blog post

By Lukas André. January 21, 2016

A Manifest for Net Neutrality

For more than two decades all traffic in the internet was substantially treated equally (referred to as “net neutrality”). With the raise of global content providers like Netflix that drive bandwidth consumption and threaten the offerings of residential internet service providers, a war on quality and costs for internet traffic has begun. Today the principle of net neutrality is under attack. It represents a fundamental shift in power in the internet economy, which threatens to undermine the competitive market structure that have served internet users so well and acted as a strong catalyst of innovation.


What is net neutrality?

Net neutrality is the principle that internet service providers and governments should treat all data on the internet the same, not discriminating or charging differentially by user, content, site, platform, application, type of attached equipment, or mode of communication (Wikipedia).

For the past two decades, the internet has operated as an unregulated free market. Backbone providers connect the content providers (websites) with residential internet service providers (ISPs). Settlement-free peering between the backbone providers ensures that every computer on the internet can reach every other computer. Competition among the providers helps to keep prices down and quality up and that there is no discrimination of websites or traffic.

 

The world of communication is changing

We consume more and more content from the internet. Many services that historically were consumed by end-users directly from a local telecom or cable operator (i.e. voice communication, text messaging, TV) are today accessed using new business models or for cheaper price from third-party companies via the internet (like Skype, Whatsapp or Netflix). Obviously, these third-party companies have an interest to get their content and services delivered at best quality to the end customers. But they are dependent on the backbone providers and ISPs. The increasing data traffic and demand for bandwidth drive investments into infrastructure of ISPs.

The ISPs or telecom and cable operators risk to get diminished to providers of data connectivity. At the same time, due to consolidation, the ISPs became powerful gatekeepers of the internet traffic. In search of new revenue models to finance investments into infrastructure, ISPs started to undermine net neutrality:

  1. NetflixComcast.pngOne example is to demand payment from content providers in order to provide quality peering and deliver their traffic at sufficient speed. ISPs attempt to ask for extra payment from content providers for a “fast lane”. A prominent example is the Comcast/Netflix dispute from 2013/14. Accessing Netflix content for Comcast customers was becoming slower and slower. And only when Netflix finally agreed to a payment to Comcast, the speed of Netflix service for Comcast clients dramatically increased. Charging for traffic on both sides of the line is called “double paid traffic”. The problem of fast vs. slow traffic lane and double paid traffic is an issue for many successful content provider today but often not visible to the public.
  2. A more visible violation of net neutrality is called “zero rating”. Mobile operators enter into partnership with selected content providers and exclude their traffic from the charge/quota of the customers’ subscription. Salt for example has a commercial partnership with Zattoo and does not charge the traffic for watching their streamed video content. It gives Zattoo a commercial advantage over its competition.

 

Giving up net neutrality will slowdown innovation

These developments represent a fundamental shift in power in the internet economy. Of course, investments into infrastructure by ISPs need to be covered by relevant revenues. But this is why we pay a subscription fee. As customers we should accept that access to internet has a certain cost. ISPs should not start a war on subscription prices. If we allow to undermine net neutrality for cheaper subscription prices, we change a competitive market structure that has served internet users so well for the past two decades:

  1. Freedom of choice of users to access websites and services globally
  2. Equal opportunities for all players in the internet economy

It was this freedom of the internet that acted as catalyst for the development of new, innovative business models and brought game changers for our daily life: Skype for voice communication, Whatsapp for text messaging, Netflix for TV and DVDs, Spotify for CDs, Dropbox for data storage, just to name a few. It is the ease of distribution and equal opportunities for all player in the internet economy that makes it possible for a start-up to conquer a whole industry. In an economy where ISPs as gate keepers can discriminate offerings against other, it will become easier for established players to protect their current market position. Larger customer bases and stronger cash flow will allow them to negotiate better deals with ISPs. Thus, it will get more difficult for innovators to challenge the status quo. We will see a slowdown of innovation.
John Oliver on his show Last Week Tonight (HBO) brought it to the point. It’s fun and worthwhile to watch:


Regulation is required
Various countries have taken on the problem with different solutions. In Europe in Fall 2015 the European Parliament voted for net neutrality but with a significant exception for “special services”. “Special services” should be allowed to be treated differently on the network. Unfortunately a clear definition of “special services” is missing. While some politicians see “special services” to be a small amount of specific services to serve public good (like telemedicine or emergency services), Deutsche Telecom and Vodafone see the new law as an open door to classify online services like Spotify as a special service against a revenue share.

In the US, FCC (Federal Communications Commission) went much further and voted early 2015 in favor of a strong net neutrality rule to keep the internet open and free. In fact, FCC reclassified broadband as a common carrier under Communications Act. The FCC sided with many consumers, small businesses, entrepreneurs, and prospective startup companies. During the meeting FCC Chairman Wheeler said: “This is the FCC using all the tools in our toolbox to protect innovators and consumers to ban paid prioritization [...]. Consumers will get what they pay for, unfettered access to any lawful content on the Internet.” President Obama supported the stricter regulation, too. Watch his statement here:

 

And where is Switzerland? A partial revision of the Telecommunications Act is currently in consultation (until end of March 2016). Based on the current draft, special treatment of specific services and content will be explicitly allowed. The ISPs will only have to inform transparently if they treat traffic of specific services or content differently. This is too weak. Our internet start-ups risks to fall behind in a global competition. Only if we follow a similar path as the FCC in the US and protect net neutrality in Switzerland unconditionally can we protect the innovativeness of our start-up industry.

 

Affentranger Associates supports start-ups as a principal investor and advisor. Telecom, media and technology is one of our focus areas. In December we have successfully supported the private capital placement of Exoscale, an innovative cloud service provider in Switzerland (www.exoscale.ch). Exoscale’s ambition is to become the leading cloud hosting platform for SaaS companies. Exoscale is committed to provide unfettered access to its platform for all internet users.


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