Friday, November 4, 2016

A Nuanced Analysis of Zero Rating

            Zero rating has become the next network neutrality issue in light of two simultaneously occurring marketplace developments: 1) wireless and now wireline carriers impose data caps as a part of their revenue maximization strategy and 2) these very same carriers want to create deal enhancers to improve the value proposition of more expensive service tiers by offering zero rating to specific data streams.  Can carriers get away with a strategy of creating scarcity, rationing broadband capacity, despite its low incremental cost, and upselling subscribers to more generous data plans at higher rates?

            The zero rating issue generates the most controversy when carriers ration and tier broadband access. While they may frame the matter in terms of congestion and network management, in application, zero rating provides a convenient way to tier service at different price points.  Broadband carriers largely have eliminated the prospect of actual congestion and they have every right to recoup substantial infrastructure investment.  However, broadband capacity does not closely match the cost characteristics of other metered, public utility services, such as electricity and water.  Broadband carriers incur insignificant extra costs when increasing a monthly data allotment.  How else can they profitably offer truly unlimited voice and text, particularly a few years ago when subscribers primarily relied on their handsets for these services?

            Unfortunately carriers have resorted to zero rating as a solution to problems they have created for consumers: “unlimited data plans” that punish high volume users with throttling at 2G bit transmission rates; disabling subscriber commands not to auto play commercials; and miserly data rate plans with high financial penalties for overages. 

            Also in the mix is the possibility for artificial congestion manufactured by carriers to justify data caps.  Consider the on again/off again congestion subscribers of both Netflix and Comcast experienced. A remarkable thing happened virtually overnight after Netflix agreed to a preferred co-location/paid peering arrangement.  Congestion evaporated without any new facilities construction and Netflix traffic returned to normal.

            Network neutrality advocates fairly point out that zero rating prioritizes specific traffic streams, by making them more attractive to consumers in light of their lower out of pocket cost.  However, I believe they overstate their case, particularly with the premise that zero rating condemns people with low incomes to perpetual hardship resulting from subsidized access to an inferior, curated sliver of Internet content.

            Zero rating offers access opportunities to individuals who want broadband access, but lack sufficient discretionary income.  A subsidy provides an opportunity to test the waters and to decide whether to change spending priorities.  In developing countries, penetration rates continue to rise to near that of developed countries, because even poor people want and will pay for access.

            Zero rating also provides a new incentive for people with sufficient funds who do not see the value proposition in ascending a steep learning curve toward digital literacy, plus making even a small financial commitment in buying a smartphone and subscribing to a monthly data plan.  Surely these people are not condemned to a lifetime of inferior access, because they might opt to pay for access to the entire Internet cloud.

            Lastly, we should consider the consequences if the FCC—or any regulatory agency—rules against a subsidy arrangement that consumers like.  Does the FCC really want to invoke fairness when doing so prevents consumers from “free” access to certain video streams?

            I provide a deep dive on zero rating in a paper available at:  https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.

 

 

           

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