The Proliferation of Zero-rating: Threat or Opportunity?

Image of zero-rating, net neutrality

We have written several articles about net neutrality and the challenges in maintaining an “open, interoperable and unified” Internet.  Net neutrality implies that the Internet should be free of blockages, restrictions and artificial barriers amongst the various segments of the Internet.  It is based on the principle that fixed network operators (FNO), mobile network operators (MNO) and Internet service providers (ISP) should allow access to all Internet content and applications without favoring or obstructing any particular website, product source or type of content.  

What is Zero-rating?

Of course, the Internet does not exist within a perfect realm and it is influenced by a vast array of conflicting interests and objectives.  In this article, we address the increasingly popular practice of “zero-rating” utilized by many of the major FNOs, MNOs, and ISPs.   Zero-rating exempts the use of certain applications and data feeds from a user’s data cap and/or exempts the user from incurring charges for data use in excess of his or her cap.  Can providing usage exemptions from data caps and charges have negative impacts?  Should this be considered a method to provide more services for no additional charge, or giving something away for free?

Zero-rating In Action

A common zero-rating approach is to use third parties to pay for, or sponsor, the program or application that allows for user data cap exemptions. Sponsored programs enable the MNO to charge a fee to the companies providing the content.  Frequently, the offered programs are services owned by the MNO or an affiliated company with common ownership.  Some argue that this type of relationship provides a competitive advantage to large, established companies over smaller, less financially-capable companies unable to participate in sponsored program deals.  Others believe that it provides competitive advantages to same-ownership services over competing, independent companies.  A good example of this is AT&T’s ownership of DirecTV and the DirecTV Now video service.  In the United States, zero-rating programs include T-Mobile’s Binge-On, AT&T’s Sponsored Data and Verizon’s Go90.  Comcast, an FNO, has a zero-rating program called Stream TV.  

The practice is not only limited to the US markets or to only MNOs.  Companies such as Facebook and Google have zero-rating programs– Facebook Zero and Google Free Zone– on mobile networks in many developing markets across the globe. These programs have substantial impact on local content providers and competing technology platforms.

Theories in Debate

Many claim that the basic impacts of zero-rating are distortions to open markets and restrictions to the Internet.  These groups argue that large companies with diverse portfolios are able to gain a significant advantage over small, local and new start-up Internet companies.  To them, this reduces competition, and they believe it could potentially hinder innovation and stifle unique, local alternatives.  Will large companies with in-house services have the upper hand over independent competitors by favoring certain services or by restricting access to these services?  Or, will the start-ups embrace this challenge as an opportunity to disrupt the market?

Another theory that some hypothesize is the “Walled Garden Effect” of zero-rating. If proven, debaters of this concept state the zero-rating has the potential to reduce the range of possible Internet experiences for the user by encouraging them to stay within the limits of free services. Those who disagree state that the free services allow for new options for users with tighter budgets.

A final point on the debate ticket is the theory of the “Gatekeeper Requirement.”  Gatekeeper activities often extend well beyond signing into a site or application, and they frequently include tiered access to certain protocols, encryption schemes and applications.  Some argue that this may not only limit user access, but that it could have a trickle-down effect to deter aspirations and efforts of future software developers. Others hypothesize that the Gatekeeper activities would protect the intellectual property of engineering and software producers. Would the new levels of exclusivity preserve data and foster new partnerships, or could it threaten the interoperability of the Internet?

Zero-rating and Net Neutrality

Since the FCC won its court challenges to enforce net neutrality, whether or not zero-rating should even be up for debate is, in itself, a debate.  According to the FCC, zero-rating falls under a 2015 decision which allows it to be regulated under a general conduct rule. The FCC has confirmed that it will look at cases of unreasonable discrimination on an individual basis.  

In Whose Interest?

In an earlier article entitled “Net Neutrality: How Will You Be Affected?” we explained that there are two significant sides to the net neutrality argument.  One side is represented by the network operators, who contend that their inability to manage data traffic according to market principles would hinder network innovation in the US market. Does zero-rating give the MNOs the flexibility to create new options for their data consumers?  

On the other side of the argument are the content providers such as Google, Facebook and the like.  They state that allowing MNOs to manage traffic access and flow could potentially harm equal and fair Internet access to users in the domestic US market.  However: Many of these companies have on fact implemented zero-rating programs in other developing nations.  

Regardless of which side you are on– network operators with their network innovation concerns, or content providers seeking open traffic access and flow– financial interest of all parties should be considered. Where does this leave users and net neutrality?

It is now the responsibility of the FCC to determine whether zero-rating practices do indeed violate net neutrality rules. 

Vertex Innovations, Inc

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