Lawmakers lament detriment to startups of Trade Rep’s digital trade reversal
After overcoming childhood shyness in the warmth of his local Caribbean-owned barbershop, Royon Jeffrey knows the power of the beauty industry firsthand. He set out to create ListedB, an online marketplace for beauty industry professionals. We spoke to him about the financial opportunity within the industry, navigating capital access and investors, and his desire to empower small businesses owners.
Foreign nations are saddling U.S. companies — including startups — with discriminatory burdens.
MegaMinds was created out of a need to make learning more creative, fun, and hands-on for students. In our conversation with Co-Founder and CEO Eric Tao, we learned about the growing popularity of immersive learning, the tricky regulatory landscape for a product like MegaMinds, and what it’s like for many first-time entrepreneurs to build businesses.
On April 26, more than 800 startups, innovators, investors, and entrepreneurial support organizations from all 50 states joined Engine, Y Combinator, and Techstars in sending a letter to Federal Communications Commission (FCC) Chairman Ajit Pai urging him to protect a free and open internet.
The net neutrality debate that dominated tech headlines in 2014 and 2015 was once again the top telecom issue in 2016, peaking in June with the U.S. Court of Appeals decision to uphold the Federal Communications Commission’s (FCC) 2015 Open Internet Order. The telecom excitement didn’t end there, as policymakers dealt with a huge number of issues related to promoting telecom competition; preparing for a wireless, connected future; and building out broadband access in underserved parts of the country. In short, the momentum in 2015 carried over into 2016 in a big way. Looking ahead, 2017 is poised to be yet another busy year in telecom policy, though the impact of an incoming Trump Administration still remains uncertain.
Today, Federal Communications Commission Chairman Tom Wheeler announced his plans to step down from the agency on January 20, 2017. The following statement can be attributed to Engine Executive Director Evan Engstrom: “In his time at the helm of the FCC, Chairman Tom Wheeler has been a tireless champion for startups and innovators everywhere, and Engine is grateful for his service.
As the Republican National Convention kicked off this Monday, the GOP also released the final draft of their party’s platform. The platform, which was written with input from the party’s base sourced via www.platform.gop, included generous mentions of issues important to the startup community.
Today, the D.C. Circuit Court of Appeals upheld the Federal Communication Commission’s (FCC) historic net neutrality rules in a 2-1 vote. Affirming that Internet Service Providers (ISPs) cannot block, throttle, or slow down web traffic at their own discretion, the ruling is a major victory for thousands of startups that depend on the open internet as a level playing field.
In the year since the Federal Communications Commission (FCC) approved its historic Open Internet Order, net neutrality has faced countless attacks in both the courts and Congress. Once again, the Order and the FCC’s broader authority have come under fire. H.R. 2666, the “No Rate Regulation of Broadband Internet Access Act,” threatens the FCC’s ability to fulfill its congressionally-mandated responsibilities and represents yet another attempt by anti-net neutrality lawmakers to undermine an open Internet.
Our weekly take on some of the biggest stories in startup and tech policy.
Safe Harbor Agreement Nears Deadline. With a January 31st deadline looming, there is more pressure than ever for the U.S. and EU to wrap up negotiations around a “Safe Harbor 2.0” agreement. In a letter sent to U.S. and EU leaders last Friday, industry stakeholders emphasized that “the consequences could be enormous for the thousands of businesses and millions of users impacted” if a deal is not reached. But another setback came this week when the Senate Judiciary Committee postponed consideration of the Judicial Redress Act. The bill, which would extend rights to judicial redress to citizens of the EU and other designated countries, is seen as essential to advancing an updated safe harbor agreement. This delay makes it even less likely that a deal will be reached in time, the ramifications of which could disproportionately impact startups.
Another Proposal to Weaken Encryption. Another week, another misguided state bill seeking to weaken encryption. The legislation comes from a California Assemblymember whose proposal would prohibit the sale of smartphones in the state with unbreakable encryption. A similar New York bill requiring a “backdoor” for encrypted technologies was covered in last week's digest. In an opinion piece, Christian Dawson of the i2Coalition does a good job breaking down why policies like these would stifle the Internet economy. He writes, “If the U.S. government were to institutionalize backdoors, it would be a heavy burden to businesses, and an operational lift that would likely force a large number of small companies to shut their doors.” We couldn’t agree more.
Verizon Joins the Zero Rating Crowd. Tuesday morning, Verizon announced a new sponsored data program, FreeBee Data, renewing debate around “zero rating” programs and whether they violate net neutrality principles. Under the FreeBee program, content providers have the option to pay Verizon a fee to exempt their content from customers’ monthly data caps. Verizon is the third wireless provider to offer a cap-exempt data program—AT&T has been running a similar sponsored data program since 2014 and T-Mobile has its own video-specific service, BingeOn (which has come under intense fire in recent weeks). The FCC’s Open Internet rules don’t explicitly outlaw “zero rating” programs, but the agency reviews them on a case-by-case basis whether the service harms consumers or businesses. They recently requested meetings with both AT&T and T-Mobile on their programs, and have said that they were notified by Verizon about FreeBee. We’re tracking.
A Grim Outlook for Startup Financing? Recent turbulence in the global stock market may have an impact on 2016 startup financing, the Washington Post reported this week. Volatility in the public markets has many investors considering whether some growing tech startups have been overvalued, a concern that's "likely to trigger a wider pause, denying funds for the innovators that disrupt industries and create new markets." Not good. And while 2015 was a banner year for VC investment, with $72.3 billion going into venture-backed companies in the U.S., (the highest since the dot-com boom), activity slowed by the fourth quarter, suggesting changing investor sentiment. Further, tech IPOs were significantly down in 2015 as companies are treading cautiously into the public markets. 2016 may prove to be an especially important year for policy that promotes greater capital access.
