How Fumbling Bureaucrats Could Destroy European Tech in One Move

What it would be like today if the Googles, Apples, Facebooks, Ubers, and AirBnBs of the world had never had the opportunity to take off?  And what it would be like if those tech pioneers-turned-giants didn't have hungry competitors driving them to new heights?

A crucial vote this week in Europe will determine the fate of European tech for years to come. If the fumbling bureaucrats prevail, the tech sector - and investors - will pay the price.

What Is Net Neutrality?

Net neutrality is the idea that data on the Internet shouldn't be regulated by the government or Internet service providers (ISPs). Think of it as an extension of freedom of speech.

An "open Internet," where data is treated equally and without third-party interference, is better for free communication, conducting business, and more.

By contrast, a "closed Internet," where the government or corporations favor or disapprove of certain data, would stifle communication, business, and more.

You see, on Oct. 27, the EU Parliament votes on net neutrality. New legislation many EU members claim will "protect" net neutrality may be approved.

But in reality, the opposite is true. If passed, the new laws will prove deadly to open, fair market competition that is the vital nursing ground of tech innovation.

"The European net neutrality discussion is very dangerous - not just for American tech but for the business community in general," Money Morning Chief Investment Strategist Keith Fitz-Gerald said on Monday. "Even though Europe is attempting to make a move to protect the Internet, they're going to put the kibosh on innovation. They're going to slam anything that could ever take on American giants. It's going to hurt the economy - and certainly consumers."

Here's what you need to know about this very important vote...

The Fine Print

On June 30, Ars Technica UK described the new legislation that'll go to vote on Tuesday:

    "A two-tier Internet will be created in Europe as the result of a late-night "compromise" between the European Commission, European Parliament and the EU Council. The so-called "trilogue" meeting to reconcile the different positions of the three main EU institutions saw telecom companies gaining the right to offer "specialised services" on the Internet. These premium services will create a fast lane on the Internet and thus destroy net neutrality, which requires that equivalent traffic is treated in the same way."

In other words, there will be two "lanes" Internet service providers (ISPs) offer.

The "Fast Lane," where:

  • It's not "open." Only content permitted by the ISP is allowed.
  • It's "pay to play." Businesses must pay the ISP a premium for a spot; priority is based on payment.
  • It gets special treatment. These businesses enjoy better treatment by the ISP. In other words, the business' content gets to end-users at faster speeds, without throttling (slowing it down on purpose).

The "Open Internet," where:

  • All content has guaranteed access to end-users on the Internet - it is open.
  • It favors no one. There are no payment contracts with the ISP to determine priority to the end-users.
  • ISPs are permitted to throttle speeds to end-users at will.

Here's how these rules will work in the real world...

Under the proposed legislation, ISPs can distort competition. They can choose to speed up or slow down traffic for whatever content they choose, even if there is no congestion. This means discrimination against anything ISPs choose not to approve.

Additionally, established companies with deep pockets will have a clear advantage over smaller companies that can't afford contracts with telecom companies. End-users will see "Giant Company A's" content delivered at lightning fast lane speeds, while "Small Company B's" content is stuck in the leaden open Internet tier.

And the established companies that do decide to pay for the premium fast lane would face higher costs to be there. Those costs would likely be passed onto the consumer.

Meanwhile, smaller companies - even those potential game-changers - would lack the capital to compete and reach new consumers.

The amount of money going into European tech startups hit a four-year high this year. Roughly $2.5 billion was invested in the first three months of 2015 alone. According to Business etc., the UK became home to three more "unicorns" - tech companies valued at over $1 billion - in Q1. They included foreign-exchange company TranferWise and music-recognition app Shazam.

These gems very likely wouldn't stand a chance if the EU parliament votes for stringent net neutrality laws on Tuesday.

"Investors should hate this," Fitz-Gerald said. "These laws would diminish shareholder value by preventing companies from growing as fast."

Follow the EU vote on European tech on Twitter this week at #netneutrality, or leave a comment on Money Morning's Facebook page.

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