By Ryan Singel
Instead of listening to the thousand of startups and investors who argue that ending net neutrality would damage online innovation, FCC chair Ajit Pai is pushing a vote this Thursday to dismantle two decades of open internet protections in one of the biggest corporate giveaways in history.
Ryan Singel (@rsingel) is media and strategy fellow at the Center for Internet and Society at Stanford Law School and the CEO/cofounder of Contextly.
Existing net neutrality protections have made it cheaper to start an online business than a cafe. I know because in 2012 I left a job I loved at WIRED to pursue my own startup dream of improving publishers’ recommendations and start Contextly, which is still going strong.
I truly am one of the lucky ones. I got a shot at starting something new because the cost of launching a new idea was extremely low. Future entrepreneurs should have the same chance I did.
When I started Contextly, we paid $19.95 a month for one server; a year later, when I left my job to run the company full time, Contextly’s recommendations were showing on tens of millions of news articles a month, and we only paid $288.55 per month for 8 servers. That’s cheap. I didn’t need outside funding to launch a business.
But if Pai’s plan had been in effect, I couldn’t have afforded to start Contextly, and I wouldn’t have. Here’s why: Under Pai’s proposal, broadband providers will be allowed to charge all websites and services, including startups, simply to reach an ISP’s subscribers. That’s a huge threat to the low cost of starting a company, and it totally up-ends the economics of the internet.
It’s also what ISPs have been wanting for years. In 2006, AT&T CEO Ed Whitacre said of Google and Yahoo, “Why should they be allowed to use my pipes?” In 2013, Verizon—Pai’s former employer—told a federal court that it should be free to charge any site any amount of money to reach its customers.
These types of fees have never existed in the US in the history of the internet. When ISPs began floating the idea to charge fees, more than a decade ago, the FCC began investigating whether they should be allowed; it finally prohibited such fees in 2010. So when Aji Pai says eliminating net neutrality would simply be taking us back to the pre-2015 internet, that simply isn’t true.
But Pai’s plan doesn’t stop there. The FCC chair wants to allow ISPs to create fast lanes inside their networks; online services will have to pay to stay out of the slow lane.
In the 346-page proposed Order, Pai tells startups not to worry about fast lanes, also known as paid prioritization, because only online services with very specialized requirements will need them:
“We disagree with commenters asserting that [paid prioritization] is
likely to significantly burden edge providers by requiring them to
negotiate with hundreds of ISPs because as discussed, paid
prioritization is likely to be focused only on applications with
require special Quality of Service guarantees….”
The argument is simply wrong. Speed matters online. You have to be fast just to compete. Users bounce and customers don’t buy if sites or apps are slow to load or feel laggy. If there are fast lanes, every website, every startup, and every small merchant will have to be in them, not just those that need speed—a k a Quality of Service—guarantees.
Pai goes on to say that fast lanes will help tiny startups against larger competitors:
“Paid prioritization could allow small and new edge providers to
compete on a more even playing field against large edge providers,
many of which have Content Delivery Networks and other methods of
distributing their content quickly to consumers.”
First off, arguing that startups can’t compete with incumbents because incumbents have Content Delivery Networks is hilarious to anyone running a startup. CDNs, for those not familiar, help speed up websites by putting commonly used files, like images and videos, on servers around the world, so that users download the images from a server physically closer to them.
But almost every startup uses a CDN because they are cheap, and some are even free. Startups have their choice of Amazon Cloudfront, Akamai, Fastly, MaxCDN, and dozens more. Cloudflare offers its CDN for free, and anyone who starts a WordPress blog can use Automattic’s CDN for free with just a few clicks. Startups don’t need ISP fast lanes so that their apps can be fast. But if fast lanes are allowed, startups will have to pay for the fast lanes simply not to be slow.
In fact, fast lanes will make it harder for startups to compete. Incumbents will pay for fast lanes just so their upstart competitors have to as well, a clever way of making younger companies burn through their resources. If startups can’t afford to pay, their businesses will grow slowly due to their services’ poor performance—a situation beyond their control. Either way, incumbents win and startups lose.
Only in Ajit Pai’s upside-down world would startups have the money to pay for fast lanes and incumbents wouldn’t.
Pai further goes on to suggest that startups shouldn’t worry about paying fast lane fees to ISPs because VCs will pay them, referencing the early days of Google, Amazon, and Facebook as examples:
“[W]hile it is common to claim new entrants would not have the deep
pockets necessary to implement such an entry strategy, new economy
startups have demonstrated that capital markets are willing to provide
funds for potentially profitable ideas, despite high failure rates,
presumably because of the large potential gains when an entrant is
That’s. Not. How. Startup. Investment. Works. And. It’s. Historically. Wrong.
Investors do not put money into “ideas.” They fund companies with substantial and growing numbers of users or revenue.
In his newsletter last week, Jason Calacanis, a prominent angel investor (including in Uber) laid out what he looks for when putting the first real money into a company: “We focus on investing in startups that have product/market fit and some traction. This could be $10,000 to $150,000 a month in revenue, or tens of thousands of daily free users.”
How’s a self-funded startup going to reach that point, if it must pay off dozens of ISPs simply to get its first dozen paying customers or thousands of daily active users? The examples Pai chose just prove how wrong he is.
Facebook’s server costs were $85 a month when it started, and the social network’s founders didn’t drop out of school and get funding until the social network had 250,000 users. Jeff Bezos funded Amazon himself for six months, then took small investments from his mother and father. Google had more than 10,000 search queries a day before it got any angel investment, and it was named one of PC Magazine’s top 100 web sites before raising any venture capital funding.
These companies were able to launch because starting a company was inexpensive. They succeeded because they did not have to contend with access fees and fast lanes at their inception; they’re not examples that prove startups would be fine if fees did exist.
If fewer startups can get enough traction to raise funding, there will be fewer breakthrough companies, and VCs that do invest will provide less money for more equity to compensate for the risk that startups are vulnerable to ISP rent-seeking. It will be like returning to the pre-iPhone app store days, when investors shied away from investing in apps for mobile devices because getting onto a device required making deals and paying off carriers keeping their subscribers inside walled gardens.
What does this mean for you if you’re unlikely to launch a startup? All the services you pay for as a consumer, producer, or business will become more expensive because those services have to pay off ISPs, raising their costs. There will be fewer free and freemium services, as the cost to run the free versions of paid services grows too high to maintain.
There will be (even) less local news. Fewer quirky startups. Fewer entrepreneurs who figure out how to make it online without or without raising any venture capital.
Services from the big platforms like Facebook, Google, Amazon, Apple, and Microsoft—again, companies that largely would not have succeeded without net neutrality protections—will become even more dominant, because they can both afford the fees and have the market clout to negotiate bulk discounts with ISPs.
It’s that simple. The net will become more boring, less free, and less innovative, thanks to Pai’s plan.
As a reporter at WIRED, I was lucky enough to see up close the excitement of fired-up startup founders building things that never existed before. I got inspired enough to leave behind a great job with healthcare and put my savings into building my dream.
Pai’s short-sighted plan will crush that dream for future would-be founders.
Congressional Republicans say they love entrepreneurship, free speech, free markets, and innovation. Yet they are standing by in silent assent as Pai’s vote draws close, ignoring the pleas of the citizens and entrepreneurs they claim to care about. They are the only ones that can still stop Pai, and they ought to be loudly denouncing Pai’s plan and defending startups and small businesses.
WIRED Opinion publishes pieces written by outside contributors and represents a wide range of viewpoints. Read more opinions here.