Engine: Loss of net neutrality puts innovation at risk in Hawaii

Tarik Sultan, is a managing partner at Sultan Ventures based in Honolulu. 

The world of innovation is at an exciting point in time, unrivaled by anything we’ve ever seen before. The cost of launching a startup has never been cheaper and the process has never been more efficient. This is largely due to reduced business costs (e.g. server fees) resulting from advancements in technology services and internet access. What once cost a startup hundreds of thousands to millions of dollars in capital expenditures just to get to the starting line is now accessible to almost anyone for much, much less. With the Internet, the distance between business and consumer has also shortened drastically; marketing directly to your customer demographic across the world is now possible. Additionally, information in the form of advice, mentoring, and best practices is now abundant and accessible. What was once restricted to Ivy League schools or knowledge bases such as New York and San Francisco is now available for free online.

This open access to information online is especially important for areas like Hawaii and flyover states in the U.S., or quite frankly, any geographic region globally that is looking to develop their innovation economy. Hawaii has had an explosion of activity in our innovation ecosystem over the last five years– largely focused on early-stage startups. We have four nationally recognized venture accelerator programs (XLR8UH, GVS Transmedia Accelerator, Blue Startups, and Elemental Excelerator) that have deployed millions of dollars into scalable ventures and technologies, virtually all of which are heavily reliant upon the Internet for the success of their ventures. In December 2016, Sultan Ventures prepared a brief report analyzing the 4-year impact of these four accelerators and found that roughly 145 startups have generated around $250M in Total Capital (defined as revenue generated and funding raised), while creating over a thousand jobs in the process. As the most isolated population mass in the world, Hawaii is continuing to increase our efforts to diversify and bolster the local economy, today largely reliant on tourism.

Not only has the Internet created new job and revenue opportunities for the people of Hawaii, but it has also delivered a wider range of choices for consumers around the world who now have access to goods and services produced in the Hawaiian Islands.

The beautiful thing is that the world’s innovators are just getting started. The Internet is spreading into new industries, such as energy and healthcare, making formerly inaccessible data available in real time through smart devices connected to the Internet – the Internet of Things.

Perhaps even more compelling, because of the law of accelerating returns, the speed of these innovations has and will continue to accelerate– i.e. the more technology there is, the faster technology will innovate. So as we enter into the exponential proliferation of the Internet of Everything, protecting democratic access to the Internet will be equally paramount.

Worryingly, the Chairman of the Federal Communications Commission (FCC), Ajit Pai, recently moved forward with his plan to roll back key open Internet provisions, threatening both the broad range of choices consumers were previously offered and the economic growth that net neutrality has spurred in Hawaii. As a result, Internet Service Providers (ISPs) have made it clear that they plan to capitalize on the green light Chairman Pai has extended to them and will begin establishing paid “fast lanes.” Essentially, this means that ISPs can speed up the traffic of the sites and businesses that are able to pay, and slow down the traffic of those, like startups, that are not. This new pricing structure will reduce the ability of new, disruptive companies to compete and, to the detriment of consumer choice, will reinforce the incumbents and their standard offerings.

Despite the obvious signs that startups are the clear losers in Pai’s plan, some supporters of the FCC’s new initiative argue that changing net neutrality regulations will actually benefit new, innovative businesses. This opinion is at best poorly informed, and at worst consciously deceptive. Let me explain:

One common defense that supporters offer for the change is that “deregulating” the Internet actually opens the door for a more competitive landscape. Essentially, this group purports, if people dislike the service they’re receiving from an ISP, they can simply switch providers. Unfortunately, more than two-thirds of Americans do not have access to more than one high-speed internet provider.If they are blocked or throttled by their ISP, there is no other option for them to “switch” to. The broadband monopoly is further magnified in rural communities where broadband choice, and sometimes even service, is non-existent.