VC Sets New Diversity Standards. Kapor Capital, a longtime leader in its commitment to diversity in the tech industry, announced a new set of standards for its portfolio companies this week. TechCrunch calls it a “a four-part roadmap for startups to foster diverse and inclusive cultures early on.” This commitment will soon become one of the terms in all Kapor’s future investment agreements. Portfolio companies will be required to establish diversity and inclusion goals, invest in tools and resources that assist in mitigating bias, organize volunteer opportunities for employees, and participate in Kapor’s diversity and inclusion workshops. Way to put their money where their mouth is!
Our weekly take on some of the biggest stories in startup and tech policy.
Patent Lawsuits Up in 2015, Trolls in the Lead. Surprise, surprise! The latest numbers are out, proving that patent litigation is still out of control and patent trolling is indeed a real problem. Unified Patents’ latest breakdown of data indicates that 2015 saw the second highest number of patent cases ever (nearly 5,800 cases filed). Further, non-practicing entities (or NPEs, aka, trolls) filed two-thirds of them, largely in the Eastern District of Texas, a judicial district notorious for its friendliness to patent trolls. Additionally, 64 percent of patent litigation in 2015 occurred in the high-tech sector and NPEs were involved in over 88 percent of these high-tech cases, a 10 percent increase over 2014. Until the patent system is fixed, the trolling problem evidently isn’t going anywhere.
Net Neutrality Kerfuffle Over T-Mobile’s “BingeOn” Program: Recent reports about T-Mobile's treatment of streaming video services has many net neutrality advocates up in arms. Its latest offering, BingeOn, has actually avoided most of the criticism typically directed towards so-called "zero rating" programs. With BingeOn, T-Mobile allows any video provider to participate for free, thus skirting net neutrality rules that bar preferential data treatment for some paying companies. However, apparently, T-Mobile has been throttling (or, from T-Mobile's perspective "optimizing") all streaming video its users consume, not just streams from companies participating in BingeOn. Throttling lowers the data consumption associated with watching a video, but also diminishes video quality. Because the FCC's net neutrality rules essentially ban throttling, it's possible that the FCC could find T-Mobile in violation of its Open Internet Order. T-Mobile points out that users can opt out of BingeOn and the associated video throttling, but critics note that T-Mobile makes opting out excessively difficult. While FCC Chairman Tom Wheeler has praised similar offerings from T-Mobile in the past, BingeOn raises difficult questions about the application of the Open Internet Order that the FCC will need to resolve.
Drone Registration Challenged in Court. In December, the Federal Aviation Administration (FAA) announced new rules requiring the registration of recreational drones. According to data released by the FAA this week, over 181,000 drones have been registered since the registration site went live just three weeks ago. But not everyone is keen on registering their brand new toy. Some stakeholders have criticized the rules as being burdensome and unnecessary, while others have raised concerns around the public availability of registry data. And now a Maryland “model aircraft hobbyist” has sued the agency over the contentious rules, arguing that the registration requirement violates a federal law that prohibits the FAA from regulating recreational drones. The court has denied his request to immediately halt registration.
#CES2016. The annual Consumer Electronics Show takes over Las Vegas this week and along with the new electric cars and Ultra HD TVs, policymakers and government officials are also taking the stage. In fact, it was at last year's CES that FCC Chairman Tom Wheeler first indicated the agency's support for net neutrality. We don't expect any news of that nature, but this week FTC leadership told conference-goers the commission is close to striking a data-transfer deal for U.S. tech companies with its EU counterparts and FAA officials discussed new recreational drone requirements. USPTO Director Michelle Lee and Rep. Darrell Issa (R-CA) talked patent reform and Sen. Mark Warner (D-VA) made a showing, addressing policy challenges facing both government and emerging gig-economy startups as did . The new technologies unveiled at CES—virtual reality devices, autonomous cars, and other smart, connected tools—also offer a preview of new tech policy challenges to come.
The State of Female Founders. CrunchBase released their latest data on women-founded companies, illustrating that there is still a long way to go for gender parity among startup founders. Though 18 percent of companies that received seed funding in 2015 have at least one female founder, only 8 percent companies that received seed funding have at least one female founder CEO. For companies that received Series A and B funding in 2015, these numbers drop to 14 percent and 5 percent, respectively. The numbers may seem dismal, but this is a strong improvement from 2014, when only 10 percent of founders raising Series A rounds were women.
Our weekly take on some of the biggest stories in startup and tech policy.
CISA Sneaks into Omnibus. As Congress scrambled to clear its legislative calendar before leaving DC for the year, it packed a bunch of unrelated bills together into a 2,000 page omnibus spending bill that will need to pass in order to adequately fund the government. This potpourri approach to legislation raises serious concerns about government transparency and access, as all but the most well-connected groups are effectively blocked from the closed-door dealmaking that resulted in the omnibus. This year’s omnibus produced one notably terrible outcome: the resurrection of the much-maligned Cyber Intelligence Sharing Act (CISA), which is meant to allow companies to share information on cyber attacks with government in order to help prevent future hacks. Critics argue that the bill creates more problems than it solves by jeopardizing user privacy, incentivizing companies to secretly monitor user activity, and allowing the government to obtain consumer data without a warrant. With the ECJ’s nullification of the EU/U.S. data transfer safe harbor so fresh in policymakers’ minds, it is a particularly inopportune time to pass a bill that many believe is effectively an expansion of government surveillance authority.
