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Originally published January 15, 2014 at 7:45 PM | Page modified January 16, 2014 at 9:49 PM

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‘Net neutrality’ ruling could stifle innovative startups in Seattle

An appeals-court ruling overturning key “net neutrality” provisions might increase costs for startups that transmit large amounts of data.

Seattle Times business reporter

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A federal appeals court ruling Tuesday could well drive up costs for Web startups in Seattle and elsewhere as they cope with potentially higher costs of transmitting data over the Internet.

The ruling in the case, Verizon vs. the Federal Communications Commission, struck down key parts of the so-called “net neutrality” regulations. It will allow Internet service providers to restrict speeds for websites and their visitors, and let them charge higher rates for faster access. That could lead to consumers paying more money to play video games with friends over the Web, or companies such as to pay more to stream videos to its Amazon Prime Instant Video customers.

Internet service providers haven’t said how the ruling will change their strategies. And both Amazon and Microsoft, bandwidth-heavy businesses, declined to comment on the ruling.

While big companies might have leverage to fight rate hikes, startups with services that use significant bandwidth might find themselves unable to negotiate better deals. That could make it harder for them to prove their business model to investors, in turn limiting their access to funding needed to launch their businesses.

“This decision is a blow to the principles of fairness and competition that our innovation economy is built on,” Sen. Maria Cantwell, D-Wash., said in a statement. “An open Internet is the building block of innovation and dynamic growth in the 21st century economy. But this ruling puts the reins of power in the hands of telecom conglomerates, allowing them to create fast and slow lanes on a tiered Internet.”

Cantwell, a former executive at Seattle’s RealNetworks, intends to pursue legistlative remedies to restore key provisions struck down by the appeals court.

It’s unlikely there will be any immediate impact of the ruling. Companies that provide Internet access might eventually try to charge content providers such as Amazon and Net­flix more to get priority over other Web traffic so their programming does not slow during peak-use periods.

Allowing deep-pocketed giants to buy access to an Internet fast lane could stifle innovation for cash-strapped startups whose businesses depend on high-speed data. Mika Salmi, chief executive of creativeLIVE, which streams online classes for entrepreneurs, worries that payments for high bandwidth might provide challenges for the next creativeLIVE-like service.

“It would throttle back innovation,” Salmi said. “It would increase the expense.”

But Salmi also recognizes that the matter is far from settled. Appeals are likely. Lawmakers will weigh in with proposed rules to mitigate potential damage. And the companies given the opportunity to create new revenue sources will have to temper those ambitions with a marketplace that might resist increased costs.

That said, startups seeking investments may well have to rethink their valuations as they pitch their businesses to venture capitalists, said Matt McIlwain, a managing director at Seattle-based Madrona Venture Group. And while he doesn’t believe the ruling is “a major factor” for Madrona’s portfolio companies, the higher cost is something he’ll consider in future investments.

But McIlwain also believes that removing regulations might also lead some tech companies to pick up the heftier access tab for customers in order to gain a competitive advantage over rivals that don’t want to foot that bill.

“Gravity is driving the cost down of everything in the tech sector,” McIlwain said.

Jay Greene: 206-464-2231 or Twitter: iamjaygreene

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