The previous net neutrality regulations existed because we cannot count on the goodwill of ISPs in a free market. If you search “net neutrality” on Google, you will come across dozens of articles (like the ones here, here, and here) providing examples of how ISPs can and will take advantage of Internet-based companies by hiking up prices as they see fit. They have blocked and throttled content before, and the FCC’s new order opens the door for them to do so again. Comcast has already dropped its promise not to engage in paid prioritization after the FCC announced its open Internet rollback, and it’s only a matter of time before our Internet pricing options begin to look something like this:

An additional argument made by Chairman Pai and ISPs is that the net neutrality rules passed by the previous presidential administration have hurt investment in broadband. Despite the fact that they make this claim loudly and often, there are a few groups to whom they are actually telling a different story. The executives of the biggest ISPs, like Comcast and Verizon, constantly tell their investors and the Securities and Exchange Commission (SEC), to whom they are legally obligated to tell the truth, that they are continuing to invest in broadband. Of all the publicly traded Internet Service Providers in the U.S., not one has ever told its investors or the SEC that net neutrality rules or Title II classification of broadband had a negative impact on its investments. Moreover, a collection of 30 small ISPs, like many of the companies who service Hawaii, have already told Ajit Pai that the FCC’s 2015 net neutrality rules brought “no new additional barriers to investment or deployment.”

Another claim Big Telecom and the FCC has made is that their new net neutrality regulations keep moderate users of the Internet from subsidizing the usage of those who stream large amounts of content all day long. While this protection is important, it was already fully achieved under the previous rules. For years, ISPs have been offering various tiers of service based on how much bandwidth consumers want to use. Additionally, there is no guarantee or evidence that the ability of ISPs to differentiate charges for high-bandwidth websites will result in savings being passed on to Internet users by lowering their overall rates.

Furthermore, most companies operate their businesses with revenue models that assume a select group of customers will account for a disproportionate amount of resources, bandwidth, or other expenses in relation to the revenue they generate in return. This concept, known as the Pareto rule, or more commonly known as the 80-20 rule, is a general principle used by business managers all the time. In fact, dozens of the world’s fastest scaling startups demonstrate that it is possible to have a highly competitive yet highly profitable business model in which the vast majority of your revenue comes from a minority of your customers (e.g. Dropbox or Tinder with only 0.04% and 0.85%paying users, respectively).

A final argument made by supporters of the FCC is that the new order will have no effect on free speech. The Internet, they claim, will always be a forum for free speech because, as this author wrote, “no matter how rude, obscene or disrespectful something is, someone will argue it’s all a matter of opinion…and that they have the right to post whatever they want.” While it is true that everyone will continue to have the right to post whatever we want, what is now threatened is a person’s ability to reach an audienceIf an ISP, or a subsidiary of an ISP, does not want your content to reach a wide consumer base– either because they disagree with you or because they view you as a potential competitor– they now have the ability to block or throttle you. For a community like Hawaii, where we pride ourselves on sharing our local culture, knowledge, and the products of our industries, the impact of this change could be devastating.

As you can clearly see, the repeal of net neutrality has obvious implications for high-growth, innovative startups looking to compete on a national and global scale. Two local companies within our portfolio operating in vastly different industries (Energy Efficiency and Medical Education) recently spoke up about this:

  • “Net neutrality has been a cornerstone in enabling startup companies to compete on a reasonably level playing field. Rescinding it will consolidate power in the hands of a handful of companies, resulting in restricted access for consumers and small businesses alike. At Ibis Networks we help companies reduce plug load energy using our patented cloud based system. Under the new rules, the big ISPs could restrict access to our system for their customers and force them to use a competing product (that they might own). This is the antithesis of fair competition and does a gross disservice to our customers.” -Michael Pfeffer, CEO, Ibis Networks
  • “Radial3D supports strong net neutrality backed by the Title II “Common Carrier” status. With net neutrality now in flux, web and data driven startups like ours could face potential anti-competitive favoritism for companies backed by ISPs. This not only affects our ability to serve our customers, but it also affects our options when utilizing our developing augmented reality/virtual reality web services for communication, billing, and management.” -Jesse Thompson, CEO, Radial3D

By revoking net neutrality, we are worried that the divide between mega corporations and innovative startups will continue to exist, and worse, will expand even more. The speed of innovation in virtually all sectors depends on reliable access to fast networks and more data delivery. Net neutrality helps to level the playing field for small businesses and startups by providing them a chance to compete with larger, resource-rich corporations.

The direction that the FCC has taken is a critical loss for entrepreneurs, investors, consumers, and frankly, our national economy. Our country has been built on the principle that if you work hard, you can succeed. Net neutrality allows all founders, regardless of gender, ethnicity, geographic region, or any other socioeconomic status, equal access to this opportunity, to this American dream.