EU Sets New Data Privacy Rules. On Tuesday, the European Parliament and Council effectively agreed upon a negotiated version of the EU Data Protection Reform originally drafted in 2012. The measures will be formally adopted in early 2016 and go into effect in 2018. US businesses are concerned with several of the law’s provisions that make compliance challenging and also expensive. Among their concerns: Companies that violate the rules could face fines of up to 4 percent of global sales; the law also formalizes the “right to be forgotten” statute, allowing users to not only correct inaccurate personal data, but also the right to remove irrelevant or outdated information; the age of consent for data processing is set at 16 years; companies must alert authorities within three days of a reported data breach; and larger “data-processing” companies must designate a data protection officer.
An Uber Union? Seattle has become the first city in the nation to allow on-demand drivers for companies like Uber and Lyft to unionize. The legislation, passed by Seattle’s city council on Monday, is seen as a test case for the changing 21st century workforce and will likely be contested in court. While some have argued that the new policy conflicts with federal law and raises antitrust concerns, others insist that the local law has teeth. Regardless of its merits, the law further complicates the broader debate around worker classification in the emerging “gig economy” and whether policies can support both innovation and workers.
California’s New Self-Driving Car Laws. A month after a study by California’s Department of Motor Vehicles, the state released proposed rules for driverless cars. Some of the rules came as no surprise to driverless car manufacturers such as Google, Tesla, and Ford: consumers must receive special training certificates and the autonomous vehicles must meet certain cybersecurity standards. However, one proposal, if passed, could significantly impede innovations in this emerging industry. The California DMV wants a licensed driver present in the vehicle, preventing the kinds of functions—package-delivering vehicles or transportation for the blind—that could truly revolutionize transit. This rule also complicates the liability question by making the licensed driver legally on the hook for any accidents. Google, on the other hand, has thus far stated that it is willing to take responsibility for any accidents on the road. There’s still room for debate though; these rules open for public comment next month.
BingeOn? Maybe Not Says FCC. In its net neutrality rules from earlier this year, the FCC declined to enact a flat ban on “zero rating” programs whereby ISPs exempt certain data from user data caps. Instead the FCC decided to tackle such issues on a case-by-case basis. Since then, ISPs have begun to test the FCC’s willingness to regulate data exemption policies, such as T-Mobile’s Music Freedom and BingeOn plans. While T-Mobile’s programs do not implicate the most concerning net neutrality problems by allowing any music or video streaming company to take advantage of the data exemption without payment, some net neutrality advocates have taken aim at T-Mobile’s policy of throttling all video traffic regardless of whether it is a part of the BingeOn program. FCC Chairman Tom Wheeler has previously applauded T-Mobile’s programs as creative, pro-consumer innovations, but now, the FCC wants to take a closer look. With the Commission’s data cap inquiry and the DC Circuit’s pending decision on the validity of the FCC’s net neutrality, 2016 looks to be an important year for the future of the open Internet.
Drone Registration Goes Live. The Federal Aviation Administration unveiled new recreational drone requirements this week. Starting December 21, drone hobbyists must register their unmanned aircrafts and pay a $5 fee through a new FAA web page. The registration requirements represent a mostly uncontroversial attempt to maintain safety and accountability in national airspace as more and more drones populate the skies.
GOP Misses on Tech Issues. While many observers called this week’s Republican debate the most “substantive” yet, tech experts heard uninformed positions and misconstrued information on issues such as surveillance, the operation of the Internet, and encryption. For instance, Gov. Kasich inaccurately assumed that encryption prevented law enforcement from collecting information that could have foiled the San Bernardino shootings. Yet, whether encryption played any role in law enforcement’s access to important digital communications has not been confirmed. Meanwhile, Mr. Trump suggested that parts of the Internet should be “closed,” a preposterous suggestion that would not only hinder communication amongst bad guys, but also the good guys who drive ambulances, operate hospitals, and alert the world to vital information. Such superficial positions on high-impact tech policy are disconcerting - legislating these areas will require thoughtful (and, frankly, more complicated) solutions.
Prisoners Turned Coders. San Quentin State Prison just graduated 21 inmates from its tech incubator, which teaches inmates to code as well as the skills it takes to design and pitch a business to investors and peers. The program, made possible by The Last Mile organization, has become so popular that inmates are requesting transfers to San Quentin. Next up: A new program from The Last Mile will provide inmates with paid coding jobs for businesses outside prison walls.
Though the EU’s economy is the largest in the world in terms of GDP, its innovation economy has historically lagged behind the US and other international peers. Investment in EU startups has risen slowly but steadily in the past decade, but, the EU is home to only four of the top 20 cities for startups in Compass’s 2015 rankings. This is not just bad news for the EU economy, but also for US startups looking to expand overseas.
The sluggishness of the EU’s startup sector is due in no small part to the significant regulatory burdens involved in conducting business across member state boundaries. In fact, our research shows that how a country regulates its technology sector has an enormous impact on early stage investment in startups. In a study we published earlier this year, 88% of worldwide investors said they would be uncomfortable investing in digital content intermediaries in countries with an unfavorable or murky regulatory environment.
