The Repeal of Net Neutrality: An Uncertain Future for E-Commerce Businesses

di Andrea Giarrusso

Introduction

“Network Neutrality” [1] is the principle that Internet service providers should enable access to all content and applications regardless of the source, and without favouring or blocking particular products or websites.

The proponents of net neutrality regulation depict it as necessary to prevent harmful conducts by broadband providers [2] that might thwart the development and the growth of the Internet.

The concern is that, unless a regulatory framework is adopted, broadband providers will discriminate in diverse ways against edge providers [3], reducing the investment in them and consequently deterring the entire value of the Internet.

The United States Federal Communication Commission (“FCC”) in its Open Internet Order established a set of regulations that seek to prevent that harm by banning broadband providers from engaging in such behaviour at the expense of end consumers.

Under the law of net neutrality, all content on the internet was required to be equally available for users in the United States. It does not matter if the content is big or small, mainstream or niche, commercial or free, all the bits are created equal and must be treated in the same way. Internet Service Providers (ISPs) such as Comcast, Verizon and T-Mobile were mandated to ensure that all online content could load or stream at equal speeds. [4]

ISPs were further forbidden from blocking certain sites or charging extra for access. But in a 3-2 vote on December 14th, 2017, the Federal Communications Commission (FCC) dismantled the protections that safeguarded net neutrality.

Without this protection, now internet service providers have the right to slow down or speed up loading times as they choose. This possibility may create a divided internet, split between fast and slow lanes.

Although, the major ISPs stated that they will not change their services. For example, Comcast has publicly stated that it will not block or throttle Internet access, but it noiselessly dropped its promise to not implement paid prioritization, which will convey faster internet lanes for those who are willing to pay more.[5]

The aim of this Essay is to analyse the possible implications that the absence of an Open Internet may shape the behaviour of e-commerce businesses and consequently how the consumer choices would be influenced by that. 

Consumer choice in the e-commerce environment

“Online commerce takes place in technology-mediated environments. The online consumer depends on manipulated information that shapes his perception of the marketplace and influences his purchasing decisions. The online business designs the transacting environment to promote certain behaviours and to discourage others, to prioritise certain content while making other content more difficult to access or less prominent”. [6]

Professor Mik shows in her article how technology already influences consumer choice in the online environment. In particular, the ‘combined, mutually-enforcing effect of multiple technologies‘ often determine what information is displayed as well as how and when is displayed.

At first glance, the online environment may appear very convenient for the consumer: he has a wide range of choices, he can compare different websites at the same time, thus he can search for lower prices. Therefore, e-commerce is supposed to increase consumer welfare.

A deeper analysis instead shows how the actual situation is not that idyllic.

The ISPs, often defined as the gatekeepers of the Internet, limit the consumer choice, narrowing it only to what they intend to show to consumers, restricting their access from certain contents and conveying them to others. Hence, there is an unequal balance between the transacting parties, the consumer is highly influenced by ISPs’ policies and technology in general, which certainly restrict his autonomy during an online purchase.

“Technology is, after all, never neutral: depending on how it is used, it can preserve, enhance or diminish autonomy. It enhances autonomy when it improves the ability of making informed choices, of shaping and fulfilling individual preferences. It diminishes autonomy when it interferes with or pre-empts such choices and imposes preferences”.[7]

Although, ISPs cannot impose consumers to make specific purchases, they have the power to influence the consumer’s online experience. The average consumer is not aware of the wide range of possible choices that exist on the Internet, while he often relies on the first results provided by search engines.

Nowadays, search engines have an enormous power: “the manner of presenting search results shapes the consumers’ view of the online marketplace and directly affects which websites they visit and what products they buy”. [8] Rarely a consumer gazes the results showed at the bottom of the first page and almost never the ones appearing only in the second page. For an e-commerce company being in the second page of results is equivalent to be non-existing and its website will unlikely be visited by consumers.

Certainly, online consumers have access to more information compared to the traditional offline consumers; the problem is that the huge availability of information does not automatically mean that consumers are capable of process it and deploy it in order to make reliable choices.

Moreover, consumer may be influenced by the presentation of information, namely the interface design, colours, shapes and general layout.[9] E-commerce businesses are actually using empirical findings gained through lab experiments (which consist of fMRI, eyeball tracking and heat maps) to channel the subconscious of the consumer to certain content, facilitating some choices and discouraging others. Considering that the average consumer is seldom capable of individualize these techniques, his autonomy is likely to be biased.

