pay web hosting companies for bandwidth, but do not pay ISPs for the use of their “last mile” networks to get from the internet backbones to consumer’s homes.)

The ramifications for startups will largely depend on how ISPs begin to exercise their newfound freedom.  Some of the theories focusing on potential negative outcomes include the following:

  • Right now, the spotlight is on video streaming sites, like Netflix and YouTube, that account for a huge portion of Internet traffic.  Startups operating in this area could potentially be forced to pay for bandwidth on ISP’s networks, in addition to paying their web hosting service for bandwidth.  While no one knows how big these charges might be, added costs would make it harder for small companies to innovate and operate high bandwidth sites.
  • Turning the Internet access into something that looks more like Cable TV where consumers are given a limited menu of available channels, pay for basic service and then pay extra for additional content.  In this scenario, consumers would sign up for access to packages of content providers (such as access to Google, Netflix, or BitTorrent).  One of the main concerns here is that only large companies would be able to afford the fees that ISPs might charge to provide content to consumers.  Startups and other content providers might be totally blocked or have to deal with restricted speed and bandwidth limits.
  • If ISPs act as gatekeepers, it may limit the innovation that is possible when consumers can chose the best services and websites for themselves.  For instance, think about what might have been if Comcast had a deal with AltaVista to be the sole search engine for Comcast customers.  When a startup called Google created a better search engine, Comcast consumers would have been unable to try this new service, or would have been able to try it, but with Comcast limiting the speed that pages load.

It is also not a certainty that the lack of net neutrality would be entirely hurtful for innovative startups.  Opponents of net neutrality argue that:

  • Competition among ISPs will drive them to keep their networks largely neutral because if they block or limit access to certain websites or services their customers will chose other, less restrictive, ISPs.
  • ISPs might not charge smaller startups very much, if anything, for access to their networks.  The focus would be on big users of data.
  • With more money flowing into ISP’s coffers, they could potentially ramp up deployment of faster networks, allowing for new innovative services and products that utilize the better speeds.
  • ISPs could become a new exit option for startups.  If ISPs are allowed to prioritize and block traffic, they may want to begin acquiring content providers and innovative startups to put within their pay walls to provide content and services to their customers.

Despite the ruling, net neutrality is not dead.  The court of appeals left room for the FCC to re-regulate ISPs, and congress could also act to pass net neutrality laws.  The court found that the FCC had the authority to regulate broadband use, but that the 2010 regulations did not go about it in the right way.  Instead of classifying ISPs as common carriers, like telephone companies, where the FCC would be able to impose net neutrality’s anti-discrimination and anti-blocking rules, the FCC categorized ISPs as information service providers.  The court declared that the FCC did not have the authority to impose common carrier like restrictions on information service providers.  So, while striking down the current rules, the court left the door open for the FCC to reclassify ISPs as common carriers and then impose net neutrality rules.

Another way for the FCC to ensure net neutrality would be to bring case-by-case actions against ISPs that abuse their market power and act in an anti-competitive manner.  Under what circumstances the FCC might find this type of abuse remains to be seen.

In conclusion, the end of net neutrality rules, at least as they were previously written, gives ISPs the ability to exercise greater control over who may provide content over their networks and who must pay for that traffic.  Just how the ISPs choose to exercise this power remains to be seen, but startups could find themselves facing additional barriers to introducing products and growing their businesses.