Fortunately, the EU is already well underway in devising a fix for its complicated regulatory hurdles in the form of the proposed EU “Digital Single Market”—essentially a uniform, trans-Europe market for digital goods and services. As part of its effort, the EU Commission recently issued a consultation asking for information and commentary regarding the value of online platforms and intermediaries in promoting innovation and economic growth. Since the Commission’s Digital Single Market strategy is still somewhat in flux, there is no guarantee that the new regulations it puts in place will work if the Commission doesn’t receive enough feedback explaining how crucial online platforms are in a well-functioning Internet economy, and how dangerous restrictive regulations would be to the viability of the EU’s burgeoning startup sector.
To maximize the potential of the Digital Single Market and foster startup growth throughout Europe, the EU Commission should ensure that its Digital Single Market strategy focuses on policies that support online platforms and intermediaries. Online platforms are critical to a healthy Internet economy by virtue of the core services they provide in connecting Internet users and facilitating the flow of information, but as the US tech sector shows, their real economic value lies in their ability to support interoperable startups that use larger intermediaries to build and promote their services. The Google Play and Apple App stores feature more than 1.8 and 1.5 million apps, respectively—a great many of which were created by the startups responsible for virtually all new net job growth. The economic value of this market is significant; by 2017, worldwide mobile app revenue alone is projected to exceed $77 billion. Assuming the EU doesn’t hamper the growth of this market by crafting regulations that impose undue costs and restrictions on online platforms, Europe stands to gain a significant portion of the app economy’s growth. Projections estimate that employment from the app market in Europe will increase from 1.8 million in 2013 to more than 4.8 million in 2018.
Of course, the app market represents just a small fraction of the value that online intermediaries provide in spurring startup activity. Social media platforms and search tools allow startups to easily and cheaply connect with customers and online payment platforms help lower startup costs by outsourcing payment systems; together, these intermediaries give entrepreneurs the ability to reach customers and turn their ideas into business realities. Online platforms are the hubs off of which countless startups have built their businesses, and the low cost of operating a business in this symbiotic, open model of innovation allows new entrepreneurs to build ventures with few resources. In this sense, allowing online platforms to operate effectively across the EU is critical to growing the EU’s startup ecosystem, not to mention to US companies looking to expand into international markets. As the EU collects information regarding the role online intermediaries play in Europe’s startup market, it’s important that the Commission hear from entrepreneurs and innovators on the ground who can speak to the value freely operating intermediaries provide to fledgling enterprises. The consultation closes December 30; interested parties can fill out the EU’s survey here.
UPDATE: The EU Commission is holding an event this Thursday in San Francisco at the Consulate General of the Netherlands (120 Kearny St.) with key stakeholders to discuss the implications of its online platform regulation strategy. This is an incredible opportunity to help shape the future of EU tech policy, so sign up while there’s still space.
Our weekly take on some of the biggest stories in startup and tech policy.
Trade Secrets Bill Resurfaces. On Wednesday, the Senate Judiciary Committee held a hearing on the Defend Trade Secrets Act (DTSA), a bill purportedly meant to help curb international trade secret theft by creating a federal cause of action for trade secret appropriation. However, like most intellectual property laws, trade secret litigation is rife with abuse as companies regularly use trade secret claims to stifle competitors and hinder employee movement. The proposed legislation would exacerbate these problems by creating an ex parte seizure procedure whereby a party can—without detailed factual inquiry and without a presentation of both sides of the case—ask a judge to seize a defendant’s property. In this regard, the DTSA goes well beyond what state trade secret law provides, making it a potent tool for incumbents to use the courts to unfairly hinder legitimate competition. And, international trade secret thieves will be able to avoid this federal law as they have avoided prior state laws by simply being outside of the US, it’s hard to see how this bill would actually address the problem it claims to address.
Net Neutrality Hearing. The DC Circuit Court of Appeals heard oral arguments today in the challenge to the FCC’s net neutrality rules. A group of telecom companies filed suit against the FCC shortly after the Commission issued its net neutrality rules this spring, arguing that the decision to reclassify violated administrative rules and exceeded the FCC’s delegated authority. While most net neutrality supporters believe that the Commission’s rulemaking is likely to withstand legal challenge, the DC Circuit is notoriously unpredictable. The hearing itself was not broadcast due to the DC Circuit’s strict rules on recording proceedings, so we’ll have to wait for reports from those in the room to get a read on how the judges received each side’s arguments. We’ll be tracking closely.
Starting Up the Broadband Economy. In an op-ed in re/code, Engine Policy Director Evan Engstrom elaborates on why policies that encourage a competitive broadband market are essential to the continued success of the startup economy. Increasing competition ensures America’s entrepreneurs can use their limited funds to build their businesses, rather than lining the pockets of a few huge incumbent providers. There is still a long way to go towards a robust, healthy Internet ecosystem. But we are working to ensure that startup voices are heard and that real reform happens now.
Trouble for ECPA Reform? The broadly supported Email Privacy Act ran into opposition from law enforcement authorities at a House Judiciary Committee hearing on Tuesday. Calls for an emergency exception and a carve out for civil agencies are nothing new, but they are preventing the committee’s chairman, Rep. Bob Goodlatte, from backing the legislation. Despite being one of the most popular bills in Congress with over 300 bipartisan cosponsors, it won’t move until Rep. Goodlatte gives the go-ahead. We’re tracking.
Add “Lobbying” to List of Startup CEO Responsibilities. Engaging with lawmakers is just another part of being a startup leader now, reports the New York Times. “In addition to knowing the language of computer code, founders are speaking the language of Washington, keenly aware of the potential regulatory battles that could be on the horizon.” In a shift from the historical status quo, startups are no longer eschewing politics, but increasingly embracing a dialogue with D.C. instead.
