While some could argue that a free and open Internet means less regulation and oversight, my experience leads me to believe that an Internet that encourages innovation and startups is one that supports net neutrality. Unless it’s enforced, capitalism on the Internet is in serious jeopardy.

The crossfire from friends and colleagues debating net neutrality has caught my attention in recent weeks and got me thinking about how it affects my industry, venture capital. We make our money by investing in startups, of course, which would not, by definition, exist without capitalism. Many of the technology startups we invest in similarly wouldn’t exist without the Internet, as they use it as a platform on which to provide their services.

The capitalistic system on and off the Internet encourages economic growth by the use of free and open markets to distribute goods.  While some could argue that a free and open Internet means less regulation and oversight, my experience leads me to believe that an Internet that encourages innovation and startups is one that supports net neutrality — and unless such neutrality is enforced, capitalism on the Internet is in serious jeopardy.

The essence of the net neutrality debate is about the control and management of the publicly subsidized last-mile connection between the consumer and the service provider. Service providers argue against net neutrality because they want the ability to apply policy to the traffic flowing across the last mile, which they claim is the only way operating costs can be controlled, fees can be kept reasonable and service levels can be maintained throughout the network.

From a startup and innovators perspective, service providers need to exist and be profitable. They provide the last mile and global connectivity required by technology startups to operate at any level. They also buy products and services from those startups, and often deploy them at a scale unheard of in other end markets. Customers like that make startups attractive acquisition targets — often resulting in a nice return for a VC fund (see Reliance’s acquisition of Yipes or BT’s acquisition of Ribbit).

Those in favor of net neutrality argue that service providers need to be decoupled from the last-mile infrastructure. The problem is that if service providers are allowed to apply policy to the last mile connecting to the consumer, that policy may be constructed to favor the service provider’s and their partners’ services over a competitive offer from another company, such as a startup.

Imagine, for example, if your service provider had a business relationship with a specific set of e-commerce sites and applied policy that allowed their web sites to load faster and their transactions be completed quicker than yours. Or if your provider applied policy that affected the quality of video streams or voice calls from a competitive service provider or startup. In fact, in some global markets, this is exactly what happens, especially where the service provider is a government-owned or controlled entity.  Just ask anyone trying to use voice-over-IP or watch uncensored streaming video in countries like Singapore or China.

More importantly to a VC, imagine funding a startup whose offering depended on the use of a service provider’s last mile. Without net neutrality, there would be no guarantee of a free and open market and by extension no guarantee of the delivery of goods and services. Such an environment would hinder, not foster, innovation and economic growth — core principles of capitalism and venture capital investing.  Startups need the ability to buy services from providers on a fair and level playing field — even if their services may compete with those of the provider itself.

Service providers need to accept the fact that net neutrality is the only way that capitalism on the Internet will survive. Without it, venture capital would no longer be able to fund innovative technology startups — the very same startups that will inevitably make service providers’ offering attractive to consumers, as Google, Facebook, Twitter and countless others have done.

This article also appeared on BusinessWeek.com.

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  1. Yes agree Allan and here’s another reason for viability of startups and innovation…

    Job creation? Look to entrepreneurs – CNN.com
    It is time for the White House to return to its campaign roots. Since Obama’s inauguration, our unemployment rate has risen from 7.6 percent to 10.2 percent. It is time to stop propping up outmoded and overleveraged institutions and start betting on the new men and women who offer hope for greater prosperity. Supporting entrepreneurs is change we can believe in.

    Kudos and well said Amy M. Wilkinson !

  2. You are totally off base. For the net to be actually be neutral then the govt needs to be kept out. Let the market and more importantly the consumer regulate itself. Take Comsat for example. They tried to charge bandwith limits, consumers revolted and there are no more companies trying to pull that crap. Consumers nor competitors would allow the net to become anything other then neutral. Take a look at all the issues and you’ll see they arise explicitly because of govt interference. AT&T and timewarner and the like monopolize the way they do because they lobby and get govt approvals smaller companies don’t get. LESS GOVT. Ron Paul 2012!!!

    1. If we do not have Net Neutrality then the Internet will not be neutral. Comcast, Time Warner and many others are already starting bandwidth usage limits and caps – you should expect this as the service provider’s way to charge more for access to the last mile for your service. And without Net Neutrality they can be “managing” that last mile according to their desires and business policy.

      1. Allan, you are dead wrong. The Internet is not “neutral” and never has been. And neither are the so-called “network neutrality” regulations. They are intended to give a leg up to content providers at the expense of Internet service providers. Do not drink the Google “Kool-Aid.”

