Part 1 of Large Corporate America’s War on Small Business – The End of the Open Internet

In 2010, the Kauffman Foundation published a report that showed that without fast growing, early-stage companies, job growth would have been negative in America for the past 35 years. According to the National Venture Capital Association, 92% of the job creation that occurs with small businesses is after their initial public offering and they are already trading. Small businesses have played a big role in innovation and employment growth in America.

For the first 7 of 10 recessions this country has experienced between 1948 and 2011, it only took 6 months to fully recover lost jobs from a recession. In the recession of 1990, it took about 15 months for the economy to get back to its prior peak employment. For the recession of 2001, it took about 39 months to get back to the peak employment the economy had before that recession began. For the Great Recession that began in 2008, it has been over 72 months, and this country still can not get back to its prior employment peak.

Something has gone very fundamentally wrong with the nature and very structure of our economy. Jobless recoveries clearly were not the norm 30 years ago. It has also become readily apparent that a key mechanism of job creation, the ability of small businesses to organically grow, has been completely hijacked.

This is the first of a series of articles which will detail what mechanisms have changed the landscape for small businesses and small-cap publicly traded companies, and consider where opportunities may exist for small-cap investors.

Let’s focus on a factor that is often discussed regarding the current nature of our economy. There is currently in the press quite a bit of discussion regarding the record levels of wealth inequality that exist in the United States. Currently the richest 1% owns about 42% of the nation’s wealth, and the richest 10% own 65% of the nation’s wealth. Just before the great recession, it was pointed out by a number of economists that the income and wealth gap was comparable to what existed in the 1920s. Now the inequality is greater than it has been in the last century, and is even greater than it was going back to 1774, when we were colonial America, and that is with factoring in the existence of slavery.

The simple fact is financial capital is easily converted into political power. C-level executives, such as chief executive officers and chief financial officers of the large S&P 500 companies, fall within that class of wealthiest Americans. So it is apparent that they are able to contribute to the campaigns of politicians and spend money on lobbyists that continually influence the legislation that is written by congress and approved of by the White House. We have over 12,000 K-Street corporate lobbyists that work full time in Washington, DC, influencing the decisions of 535 members of U.S. Congress. Over the past 5 years, the Supreme Court of the United States essentially removed the floodgates so that the wealthier elites can now invest unlimited amounts of funding at political campaigns, and they were quite influential before those decisions were made.

We have occasions where members of this investor class compete with each other to determine who gets to structure the state in their best interests. We just happen to call those periods of intense competition among elites ‘elections.’

Political candidates are effectively sold to the population via costly political advertisements. So, the marketing haven of Madison Avenue sells our politicians to us pretty much like any other product, such as tubes of toothpaste. Matter of fact, President Obama’s 2008 presidential campaign won the AdvertisingAge Marketer of the Year award, beating out Apple Computer, Zappos, Nike, and Coors beer. Marketing and media columnist Joe Fine of BusinessWeek praised the Obama campaigns successful usage of social media to reach voters. Corporate boardrooms were quite enthralled with the successful marketing techniques that can be applied to elections for candidates of either party, as well as boost sales of products and services. The competition between elites is certainly getting fiercer as the cost of the 2012 presidential campaign was $7 billion, more than double the $2.4 billion of the 2008 campaign, which was double the campaign of 2004.

The result is a system in which the institutions of democracy effectively fail for the population but best serve the interests of the big transnational corporations of the S&P 500 and other wealth elites. It stands to reason that policies that strongly benefit large corporations can be very detrimental to the growth of small businesses.

For example, it was long since recognized that when a company gets so large that it becomes a monopoly and dominates a market, it effectively destroys all competition. As a simple example, consider a company like Wal-Mart. Through economies of scale, Wal-Mart can stock up on huge supplies of products to put on its shelves than smaller competitors because it can buy at bigger quantities and get a bulk discount. When a Wal-Mart moves into an area, the smaller retailers simply can not compete. So they end up going out of business. Even though the new Wal-Mart location will offer several jobs, studies have shown that with the loss of existing retailers, the community with the new Wal-Mart on average loses 15% of its jobs. As the Wal-Mart often pays closer to minimum wage than the original smaller retail stores, the lower wage employees have less purchasing power, which effectively hurts the economy of the community even more.

Enacted in 1890, the Sherman Anti-Trust Law was established to prevent businesses from effectively becoming to monopolistic and to keep in place competition which is considered to be healthy for market based capitalism. In 1941, when the company Great Atlantic Pacific & Tea, more commonly known as the A&P grocery chain, captured more than 12% of the grocery market and the company effectively put thousands of mom and pop grocery stores out of business, the government forced A&P to break up into 7 separate companies and spin-off its manufacturing business. Wal-Mart currently has over 25% of the grocery market share.

