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Net neutrality: Is the mother of innovation under threat?

By Allen Klosowski | vice president of Mobile & Connected Devices

November 18, 2016 | 9 min read

A wind of change is sweeping across the United States, and it may have a dramatic impact on the future of over-the-top (OTT) video services worldwide. Net neutrality, a contentious issue that was already in a precarious position, is suddenly further endangered. The ongoing availability of open internet will undoubtedly shape the future of video consumption in the living room, as well as the advertising ecosystem that supports it.

Allen Klosowksi
Allen Kloswoski SPOTX

Allen Klosowksi

Allen Kloswoski SPOTX

A hard-won victory

In 2016, the Federal Communications Commission’s (FCC) net neutrality rules were introduced, ensuring internet service providers (ISP) provide open access to all content and applications regardless of the source, without favoring or blocking particular products or websites.

This essentially cleared the road to allow for the acceleration of OTT services, like Netflix, connected TV apps or ‘TV Everywhere’ initiatives. No longer could ISPs slow down competitive services delivered over their network, or require those services to pay for a ‘fast lane’ to deliver content.

It was a hard won ruling. Under the Obama administration, the appointment of Tom Wheeler as chairman of the FCC was originally feared by the industry, due to his deep ties to the very industry he was set to regulate. However, Wheeler surprised many by pushing through some sweeping regulatory changes including the reclassification of broadband providers as common carriers under Title II.

Why is this important to the consumer? Users of Netflix found out in 2014 when they started experiencing choppy streaming and bandwidth throughput well below what they were paying for and promised. The solution from the ISP side was to ask Netflix to pay a fee for their ‘share’ of the bandwidth, essentially asserting their control by double charging - once from the provider of the video, and again from the consumer. It was the equivalent of a pay-for-protection scheme from the ISPs, akin to the threat “it would be a shame if something bad happened to your data while it crossed our network.”

This practice could impact any number of services. Imagine if you couldn’t get Spotify access on your phone through your carrier, because they wanted you to pay for only their music service. Each mobile carrier could enforce a similar policy, and push their own services, while locking you out of competitor offerings. How does this affect the overall pricing offered to the consumer? Either Spotify would have to raise prices to afford the additional fees they would need to pay every single network, or you would have a service offered by the ISP that does not suffer from competitive price pressure. There is no incentive for innovation, betterment of user experience, or lowering prices for the entrenched product that the ISP essentially mandates the consumer to use.

The FCC’s embrace of net neutrality in June 2016 put an end to this nonsense. No ISP or carrier can block or slow down or otherwise interfere with what is coming over the pipe.

Neutrality is the mother of innovation

There is no question the open nature of the internet is a driver of innovation, and net neutrality is a fundamental tenet of that growth. We’re seeing OTT options flourish on popular platforms like Roku and Apple TV, and new content entrants creating direct-to-consumer offerings that add value to the consumer, and that may have never even been developed or offered before.

The living room is about to be the hotbed of innovation from both a content and services standpoint. However, without net neutrality, whatever ISP is available to you could dictate what videos you can watch, what home security system “works” over their network, and what websites you can access.

It’s particularly damaging for new market entrants. While someone like Netflix may be able to afford additional fees now, and is also getting closer to old rivals like Comcast, what happens to innovation when it becomes unaffordable to new entrants who are creating the next Netflix and Spotify? Is innovation stifled before it even gets started because the field is already tipped in the favor of existing market players?

But ISP don’t want to be just a dumb “pipe”. Even under Title II, many of the players are already pushing to bend the rules to the stretching points to gain advantages. Many are already introducing onerous data caps that will prevent the proliferation of high-bandwidth OTT usage required for activities such as 4K streaming. Essentially being reduced to become “just the pipe” allows other companies to offer your existing subscribers better video services, as well as other services, like home automation or voice services, that used to be high-margin additions to the company balance sheet.

Challenging advertising monopolies

Beyond the basics, net neutrality is a challenge to the advertising monopoly these companies previously enjoyed. When content becomes ubiquitous across channels, and addressable with audience data, the method of advertising delivery is changed. Advertisers are starting to demand insight into their audiences before they serve the ad, optimization of their campaigns mid-flight using real-time insights, and post view attribution by linking viewer data to in-store sales reporting. This is the new model that net neutrality is empowering for brands, agencies and buyers.

However, the ISPs themselves are building their own solutions that they could prioritize with “fast lanes” and exclude from data caps, essentially locking down control of both the content and the monetization. Sure, you can offer your OTT channel to everyone worldwide, but your ad platform could possibly not work across all networks. Would there be a scenario where a content producer would have to use different ad platforms for different ISPs due to “neutrality” issues, or increase ad loads for some viewers to offset the additional fees they would have to pay for the “protection” of their data packets? It is an entirely possible outcome, and it could extend to what online video platform to use, what advertising framework to implement, and even which data management platforms can be enabled.

There is an argument to be made that these existing companies have enormous infrastructure development and maintenance costs, and they should be essentially “protected” because of their scale in offering services that cannot be easily replaced. The flip side of the argument is that these companies are already protected through federal, state, and local legislation that has prevented cities from developing their own broadband offerings, or these regulations have made it impossible for competition to create serious competitors in markets. In fact, many people have a very limited selection as to what ISPs they have access to in their markets, and that has been shaped by years of protectionist policies being aggressively pushed by lobbyists and accepted by politicians.

So why is all of this important now? The very fabric of net neutrality is likely to be challenged by the new administration. ISPs have been looking to challenge the Title II ruling in a Supreme Court challenge, which will now shaped by a Trump-supported nominee. The new set-top-box rulings that were going to be a boon for competition could be essentially dead on arrival as of this week, after lobbying efforts and setbacks in September. Additionally, Trump, who called net neutrality a “top down power grab” by Obama, could look to reshape the FCC to weaken its leadership and dismantle net neutrality.

European companies may get more runway with this scenario to entrench competitively against new content offerings and business models originating in the United States, essentially putting the US at a self-inflicted competitive disadvantage when it comes to technological innovation and content distribution.

The future may be a pay-to-play OTT environment where the ISPs have final control over every single data packet that travels to consumers. This should be highly concerning to consumers, brands, advertisers, and anyone who is looking to transform the industry. Whatever comes next may look much different than the open field of opportunity under the current net neutrality structure. At this point there has been a significant amount of talk and posturing, so it’s up to the industry to keep the pressure on to maintain a free and open playing field for OTT competition and innovation.

Allen Klosowski is vice president of Mobile & Connected Devices at SPOTX

Similar issues and topics will be covered during The Drum's Programmatic Punch event in London next month.

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