Bits Don’t Lie

The form of net neutrality that proponents are pushing seems like it would have significant adverse consequences for consumers, entrepreneurs, and broadband innovation. As I’ve covered in previous posts, a rigid form of net neutrality that would prevent network operators from throttling P2P traffic would be unfair to the vast majority of consumers who get lower quality service due to a few bandwidth hogs. Rigid net neutrality legislation would also prohibit them from prioritizing time-sensitive such as Internet telephony and streaming video over time-insensitive traffic such as email and web browsing. Half-second delays to time-insensitive traffic would be minimally noticeable, while even the smallest delays in the delivery of Internet telephony or video streaming data would render such application unusable. The rigid form of neutrality would prevent network operators from adapting to and optimizing for the increasingly heterogeneous demands of their users. These restrictions would force networks to compete solely on price and size, and as a result, would seriously hinder the ability of potential last-mile network operator entrants from being competitive with the incumbents. Consumers would not have the opportunities to choose between networks optimized for email/web browsing, networks optimized for Internet telephony/conferencing, and networks optimized for video streaming/file sharing.

Further, network operators would be barred from charging major content providers such as Google higher fees for the massive amounts of data they pipe to end-users over their switches and routers, and they would also be prohibited from making an exclusive search deal with Microsoft’s Bing and subsequently blocking or slowing other search engines. So, in a way, if consumers have enough Internet providers to choose from, much of the net neutrality debate boils down to how profits should be distributed between large online content providers and the network operators delivering that content.

It’s clear why the Amazons and Googles are lobbying for net neutrality and why the Comcasts and Verizons are trying to block legislation. If it’s only a question of profit redistribution between content providers and content deliverers, entrepreneurs and the venture capital firms that invest in their start-ups should be more or less neutral on net neutrality. In fact, most VCs and entrepreneurs should be in favor of forcing large content providers to pay more, and therefore, should oppose net neutrality legislation. But yet they vehemently support it. Why?

What entrepreneurs and venture capitalists worry about is not the prioritization of time-sensitive traffic or the slowing of bandwidth-hogging protocols, but the possibility of anti-competitive discrimination against certain websites and applications. One worry is that giving operators the power to freely regulate the traffic they transmit to end-users will incentivize them to create, acquire, or exclusively sponsor a search engine, an auction site, an email service, a new site, etc., creating network operator-owned vertical monopolies that would, without adequate competition, effectively extinguish the innovation on the fringe (and VC investment opportunity) that has made the Internet into the treasure it is today. In many markets, there are only two or three last-mile network operators, and entry into the last-mile network market is very cost-prohibitive–laying down infrastructure to adequately deliver content to even a few million end-users would cost tens of billions of dollars. While it is not plausible that a network operator could create an extreme vertical monopoly without incurring customer rebellion, mass defections, and creating new last-mile competition, without any form of net neutrality, operators would be able to use their incumbency and cost barriers to market entry to profit from subtle anti-competitive discrimination. As a result, the Internet would become a little more like cable TV. This would discourage competition and innovation, and this is what makes entrepreneurs and the venture capital firms that back them uneasy.

A reasonable middle ground in this debate would be to prohibit anti-competitive discrimination by network operators, while also allowing them to offer tiered services and prioritize certain protocols/types of traffic to provide more choice to customers and optimize user experience.

For your amusement, here is Tim Draper, Founder and Managing Director of DFJ, dancing and rapping about net neutrality in Bits Don’t Lie.