The principle of choice architecture [10] reflects the fact that there are many ways to present a choice to the decision-maker, and that what is chosen often depends upon how the choice is presented.[11]

“Choice architects can influence choice in many ways: by varying the presentation order of choice alternatives, the order attributes and their ease of use, and the selection of defaults, to name just a few of the design options available”.[12]

Thaler and Sunstain call this activity ‘nudging’: a nudge is any aspect of design “that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives”.[13]

The authors sustain that nudges must preserve choice, but the truth is that there is no neutral architecture. In particular in the online environment, nudges deflect rational choices and are usually designed to exploit behavioural biases on a subconscious level.[14] Online businesses deploy ‘technological nudges’ in order to drive the consumers’ subconscious towards what is more profitable for them, thus strongly influencing their choices and restricting their autonomy.

The End of Net Neutrality

This already controversial situation is about to change due to the FCC’s decision to repeal the principles that guaranteed the Neutrality of the Internet, which were established under the Obama’s presidency.

Initially, this decision will not affect European regulations, being these principles territorial. Although, it is evident that if the wind shifts in the US the debate is likely to spread across the rest of the world.

Under the net neutrality principles [15] all bits are created equal — every information, messages, images, videos have to be treated equally: the edge provider is not able to deliver its content to the consumers faster than its competitors (e.g. Netflix, YouTube and Spotify have the same speed of any other service). For example, a consumer using the Internet to rent a movie should receive the same speed and level of service as a someone listening to streaming music or buying a pair of jeans from an e-commerce store. [16]

The idea lying down these principles is that the Internet shall not be ruled by money, instead it shall be open, in a way that those having original ideas are free to exploit it delivering their services to the users. [17]

Ajit Pai, the FCC’s chairman in the Trump administration, stated that he planned to “modernize” FCC policies to “match the reality of the modern marketplace”.

In an interview on May 5, 2017, with NPR, Pai stated his argument against net neutrality enforcement rules to be only about focusing on fixing actual anti-competitive behaviour that Internet providers show as opposed to just “regulating against hypothetical harms”[18]. “Preemptive regulation is appropriate when there’s a major market failure — when the Internet is broken,” he says. Another argument he makes against this is that the government interference into the Internet’s issues would stifles its innovation and growth. He argues that it is impossible to predict all outcomes, and although some might be bad, it is not a good idea to put such strict restrictions on everyone when there are only a few companies who would harm consumers or innovators. He believes that strict net neutrality rules would “prohibit a number of pro-competitive business arrangements” and “would reduce investments”.

In early June 2017, Battle for the Net, a coalition spearheaded by Fight for the Future, Free Press Action Fund, and Demand Progress, announced a “massive day of action” for July 12. Over 50,000 websites, including multinational corporations, participated in what Fight for the Future called “the largest online protest in history”. [19]

Nonetheless this massive online campaign, the net neutrality regulation was repealed by the FCC on December 14, 2017, with a 3-2 party line vote.

Battle for the Net is still fighting for restoring the freedom of the Internet. It encourages the citizens, through its website, to write a letter to the Congress: “The FCC killed net neutrality rules, but Congress can stop the FCC with a “Congressional Review Act” (CRA) vote. We have to win. If we don’t, big ISPs like Comcast will control what we see & do online with new fees, throttling, and censorship. We need just one more vote in the Senate. Can you write Congress now?”. [20]

How the repeal of net neutrality could affect E-commerce

The repeal of the network neutrality principles is likely to have serious implications for the e-commerce business. “The common concern is that such discrimination could create fast and slow lanes on the network, undermine competition and the open character of the Internet”. [21]

Internet Service Providers will not be required to treat all data the same, so they could potentially charge users more to access specific sites or view certain content, or impose tighter data caps. Additionally, ISPs could force Internet companies and web sites to pay more for faster connections — potentially leading to the slowdown or even blocking of online traffic.

In the e-commerce context, microseconds count: users abandon websites with slow loading times, consequently faster-loading websites have more visitors and more revenues. “Research shows that a 1 second delay in page response time can result in a 7% reduction in conversions. Put into perspective, if an e-commerce site is making US$100,000 per day, a 1 second page load delay could potentially cost US$2.5-million in lost sales every year”. [22]

Hence, e-commerce retailers must adjust to an uncertain environment, one in which they may have to pay up in order to get out in front of the consumer.

In this new atmosphere where larger companies can pay more money to partner with ISPs, major retailers are likely to have an advantage in gaining online visibility. However, even they would have an extra expense they did not have to worry about before the net neutrality repeal. At the end of the funnel, this would then affect consumers, who then may have to pay more.

