By Ed Elliott

It's hard to believe, but e-commerce turns 10 this year. With its rapid growth and broad-based consumer acceptance, one would think e-commerce had been around forever. Fortunately for direct marketing, online pioneers like Amazon, Travelocity and Expedia were able to convince consumers it was safe to give up confidential information like credit card numbers in exchange for convenience. As a result, U.S. shoppers will spend an estimated $18 billion online this year.

Online sales have been a real windfall for the direct response industry, generating as much as 30 percent--some say even 50 percent of total sales. Even the most modest advertising budgets can afford online campaigns and now compete with huge catalog companies and fully integrated companies like QVC and HSN, which have leveraged their online assets to amazing new heights.

THE TIDE TURNS
Tragically, for e-commerce companies of all types the good ol' days may soon be coming to an abrupt end. Because of something called net-neutrality, the Internet as we know it is about to change&and not for the better.

While we were all making money online, a heated dispute erupted in late 2002 over how the networks owned by cable and telecom giants should be regulated.

At issue is the idea of open access, or net-neutrality, an evolving doctrine that forces network operators to open transmission networks without favor to content, use, application or hardware. In simple language, net-neutrality says, "Deliver my content regardless of source, without discriminating against any application or web site and allow me to attach any device I choose to the network." Since the establishment of the Internet, net-neutrality has been the very foundation of its success!  

So, you think the current common carrier regulations protect you? Think that huge telcos like SBC, Verizon and BellSouth are required by law to deliver your content or give you open access to their subscribers? Think again! Recent court decisions could change everything and could soon have you paying fees for access, even sharing revenues with telecom and cable companies for the privilege of reaching potential customers on their networks.

Say you're a typical online DR marketer with a hot new exercise product. You buy some keywords, set up an affiliate network, you even use video e-mails to get your message out; guess what? Net-neutrality could mean that your web site is blocked from the customers you paid to generate, and without your knowledge, your customers are rerouted to your competitors. If net-neutrality evolves like this, you'll have absolutely no recourse except to pay fees to the network providers for what you used to get free.

HOW'D THIS HAPPEN?
Back in pre-Revolutionary times, content providers and the transportation of that content went hand in hand. The local newspaper publisher and person who delivered the mail, were usually one in the same. As a result of this cozy relationship, competitive, independent newspapers and publications were rarely delivered. This discriminatory practice ended in 1775 with the establishment of the U.S. Postal Service whose charter created the legal framework that prohibits carriers from interfering with content.

As technology began to evolve in the mid-1800s and voice and data communication became a reality, the separation of content and its transportation was established in the law. It was now illegal for the telephone company to censor your calls or even wiretap them without a judge's order.

It would be logical then to assume this same principle would apply to the Internet; and for more than 30 years now it has. In the 1970s and 1980s, the Internet grew in popularity primarily because the telcos opened up their telephone lines on a non-discriminatory basis. Internet service providers (ISPs) sprung up everywhere, developing a profitable business model that was widely credited with broadening access to the 'Net and its corresponding growth. It wasn't long before consumers worldwide were surfing.

Then in about 1995, without anyone really noticing or anyone really understanding its impact, some enterprising individual sold something online and e-commerce was born. Suddenly e-commerce web sites sprung up across the web and companies like Amazon, Travelocity and Expedia changed the way consumers shop forever.

The laws already in existence under Title 2, allowed these online retailers and e-commerce companies to grow unabated throughout the late '90s. Title 2 forced telcos and cable companies to allow non-discriminatory, open access to their networks without regard to content under an open pricing structure.

So what went wrong then? As the Internet grew up, Internet usage changed from a passive one-way system into an interactive, two-way environment that began gulping bandwidth. It was about 1999 when the first real crunch on network bandwidth happened as a result of upstart Napster--the independent music download web site that went crazy, with up to a million downloads a day.

Gone for good were the days when everyone used their Internet pipeline primarily for e-mail and research. Usher in today's users who see as a right of their broadband service, downloadable music, video on demand, online shopping, chat and the biggest threat to the telcos yet, VoIP phone service.

Now on the heels of the iPod revolution, new content services like blogs, RSS and podcasting are changing the Internet landscape yet once again. It's not just the cool kids on the block who are blogging, podcasting and downloading movies either. Just ask mega companies like Disney, Microsoft, General Motors and IBM how important their web initiatives are to their bottom line. Whether it's business-to-consumer, or business-to-business, the importance of e-commerce on the web can no longer be ignored.

