Mobile Zero Rating: The Economics and Innovation Behind Free Data

This article originally appeared on ITIF.

Zero rating should be welcomed as a sign of healthy product differentiation that better allocates scarce resources while improving customer value.

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Zero-rating programs, which allow consumers to access certain Internet content and services without it counting against their monthly data plans, have proven polarizing, being met with reactions ranging from derision to praise. The crux of the controversy is whether the practice of zero rating violates the spirit of network neutrality principles. Strictly speaking, zero-rated data is treated differently than other data in a way that influences consumer behavior. But adhering to such a strict interpretation of net neutrality would be misguided. Zero-rating products are unlikely to harm the open Internet; instead they are a sign of healthy product differentiation that more efficiently allocates scarce resources in a competitive market, ultimately improving consumer value. The Federal Communications Commission—along with other regulators around the world—is examining zero rating, and while its case-by-case approach to overseeing these programs is sound, telecom regulators should make it clear that they believe nonexclusive zero-rating programs are in the public interest.

Zero rating is being rolled out, by major carriers in the United States and around the world. Zero rating offers a number of benefits.

First, it is good economics to help advance innovation in information technology markets. Where both content or “edge” firms as well as network operators make large investments in establishing platforms that have relatively low marginal costs, and gain value with each additional user, zero rating can help bring new customers into a firm’s customer base, enhancing the value of the product, and providing additional revenues to defray the investment for additional innovation.

Second, zero rating is an important tool to expand access to information, particularly in developing countries. As of 2015, mobile broadband networks covered about 78 percent of the world’s population, but only 43 percent were actually using the Internet. That 35 percent—some 2.5 billion people—who have access to mobile networks, but choose not to subscribe, could be given the opportunity, with zero-rating programs, to connect at a relatively low cost.

Third, zero rating is generally pro-competitive. There is little difference between zero rating and common-place discounts that sellers provide through middlemen that everyone accepts as normal, like toll-free 800 numbers. Zero rating allows for differentiation of company offerings, both at the application layer and between competing carriers. This ability to differentiate services tends to most benefit maverick firms that change the terms on which firms compete, and allows new applications a foothold to get discovered.

Fourth, consumers enjoy zero rating plans, and appreciate the ability to use zero-rated apps without having to worry about their data limits. We should celebrate when competitive markets work to provide consumers more of what they want. Critics argue that zero rating is against the public interest, but the bar for arguing that the public interest directly contravenes consumer preference should be a high one.

Fifth, zero rating programs can lead to more efficient use of networks if they zero-rated services use fewer bits than a non-zero rated version while having essentially no diminution of quality and customer experience.

Lastly, zero rating can help facilitate more efficient advertising, leading to more transactions online, boosting economic growth and adding fuel to continued growth in the advertising supported Internet.

These programs are a win for “edge” video providers, who see more use of their products and services. They are also a win for network operators, who are working to gain market share and explore new business models to meet demand. And most importantly, they are a big win for consumers, who end up getting more for less.

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