Net Neutrality, Differential Pricing and Vertical Integration
Regulators around the world, be it the FCC or TRAI, are grappling with the issue of Differential Pricing (Zero Rating is a special case of it) and whether it violates Net Neutrality or not. Some academic researchers have been warning for a while that it absolutely does, and it is pointless to talk about Net Neutrality without factoring in (differential) pricing. Barbara van Schewick has written a paper recently detailing how T Mobile’s Binge On Zero Rating program violates Net Neutrality. In some circles however, if you say something with “Prof.” as your title, it is dismissed as mere academic speculation.
Fortunately, T-Mobile has run a controlled experiment with Binge On for all of us to look at the impact of Zero Rating, so it isn’t the rantings of clueless academics or Net Neutrality activists that you have to listen to. This is a large scale deployment of a Zero Rating platform with very clear differential pricing between major providers of online video in the US. We can look at the early data that is coming in (and note that the data is coming from advocates of Binge On).
In one study, it was shown that while Binge On partners (Netflix and Hulu), whose traffic was Zero Rated, showed an increase in average viewing time of 50%; the viewership of the most prominent non-partner, YouTube, increased by 16%. Note that while the study claims that this is a win for all video providers, it appears to be a clear case of market distortion where the Binge On partners are benefiting in a statistically significant way compared to non-partners.
Separately, T Mobile’s senior vice president of government affairs Kathleen Ham put the numbers at 79% benefit for partners, and 33% benefit for non-partners, again touting it as beneficial for all video providers.
If I am running a video streaming business and I see my competitor’s product usage grow significantly faster than mine, I am unlikely to term it as “beneficial to me”. Empirical evidence is strongly supporting the claims by many of us in the past that Zero Rating will cause market distortion and is anti-competitive.
In a related development, Verizon recently announced its own Zero Rating program, where its own video service will be exempt from bandwidth charges. Verizon also claims that the program is open for all competitors, and they can pay to get their service Zero Rated. This program is actually the worst form of Zero Rating.
- Given the evidence coming in from Binge On, every competitor will be forced to join the Verizon Zero Rating program or risk losing market share.
- All (mobile) ISPs will then play catch up and start their own Zero Rating programs with vertically integrated services and every new business that starts in the video space will need to sign up for these programs.
- Verizon claims that what they are doing is not double dipping, but it is an additional expense for every video provider and an entrepreneur will see it differently. Currently, they sign up with a CDN, pay it for bandwidth usage and get done with their transmission costs. Now to stay competitive they will need to pay for Zero Rating as well.
- Verizon says the vertically integrated video service will also (cough cough) “pay” for Zero Rating. Does anyone seriously believe this book transfer has the same effect as what competitors will end up paying? This is essentially a subsidy given to the in-house video service of Verizon, in addition to not paying for transit costs and naturally receiving better QoS.
- It makes starting a video business much harder for everyone else, given Verizon’s dominant position in the market. Moreover, just like the case of Binge On, it is easy for ISPs to create technical or economic barriers to joining a Zero Rating program, while paying lip service to openness.
- If you let this happen for one service (video) at one place, then you let it happen around the world for all services and you will soon have Zero Rated and vertically integrated music services, messaging apps, VoIP, cloud storage, social networks etc. To compete, entrepreneurs will need to go around signing Zero Rated deals all around the world instead of focusing on innovation.
Differential pricing and Zero Rating is absolutely a critical Net Neutrality issue. Early data from T Mobile is confirming the theoretical predictions on what it can do to the competitive landscape. Those same theoretical tools predict vertically integrated Zero Rating as the worst form of Net Neutrality violations, and regulators around the world need to stop it if we want to sustain the rapid innovation the Internet has enabled thus far.