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Thursday, June 05, 2014

Mobile data zero-rating: adhering to letter of the law on Net Neutrality, or the spirit?

An increasing number of mobile networks are zero-rating specific data services to their customers, giving free access to certain applications or websites, rather than charging against the customer's allotted quota of data.

Some of the best-known examples are in the developing world, with Facebook, Google, Wikipedia and other services offered for free on numerous networks, either as a temporary promotion or ongoing plan. Other examples in Europe (eg DT & TeliaSonera) have bundled free data traffic with paid music or video content. This is starting to cause controversy, as some observers perceive it to be contrary to the principles of Net Neutrality on the basis of differential treatment or pricing of Internet traffic.

This matter has gained a lot of attention recently, with the Chilean regulator (one of the earliest to enact "hard" Neutrality laws) banning the practice. Several articles & certain of my analyst peers have opined that zero-rating might give Facebook & Co. an unfair grip over novice Internet users, who might be left unaware of the rest of the Internet, or at least dissuaded from exploring it at extra cost. In more mature markets, there is a fear that zero-rating certain popular services might give operators an excuse to reduce "open Internet" quotas and steer users to partners who offer revenue-shares, or perhaps direct "sponsored data" payments for traffic.

I am more sanguine about these threats. Although these practices seem to break the letter of (some interpretations) of Net Neutrality, I'm less convinced they break it in spirit, when the actual outcomes are examined. That said, I'd certainly agree that zero-rating bears close and ongoing scrutiny in case future risks emerge, but I'd say that some clear benefits suggest "ex-ante" laws are not needed in this instance, as opposed to some other manifestations of "non-neutrality".

In addition, historic practices of the mobile industry - which nobody has complained about in the past - seem to suggest that this might all be a storm in a teacup.

In my mind, there are three main classes of mobile data zero-rating:

  • Zero-rating of paid Internet content/app, such as music or movie streaming
  • Zero-rating of free Internet content/apps, which might be either
    - Commercial (search or maps or social networking) or
    - Non-commercial (eg health & education & government services)
  • Zero-rating of non-Internet data, such as the telco's own in-house data services (MMS messaging for example, or new VoLTE phone services on 4G), or operational tasks such as handset software updates, customer-care functions and so on.
The first class - paid Internet apps - is largely irrelevant. For example, if a carrier sells Spotify as an add-on service, it can say "free data for Spotify use" (technically non-neutral), or equally easily, "buy Spotify & get 200MB a month extra data allowance as a bonus" (perfectly neutral). If the average usage is 200MB, it nets out, although some individual users might be worse/better off. Competitors are "disadvantaged" either way, because they didn't get a deal in place while Spotify did.

The third class ought to be non-controversial as well - mobile operators have long sold non-Internet data services in all manner of pricing configurations. MMS & SMS messages are priced per-message, irrespective of whether your photo compresses down to 1MB or 100kb. BlackBerry email services have traditionally been sold as per-month subscriptions, not volume-based. And your phone sends and receives a variety of zero-rated operational data just to function. If a service provider tried to charge for data used for an online help function, or to access its billing portal, it would get criticised by every consumer activist.



The complication emerging here is if one of these "own brand" services implicitly competes with Internet equivalents. Nowadays, MMS competes with all manner of photo-sharing apps, while a telco's own mobile TV implicitly competes with YouTube or Netflix or other commercial equivalents. Yet the original licences for 3G spectrum assumed that these were exactly the type of "multimedia" data services that operators would be selling. Open access to the public Internet only started taking off later, with the iPhone and USB modems, around 2006-7. Since then, the Internet tail has wagged the mobile data dog - but we shouldn't be surprised when "on-net" paid mobile data services appear again.

In any case, no such services have shown any sign of enough popularity to warrant telcos unilaterally reducing overall mobile data quotas, in the face of ever-fiercer competition. No MNO is going to do well selling "1GB open data + as much of our movie service as you want" vs. a rival selling 3GB of "anything" usage. There might be a Machiavellian wish for this to occur - and perhaps a few TV addicts who can live without flexibility - but given the tendency to just bundle useless and unwanted apps like RCS messaging in this category, we can probably relax about the hypothetical risks for now.


This leaves zero-rating of free Internet services as the main point of contention. And here, the real gripe seems to be with Facebook, Google, WeChat and similar large app providers, helping (mostly) developing-world operators with various types of free-access services. The perceived risk is that these companies become the "main destination" for low-end mobile Internet users, squeezing out startups or rivals. Alternatively, some wonder if they become "gateways", coordinating other apps inside their platforms and restricting access to others. Facebook's acquisitions of Onavo and Pryte suggest possible intentions.

What's in it for the telcos concerned? The pitch is that this gets non-data mobile users onto the first rung of Internet use with low friction, by offering something useful/popular for free. The hope is that they will then click "off-app" links, or start using other apps and websites that cost money to access. There are also rumours that some app providers are actually paying money ("sponsored data" rather than "zero rating") although others such as Wikipedia are very clear that they only deal on a zero-payment basis. There are also reports that some in-app payments (eg for games or stickers) are revenue-shared, even if the main app is free. Some of these deals are ongoing, while others are short-term promotions.


More hardcore neutrality advocates would prefer such operators to just give (say) a starter balance of 50MB free data for general use. And that is indeed a possible answer - although it is less clear that people would know what to use it for - or bother going through the pain of configuring their phones to explore.

Yet as before, there are some historical precedents here too. Many operators in developing countries have done special deals for Opera's Mini browser traffic, or sold SIM cards pre-configured for BlackBerry data. It is perhaps only because of Google and Facebook's scale, breadth and ambition that people seem to be objecting now. Both companies face cynicism over their public statements about "getting the whole world online" - is it pure philanthropy, or also self-interest?

Another wrinkle is also making zero-rating seem "acceptable". Some operators are giving free access to educational material, such as Econet in Zimbabwe. It isn't too hard to imagine a charity like the Gates Foundation offering free access to anti-malaria advice, either - or perhaps local authorities giving free access to jobs websites or agricultural market pricing services. Prohibiting zero-rating might discourage such initiatives.

On balance, the benefits seem to outweigh the risks, as long as appropriate scrutiny is applied. Many use-cases seem uncontroversial, while historical precedent makes it difficult to frame this as a new anti-competitive practice, too.

Overall, Disruptive Analysis expects zero-rating to become commonplace, especially in developing markets. It forecasts more than 1.5bn people to have access to zero-rated applications or content by 2019, one of the findings in its new report on "non-neutral" mobile data business models.

It is right that regulators and neutrality advocates should keep a close eye on zero-rating - but it should not be summarily prohibited without careful thought.

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