  3. The problem with “net neutrality” is that you substitute government control for market control. That might help certain parties in the short run but do we really think making this into a public utility is the way to go, given history?
    Also, if you believe in net neutrality, you must also believe that restaurants can only serve “all you can eat for one price” meals, and that they must carry food from every supplier who wants to supply them.
    The biggest enemies of the free market are the capitalists who want some government protection for their business.

    1. Agreed that you substitute some government control but not instead of market control. In a free market there is the ability for the open distribution of goods. On the Internet the distribution is going through a government and public subsidized distribution point that is controlled by a non-government entity. We just need a level playing field – otherwise how can a startup innovate and potentially build a service and get it distributed fairly?

  4. Start with the cell phone companies. The most anti-competitive industry there is. Blocking apps, traffic, etc.

    We also need Search Neutrality, Internet Advertizing neutrality and CDN neutrality. Those industries have just as large barriers to entry, are world wide, and currently mono/duopolies controled by even fewer players than the ISP business.

    How can anyone make money on Internet adveritzing when only a few control all of it? Same goes for CDN.

    1. Or just innovate and release a device that causes the carriers to be more open and flexible in their distribution model. Does anyone really think that AT&T wanted the iPhone AppStore to be open? Of course not – if they had it their way all of those application would be AT&T branded applications and controlled by their distribution policy. It’s the open market that led to innovation.

  5. Richard Bennett Sunday, December 6, 2009

    The Internet is not governed by any network neutrality regulations today, nor has it ever been. The FCC and other national regulators are considering applying net neutrality regulations for the first time, and it’s because of that consideration that there’s a discussion about the shape that such regulations should take. But the status quo is that the Internet, which is after all a world-wide system, is not governed by the regulations that the established web properties (Google, Amazon, eBay, some of the CDNs, Netflix, et. al.) would like to impose.

    So how is it that VCs have invested so much money in startups doing business on a network that has never been regulated the way that the established players wish to regulate the Internet in the future?

    1. You bring up a good point but one that has its place in time. Up until the most recent years, the technology to implement policy via network management has not been been available at a scale that allows the service providers to change the playing field. Now that technology has caught up to the scale of the service provider’s networks (see Sandvine and Comcast) we’re potentially seeing a fundamental shift and that is not going to help innovation.

      1. The Sandvine tool that Comcast used to use is an application that runs on an x86 Linux machine out-of-band with the DOCSIS data plane. Such systems are essentially as old as the Internet, they’re just slightly more spiffy versions of net monitors like Sniffer. There’s nothing new there.

        The reality is that network operators have been making policy-based routing decisions since the advent of BGP. Hence, the VCs have been investing in a network ecosystem that’s been governed by policy-based routing since the advent of the commercial Internet so it’s in fact quite unlikely that they’re going to stop now unless the FCC issues a new set of regulations.

        What is happening now on the Internet that we haven’t seen before is a more diverse mix of applications ranging from Twitter to HD video conferencing, each with its own requirements for latency and price. Net neutrality regulations will hamper the diversification of the Internet ecosystem by hampering the kinds of delivery services ISPs can sell to service providers. Unless someone can show a pattern of abusive conduct under the status quo system, it’s hard to justify the need to regulate. That’s especially true when we consider that every regulation has unintended side-effects, as well as the intended side-effect of locking down the dominant role of the established players.

  6. Robert J Berger Sunday, December 6, 2009

    Its pretty clear if you look at the rate of innovation and bandwidth in the last mile since it has been re-monopolized (an oligopoly of ATT, Verizon, Comcast and Time-Warner if you want to be specific).

    I live in Silicon Valley, My home neighborhood has NO option of high speed Internet access. My startup in Mt View CA at the corner of El Camino Real & San Antonio Rd can only get 3Mbps/512K. Next step at significant cost increase is a T1 (1.5Mpb/1.5Mpbs) and then the next step is to spend $10K+ upfront and thousands / month for some kind of fiber.

    Other countries that have effective Net Neutrality (in most cases that the incumbents must resell last mile infrastructure at true cost+ basis) are having much better penetration and significantly higher bandwidths.

    This doesn’t even touch on the issues that Allan brings up, that when the same oligopoly controls Content & Transport, they can freeze out competitors at the Content level because of their control of Transport.

    Its time for Re-Divestiture. But this time break them up horizontally. A public common-good entity that owns and operates the physical plant and a vibrant competitive marketplace on top of that. Just like Roads.

