Net neutrality is weeks away from dying, and the first signs of change are already showing up at Netflix and other internet companies
Getty Images for The New Yorker
- The Federal Communications Commissions' repeal of its net neutrality rules is set to take effect next month.
- In recent months, a growing number of companies has begun to warn investors that the repeal could significantly harm their businesses.
- Those warnings seem to contradict FCC Chairman Ajit Pai's assurances that the move will be good for business, encouraging innovation and investment.
Investors have a new risk factor to take into account when betting on tech companies - the end of net neutrality.
Dozens of tech companies, from internet video giant Netflix to online dating company Match, have begun sounding the alarm that the impending repeal of open internet rules could cause real problems to their businesses.
As the Federal Communications Commission was readying its repeal of net-neutrality rules towards the end of 2017, and picking up more speed in recent months, dozens of companies have warned in regulatory filings about the threats to their businesses. The warnings come from startups and tech giants alike, including Spotify, Snap, Dropbox, Activision Blizzard, Box, and DocuSign.
As a result of the repeal of net neutrality "coupled with potentially significant political and economic power of local network operators, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business," Netflix warned in its annual report.
Net neutrality is the principle that all data transmitted over the internet should be treated the same, without any bits getting prioritized over others. The FCC has had some form of net neutrality rules in place off and on since 2005, but it enacted the latest version of them in 2015. Those regulations bar internet service providers from blocking, slowing, or providing preferred access to particular online sites or services.
The FCC chairman has said the repeal will be good for business
However, in December the FCC under Ajit Pai, its new, President Trump-appointed chairman, voted to repeal those prohibitions. Broadband providers will now be able to block or slow access to certain sites or create so-called fast-lanes. Under the repeal, which is set to take effect next month, the only requirement the FCC will now make of internet providers is that they disclose what they are doing to their users.
"On June 11, we will have a framework in place that encourages innovation and investment in our nation's networks so that all Americans, no matter where they live, can have access to better, cheaper, and faster Internet access and the jobs, opportunities, and platform for free expression that it provides," the chairman said in a statement this week, announcing the effective date for the repeal.
Consumers have largely rejected that line. In the months leading up to its repeal vote, the FCC was inundated with comments from citizens urging it to maintain its net neutrality rules. And in a poll right before the FCC's vote, large majorities of citizens - including normally antiregulatory Republicans - supported keeping the rules in place.
But now even companies are formally questioning the wisdom of the move, saying the end of the net neutrality guarantees could harm their businesses.
Some of the tech companies that listed the end of net neutrality as a risk factor did so almost in passing.
"Changes in laws or regulations that adversely affect the use of the internet, including laws impacting net neutrality, could impact our business," cloud security company Zscaler said in the regulatory filing it made in preparation for its initial public offering.
Spotify detailed how the repeal could harm its business
But other were more specific in laying out how the end of the rules might hurt their businesses. In the document it filed before going public, for example, Spotify warned that the end of the net neutrality rules could encourage "broadband providers in the United States [to] decrease access to certain content, start entering into arrangements with specific content providers for faster or better access over their data networks, or otherwise unfairly discriminate against content providers like us."
What's more, the end of the rules could result in wireless service providers blocking access to Spotify or giving its competitors a leg up, the company said.
"If that occurs, our business, operating results, and financial condition would be seriously harmed," it said.
Many investors and stock analysts don't pay much attention to the risk factors companies list in their regulatory documents, because they're often comprised of boilerplate language that gets reused from company to company. But corporate lawyers are careful to include in them anything they think could be a significant liability, said Matt Wood, a policy director at Free Press, a consumer advocacy group that supports net neutrality.
That's why the inclusion in the list of risk factors of the repeal of the rules is a significant development, he said.
"They wouldn't list it if it wasn't a real threat," he said.
More companies could soon recognize the repeal as a risk
The companies that are listing the repeal of the net neutrality rules as a risk factor thus far have largely been companies that focus on offering services online or via internet-connected apps. But with growing numbers of companies dependent on the internet for significant chunks of their business, many more may need to consider including it, said Glynna Christian, a partner and cohead of the global technology transactions business at the law firm Orrick.
Companies that offer or are reliant on devices that need to connect to the internet - whether smart home devices or autonomous vehicles - could be affected by the repeal of the rules, Christian said. But so too could companies whose employees need to access their data and applications remotely or businesses that are shifting their data and applications to the cloud.
They wouldn't list it if it wasn't a real threat
"I'm not sure how much mainstream businesses are thinking about that," Christian said.
To be sure, even before the current trend, some companies had included net neutrality as a risk factor - but for the opposite reason. Telecommunications operators have warned that their businesses could be constrained by the outgoing consumer protections and could be burdened anew if a repeal of the rules were blocked.
The soon-to-be repealed rules "may increase our costs, impact our ability to provide service to our customers and adversely affect our profitability," cable company WideOpenWest said in a regulatory filing last year.
But for now, it's more likely the rules will be repealed than stay in place. And as more companies realize the threat the end of the net neutrality rules poses to their business, the more often it's going to show up in their risk factors, Christian said.
"I think it's a trend you'll continue to see," she said.
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