WINDS OF CHANGE
In an attempt to stem competition and increase profitability, big network operators have begun to strike back against rivals like VoIP calling companies and video file sharing services, claiming these companies are hogging bandwidth and creating heavy network traffic that degrades the average consumer's Internet experience.

This is a thin argument made by network owners who see increased competition within their own enterprise sector, and worry about their role diminishing to that of simple network infrastructure providers. "They claim it's a network-management issue when it's really a revenue-maximization issue," says Mark Cooper of the Consumer Federation of America who disagrees with this contention.

These claims of bandwidth hogging have given rise to content discrimination, which resulting controversy has made its way into the courts. In one case, the operator of a rural telco actually blocked consumer access to VoIP services, claiming such services overloaded their network. In another case, a Canadian telco blocked over a million users from accessing a pro-union web site.

Although the FCC took quick action to protect consumers in these situations, recent decisions by the FCC essentially permit a duopoly between cable companies and telcos that provide broadband access. This spells trouble for online retailers who are no longer protected by the common carriage laws of Title 2 and are now considered "information services" under the laws of Title 1.

This legal determination opens the door to what e-commerce sites fear most--the end to free, open Internet access. Telco executives like SBC CEO Edward Whitacre scoff at the idea that companies like MSN, eBay, Vonage and other e-commerce companies can continue to get a free ride on "his" bandwidth. Whitacre said recently, "[he'd] love to charge Google and other "upstarts" for accessing his network." That statement came just days after BellSouth said, it hasn't ruled out blocking certain application ports. Those are bold comments from an industry that hates regulation, just at a time when Congress is debating a host of net-neutrality laws.

E-commerce companies should be aware of two possible worse case scenarios as they prepare for the future. Scenario 1 would be similar to the broadcast model and would see network providers charging fees to content providers for access to "their" users/audience with additional bandwidth charges for specific applications. The user's experience would change little, and consumer access would be provided on a non-discriminatory basis. Thus, access fees in all likelihood would be set by the network providers.

Scenario 2 would create a "walled garden," where closed system broadband providers would decide what Internet users would and would not see. These closed systems would limit the user access to "approved" or top-tier vendors who would pay access fees and share their revenue with network providers. The user's experience would change dramatically in this closed, discriminatory system, which would have a limited number of competing top-tier vendors. In many cases, top-tier vendors would be subsidiary operations or even directly owned by network providers.

REGULATORY RELIEF?
There's a lot of talk within the halls and committee rooms of government right now about proposals aimed at overhauling the Telecommunications Act of 1996. While the FCC has released a policy statement on issues affecting consumers, the Federal government remains largely silent about e-commerce and commercial content delivery. This is problematic as what the FCC policy statement does not say, opens the door to possible unregulated pricing, restricted content access and other discriminatory practices. This should be a major concern, as any undue economic pressure placed on e-commerce companies would likely have an adverse effect on consumers in the form of higher prices for goods and services.

U.S. Representative Rick Boucher (D-VA), who has long been active in Internet policy matters, praised the FCC's statement but pointed out the inherent weakness of its position. "The absence of a binding statute codifying the principles of net-neutrality," Boucher says, "leaves a significant gap in our regulatory structure which will undoubtedly be exploited again by companies seeking to gain an inappropriate competitive advantage."

Two pieces of draft legislation are currently soliciting public comment but like the FCC policy statement, they focus primarily on consumer issues. U.S. Representative Joseph Barton, (R-TX), chairman of the House's Energy and Commerce Committee, has made the issue a top priority and is hoping to have a bill introduced this fall. Both houses have similar proposals that focus on consumer access, and make it possible for providers to serve up different content and delivery bandwidths for different content providers.

In English, this means that inside the "walled garden" a network provider could offer its customers video on demand through one of its "approved" vendors at the highest possible download speeds, employing the latest technology. This means the best possible user experience.

Outside of the "walled garden," the same network provider would simultaneously make available to the same customers, services offered by any number of video-on-demand competitors. However, these competing e-commerce web sites would be unable to offer similar competitive services because of network imposed technical limitations, such as restricted upload/download speeds and "best effort" network protocols, which allow for bumping and dropping of data packets. If you find yourself outside the "garden walls," your web site will have a difficult time competing with top-tier competitors inside the "garden."