    1. If you want to know the role that policy choices have made in international broadband systems, I recommend you read the ITIF report “Explaining International Broadband Leadership”, http://www.itif.org/index.php?id=142. The bottom line is that 75% of the differences are due to non-policy factors such as population distribution and the length of the pre-existing copper loop. Copper loop unbundling is only helpful in places that lack facilities-based competition between DSL and cable, which is the situation in most of Europe. Japan, the world leader in residential broadband speeds and prices, got where they are by following the facilities-based competition model. See NTT’s comments with the FCC on how the Japanese system was put together: http://fjallfoss.fcc.gov/ecfs/document/view?id=7020348410

    2. Robert, you are dead wrong. Not only do you have DSL and cable modem service available; you also have multiple cellular providers as well as several WISPs. (Etheric Networks, for example, is right in your neighborhood.) And that’s not to mention Google’s network. Are you simply ignorant of your options, or are you lying to support a political agenda?

  7. Clearly net neutrality is critical. Carriers are anxious to corral traffic and make pay barriers at every opportunity.Let’s hope that someone in Washington has a head on their shoulders. Makes me hopeful that Google continues to have some influence, rather than ATT?

    1. I’d like to see the Web100 companies work together and fund a special interest group to lobby in Washington against the carriers. Maybe there is already such a thing?

  8. Allan Leinwand Sunday, December 6, 2009

    @Richard Bennett – I don’t know the last time you worked with a Sandvine product, but it was hardly an x86 device when I was looking at them a few years ago. I’ve yet to see all but the most optimized software route at 10 Gbps on x86 architectures, even today. But that is besides the point….

    I agree with you that Net Neutrality will alter the services that a service provider can offer. They will have to continue to offer services on a level playing field in a free and open market. As a venture capitalist, that is what I want to see because that is what I believe leads to innovation.

    Can you tell me how startups and their service offerings can be expected to be treated on an Internet where a service provider can apply policy specifically to their traffic? If there is no abuse in the status quo environment (and I think we’ve all seen abuse from Comcat and others already) and the service providers are doing nothing wrong, then why fight against Net Neutrality? In other words, if you can guarantee that service providers will not apply policy that hinders innovation and startups then why not just let Net Neutrality happen and continue business as usual?

    1. Sandvine sells a variety of different devices, and I happen to know for a fact that the one that examined traffic for P2P and injected TCP Resets to keep P2P under a 50% quota of upstream is as I’ve described; I got this from the horses mouth at both Sandvine and Comcase, so I’m not guessing about it. You know as well as I do that passive monitoring and RST injection is not a compute-intensive job that needs specialized ASICs to perform; this device didn’t do rouing anyhow.

      Was this system abusive? I don’t think so, given that the goal was to prevent piracy from disrupting Vonage so badly that customers complained. Comcast has an obligation to all their customers to make their network work well, not just to those running P2P seeders.

      You ask the critical question about net neutrality, namely if the system ain’t broke, why fix it? But that’s the question I asked you, since you’re the one who wants to change the law. Your answer, that operators can do things they couldn’t do before, still hasn’t been supported.

      My estimation is what I said before: “What is happening now on the Internet that we haven’t seen before is a more diverse mix of applications ranging from Twitter to HD video conferencing, each with its own requirements for latency and price. Net neutrality regulations will hamper the diversification of the Internet ecosystem by hampering the kinds of delivery services ISPs can sell to service providers. Unless someone can show a pattern of abusive conduct under the status quo system, it’s hard to justify the need to regulate. That’s especially true when we consider that every regulation has unintended side-effects, as well as the intended side-effect of locking down the dominant role of the established players.”

      The Internet is changing in terms of application diversity and a pending explosion of users on mobile platforms which have traffic management needs that the Internet of today is poorly-equipped to handle. The Internet is certainly not a level playing field with respect to any of the critical dimensions of network service (latency, capacity, and cost.) The behemoths of the web have bought an advantage for themselves by building massive server farms at critical points on the Internet, and they’re fighting any change that might undermine the value of these multi-billion dollar investments. The established players are not the least bit concerned about scrappy Web Squared startups, and simply use the rhetoric to hide their monopolistic nature.

      Startups will he helped if ISPs are allowed to sell diversified services, but Google won’t be helped. That’s the issue.

      1. We’re going to have to agree to disagree here.

        I believe that what Comcast was doing was not in the best interest of anyone on the Internet but Comcast. In Aug 2008 the FCC agreed and that set the proper precedent. http://www.washingtonpost.com/wp-dyn/content/article/2008/08/01/AR2008080101205.html

        I’m also not sure I see the established web players as monopolistic. Almost all of them were driven by capitalism and thrived in a world where the publicly subsidized last mile and access to their consumers was free and open.

