The open internet and the freedom to innovate

I spent the last two days in meetings with FCC Chairman Tom Wheeler and his staff, discussing their proposed Open Internet rules (aka net neutrality).  Monday’s meeting was with a group of NYC VCs, and Tuesday’s meeting was with group of NYC startup CEOs and GCs.

Coming out of these meetings, and after working on this over the past several months, a few things have become increasingly clear.  Specifically, what we mean when we talk about the “freedom to innovate” and why it’s important for the future of the internet (both infrastructure and applications).

The question that the Chairman opened both meetings with was: how can the FCC achieve the dual goals of “access” and “flexibility”.  ”Access” meaning the ability for websites, startups, apps and content providers to reach end-users (and vice versa), and “flexibility” meaning the ability for internet access providers to expand and improve their networks in new (and potentially unexpected) ways.

Access: innovation without permission (on the network)

Yesterday’s startup meeting led off with each company[1] talking about why the open (non-discriminatory, non-prioritized) internet mattered to them — in particular, why it mattered to them when they were just starting out.

Eli Pariser from Upworthy put it perfectly, when he said: “I’m here because I’ve thought a lot about the tests you have to go through as a startup CEO. And I’m very thankful that one of the tests I *didn’t* have to pass was the Knows How To Negotiate A Complex Deal With A Large Telecommunications Conglomerate Test. I’m not sure many of us could have passed that test in the early days of our companies.” Amen.

Many companies noted how long they had operated before they need to hire a biz dev person or an in-house counsel.  David Karp from Tumblr noted that their GC was hire #37 (this was considered early) and they didn’t hire a biz dev person until the company was 7-1/2 years old.  Chad Dickerson from Etsy noted that their first GC was hire #500.  Erik Martin, GM of reddit noted that they he is their policy person (out of a staff of about 50).  Every company in room was able to reach and serve millions of users and customers without having to negotiate a pay-to-play deal with a carrier first.

The buzzword idea is “innovation without permission” — the ability to launch an app, try out an idea, start writing, start competing with the big boys, start gaining real users, just by hitting enter.  Anyone — a 16-year-old kid with an app or a 75 year-old grandmother with a blog — can simply start.   No need to hire a lawyer, negotiate a deal for access, or (in the worst case) file and litigate a complaint with the FCC.

Then, as David Pakman put it in the VC meeting, “the users can king-make the apps” (as opposed to the carriers charging, and picking, winners).

This is what brought us the internet we have today, and this is the world I want to live in.

Flexibility: freedom to innovate (in the network)

Regardless of whether we want ISPs to “innovate” in the first place, a central and critical question in the open internet debate is how to stimulate ongoing investment in our internet infrastructure.  To make internet faster, cheaper, and better for everyone.

This is the contentious issue.  Some argue that open internet rules would remove incentives for investment in infrastructure, by limiting the ways internet access providers are allowed to charge.

In the VC’s meeting on Monday, my colleague Brad said the following (as published in the forthcoming FCC ex parte filing — emphasis mine):

Mr. Burnham pointed out that the relationship between innovation in the network and innovation on the network is more nuanced than often assumed. For example, integrating the network more closely with applications by making the network application-aware may be advantageous from a business perspective, because it allows access providers to control the economics and the innovation at the application layer. Mr. Burnham recalled that when he worked at AT&T, at a time when that company introduced several application aware network architectures in an effort to compete with Internet, the network engineers there were so worried that changes in the network would break applications, that innovation in the network was very rare. At the same time, investment and innovation in and on the Internet was growing exponentially because the Internet’s layered architecture separated the applications from the network and allowed each to evolve independently. He argued that regulatory policy that continues to separate the network and applications layers by requiring ISPs to manage their networks in ways that are application agnostic will promote innovation not limit it.”

In other words, separating the applications layer from the network layer actually stimulates investment in both, by giving both the freedom to innovate.

The Virtuous Cycle

This brings us to a central idea:the “Virtuous Cycle” of innovation and investment:

This theory of innovation and investment — in both the applications layer and the network layer — is the core idea behind the FCC’s 2010 open internet rules.  And, contrary to what many critics argue, this rationale was not overturned in the recent court case vacating the rules.  Rather, the court simply ruled that the FCC could not enforce those rules without reclassifying ISPs as “telecommunications services” under Title II.  From the court’s decision:

“Internet openness, it reasoned, spurs investment and development by edge providers, which leads to increased end-user demand for broadband access, which leads to increased investment in broadband network infrastructure and technologies, which in turn leads to further innovation and development by edge providers.” (link)

“[The FCC’s] justification for the specific rules at issue here—that they will preserve and facilitate the “virtuous circle” of innovation that has driven the explosive growth of the Internet—is reasonable and supported by substantial evidence. ” (link)

So that’s where I’m at right now.  I believe in the power of innovation without permission.  And I believe that we need to stimulate expansive and ongoing investment in our internet infrastructure.  And I think the best way to do that is to align everyone’s incentives and give everyone the freedom to innovate.

—-

[1] Companies attending the 7/15/14 meeting: BuzzFeed, Codecademy, Dwolla, Etsy, Foursquare, GeneralAssembly, Gilt, Kickstarter, Meetup, Reddit, Spotify, Tumblr, Upworthy, USV, VHX, Vimeo, Warby Parker

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