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The Economics Behind Innovation's Demise

07/01/2014 01:48 pm 13:48:38 | Updated Aug 31, 2014

As the fate of internet innovation rests in the hands of the FCC, it seems Net Neutrality and its potential repercussions are continuing to be discussed flippantly throughout news programming and blogs alike. The petitions circulating on the matter have the same value as email forwards with kitten pictures. It seems that whether we like it or not, the legislation is probably going to move forward, as the lobby money behind it is undeniably equal to the GDP of many countries.

The effect on startups has been marginalized as being the simple maturation of the market. Net Neutrality legislation has been talked about by politicians as being a spark for innovation through creating scarcity, but the reality could not be farther from the truth. Unfortunately for them, using depression economic precepts for understanding digital innovation is ignorant and Net Neutrality's current path with stifle, if not viscerally crush, it.

Innovation is, at its core, beholden to incentivized resource allocation. Whether it is 3M and the creation of the Post-it note or Google, the environment remains the same. A robust supply chain, free of impedances, allows organizations to find new ways to provide or streamline delivery of goods and services. The Internet Service Providers argument for legislation always leads with Netflix. From the perspective of these ISPs (which also happen to be cable companies--you still have a TV and cable box at home right?), innovations that companies like Netflix have brought to the market have changed how and where we consume video.

The percentage of millennials who have their own cable subscriptions is well under 25%. The percentage of the same group that has a login to one of the many online video sites--I would wager--is as close to 100%. If the legislation were signed into law, the far-reaching effects would go well beyond Netflix and infrastructure usage, with the inferred goal by lobbyists to invert the aforementioned percentages.

At the outset, it's clear who will bear the cost of net neutrality legislation. Pundits across the 24-hour news landscape pontificate how it will hurt profits for most companies with exposure, but when was the last time a company sacrificed profits for consumer benefit? As history has shown us, the skyrocketing price of staples like oil, gas, beef, and even milk, assure profits will be secured and ISPs will make bandwidth a scarce commodity, even when the concept of such is absurd.

Bandwidth is like sculpture's putty for digital engineers. If scarcity were introduced, startups would not be incentivized to create, test and launch new tools. If Net Neutrality legislation continues moving forward, it would undoubtedly hurt digital startups ability to even raise money. Who, other than maybe the founder's parents, would risk capital on an industry where the medium is a controlled commodity?

The concept of Net Neutrality hurting developer and engineering careers has been mocked, but look at what happened to doctors. The market, through insurance company policies, decimated reimbursements. MDs made less money, causing fewer people to practice medicine. Now, government reports point to a lack of trained medical professionals in the field. Love it or hate it, economic incentives rule most decisions. Net Neutrality legislation will lower the money available for some of these salaries, thereby lowering the incentive to even train in the digital engineering disciplines. Hobbyists will be abundant, but trained professionals will be few and far between.

The greatest case for what would lie ahead, is in the not too distant past. Go back to mainframes, computers the size of entire rooms and program cards. Only a few could afford access, and the majority of the time, they were universities or corporate conglomerates. That period of time gave the digital space some of its greatest names, and the most amazing companies were born.

Fast-forward two decades and the names, companies and technologies that have innovated into a market explosion are beyond count. Besides the lobby's economic incentive to crush competition in a market where large cable companies and ISPs are unequipped to compete and be agile, to limit access to bandwidth would cripple that kind of exponential growth. Only a select few would have access to necessary resources, influencing a genocide of online innovation.