Critics of zero rating claim (0) the practice violates net neutrality and harms consumers and competition. Is it true that giving consumers free access to important sources of information and entertainment is a bad idea? In a new paper, Silvia Elaluf Calderwood of the London School of Economics and I explore the real-world effects of zero rating (1) on consumers and markets.
The core question: Is price differentiation harmful?
The debate around zero rating comes down to whether we will allow differential pricing of Internet access. Today, differential pricing exists for nearly every good and service we buy, including concert tickets, transportation, restaurants, and medicines. It allows companies to tailor their offerings to the needs and preferences of consumers, and the FTC itself extols the virtues (2) of “loss leaders” (the practice of selling one product at a price below cost to stimulate demand for related products and services) and volume discounts to boost competition.
Meanwhile, those who wish to ban zero rating assert that all mobile plans must be “affordable full access,” and that anything less would be robbing consumers of the complete Internet experience. But this is tantamount to mandating that everyone fly first class.
Clearly, this one-size-fits-all attitude ignores the fact that consumers have widely varying needs and preferences. In the same way that people want to pick and choose their cable channels, they want the same freedom when it comes to their Internet service.
Furthermore, differential pricing is common in digital industries. Take for instance the freemium model in which firms offer free basic software, media, games, or other services and charge only for special features, increased functionality, or virtual goods. LinkedIn, Amazon, online newspapers, and countless other companies employ freemium models.
Similarly, Google effectively zero rates search services, and Facebook zero rates social networking, both recouping their costs through advertising rather than user fees. Facebook has offered its customers the option to pay outright for the service, but most have declined.
If price differentiation works to the benefit of consumers and competition in virtually every other aspect of our economy, why shouldn’t this idea also hold true in the world of Internet access? Our research has revealed some benefits arising from zero rating, which also implies that there are costs associated with banning the practice.
Who shoulders the cost of a ban on zero rating?
Our research shows that those who stand to gain the most from zero rating – and thus risk losing out if the practice is banned – tend to be developing countries, small start-ups, and the cost-conscious consumer.
- Mobile broadband adoption now stands at about 40% of the population in the developing world. However, even the cheapest mobile subscriptions may be cost prohibitive for many of the world’s poor. The fact that this population has never experienced the Internet makes it even more unlikely that they are willing to devote the resources needed to get connected. Thus, zero rating offers an incentive for potential users to try the Internet and is an important way to bridge the digital divide.
- Some have argued that start-ups will suffer if zero rating is available. In fact, the opposite is true. Zero rating is a marketing tool that small companies use to compete. In certain countries, a ban on zero rating has resulted in a 50% decline in traffic for small, local content providers.Moreover zero rating is a strategy for small and entrant mobile operators to challenge established telcos with bigger networks. Our research finds that bans on zero rating have been used to punish smaller operators without significant market power (less than 1% market share). Meanwhile, powerful and profitable companies such as Netflix abuse net neutrality, simultaneously lobbying the Dutch government (3) to end zero rating all together (solidifying its market position as the most popular mobile entertainment app in the Netherlands) while launching a zero-rated service (4) with a fixed line operator in Australia.
- Our analysis shows that one of the biggest losers of bans on zero rating are cost-conscious consumers who no longer have zero-rated access to applications such as technical support, the equivalent of a toll-free 800 number. Instead of topping up their mobile balance for free, consumers in countries with zero rating bans are now forced to call a customer service center, resulting in a five-fold increase in call traffic for one operator.
What is driving the push for a ban on zero rating?
As our case studies reveal, in Chile and Slovenia zero rating has been banned not because of consumer complaints, but advocacy from net neutrality proponents. In Chile, Pedro Huichalaf left his job at the net neutrality advocacy organization to head the nation’s telecom regulator. A month later, zero rating was pronounced illegal. Huichalaf declared (5) that though zero rating is attractive to consumers, ultimately, the regulator should decide whether it should be allowed.
The war against zero rating has an end game: to force operators to move toward universal flat rate pricing. To be sure, flat rate, unlimited plans have certain benefits. However, they also force low volume users, whether by choice or budget constraint, to pay more for Internet access, while heavy users pay less (6). In a world where being connected to the Internet comes with great benefit, we should not punish the poor by making them pay more for Internet access.