Patent Lawsuits Filed Set New Record. On November 30, 257 new patent litigation cases were filed—a new one day record. Furthermore, 196 of these cases were filed in the Eastern District of Texas, a notoriously plaintiff (and troll) friendly court. This is clear proof of forum shopping and further evidence that patent reform legislation should also address venue abuse. The mass amount of filings are likely tied to the fact that December 1 marks the effective date of significant changes in the Federal Rules of Civil Procedure for patent cases—i.e. going forward, plaintiffs may be required to provide more information in their initial claims.
Women in STEM. Michelle Lee, the Director of the US Patent Office, authored an op ed in which she cites a study that found that only 15% of all inventors are women. She writes, “The lack of gender parity is not just a social issue, it is an economic imperative.” In response, the Patent Office has launched, in partnership with Invent Now, an “All in STEM” initiative to get more girls interested in STEM and more women in flourishing STEM careers. Meanwhile, the latest diversity numbers from tech companies demonstrate the continuing need: women employed globally by Microsoft decreased from 29% to 26.8%.
Cities and Innovation Ecosystems. It takes years for cities to build up a “critical mass” of tech companies and workers to the likes of the Bay Area. But in some of the nation’s smaller cities, the environment has proven conducive to small companies and large companies cooperating in a way that has become engrained in the DNA of Silicon Valley—where startups are built off the API of large companies and interoperability is part of the culture. A recent report by the World Bank discusses what factors affect the growth of entrepreneurship ecosystems across different cities.
Conversations Around Capital Access. Before taking a break for Thanksgiving, Engine attended a forum hosted by the SEC on capital access issues for startups. Participants honed in on the JOBS Act rules: how they’re playing out in practice and whether there are policy modifications that could facilitate their success. Read Emma’s run-down of the discussions here.
Our weekly take on some of the biggest stories in startup and tech policy:
Startups Defend Net Neutrality Order. The FCC is facing ongoing litigation in the DC Circuit Court of Appeals over the net neutrality rules it passed earlier this year, and on Monday, the court received briefs from a variety of companies and organizations supporting the FCC’s rules. Engine filed a brief along with a group of innovative startups that included Dwolla, Fandor, Foursquare, General Assembly, GitHub, Imgur, Keen IO, Mapbox, and Shapeways. We argue that the FCC’s decision to reclassify broadband as a telecommunications service was necessary to preserve the continued growth of the startup sector, which has in turn driven consumer demand for broadband and incentivized companies to invest in their networks. The court will hear oral arguments in the case on December 4 and will likely render its decision sometime next year.
SEC To Finalize Crowdfunding Rules. Sources at the Securities and Exchange Commission have told Politico the agency is likely to finalize long-awaited crowdfunding rules in late October or early November. SEC rulemaking will put Title III of the JOBS Act into effect, which could radically expand capital access for startups—though the statute does contain some burdensome requirements for companies. While the startup community will be excited to see any action from the SEC in light of an extended delay, we need to ensure that whatever regulatory regime the SEC adopts is well-calibrated and accessible to the small, emerging companies that could most benefit from new sources of capital.
Bush Campaigns Against Open Internet. Most of the Republican candidates in the 2016 presidential race have come to realize that an overwhelming majority of the public supports net neutrality rules (including 81% of Republicans) and have refrained from loudly criticising the FCC’s Open Internet Order. But this week, Former Governor Jeb Bush expressed his opposition to net neutrality (a policy he onced called “one of the craziest ideas [he’s] ever heard”), arguing that preventing ISPs from abusing their gatekeeper power does nothing to enhance consumer welfare. Bush’s comments run counter to both the FCC and the conservative DC Circuit Court of Appeals, which have recognized that net neutrality rules and foster the growth of the edge providers and promotes investment in broadband networks, resulting in better and more affordable service for consumers. It’s a reminder that startups, consumers, and everyone else who benefits from the open Internet should keep a close eye on this presidential race.
Administration Taking Steps to Promote High-Speed Broadband Access. On Monday, the Broadband Opportunity Council published its first report, which includes 36 actions that federal agencies will take to encourage broadband deployment. These actions require no new funding, “but existing sources of funding are being opened up and barriers to deployment are being brought down.” Of particular note is that the White House refers to broadband as a “core utility,” like electricity or water. We tend to agree - broadband is no longer a luxury. Connectivity is core to innovation and the ability of startups to reach customers and scale, and we are pleased to see the Administration taking these steps to bring access to underserved populations and areas of the country.
White House Considers Encryption. Thanks to some leaked documents from the White House, it’s rumored that President Obama may come out in opposition to a law that would require firms be able to unlock their customer’s encrypted smartphones and applications. Up to this point, law enforcement has argued the need for backdoors to encryption to ensure national security and safety. This sort of advocacy from the White House would help repair global trust in the US government, countering the narrative in Europe that the US is trying to expand its surveillance activities. Meanwhile, the American Civil Liberties Union (ACLU) and other privacy advocates continue to push the importance of US government’s use of encryption to promote both personal privacy and national security.
“Facebook giveth and Facebook taketh away.” The Wall Street Journal reported this week that dozens of startups have “shut down, been acquired or overhauled their business” as a result of Facebook’s new policies limiting outsider access to some of its users’ date. Facebook’s rules, which went into place in May, restrict what data can be used by third parties like startups, academics, politicians or organizations. Other social media giants like LinkedIn and Twitter have enacted similar policies, signaling to the startup world that if you are building a product or service that relies on data from social media sites, that data may not always be available...
