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Guest blog: the real threat to the open internet is zero-rated content (continued)

Web Foundation · February 18, 2015


In the second of this two-part blog, Antonios Drossos of Rewheel concludes his discussion of the potential threats of price discrimination.

The core issue in the net neutrality debate is the price of open internet access

Mobile operators have a fundamental conflict of interest in selling both open internet access and as well their own or their selected partners’ online video and cloud services. If price discrimination such as zero-rating is not banned, mobile operators have an incentive to favour their own services by zero-rating the usage (selling gigabytes at zero cost) while collectively overpricing the gigabyte usage of all other internet services.

However, there are exceptions. In competitive markets such as Finland, mobile operators have already fully embraced a non-discriminatory open internet access model. Finland is ranked no.2 behind Denmark by the Web Index compiled by the Web Foundation. The Web Index measures the Web’s contribution to social, economic and political progress in countries across the world. According to Digital Fuel Monitor research, Finland has the lowest mobile internet usage (gigabyte) prices, the highest mobile broadband penetration, the highest mobile data consumption per capita and the second highest average mobile network speeds behind South Korea among the OECD countries. It is important to note that while Finland is free of zero-rating, the practice is widely used in Denmark.

In Finland’s three-player mobile market, two operators sell competitively priced, truly unlimited volume mobile internet plans while the third, TeliaSonera, sells plans with very large volume caps. TeliaSonera, currently sells a 50 gigabyte 150Mbps 4G smartphone plan with unlimited minutes and SMS for as low as €25. If TeliaSonera customers deplete their 50 gigabyte allowance they can buy more data for as low as €0.2 per gigabyte. On the other side of the Atlantic, AT&T, sells a 50 gigabyte 4G smartphone plan with unlimited minutes and SMS for as much as $390. That is roughly 15 times more than TeliaSonera’s Finnish price! Furthermore, AT&T sells additional allowances for as much as $15 per gigabyte or roughly 75 times more expensive than TeliaSonera’s gigabyte prices. Moreover, €25 that buys consumers 50 gigabytes of open mobile internet access in Finland would not even buy AT&T customers 0.3 Gigabytes. In competitive markets like Finland, where mobile internet access prices are very affordable and volumes are practically unlimitedm zero-rating could do no harm!

If zero-rating is not banned, mobile operators are incentivized to set low volume caps in order to enhance the appeal of their own zero-rated services

This point was recently reiterated by 36 leading US scholars. In their letter, addressed to FCC, the scholars called for a ban on all forms of paid prioritization (including zero-rating) and highlighted the inadequacy of competition law in addressing all net neutrality violations. The scholars wrote “Antitrust cannot practically prevent the other two competition problems associated with paid prioritization: excessive access charges imposed by terminating monopolists and their incentive to degrade non-priority traffic or set low monthly bandwidth caps”.

Empirical Digital Fuel Monitor research shows that the scholars have every reason to be concerned. During the fourth quarter of 2014, several OECD mobile operators that have launched zero-rated video services have at the same time hiked the price of open mobile internet usage.

Price hikes of mobile internet usage by operators that have launched zero-rated video services were particularly pronounced in recently consolidated mobile markets. In the Austrian market, where the number of mobile operators went down from four to three, post-merger mobile internet usage prices have almost doubled.  At the same time, all three mobile operators, which post-merger collectively control over 90% of the mobile internet access market, have launched potentially anti-competitive zero-rated mobile TV and film streaming apps for flat fees of few Euros per month.

Banning zero-rating leads to lower mobile internet access prices, evidence shows

If price discrimination such as zero-rating is banned, mobile operators are commercially incentivized in pushing down the price of open internet (or conversely push the monthly volume caps as high as possible) in order to encourage the carefree usage of, first and foremost, their own video and cloud services.

In the Netherlands, where zero-rating is banned, KPN just doubled (free of charge) the mobile internet volume caps to encourage a carefree usage of its online videos. KPN’s action is the first empirical evidence of the pro-competitive benefits of real net neutrality rules that ban zero-rating and all other forms of price discrimination.

Net neutrality rules that do not ban zero-rating practices will prove toothless

The FCC does not intend to ban outright price discrimination: zero-rating is not included in FCC’s Bright Line Rules. The FCC plans to deal with zero-rating under the General Conduct Rule if complaints are filed. Bloomberg reported that FCC’s senior officials weren’t convinced zero-rating is necessarily a bad thing and see less urgency to act on an issue that largely happens overseas. These comments are rather odd.

According to Digital Fuel Monitor, while there are 92 zero-rating reported discriminations in OECD, we did not find a single case of ‘fast lanes’ discrimination. Why did the FCC propose to ban a discriminatory practice like ‘fast lanes’ with no real market examples while it ignored the most common discrimination form which is also present in the US? Note that President Obama, in his intervention, asked for an explicit ban “on paid prioritization and any other restriction that has a similar effect”.

The FCC’s senior officials, quoted by Bloomberg, did draw a line in the sand: a) zero-rating own or affiliate content and b) zero-rating 3rd party apps for a fee will cross the line while c) zero-rating 3rd party applications or applications classes (e.g. T-Mobile US music streaming service) without a fee could be found acceptable. However, Gigi Sohn, an FCC Special Counsel, stated that “any internet service provider practice that harms user choice or edge providers ability to make their content, application and services available to users will be looked at for weather it is discriminatory or not”. Zero-rating does not per-se restrict the availability of all other non zero-rated services. However, the flip-side of zero-rating severely restricts the usability of all other non zero-rated services which get throttled as soon as end-users deplete their artificially low volume caps.

Net neutrality is more, much more, than protecting consumers or competitors from economic harm. Net neutrality is also about media plurality and freedom of speech. Andurs Anip, Vice President of the European Commission responsible for the Digital Single Market, stated when I asked him about zero-rating and price discrimination: “No company has the right to act as a gatekeeper of the internet”. Quite right! As The Economist recently put it, telco consolidation and zero-rating could lead to asymmetrical influence over what customers read, see, hear and even think while they are online.

You can download the complete version of this post here: The real threat to the open Internet is zero-rated content

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Antonios Drossos is the Managing Partner of Rewheel a Helsinki based consultancy that specializes in pro-competitive telecom strategies.

The Digital Fuel service is founded and operated by Rewheel.


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