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Tuesday, February 04, 2014

"Sender-pays" is a ridiculous 19th-Century idea misapplied to the Internet

I'm currently doing a fair amount of work looking at next-generation fixed and mobile data tariffs and business models.

One of the concepts I still see expounded is the idea of "sender-pays" models, where a third party (typically a content or application company) pays for a consumer's data usage for a given website or app.

Usually, this is given equivalence to either 1-800 phone numbers, or maybe the original model for the postal service, where the sender (generally) pays for the postage for a product, rather than the recipient. Occasionally, people talk about the Amazon Kindle or some other dedicated hardware such as smart-meters or in-vehicle telematics, where the network provision is vertically-integrated into the offer.

This has recently come to the fore with AT&T's suggested "sponsored data" model, which I believe will fail. It is also a recurrent theme among certain lobbying and industry groups, which keep trying to come up with ways for Internet access to be paid for "twice", usually with spurious references to "sustainability".

(I wrote a full report on the near-certain failure of prospective 1-800 models for mobile data some time ago - http://disruptivewireless.blogspot.co.uk/p/1-800-dataplans-report.html )

I thought it was worth reiterating a few of the reasons why "sender-pays" is a pointless, misleading or maybe even dangerous metaphor to use:
  • With very few exceptions, there are multiple "senders" in any given Internet interaction. Most obviously, there is upstream traffic as well as downstream. Who is responsible for the upstream?
  • The nature of the web is very bi-directional. Your web-browser sends (and receives) various data in the background, using technologies such as JavaScript.
  • Unlike 1-800 and postal models, users frequently use alternative connection mechanisms, especially 3rd-party WiFi. Few content companies will be happy to have different business models depending on how a user connects with their phone/tablet to their servers, especially as they have no control. It will also be in their interest to push users to free WiFi rather than sponsor cellular data
  • No content/app companies would want to have 800 different "sender-pays" arrangements with every network operator, and possibly multipliers of that given each has many different plans.
  • No content/app company is going to want to pay extra sponsor data where users have more-than-enough in their monthly/PAYG quota. 
  • On a typical web-page, many elements are served from CDNs, advertisers and other sources. Except for standalone downloads, it will be very difficult for users to ringfence which bit is sponsored - and even harder to demonstrate this in-app or in-webpage
  • There will need to be very strong controls for the sponsor - eg managing fraud & abuse (eg if a competitor tries to rack up bills by downloading excess volumes), dealing with network problems which drive users to hit refresh (or re-download) for problems which are the service provider's responsibility
  • Entirely unclear how "sender" models (eg notifications of sposored use) maps onto app-based models, especially in iOS. Many, many "gotchas", eg push notifications
  • Poor fit with adapative-rate codecs & other solutions, which will vary the amount of data depending on network conditions and therefore make predictions of volume/cost impossible.
  • The content/app company will often be at the mercy of the device/OS choice of the user and how it requests / caches / transmits / compresses data. This is utterly different to a 1-800 number where a phone is a phone is a phone, and a "minute" doesn't differ based on what type of device the user owns
There are many other pitfalls, erroneous assumptions and outright fallacies here. There is also a huge moral hazard around transparency, neutrality and potential damage to the wider Internet model which is a multi-trillion dollar benefit to the global economy and democracy. While AT&T has been very careful to stay on the right side of Net Neutrality for now, it is entirely possible that other operators will be consumer-unfriendly or simply fail to think through the ramifications.

The bottom line is that the sender/recipient model is not the way the Internet works. It is fine as a piece of rhetoric to talk about sponsored / 1-800 / third-party pays models for data services (especially outside Public Internet Access), but it must be remembered that a lot of the metaphors employed are archaic and do not translate to the reality of HTML or application design.

In particular, the use of 3rd-party WiFi puts a coach & horses (deliberate 19th Century reference!) through most of these type of models, as it gives both users and content/app companies a great incentive to arbitrage away even the current use of quota-driven broadband. I've also seen sponsored WiFi from app companies ("Free WiFi if you use Office 365"), which is likely to be better-value & better-publicity for Internet firms.


jaak defour said...

In addition, Telco "Pricing" will probably make this a niche market at best.

- A large content provider pays in the order of $0,01/Gbyte for best efforts delivery via a commercial CDN. The content Provider can reach any type of internet end-point for that same unit price, cellular or ftth user, it doesn't matter on the Internet.

