Net Neutrality and Entrepreneurship

Efforts to expand microfinance in the United States have met yet another roadblock. Although recent federal legislation to subsidize healthcare costs helped to encourage entrepreneurship, new Internet regulations proposed by the Federal Communications Commission (FCC) now threaten the success of American small business owners.

On May 15 of this year, the FCC proposed a new set of rules regarding net neutrality, or the concept that all Internet traffic should be treated equally. Within this notice of proposed rulemaking (NPRM), special provisions are outlined that would allow Internet service providers (ISPs) like Verizon and Comcast to charge websites for faster download speed for their customers.

If the proposed rules are adopted, they could cause serious problems for small business owners, especially start-up Internet companies. As the first round of public comment comes to an end July 15, it is important for stakeholders in microfinance (an industry that relies on the success of small businesses) to understand the connection between net neutrality and entrepreneurship.

Background: Net neutrality is defined as legal requirements for broadband Internet providers to “treat all Internet traffic the same, regardless of the source.” This definition comes from a January 2014 court ruling in the United States that marked the beginning of recent public debates surrounding Internet policies. The ruling, issued by the United States Court of Appeals for the D.C. Circuit, found that the FCC did not have legal authority to regulate Internet bandwidth providers like Verizon, and more specifically, could not prevent these companies from demanding higher prices for faster load speeds, also known as “paid prioritization.”

In the case of Verizon v. Federal Communications Commission, the FCC argued that the Open Internet Order ultimately struck down by the court, was intended to “preserve and facilitate the ‘virtuous circle’ of innovation that has driven the explosive growth of the Internet.” Verizon objected to the anti-blocking rules included in the Order which prohibit ISPs “from impairing or degrading particular content.”

Ultimately, the court ruled in favor of Verizon, not because the FCC’s rules were unnecessary, but because according to the court, the FCC technically did not have legal authority to regulate broadband companies due to Verizon’s legal classification as an “information service.”

Previously, in 2010, the same court ruled in favor of Comcast, even after the FCC accused the Internet provider of interfering with subscribers’ access to certain peer-to-peer networks. Again, the reason was the same. The FCC did not have authority to regulate, because (thanks to much lobbying from cable and wireless providers) these companies are classified as “single, integrated information services.” Previously, broadband providers were classified as “carriers.” According to the Telecommunications Act of 1996, only carrier classification would give the FCC authority to prevent paid prioritization.

Between the 2010 and 2014 Appeals Court decisions, the FCC could have reclassified broadband companies as carriers, but it failed to do so. After the Verizon v. FCC case this past January, the FCC was expected to finally address the issue of reclassification. However, the latest NPRM explicitly abandons reclassification efforts and instead allows Internet providers to give some Internet traffic preferential treatment, signaling the end of net neutrality in the US.

What does this mean for entrepreneurs? Video-streaming provider and US corporate giant Netflix has been firm in its stance against fees to deliver their video and other data to consumers. After the FCC’s announcement, Netflix agreed to pay such fees – but not without a fight. In a week-long series of meetings with advisors at the FCC, Netflix representatives said that allowing these fees is in direct opposition to the principle of net neutrality. Other large Internet corporations such as Google and Amazon have also received much media attention for their opposition to the FCC’s decision.

Netflix, Google and Amazon, however, can afford to pay the fees associated with paid prioritization. Start-ups cannot. Without equal treatment from ISPs, start-ups will be forced to compete with large corporate websites that can afford faster load-times for their customers. It should also be noted that if bandwidth fees are legalized, entrepreneurs have little chance of inventing new and better video-streaming, search engine or social networking companies.

In a recent letter to FCC Chairman Tom Wheeler, Senator Ron Wyden of Oregon writes, “Start-ups should not find themselves unable to get a foot in the door.” His letter argues that by sanctioning paid prioritization, the FCC is allowing ISPs to “dictate who succeeds and who fails online.”  The letter was signed by an additional 10 Senators and shows promise of Congressional action to redefine ISPs.

Before the FCC’s NPRM becomes official, a period for public comment must be considered. Following a net neutrality segment on the American cable TV show Last Week Tonight hosted by John Oliver, the FCC’s public forum crashed from overuse. As of July 12, approximately 647,000 comments have been submitted regarding the issue. After the first 60-day public comment period ends tomorrow, the FCC will open another round of public comment open until September 10. A final vote by the FCC is not expected until the end of the year.

A Global Perspective: The European response to Net Neutrality provides yet another reason why people living in the EU are more likely to pursue entrepreneurial endeavors than those in the US. The European Parliament recently voted on rules to protect Net Neutrality, including several amendments that closed the “specialized services” loophole (similar to paid prioritization in the US), ensuring that European ISPs cannot become gatekeepers to online content.

In many developing countries, such as India for example, there are no formal rules to enforce net-neutrality. According to a Times of India article from earlier this year, despite lack of formal rules, “ISPs in India mostly adhere to the principal of net neutrality. There have been some incidences where Indian ISPs have ignored net neutrality but these are few and far between.”

As high-speed Internet and Internet-based companies become more prevalent in India and other developing countries, net neutrality will become increasingly important to entrepreneurs and the organizations that finance them. At the smallest level of microfinance lending – the selling of goods locally – the Internet is likely of little significance to the entrepreneur. However, clients of modern microfinance include not only local merchants, but also small business owners, mid-size business owners, sustainable technology firms and Internet retailers, to name a few examples. This may be more true in developed countries, but in the economies of countries such as India and China, the Internet is already a crucial tool for business owners.

Access to a free and open Internet is imperative to promoting an advantageous environment for entrepreneurs, small businesses and microfinance institutions.  The microfinance sector has been more successful in the EU than in the United States for many reasons, perhaps one of the most important being entrepreneur-friendly policies in many member states. If nations want to promote small businesses and overall economic growth, a solution would be to follow the European model of net-neutrality. If the FCC’s proposed rules are made official (despite public disapproval) this will be a challenge that aspiring entrepreneurs in the US should consider before they make the leap to self-employment.

Update, 18 July 2014: On 15 July, the FCC site crashed again due to overuse. As a result, the deadline was extended until today, 18 July.  There were over 1 million comments posted to the FCC site as of this evening.

By Annie Brown for Microfinance Focus

Disclaimer: The opinions expressed are solely those of the author and do not necessarily reflect the opinions of Microfinance Focus.


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