Zero Rating is the free champion in the Internet ice cream shop – ProMarket

Why ban competitive bidding in the online world when it’s allowed offline? Big tech wants plain vanilla broadband pricing because it forecloses competition between platforms.

In the 1950s, the European Economic Community decided that trade in food, medicines, books and wheelchairs would not be taxed, as they were essential goods after the Second World War. This lack of fees became known as zero ratings.

That significance is brought to life today with the U.S. Department of Veterans Affairs (VA) Video Connect program, which emerged during the pandemic so that approximately 3 million U.S. Veterans could meet with healthcare professionals via computer, tablet or mobile device without data charges. Similar zero-rated e-government and public interest programs are being considered to help Americans find housing (Department of Housing and Urban Development); workforce training or credentialing through state and federal workforce sites; request benefits and monitor health (Health Department and Personal Services and Local Health Authority); and access early learning and child development services (Department of Education).

However, such charitable social programs are illegal in the European Union, prohibited by net neutrality rules. Ironically, regulation offered to protect end-user rights has prevented end-users from receiving free online health care and education during the pandemic. After some time and effort, the UK’s telecommunications regulator Ofcom suspended the rules and is now modernizing the policy to allow for beneficial services.

As many as 1 billion people are estimated to have adopted the internet in around 60 countries for the first time due to zero-scoring data partnerships between mobile operators and content providers. Typically, these are in-kind programs where no payments are made between the parties. That said, adoption rates have stalled due to an infrastructure investment gap estimated at $2 trillion, the report by the International Telecommunication Union’s Broadband Commission and UNESCO found. The report advocates predictable and sustainable financial participation by global technology platforms and innovative business partnerships to bridge the digital divide for the world’s 3 billion people who remain unconnected. This is the life’s work of Doreen Bogdan Martin, now the president and first female head of ITU.

For people who have never tried the internet, zero rating is like a free sample of a new ice cream flavor. It reduces the cost of consumers to try something new. Free samples are more in demand from competing companies and new products and help create competition.

Despite the demonstrated benefits of zero ratings, a recent ProMarket Bruno Renzetti’s article supports global bans on zero rating, arguing that while the programs appear to be beneficial because they lower the cost of consumers’ mobile subscription, in the long run they would strengthen the platform’s dominance and thus reduce innovation and consumer welfare. He argues that dominant web platforms would pay mobile operators for exclusive programs and thus this exclusionary behavior would push competitors out of the market or create barriers to entry or expansion.

Having measured these programs globally for a decade, I disagree. For one thing, Big Tech is lobbying governments around the world to avoid any financial contributions that could help build broadband infrastructure or improve accessibility. They also argue that, like Netflix, they have no obligation to negotiate or pay for use of other networks.

Renzetti’s aversion to zero rating appears to be related to the idea that any broadband subscription where all broadband data is not priced equally is discriminatory and therefore harmful. This is probably a misunderstanding of the word discriminate, often misunderstood in the economic and technical context. The primary definition of discriminatee is to recognize a distinction, differentiate or perceive differences, as in children they can discriminate between different facial expressions.

Price discrimination is based on this definition. When a seller can perceive differences between two or more customers, it may be possible to charge them different prices for the same product (price discrimination) or to tailor the product offered to each to reflect the difference (product differentiation). If personalized products impose different fees or anticipated costs on the seller, charging different prices is not harmful and does not constitute price discrimination. Indeed, the flat and unlimited plans enjoyed by users are forms of price discrimination, just like zero rating is. From the point of view of economists, these offers are no different.

The economic definition is not the same as the legal meaning of the word, which has to do with prejudice, for example an employment policy that discriminates against women.

Critics suggest established providers could use zero rating to make it more expensive for consumers to access non-proprietary content or new content where its providers couldn’t pay to subsidize users’ transportation costs. For this argument to be valid, it must be assumed that there is perfect competition in content, that any piece of content can be substituted for any other, that users have perfect information, and that there are no transaction costs. In such a market, consumers are indifferent to the content and would choose one over the other just because of the price.

While this model of perfect competition is interesting for academic purposes, it doesn’t exist in the real world. The best economic model is imperfect competition, which takes into account product variation which assumes that both users and content providers know the relative strength of users’ preferences for different variants and each knows where the best matches will be made. As a result, they will match in a way that maximizes total well-being.

The debates about free and subsidized content are not new. Licensed television providers have launched a similar criticism that free or ad-supported TV put them out of business. Instead the opposite happened. There is a market for both because the two types of television programming are not perfect substitutes; produce different content. While users take advantage of both, the advantage of the two models is that advertisers can participate and therefore more content is created overall.

The same analysis applies to free and subscription newspapers. There would be no room for subscription newspapers if they offered the same information as free newspapers. It often happens that local volunteers and advertisers subsidize local newspapers. Making it free may make community members more likely to read it in that city, but that doesn’t mean they’ll give up a national newspaper subscription. Also, just because the local paper is free doesn’t mean people from the nearby town will want to read it. The content of that local newspaper is of particular interest to people in that community.

Internet traffic patterns show that some content is highly valuable, but most content is not. In fact, much of the content on the internet is of no value to most users. This is especially true for a large portion of the world’s unconnected people, as they speak a language for which there is no content on the internet and often do not write, so they find it difficult to navigate the internet.

However, zero rating bans are also pursued on anti-competitive grounds. The textbook case is in India, where Google-funded advocates managed to ban the launch of an ad-free, unrated version of Facebook, arguing that India’s poor were better off without the Internet than with free Facebook. This worked to slow Facebook’s growth in the advertising market and to secure market share for Google. However, all zero-rated partnerships with Indian platforms have also been banned, so Google remains the dominant player today.

Campaigns against zero rating are also being advocated in countries to make flat rate internet subscriptions and high data caps (preferably no data caps) the norm, if not the law. While such offers have appeal, they necessarily force low-volume users, either by choice or by budget constraints, to pay more for Internet access. Meanwhile, high-volume users—those who want to stream movies or play video games—pay proportionately less for their service. Those bans benefit Big Tech, whose video services comprise the majority of the world’s Internet traffic. Ironically, the argument is made to ban Big Tech from engaging in free data programs primarily for the benefit of Big Tech.

As a related point, Big Tech fights any attempts to differentiate broadband pricing on the underlying data because advertising on its platform eats up up to 25 percent of the traffic on a mobile subscription. Advertising should work in such a way that the advertiser pays the cost of the connectivity and therefore the advertising data is not charged to the user. Don’t be fooled. Investigations against data caps are driven for this very reason. Big Tech wants its advertising data to be treated in the same way as the data you actually want to see.

Bans on zero rating bans would remove many benefits consumers enjoy today. Instead, competition authorities can judge their concerns with a simple five-question test to determine whether the practice is harmful. Check out the tool I developed with my colleague Bronwyn Howell.

Articles represent the views of their authors, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.