In Chile, net neutrality widens the digital divide

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With much fanfare, Chile famously enacted the world’s first net neutrality law in 2010. But last week, policymakers applied the law in a way that is likely to be much less popular with consumers. Subtel, the country’s telecommunications regulator, ruled that net neutrality prohibits so-called “Free Social Media” mobile plans that have proven popular in Chile and throughout the developing world. The ruling validates the fears of many analysts that, while perhaps well-meaning, broad ex ante prohibitions are likely to lead to results that are harmful to consumers and to innovation.

At issue are promotional plans offered by wireless providers that couple traditional voice service with access to selected social media sites such as Facebook, Twitter, and Instagram. Customers on these plans can access social media on the go for a fraction of the cost of traditional data plans that offer access to the entire Internet. As I have discussed in greater depth in this working paper, these plans come in many varieties. Some plans offer access to stripped-down social media sites at no charge for feature phone users who lack Internet access. Others offer smartphone customers free access to social media sites. Often customers can click on other links as well, but incur charges for visiting sites not included in the plan. Still other plans offer customers with full-Internet data plans a promotional period during which use of selected social media sites does not count against their monthly data limits. Free social media plans are proving increasingly popular, particularly in the developing world.

One might wonder why Chile seeks to ban the practice of giving customers free access to services that they want. Chile’s net neutrality law states that broadband providers cannot “arbitrarily block, interfere with, discriminate, hinder, or restrict the right of any Internet user to use, send, receive, or offer any content, application, or legal service through the Internet.” Subtel explained that by allowing consumers to access some websites but not others (or by exempting some but not all sites from a monthly data limit), the carrier is blocking or hindering access to all websites not included in the promotion. As David Meyer at Gigaom explains, Subtel’s concern is that granting Facebook preferred access will handicap a hypothetical future social media competitor, which consumers could not access for free unless this new competitor strikes a similar deal with carriers.

Of course, this detail seems relatively trivial compared to the other obstacles facing a Facebook wannabe, such as financing multimillion-dollar server farms worldwide, building a customer base large enough to be a legitimate rival to Facebook’s 1.3 billion-member network, or battling the $8 billion war chest that the company still has on hand following the What’s App acquisition. But that’s the rationale. Subtel will deny consumers free access to services that they want, to make it marginally easier for a hypothetical future social media company that might someday challenge the Zuckerberg empire.

Subtel’s ruling is a blow to both carriers and social media companies involved in these promotions. As my working paper explains, carriers use social media plans to allow reluctant voice-only customers to become more comfortable with the idea of using mobile data. Promotional plans allow customers to sample mobile data at a low cost, in the hope that some will ultimately migrate to more expensive all-inclusive data packages. Turkey’s Turkcell reports that a 2010 free social media promotion ultimately increased average revenue per user by nearly 10 percent. And for Facebook and other social media companies, participation allows them to extend their brands into high-growth markets now that European and American markets are largely saturated.

The ruling also harms consumers by reducing their choices. These promotional plans appeal to those who want access to social media on-the-go, but who are unable or unwilling to pay for more expensive all-inclusive Internet plans. Net neutrality denies these consumers the plan that best fits their needs. To get Facebook on-the-go, this customer must now pay more for a plan that includes access to sites that he or she does not want. Consumer groups condemn cable plans that package content in this fashion. But net neutrality effectively functions the same way: it prohibits companies from offering “a la carte broadband” to consumers who want it.

And of course, the cost of the ruling will fall disproportionately on Chile’s poor, who cannot afford to upgrade to more expensive plans. Net neutrality requires that if a carrier offers access to one part of the Internet, it must include access to the entire Internet. If a consumer cannot afford the full Internet plan, the only legal option is to deny that consumer any Internet access whatsoever. The net effect is to widen Chile’s digital divide: many consumers who once had access to Facebook, Twitter, and other social media apps will instead be cut off completely if they cannot pay the toll to upgrade their plans.

Finally, the ruling will harm mobile innovation. Subtel’s ruling targets more than social media partnerships – it seemingly applies to many other vertical agreements between carriers and Internet content and application providers. But these vertical agreements can be pro-competitive: bundling carrier service with particular content is an excellent way to target niche consumers that are not well served by existing marketplace options. As an example, in 2012 Germany’s Deutsche Telekom entered an agreement with music streaming service Spotify, through which consumers could purchase unlimited Spotify access on their phones. Deutsche Telekom sought to boost revenue by reaching consumers interested in mobile music, while Spotify hoped to gain share against competitors such as Pandora. By offering streaming music without data charges, the plan threatens to bring disruptive competition to traditional media and benefits music-loving consumers. But this innovative agreement would be prohibited by Subtel’s net neutrality ruling.

Ultimately, Subtel is telling Chilean consumers that they must pay more for the services that they want, and buy services that they do not need. If they cannot afford the price hike, they will be abandoned on the wrong end of the digital divide. Subtel insists that this result is for consumers’ own good, but it is a tough argument to make. American and European regulators considering similar net neutrality rules would do well to imagine themselves in Subtel’s shoes, and recognize the harm that rigid ex ante rules can impose on consumers in the name of managed competition.

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