ECJ Advisor Deals Blow to U.S. Tech Companies. In other data related news, a European Court of Justice (ECJ) advisor issued an opinion this week that the “safe harbour” agreement allowing for data transfers between the EU and the U.S. is “invalid” due to growing concerns around U.S. surveillance practices. While the lawyer’s opinion is not legally binding, if cemented by a formal ruling it would create a headache for U.S. tech companies who could face data localization requirements in any EU countries.
Women Tech Leaders. Fortune profiles some of the powerful female talent Google has been able to attract at the executive level, including Ruth Porat, a recent addition who has led the transition from Google to Alphabet. Many of these executives after building their experience at Google have left to grow smaller tech companies. Meanwhile, Mary Lou Jepsen of Facebook has a different take: she sees many senior women leaving because they feel isolated by the tech industry.
Yesterday, Engine—along with a number of innovative startups including Dwolla, Fandor, Foursquare, General Assembly, GitHub, Imgur, Keen IO, Mapbox, and Shapeways—filed an amicus brief in the ongoing litigation over the FCC’s net neutrality order.
Engine and the companies on the brief have long been champions of net neutrality, working hard over the past year and a half to ensure that the FCC enacted the strongest open Internet protections possible. Convincing the FCC to pass bright-line rules against ISP blocking, throttling, and paid prioritization was a major first step in reestablishing the net neutrality rules that were thrown out in court in January 2014.
But now the country’s biggest ISPs have banded together, trying to get an appellate court to reject the FCC’s order. Their arguments range from claims that have previously been dismissed by other courts (the FCC has never considered any kind of broadband to be a “telecommunications service”) to arguments that are profoundly bizarre (despite more than 4 million comments, the FCC did not solicit enough public commentary about its rules).
Engine’s brief makes the case that the net neutrality rules that the FCC passed earlier this year are crucial to protecting the startup innovation that has helped drive the growth of the nation’s broadband infrastructure. It also argues that the entrepreneurs and investors that built the Internet economy have relied on the FCC’s work in protecting innovators from ISPs abusing their gatekeeper power over Internet access.
Oral arguments in the case are scheduled to take place this December, and the court is expected to issue its ruling sometime in 2016.
You can read the full brief here, and some key excerpts are below.
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The “virtuous cycle” is made possible — and drives demand for broadband services — because of competition and innovation by edge providers. Consumers do not seek broadband services because of some intrinsic desire to access AT&T’s (or any other broadband company’s) technology infrastructure. Rather, they seek broadband services for one reason and one reason only: because they want to access the overwhelming universe of content, information, and services offered by edge providers, the vast majority of which either are, or began life as, startups. Consumers that want access to these services demand higher quality connections to take full advantage of the Internet’s full potential, prompting broadband providers to invest more money in their networks. And creative entrepreneurs find new ways to utilize these faster, better, and cheaper broadband connections to build more innovative services that spur consumer demand even higher.
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The connection between net neutrality and the explosive growth of the Internet economy is not a coincidence. Though Petitioners attempt to confuse the issue by conflating the regulatory classification of broadband with the actual regulations enacted pursuant to that classification, it is undeniable that the Internet has operated under a de facto net neutrality regime over the past decade, leading to a tremendous expansion of both edge provider services and broadband adoption—the virtuous cycle in action.
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The value of strong net neutrality rules and the logic of the virtuous cycle of innovation has been recognized time and again by the FCC and the courts. So long as strong net neutrality rules remain in effect, there is little reason to believe that the virtuous cycle will slow with the change in the classification of broadband.
But if broadband providers are permitted to “deneutralize” the Internet, the consequences for startups — and, due to the “virtuous cycle,” for further investment in broadband infrastructure and further innovation at the edge — will be devastating.
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Without an open Internet, many of these companies likely would have never been started due to the increased costs and uncertainty that comes with discrimination and paid prioritization. Others would have wilted in the face of their deep-pocketed competitors who would have been able to afford access to the “fast lane.” To change the rules of the game now by permitting blocking, discrimination, and paid prioritization would disadvantage not only the amici, but also the hundreds of thousands of other startups and technology companies that have come to rely on an open Internet.
Our weekly take on some of the biggest stories in startup and tech policy.
CalECPA Letter to Governor Brown Urgently Needs Your Signature. On Wednesday, the California Assembly passed the California Electronic Communications Privacy Act (CalECPA) with broad, bipartisan support. The bill (which we covered in last week’s digest) would update digital privacy laws by requiring law enforcement to obtain a warrant before accessing an individual’s electronic communications. The bill now heads to Governor Jerry Brown for signature, but opponents are campaigning aggressively for a veto. We’re sending a letter to Governor Brown urging him to sign the bill and modernize an absurdly outdated privacy law. If you are a startup and would like to lend your voice to this fight, please fill out this form by noon on Monday, September 14.
Upcoming Tech Events. Catch our webinar on September 23, “How can startups work with government to promote innovation and new technologies?” Co-sponsored with Gide Public Affairs and ConnecTech, the webinar will look at how to incorporate a government relations strategy and leverage government resources to grow your startup, and how we can all advocate to protect the startup community. Click here to RSVP.