Probably the last time the Sherman Anti-Trust Law was enacted on a very large scale was regarding the break-up of AT&T in 1982. The conservative think tank CATO institute lobbies the Republican Party occasionally to push for a repeal of the Sherman Anti-Trust Law. However, why bother repealing? Both parties are lobbied heavily enough by varying corporate interests to maintain status quo and never enact the law anyway.

Public policy can significantly impact the ability of small businesses to grow their business. There is currently a policy change occurring right now regarding the very nature of the Internet which will hurt small businesses once again.

Originally the Internet was developed in such a way that you simply pay your Internet service provider (ISP) a monthly fee, and they get out of the way as you search and surf the Internet. The idea was net neutrality, where the ISPs such as Comcast or Verizon, did not prioritize in any way which Web sites you can access or how fast you can access those Web sites. Internet based companies may pay for marketing services to have a higher search engine ranking, or place banners, or send emails to attract traffic, but the Internet is considered a level playing field for both the businesses that reach out to people on the Internet, and the users and consumers that access the Internet. The Federal Communication Commission’s (FCC) rules that held this open Internet in place were referred to as net neutrality.

The CEOs of the large broadband service providers, including Comcast, AT&T, Verizon Communications Corp., Time Warner Corp., and 23 other major corporations, have lobbied heavily the FCC and Congress to rid of net neutrality. They basically want to be able to charge Web sites a higher fee for fast access to their Web sites. Essentially what is termed “pay for prioritization,” so Web sites that pay a higher fee will get priority in terms of traffic, and Web sites that do not pay for prioritization will be discriminated against. No longer will the ISPs be acting as common carriers with our communications freely flowing over their pipes as a neutral conduit. This will result in a two-tier Internet.

This past winter of 2014, settling on a lawsuit Verizon levied against the FCC, a federal court officially struck down net neutrality. The implications of this will be disastrous to consumers who prefer the freedom and openness of the Internet. Over time, with net neutrality struck down, the broadband service providers can essentially shape the Internet experience to be much like that of cable television, where the content the user experiences will be pretty much determined by the ISPs.

The death of net neutrality will be devastating to small companies. Start-ups will have to pay additional costs beyond current online marketing costs to the service providers to simply achieve visibility. This will stifle small business innovation as Internet start-ups will lose access to higher bandwidth or have to raise more start-up capital to have higher bandwidth.

Large corporations spend millions of dollars on their internal infrastructure and monitoring, but small businesses don’t have that kind of capital. Small businesses have benefitted greatly from cloud technology than large businesses. For example, database and contact management cloud service Salesforce.com is accessible to many small businesses starting at $25 per month. As cloud providers are forced to pay fees for bandwidth access, the start-ups that use them will suffer.

So, with the potential end of net neutrality, we have a power grab by the elites of the large telecommunications sector and they will significantly enhance their wealth as a result. Small businesses and consumers will suffer.

Currently the FCC is drafting a proposal for new rules to implement an appropriate response to the court decision that struck down net neutrality. Not all corporate elites want to end net neutrality. Amazon.com, Facebook, Google, Netflix and a few others are lobbying to keep net neutrality and make sure the service providers treat all traffic equally. However, the service providers appear to outnumber them and have more muscle in this fight.

There are consumer advocates also pushing to keep net neutrality and some have even set up an ‘Occupy the FCC’ encampment outside the agency’s offices. Thursday, May 15, 2014, FCC Chairman Thomas Wheeler actually stepped outside and spoke with the activist and swore up and down he was for an open Internet. Apparently, Mr. Wheeler lied, and then proceeded to step into his conference room and participated in a 3 to 2 vote to proceed to offer up “pay for prioritization” plan that has a compromise a rule suggesting that all fees forced upon Websites be “commercially reasonable.” In other words, the FCC is moving to kill net neutrality. Net neutrality advocates were hoping that the FCC would re-classify ISPs as public utilities and be restrained to keep the Internet open.

As broadcast media is firmly entrenched with the large Internet service providers, the news coverage of this entire issue has been virtually non-existent. The FCC’s vote Thursday to approve a notice of proposed rulemaking now opens it to public comment for 120 days.

If you do not want to see another policy enacted that will change the nature of the Internet as we know it and hurt small businesses, it is strongly advised you contact the FCC and tell them “No” on any “pay for prioritization” plan and keep net neutrality in place as it is now. As President Obama appears to be falling back on his promise of keeping the Internet a level playing field, it is also recommended you contact him, and your local congressional House Representative and Senator.

To contact the FCC: http://www.fcc.gov/contact-us

To contact the Whitehouse and your local congressmen: http://www.usa.gov/Contact/Elected.shtml

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