- A large content provider will likely have to pay a price of at least $1/Gbyte for this "premium" delivery to a cellular user (Note that many Mobile ISPs claim 3G "costs" of multiple $/GB)

Paying 10,000+% more for delivery will be a showstopper for most content. In addition the nature of the cellular network prevent this price to be backed by a meaningfull SLA

Harry Quackenboss said...

A dissenting view:

Email is a great example of the pitfalls of user pays. If senders were required to pay a fee per email, we wouldn’t have a SPAM problem. When it comes to SPAM, users pay in CAPEX, OPEX, and lost productivity.

When dealing with services where you have to change users’ behavior whether it is reading a web page, or showing somebody the benefits of reality-distorting drugs, the only proven business models are advertising-funded, where it ultimately drives other revenues, or heavy investments to generate new customers, often with "free" trials.

If you could restructure it as user pays the providers would have a huge incentive to provide free trials, where like heroin, you give away samples to show people what they have been missing.

Unknown said...

Actually not so complicated for that. The operator charged the content providers by volume, no matter what where are the users from or by which type of access. The operator of course can separate the up/down traffic from the ISP/ICP but all will not be charged to users.

Dean Bubley said...

Jaak - spot on.

The pricing for "sender-pays" is a very dark art indeed. Too low, and it undercuts the retail price for data & creates pseudo-MVNOs that arbitrage away the user's spend. Too high, and nobody bothers, instead pushing people to WiFi or other mechanisms

Harry - yes, spam is indeed annoying. But if senders were "required to pay a fee per email", we wouldn't have email at all. It's popular & gained virality because it is free. And no, there are plenty of other business models besides advertising (eg Amazon). There are already plenty of "free trial" methods online already: the whole freemium concept, in particular, which the telecoms industry has so far failed to emulate.

Jimmy - very wrong. 99% of WiFi traffic doesn't transit the cellular operator's network (and won't in future either - the "HetNet" pitch is niche/BS). Secondly, the content providers have no willingness nor incentive to pay twice "per volume" - they already pay their hosting provider at the server end; why would they pay (higher & variable amounts) at the user's end as well? My whole point is that concept is unworkable for many, many reasons.

Unknown said...

I thing this "Sender-Pays" will increase the spamming, because for example if a website owner have to pay for the access of his web page by any user, then he will create such promotional content. So by making broadband internet broadband internet or simply just internet payable by the sender then it can create spamming a lot.

tommi chen said...

The traditional telco business model is opposite that of an ISP which a telco really is now. Traditionalist obviously will apply what they are familiar with to the new. As this post suggested, it's ridiculous. They should really try to understand the new internet economy and operate within the new 'rules'

Andy said...

Catching up very late with this, but I think the discussion is a bit too pessimistic.

Let's suppose the offer is for a retail website or app (eg Tesco, John Lewis...) The end customer can view as much content (eg photos and videos of the products for sale) on their phone (connected to the 3G/4G network) without paying data charges. The data is paid at wholesale rates by the retailer. Let's look at some objections...

Firstly, it is technically feasible to charge all the data (up, down, sideways, who cares?) for that URL or app to the retailer and zero-rate it for the end customer. That's not a showstopper.

Secondly, it's not necessarily substituting retail-priced data (end customer pays) for wholesale data (partner pays) because the traffic is quite likely to be additional to what the end customer would have consumed otherwise. Not having to worry about paying data charges might make the difference between the customer watching a product video and not watching it, for example.

Thirdly, the WiFi issue is irrelevant. If the phone is connected to a 3rd party WiFi network then the customer isn't paying for the data from their 3G/4G plan, anyway. Neither is the retailer paying to sponsor the data. That's fine, isn't it? The offer only applies to the mobile operator's network. If the operator offers a combined 3G/4G/WiFi data plan with its own (or a partner's) WiFi network, then the offer could technically be made to work across all the networks, but that's probably not too important.

Finally, of course it's not worth a huge amount to anyone. However, there is a win-win-win (the customer gets free data, the retailer encourages the customer to spend more time on their site, and the operator gets some sponsored data revenue). And it doesn't need to be hugely valuable if the operator can scale up to a large number of partners. Small revenues x many partners = a business case.