Zero rating in a competitive broadband market


Zero rating—that is, not charging end users for some categories of data use—represents the response of a functioning telecommunications market to consumer demand for broadband content. Unfortunately, not all regulators regard it that way, which could be bad news for innovation and consumer choice.

With zero rating, or toll-free data, an internet service provider does not count downloads from certain content providers against the pre-set data cap in a consumer’s plan. For example, if a consumer’s monthly plan included 1 gigabyte of data, he or she would be able to stream about 340 tracks on Spotify, 68 video plays on YouTube or 60 minutes of video on Netflix. However, should these content providers have zero-rating agreements with the service provider, consumers would be able to access the services as much as they want without worrying about being charged for data overages.

By definition, zero-rating plans reduce prices and increase value for consumers. Nonetheless, the practice has been under attack from some quarters as anti-consumer and monopolistic. For partisans on one side of the net-neutrality debate, the practice of zero rating long has generally been assumed to be harmful.

Zero rating likely wouldn’t be the subject of federal scrutiny were network neutrality not codified by the Federal Communications Commission in February 2015 with its Open Internet Order. But ultimately, net neutrality may simply be a fundamentally flawed framework through which to evaluate the practice. Among the unintended consequences of the nondiscrimination order’s mandate to treat broadband infrastructure as a commodity—a one-size-fits-all, end-toend approach commonly referred to as the “dumb pipe” model—has been to prohibit broadband providers from experimenting with different network architectures. Forced commoditization—that is, the insistence that all competing broadband services be marketed the same way—leaves service providers with very little, if any, room for innovation through service integration or changes in network standards and architecture.

Proponents of network neutrality argue that this is how the internet itself took shape. From a technical perspective, it’s true that the internet evolved as a network-neutral platform. However, one should question whether its designers intended the marketing of internet services to be irrevocably tied to the concept of neutrality. As Christopher Yoo of the University of Pennsylvania Law School put it in 2004:

[A]cademic debates and the arguments currently being advanced before the FCC have largely overlooked the fact that there is a crucial difference between embracing the end-to-end argument as a design principle and elevating it into a regulatory mandate. While adherence to the end-to-end argument may make sense in most cases, circumstances do exist in which mandating network neutrality would actually harm competition.

Zero rating appears to be one of those circumstances. It represents an innovative and competitive pricing strategy that could bring internet connectivity to low-income and budget-minded consumers. As one example, T-Mobile’s Binge On feature offers consumers unlimited wireless data from selected services, ranging from Pandora music to Google Maps. AT&T offers a pricing plan in which consumers are granted unlimited wireless data if they bundle their service with the company’s DirecTV satellite-television service.

For its part, T-Mobile illustrated the benefits of zero rating last year in a television ad in which a young female driver must choose between streaming music by pop singer Ariana Grande or using her navigation app. The ad underscores that, with the Binge On feature, the driver can get her music and her app without paying more.

But less than two years after the Open Internet Order was issued, zero rating’s broader adoption could be stymied by misguided regulation. T-Mobile’s plan has come under fire from net-neutrality advocates as a violation of the rule, even though the plan makes the company more competitive with AT&T and Verizon, each of whom has more than twice as many subscribers. In November 2017, former FCC Chairman Thomas Wheeler called for an investigation of AT&T’s pricing plan, citing net-neutrality concerns. While newly installed Chairman Ajit Pai has dropped that investigation, net-neutrality advocates plan to continue the fight. Zero rating also may re-emerge as a concern in the proposed mergers between Verizon and Charter Communications and AT&T and Time Warner.

It isn’t just U.S. regulators who have taken a dim view of zero rating. International activist groups such as Access Now were among the voices who pushed Brazil’s government to ban zero rating. In its guidance to national members, the Body of European Regulators of Electronic Communications (BEREC) stopped short of banning the practice, but confirmed some zero-rating plans would breach the new rules.

Telecommunications regulators in India made perhaps the most counterproductive ruling, blocking a plan by Facebook to offer inexpensive open-platform internet connectivity that provided unlimited data not only to Facebook, but numerous other commercial and noncommercial sites. In doing so, India’s regulators denied access to millions of citizens who could not afford internet service at conventional rates.

This policy study contends there are three primary reasons the FCC should halt efforts to ban or regulate zero rating:

  • Consumers benefit by getting more content value for their dollar;
  • Zero rating is based on a voluntary agreement by two parties, each of whom sees a benefit from the pact; and
  • It is a manifestation of a competitive market, not a leveraging of monopoly power.

Image by T-Mobile