David Pierpoint, Senior VP of Performance Media at Ansira, in an interview with Retail TouchPoints confirmed this concern: “You’re adding an extra business cost to innovation for that same level of access. How do you convince a consumer that that is worth it? What you will see is that the retailers will have to absorb those costs, and then pass them on to consumers. The gist of the argument with content providers, is that the big guys like Netflix will still be able to make the best deals so they will be prioritized, and first in line. From a retail perspective, the person who has the best position on Main Street with the most traffic wins the day, and you now just hope that you can get a spot somewhere else. The whole point of the Internet is to not have that problem — it is to have the open access.” [23]

Brian Kilcourse, Managing Partner of RSR, related the potential online landscape to the national highway system: “If you can imagine a highway system, what you would see is an endless stream of Walmart trucks traveling out to the West Coast to put goods into their stores. Now imagine Walmart having the ability to buy a lane so that their trucks could be unimpeded by everyone else driving in their sedans, then you have an idea of what the Internet without regulation is going to be like. People will be able to have priority lanes for their traffic. For something that’s so fundamental to our economy, it’s just a huge error to expect businesses to be able to regulate that fairly. Businesses aren’t in business to be fair to their competitors.” [24]

As we can see, retail powerhouse like Amazon and Walmart will gain more market share with the repeal of net neutrality, they would be able to make investments and pay the ISPs in order to have their websites running faster than their competitors.

“Big companies have enough money to pay ISPs to guarantee the best available broadband speeds during peak selling times like Christmas, Black Friday, Cyber Monday, etc. These deep-pocketed online businesses would be able to secure faster Internet speeds, and thus provide a better shopping experience for customers at the expense of non-paying retailers, whose customers would likely be frustrated by a slower shopping experience.” [25]

On the other hand, SMBs, independent brands and start-ups will probably encounter the main challenges. They will be the first to feel the pain of deregulation, since they lack the resources to pay for prioritization in the way a larger competitor could.

Small and independent retailers often rely on social media to reach consumers, taking the advantages of the lower costs to build their audience and grow their business. But, as Ryan Patel — global business executive who has established himself as a thought-leader and expert in growing and scaling companies — explained: “Net neutrality shifts the power to ISPs and its ability to potential interfere on this crucial component”. [26]

Amy Spitalnick, press secretary of the New York State Office of the Attorney General, shared the same concern: “Those brands [SMBs – ed.] are the ones that will be most vulnerable without net neutrality. Not only will they be unable to pay ISPs for the speedy connections to customers they need in order to compete, but they will have less money to fund legal action against ISPs if they’re being unfairly targeted.”

Moreover, the situation will be even more critical for emerging businesses: they would have to make investments and negotiate with the ISPs for broadband access before starting their activity. This new barrier could indeed discourage the ‘next Google’ to start its business and it could entail serious implications for the market, such as too little innovation.

In April 2017, a group of 1,000 U.S. SMBs wrote an open letter to the FCC and Chairman Ajit Pai, arguing: “Without net neutrality, the incumbents who provide access to the Internet would be able to pick winners or losers in the market. They could impede traffic from our services in order to favor their own services or established competitors. Or they could impose new tolls on us, inhibiting consumer choice. Those actions directly impede an entrepreneur’s ability to ‘start a business, immediately reach a worldwide customer base, and disrupt an entire industry’”. [27]

Despite this unpleasant prospect, the FCC’s Chairman sticks to his beliefs: “The framework adopted by the Commission today will protect consumers at far less cost to investment than the prior rigid and wide-ranging utility rules. And restoring a favorable climate for network investment is key to closing the digital divide, spurring competition and innovation that benefits consumers”.

Conclusion

Notwithstanding the clamour over the repeal of net neutrality and the possible disadvantages that companies will have to encounter, Kilcourse believes that innovation will not suffer, putting his trust in future innovators and especially in consumers: “Anyone that thinks we are done with innovation is not paying attention. The interesting thing about innovation in today’s world is that it is not being driven by corporations. It is being driven by consumers. Retailers did not go mobile because they thought it was a brilliant idea. They went mobile because consumers demanded they go mobile. Consumer adoption of technology is driving this innovation. That means that we do not know what the next innovation is going to be. The way the consumer chooses to use technology to solve their lifestyle problems is not all that predictable.” [28]

Hence, as David Naumann — VP of Marketing at Boston Retail Partners — suggests, small players and new entrants must continue focusing on what differentiated them in the first place to stay on top.