Intelligence Reauthorization Bill Still Held Up Over Terrorist Reporting Provision. As Congress returns to session, a bill to reauthorize funding for intelligence agencies continues to be held up in the U.S. Senate over a provision that would require social media and internet companies to police the speech of their users and report apparent “terrorist activity.” Opponents argue that the bill’s vague legislative language will result in a compliance nightmare for the wide range of companies that will be subject to the bill’s requirements. Senator Ron Wyden (R-OR) has vowed to block the bill until these concerns are addressed. We will be monitoring closely, as the currently ill-defined requirements could be overly burdensome and difficult to navigate for many startups.
An Immigrant Entrepreneur’s Story. "Our immigration system hinders entrepreneurship, innovation and productivity," writes tech entrepreneur, Amit Paka, and we couldn't agree more. Paka shares his story of patiently navigating the irrationally complex immigration system to at long last obtain residency status and become a U.S. citizen. And in that time he also founded two companies, despite significant obstacles. This broken system impedes opportunities for entrepreneurs - the men and women creating new technologies and jobs in this country every day - yet it remains to be seen whether real solutions are in sight.
Patent Reform. Lot’s of news on patents this week. House Judiciary Chairman Bob Goodlatte expressed confidence that patent reform legislation would get a vote in the weeks ahead. The NY Times wrote in an editorial that “patent law should not be used to prevent consumers from reselling, altering or fixing technology products.” And the patent research platform Patexia launched a new initiative using crowdsourcing to help companies share some of the burdens associated with patent litigation. In case you missed it, check out our recent post on the status of patent reform efforts in Congress.
A Safety Net for the On-Demand Economy. As lawmakers continue to grapple with the gig economy’s dramatic transformation of the American workforce, recommendations are emerging around which policies will best serve the growing class of on-demand workers. On Wednesday, the National Employment Law Project published a report calling on lawmakers to classify on-demand workers as employees and extend a number of protections and benefits to them. Freelancers Union founder Sara Horowitz proposed additional solutions in a New York Times op-ed published Wednesday, arguing for the creation of a “new system of portable benefits” to better provide a safety net for workers in the freelance economy. These are important conversations for the startup community to take part in as the debate continues around how to best support this new class of workers.
Diversity in Tech. African Americans face serious challenges in entering the tech field, even if they live just miles from Silicon Valley. Profiling several new organizations including the Hidden Genius Project, based in Oakland, the New York Times highlights how the tech community’s debates about its lack of diversity have spurred initiatives to educate, train and support underrepresented minorities to enter into and succeed in the industry. African Americans have become an especially important focus: they currently make up only 7 percent of the tech workforce and receive only 1 percent of VC funding. See more on Engine’s work to diversify tech here.
Tech Leaders in Politico 50. The Politico 50 is out, recognizing some of the people transforming American politics this year. The list includes a number of tech leaders, including Engine board member Marvin Ammori, along with Susan Crawford, Tim Wu, Michelle Lee and Chris Soghoian. Congrats to everyone who made the list!
For years, opponents of net neutrality ridiculed open Internet rules as a “solution in search of a problem,” even though examples of ISPs abusing their gatekeeper power are numerous. Well, it looks like the critics have once again been proven wrong. Less than two weeks after the FCC’s Open Internet Order went into effect, these purportedly unnecessary rules have already had a major impact. Here’s a look at a few notable lessons from the first few weeks of net neutrality.
An End to Throttling?
Within a few days of the rules going live, Sprint (one of the few ISPs to claim Title II-based rules wouldn’t diminish its investment incentives) announced that it would stop throttling data speeds for its heaviest users. Sprint has said it thinks that its policy would have passed scrutiny under the new rules, but decided to end its policy in an abundance of caution. On the heels of the FCC’s announced $100m fine levied against AT&T for false representations about its own data-throttling policy, it is no surprise that Sprint is keen on making sure it's in compliance with the new rules. We’ll be watching to see if other companies follow suit.
Interconnection Challenges
While some ISPs are treading lightly around the net neutrality rules, others will almost certainly test the breadth of the FCC’s rules and the Commission’s willingness to enforce new protections. Indeed, one such dispute is already queued up: Commercial Network Services, a streaming media company, has said it will bring a complaint against Time Warner Cable for charging excessive rates to deliver video to its customers.
This challenge is particularly interesting, as it implicates the FCC’s regulation of interconnection—the protocols and agreements through which large ISP networks agree to exchange traffic with each other—which was one of the more controversial aspects of the Open Internet Order. Unlike the FCC’s ban on throttling, blocking, and paid prioritization, its regulation of interconnection agreements will be hashed out on a case-by-case basis. The outcome of the dispute between Commercial Network Services and Time Warner could set a significant precedent for future enforcement actions, including those related to zero-rating and other practices the FCC will evaluate on an ad hoc basis.
New Net Neutrality Ombudsperson
That companies are already invoking the net neutrality regime’s discretionary provisions frames an important issue for how well the Open Internet Order will work to protect startups. Throughout the FCC’s rulemaking process, we argued in favor of bright-line prohibitions on discriminatory ISP activity because the cash-strapped startups that would suffer most from anticompetitive behavior are unlikely to have the resources necessary to challenge such practices. Ultimately, the FCC’s case-by-case consideration of discriminatory interconnection deals or zero-rating practices may have no value if they are too costly for startups to initiate.
Recognizing that such costs are a real threat to the efficacy of its rules, the FCC’s net neutrality plan established an Ombudsperson to field formal and informal complaints. The FCC recently appointed its first Ombudsperson, Parul Desai, who will serve as the primary point of contact for individuals and companies seeking to challenge ISP practices. While it remains to be seen how effective the Ombudsperson program will be in addressing complaints, having a low-cost protocol for consumers and companies to help enforce the FCC’s rules is crucial if the Commission’s net neutrality regime is to have any meaningful impact. Considering a new study “found significant [data speed] degradations on the networks of the five largest internet service providers,” it seems likely that the new Ombudsperson will have her hands full in ensuring the FCC’s new rules work as intended.
