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February 22, 2018

How Net Neutrality May Impact Medium and Small U.S. Businesses

MHT Partners  | Business & Information Services Investment Bank

You may have heard a lot about “net neutrality” over the last few months.  It’s a regrettably dull term for an important idea – should Internet Service Providers (ISPs) such as Comcast, AT&T, Verizon, and others be able to charge users different rates based on the amount of bandwidth used or should high-speed internet access be treated as a public utility?

Large technology companies such as Google (YouTube), Facebook, and Netflix are understandably against net neutrality since these companies require large amounts of bandwidth to deliver content to consumers efficiently.  An increase in cost or decrease in bandwidth could have a strong impact on the profitability or the performance of their content and services of these technology behemoths if they choose not to pay.  On the other side of the argument, we have the ISPs who are the gatekeepers of the internet via DSL, cable, and fiber-optic lines, and control how fast users surf the web and how quickly websites load.  ISPs would like to ‘de-regulate’ the internet in order to charge variable fees based on usage, stating that large technology companies don’t pay their fair share.

So, the million-dollar question is how the repeal of net neutrality will potentially impact the vast number of medium and small U.S. businesses?  The truth is, it’s hard to say, since some think the market will self-regulate- ISPs will play fair because they don’t want to annoy their customers and lose business, while others believe ISPs could increase the costs associated with accessing the internet by charging businesses significantly more for better service or to access a company’s target audience.  As a result of significant M&A activity over the past decade, the five largest ISPs account for over 75% of all wireline households in the U.S., so there is reason to believe the largest ISPs have little incentive to self-regulate.

If costs increase, all businesses, including medium and small U.S. businesses, could be stifled if they’re not able to pay for top-tier bandwidth access.  Smaller, tech-enabled internet businesses would certainly be affected as they compete with the massive budgets of the largest technology companies, which could undoubtedly afford to pay for top-tier service.  But even small businesses who process online orders through dedicated websites or that depend on cloud-based data centers could be affected.  In a sense, the repeal of net neutrality could increase the costs of doing business on the internet, and small-to-medium-sized businesses may be the most vulnerable to this change.

The open internet has provided many smaller businesses with a fair playing field, which could change now that the Federal Communications Commission (“FCC”) has repealed net neutrality.  Alternatively, the FCC has stated that start-up and small businesses thrived before the present net neutrality rules were enacted and will likely continue to be competitive after the rules are repealed.   While the consequences of the FCC vote won’t be felt immediately, only time will tell what the true impact on U.S. businesses will be.

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