        In fact, none of them have any publicly subsidized infrastructure and do not have a monopoly on a physical piece of infrastructure that controls access to their consumers. The behemoths you speak of built great services and companies – they just want an open market for the distribution of their goods. The issue is that the service providers do have absolute control of the last mile and control consumers access to the behemoths services. Also, from my VC perspective I’m not sure I see much of a difference between a Google and a startup like WorldGolfTour (full disclosure – WGT is in the Panorama Capital portfolio of investments). Both want access to consumers across the Internet last mile.

        If we can separate the last mile from the service providers then I think we’ll agree on nearly all of the issues. Since the service providers control the last mile and don’t seem to be giving up that control and desire to manage it any way they see fit, we’re going to have to continually disagree.

      2. @Allan Leinwand Thank you for pointing out that the FCC ruled against Comcast. I did already know that, as I was among the expert witnesses the FCC called to testify in their first hearing on the subject, at the Harvard Law School. If you read the actual order, you’ll find something very curious. The FCC demanded two things from Comcast: 1) That they explain what they were doing to P2P traffic; and 2) That they stop doing whatever it was they were doing. This order is unparalleled in the history of regulation, and is under review by the courts.

        The court challenge is the reason the FCC has proposed to codify the old Four Freedoms of Internet access, with a couple of new ones to make a round half-dozen, BTW, not anything to do with new tech that can make policy decisions never before possible.

        In US law, a monopoly is a company with 70% market share or greater; none of the ISPs has more than 30% of the national market, but Google has over 90% of the revenue from search ads, for example. So there’s your monopolies.

        The ISPs have built their DOCSIS and FiOS systems completely with private money, and as far as I’m concerned, they should be allowed to innovate, sell differentiated services, and prosper as long as they don’t abuse their position in the ecosystem; the same goes for Google. The level playing field requires the law to be fair and just toward all the players, not just Sand Hill Road’s flavor of the month.

  9. Richard Bennett Sunday, December 6, 2009

    Incidentally, Allan, I wanted to tell you I enjoyed the piece you wrote a couple of years ago about how clueless Web 2.0 companies are about the Internet: http://gigaom.com/2008/05/07/web-20-please-meet-your-host-the-internet/ I praised it to Stacy when we met at one of GigaOm’s bunker sessions. In many ways, it parallels the current discussion about Internet regulation, which is something that’s happening because Web 2.0 companies are clueless about the ways of the FCC, inside-the-beltway tussles in DC, and the implications of ISP service models for innovation. We all tend to be narrowly specialized in our little niches and less knowledgeable about the bigger picture issues than we should be.

    1. Thanks – that comment I truly appreciate :)

  10. Allan Leinwand Sunday, December 6, 2009

    @Richard Bennett – Like I said before, we’re going to have to disagree. And it’s not surprising that we disagree.

    As you point out and as I have fully disclosed, I am a VC and even work on Sand Hill Road where the “flavors of the month” – as you mockingly call them – that we fund work exceedingly hard to create innovation. That is my job – invest in, fight for and help develop startups.

    My motivation for Net Neutrality is that I want service providers to exist so that they can provide valuable services for startups – I see value in having a company provide those services. I am also clearly motivated by having service providers as potential exit vehicles for our portfolio companies. A global ecosystem of service providers fighting to acquire valuable innovation help the VC world.

    What I do not want is for those same startups to have access to their consumers and customers managed by the service providers. They need a free and open market for the distribution of their services. I believe that anything else hinders innovation and destroys the capitalistic market on the Internet.

    To me, the answer here is clear – let’s decouple the last mile from the service providers. Let’s make them no better and no worse that any other company trying to gain free and open access to consumers.

    The wired last mile that is owned by the service provider is always publicly subsidized – whether we are talking about twisted-pair, coax or fiber. How else do they reach the consumer? They use some public facility, conduit, telephone poles or roadway.

    I fully expect that you will disagree here again – your background on helping to shape broadband policy in a manner that benefits your line of work at ITIF means that you will naturally be at odds with how a venture capitalist sees the world. And since you testified for the FCC (presumably against Net Neutrality) and the FCC ruled against Comcast and for Net Neutrality, I guess as have another precedent set.

    1. Fair enough, we differ on the means to enable innovation in the Internet ecosystem, but not on the value of innovation. One thing I do want to correct, however, pertains to my affiliation and my views. I’ve been arguing about the Internet regulation issue since at least 2002, when I was employed as an engineer building QoS mechanisms for MAC layer wireless protocols, and have only been working with ITIF since June. My concern is that the proposed regulations will most likely make QoS illegal on the last-mile, layer 2 networks that really need to apply it, especially for VoIP and that sort of thing. Comcast, AT&T, Verizon, et. al. aren’t able to string a 10GE link to each mobile phone, so they have to do their job without recourse to infinite bandwidth.

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