Overall, it’s been an exciting time for all of us that fought for net neutrality. But, even as the rules are proving their merit, the FCC’s entire open Internet regime is under attack, both in the courts and in Congress, where House Republicans are attempting to subvert the FCC by burying a provision in a large appropriations bill that would preclude the Commission from enforcing even the most basic net neutrality rules. With opponents of net neutrality willing to resort to shadowy tactics to undermine the open Internet, it’s as important as ever to highlight when the new net neutrality rules are working to promote fairness and innovation online and why it’s so vital that we fight to keep them in effect.
The innovators and entrepreneurs that depend on an open Internet to drive our economy won an important legal victory today. In rejecting ISP attempts to delay the implementation of the FCC’s net neutrality rules, the DC Circuit helped ensure that the Internet will remain open during what will likely be a long period of litigation. Any departure from the non-discrimination principles at the heart of the Internet’s growth would seriously harm the startup economy and the good jobs it creates.
But, much work remains to be done. Just today, members of Congress opposed to meaningful net neutrality rules put forward an appropriations bill that attempts to use Congress’s budgetary authority to prevent enforcement of even the most basic net neutrality principles. Anyone who believes in the value of an open Internet and a smoothly functioning democracy should be alarmed by these tactics. Engine will continue to work with the startup community to prevent these efforts, and any attempts to undermine Americans' freedom to innovate.
Today, the FCC released its long-awaited Open Internet Remand Order that establishes the strongest net neutrality protections the Commision has ever enacted. While the rules are not perfect, they are an incredible victory for the many startups and advocates that fought so hard for the past year against some of the most well-funded corporate lobbying interests in the nation to preserve and protect the open Internet.
The Order is critically important for two main reasons: first, the FCC took the politically difficult step of reclassifying broadband under Title II of the Communications Act—essentially labeling broadband Internet as a “common carrier” service—in order to build its new rules on a legally secure foundation. While the FCC’s prior net neutrality orders had important protections that supported the growth of the Internet we enjoy today, the Commission has repeatedly seen its rules thrown out in court due to a failure to provide an adequate legal framework supporting the rules. The order’s reclassification of broadband as a Title II service is a necessary prerequisite for strong rules, as the court in Verizon v. FCC noted. The FCC had the courage to stand up to the powerful telecom lobby and do what was once considered politically impossible, and for that, all Internet users should be grateful.
Secondly, the Order contains strong, bright-line net neutrality rules and demonstrates a clear recognition of how important the open Internet is to startup activity. The FCC’s use of flat bans rather than case-by-case adjudication in dealing with paid prioritization, throttling, and blocking is meant to relieve “small edge providers, innovators, and consumers of the burden of detecting and challenging instances of harmful paid prioritization.” As the Commission recognized, bans on ISP discrimination are useless to startups if these small, cash-strapped companies must bear the burden of challenging violations. In addition, the order creates a “no-unreasonable interference/disadvantage” standard that is meant to give the FCC the flexibility to address future threats to the open Internet. It is unclear at this point whether the FCC’s general discrimination standard will prove effective in blocking future ISP activities that undermine net neutrality. Still, it is encouraging that in considering whether to allow these practices, the FCC will evaluate their impact on innovation and competition. Since the central value of an open Internet is the freedom to innovate and compete on the quality of one’s ideas rather than the size of one’s legal team, the FCC is right to put the concerns of innovators at the center of any inquiry into discriminatory ISP practices.
The rules, however, are not without fault. As we expected, the Order does not impose a flat ban on zero-rating schemes. Without such a ban, carriers may enter into agreements with large edge providers to exempt data from those providers from consumers’ data caps. Considering more than half of all smartphone users with data capped plans report altering their online behavior because of these caps, startups that have to compete with zero-rated companies will be at a huge competitive disadvantage, and future innovation may be stifled as a result. Similarly, the Order is somewhat unclear on how it will treat interconnection disputes, though it appears that the FCC will review claimed abuses on a case-by-case basis.
All in all, the Order released today is a monumental victory for Internet freedom. There is still significant work left to do fighting the inevitable legal challenges and congressional meddling that will seek to undo the FCC’s actions, but the plan appears to offer strong rules built on a solid legal foundation—the cornerstones of any successful net neutrality plan.
Today the FCC took a momentous step to secure the future of an open Internet. With today's vote the FCC has stated loud and clear that the Internet must remain a level playing field. This decision will not only allow today's startups to compete and grow and create new jobs, but it will also allow future generations of innovators to develop world-changing technologies that we can't yet even imagine. And while these rules may not prevent all future exploitation by Internet Service Providers, they are a tremendous victory for the Internet community in its efforts to fight discrimination.
We're grateful to Chairman Wheeler and Commissioners Clyburn and Rosenworcel for their commitment to net neutrality. And we also know that none of this would have been possible without the unprecedented efforts of thousands of startups around the country. It was their hard work that turned back a potentially devastating defeat, and it was their voices that convinced the FCC to enact the strongest protections the Internet has ever seen.
Today is a day for celebration, but our work is far from finished. In the months and years ahead we'll continue to harness the incredible energy of our startup community to combat future threats to an open Internet, and to ensure all startups can access the tools they need to thrive.
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