Fans of the television show "Shark Tank" often hear budding entrepreneurs pitch their new idea to investors saying they got their business off the ground by selling directly to consumers online. The internet has been a great equalizer for many small businesses. Anyone with a great idea and a moderate level of skill has access to a broad market at relatively low start-up costs. FCC chairman Ajit Pai recently announced his intent to end net neutrality. This is a major change to the existing laws that prevent ISPs from favoring some websites over others by throttling data speeds. The telecommunication industry will be able to create new revenue streams from content providers wanting access to data "fast lanes."
The case the FCC and carriers make for these additional fees is that the money will be re-invested into infrastructure to build out the next generation of broadband and services. This could potentially allow online companies to deliver their content faster with better efficiency to a wider array of consumers. It will also result in higher prices for streaming content providers, who will now pay ISPs for access to those fast lanes. What is unknown is how the end of net neutrality will impact ecommerce start-ups trying to build an audience for their product or content.
First and foremost, the end to net neutrality means additional fees for all types of companies. Video streaming content providers like Netflix, Hulu and YouTube (Google) will have to pay additional fees to carriers for the privilege of consuming so much bandwidth at high speeds. However, their service will theoretically be much faster than other sites.
Ecommerce firms like Amazon, Jet (Wal-Mart), Etsy, Ebay and others also seem likely to pay for premium speeds. Those costs will either be absorbed or passed on as fees to advertisers or marketplace sellers, which directly or indirectly get passed on to consumers.
An Uneven Playing Field
The end of net neutrality will put smaller ecommerce startups at a massive disadvantage. Potential customers will gravitate to the stores and content that load the fastest because quality product delivered at slower speeds will be less likely to be consumed or shared. Large outlets like NetFlix, YouTube can leverage bulk purchasing agreements with the ISPs to acquire large blocks of broadband at reduced rates per megabyte. Start-ups, on the other hand, will have to pay the highest rates per megabyte, making competition all the more difficult.
For a typical internet or ecommerce startup with low or negative net income, any additional costs create barriers to entry, restricting competition in a free market. In a worst case scenario that counters the argument that net teutrality restricts innovation, service providers could slow or block new technologies that compete with their own services.
Consider whether telecommunications companies would have welcomed VOIP or file sharing technologies that cut directly into their own bottom line. Likewise, if a communication giant owned content, like Comcast owns NBC and Hulu, would competing content be less accessible on their networks? Since pricing uncompetitively is not a sustainable strategy, those who tackle the incumbents in a world without net neutrality need to take on earlier financing, diminishing liquidity or investors which diminishes their control.
Net neutrality eliminates significant barriers to entry for start-ups. Ecommerce companies, particularly retailers, are at a distinct disadvantage because profit margins tend to be lower for them than a service provider. In the short term, it seems likely that the end of net neutrality will solidify the market positions of big players like Amazon, Netflix and cable companies while disrupting the flow of new products, designs and content to end consumers.