“It’s really about personalization, and providing customers a real personalized experience, because those are the things that are going to help you retain your loyalty and help you compete effectively,” said Naumann. “It’s still the basics, and ensuring that customers are brand enthusiasts. If we see the changes that we suspect might happen, where there’s a sliding scale for bandwidth and speed, companies are going to be ultra-diligent in optimizing their web site. It might actually create some opportunities for technology companies that look to boost speed and performance based on bandwidth.” [29]

The repeal of the Net Neutrality principles opens a fertile ground for all kind of possible predictions and suppositions. However, all of this is all purely theoretical.

“To be fair, no one knows for sure what ISPs may or may not do to the data flowing through their networks now that they have free rein, and since they are governed by the demands of their own consumers looking for fair access to content it may not be in their best interest to start regulating access. What is certain, however, is that internet speed is a crucial factor in e-commerce and consumers have come to expect a lightning-fast digital experience, so businesses should pay close attention to how this all plays out.”[30]


 [1]This term was coined by Tim Wu in his 2003 paper Network Neutrality, Broadband Discrimination.

[2]The term “broadband providers” refers generally to service providers that provide high-speed Internet connections to consumers through a variety of technologies, including but not limited to telephone networks, cable networks, fiber optic connections, and wireless transmission. See John D. McKinnon, Net Neutrality Proponents Warn of Loopholes, WALL ST. J. (Dec. 13, 2015), http://on.wsj.com/1TK2SuK [https://perma.cc/6AXE-Q7A8].

[3]The FCC defines the term “edge providers” to mean “[a]ny individual or entity that provides any content, application, or service over the Internet, and any individual or entity that provides a device used for accessing any content, application, or service over the Internet.” Protecting and Promoting the Open Internet, GN Docket No. 14- 28, Notice of Proposed Rulemaking, 29 FCC Rcd. 5561, 5564 (2014).

[4]Mikhala Lantz-Simmons, The Repeal of Net Neutrality and the Impact on eCommerce, Industry News, 3 January 2018. [https://absolunet.com/en/repeal-net-neutrality-impact-ecommerce/].

[5]Id.

[6]Eliza Mik, The Erosion of Autonomy in Online Consumer Transactions,Law, Innovation and Technology, 8:1, 1-38, DOI: 10.1080/17579961.2016.1161893.

[7]Eliza Mik, Id.

[8]Id. 6.

[9]Natalie Nahai, Webs of Influence,(Pearson 2012) 72.

[10]Term coined by Thaler, R. H., & Sunstein, C. R. (2008). Nudge: improving decisions about health, wealth and happiness. New Haven: Yale University Press.

[11]Eric J. Johnson et al, Beyond Nudges: Tools of Choice Architecture, (2012) 23 Mark Lett 487, 488.

[12]Eric J. Johnson, Id.

[13]Thaler and Sunstein, Id.10.

[14]Seegenerally Evan Selinger and Kyle Whyte, Is there a Right Way to Nudge? The Practice and Ethics of Choice Architecture, (2011) 5(10) Sociology Compass 923.

[15]The 2015 Open Internet Order established three bright-lines rules that apply to providers of broadband Internet access service:

  • No blocking access to legal content, applications, services, or non-harmful devices;
  • No throttling lawful traffic on the basis of content, applications, services, or non-harmful devices; and
  • No paid prioritization that would create “fast lanes” by favouring traffic from some sources (including content and services of affiliates of broadband Internet access service providers).

[16]Matt Dion, For Online Commerce Net Neutrality Is About Speed, Enterprise Commerce Blog, [https://www.getelastic.com/for-online-commerce-net-neutrality-is-about-speed]

[17]This is how big companies such as Google, Amazon, Netflix have built their empire.

[18]Alina Selyukh, David Greene, FCC Chief Makes Case for Tackling Net Neutrality Violations ‘After the Fact’, (May 5, 2017), NDR.

[19]Haley Velasco, Net Neutrality: What happened during the July 12 Internet-Wide Day of Action protest, (July 11, 2017), PC World.

[20][https://www.battleforthenet.com].

[21]Eliza Mik, Id. 6, 18.

[22]Id.16.

[23]Glenn Taylor, End Of Net Neutrality Creates Uncertain Future For E-Commerce, 22 December 2017, [https://www.retailtouchpoints.com/topics/e-commerce/end-of-net-neutrality-creates-uncertain-future-for-e-commerce].

[24]Id.16.

[25]Id.16.

[26]Interview for WWD, See Id.23.

[27]Id.16.

[28]Id.16.

[29]Id.16.

[30]Will the End of Net Neutrality Affect eCommerce?, Market Track, [https://markettrack.com/blog/will-the-end-of-net-neutrality-affect-ecommerce.html].

 


Author