When asked about current solutions to the problem, Congressman Boucher said, "As the House and Senate prepare to reexamine our nation's telecommunications laws, we have an opportunity to use a light regulatory touch and insert into statutory law, the very common sense principles of net-neutrality."

NOW WHAT?
The good news is that decisions affecting net-neutrality are only a few months old and no new laws are on the books, yet. Now is the time for anyone who depends on the web to sell their products and services to get involved and let policy makers know the impact these decisions could have on e-commerce.

Congress is still in the committee stage on potential new legislation, and your comments are needed to help lawmakers shape legislation that makes sense for both consumers and e-commerce marketers. An organized, rational approach to the FCC and Capitol Hill could help lawmakers understand not only the power and impact of e-commerce, but also the great harm that could be caused to this vital engine of economy.  

Net-Neutrality as a Point of Law

To provide a legal perspective on the net-neutrality issue, contributing writer Ed Elliott spoke one-on-one with John B. Muleta, co-head of Venable LLP's Communications Practice. Muleta has been on the side of technology, the Internet and online commerce throughout his career and has a great appreciation for how the Internet can dramatically affect our lives and our nation's productivity. Prior to joining Venable, he served two separate stints at the FCC, including most recently as chief of its Wireless Bureau. Ed Eliott: John, what is net-neutrality and why should online retailers pay attention? John B. Muleta: Net-neutrality is the concept that access to the Internet should be fair and open to online consumers and businesses. However, the current reality is that this open access to the Internet is going to change and that should greatly concern online retailers because it will affect their businesses. The new reality is that cable and phone companies (that are now providing most broadband access) are not required to provide uniform access to broadband services at reasonable rates. This was codified in a 2001 FCC decision recently affirmed by the Supreme Court this past June involving cable companies, called Brand X. The FCC followed that decision by expanding the concept to local phone companies in an August decision called the Wireline Broadband ISP Order. According to these decisions, phone and cable companies providing "broadband" services can be treated as "information services" and do not have to provide fair, reasonable and non-discriminatory pricing, and access to their broadband networks and services. Elliott: Won't having two competitors lead to net-neutrality? Muleta: It is not clear that once there are only two competitors--telcos and cable companies--there would be any need for them to compete on either price or service. Additionally, these markets do not have exact overlaps and the level of consolidation is different between the industries making symmetric competition or uniform availability of broadband unlikely. These outcomes are bad for online retailers who need broadband to be uniformly available and affordable. Elliott: Can you give us a picture of net-neutrality legislation? Muleta: This issue affects consumers as well as online retailers and online content providers. However, the harm or effects are very different between these two groups.   Most of the legislative drafts look at a narrow definition of net-neutrality and focus on how consumers use the 'Net. In the case of e-commerce businesses, the FCC decisions make it possible for there to be a world of businesses made up of "broadband haves and have-nots, "with the "haves" paying off network providers for broadband features that keep them competitive. The "have-nots" will be those businesses that simply cannot pay whatever it takes to get these same services. Unfortunately, neither the FCC policy statement nor legislative proposals regarding net-neutrality take the dynamics between businesses and consumers into account. Elliott: Are you saying that the features many online retailers rely on will only be available to those who pay for it? Muleta: There is no problem with paying for it. The problem is that online retailers won't know if these services will be available and if they will be affordable. It is these uncertainties that should worry online retailers. Remember that online businesses have always relied on fairly priced transport facilities, available on a non-discriminatory basis. It's very possible that e-commerce companies might have to significantly adjust their profit expectations and pay more for basic and critical technological services, possibly a lot more, in order to be a broadband "have." The second problem is that there is no requirement for these broadband providers to supply access on a non-discriminatory basis. As a result, providers can now drive consumers to their sites (or to the site of their partners--your competition). You won't even know this is happening and, more importantly, the consumer won't even be able to tell the difference. Elliott: You are painting a very grim picture. Muleta: I'm talking about possible scenarios. It's too early to tell if the worst will happen, but clearly the law of the land today says this could happen. Now's the time to get involved and get your point heard. If the online community gets involved right now, there's still time to preserve the neutrality of the Internet.

Ed Elliott is co-president of Media Partners Worldwide, a direct response ad agency based in Long Beach, Calif. He can be reached at (562) 439-3900, or via e-mail at eelliott@mediapartnersworldwide.com. To submit comments, point browser to netneutralitydec.marketing-era.com.