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A public policy blog from AEI
Zero-rating — when internet service providers (ISPs) exempt the data used to access specific applications from counting against the data cap in a consumer’s data plan — has proven to be a controversial subject. Regulators around the world are being called on, if not to intervene in markets to prevent its occurrence, at least to evaluate specific cases, such as Facebook’s Free Basics or T-Mobile’s Binge-On. The general conduct standard in the Federal Communications Commission’s 2015 Open Internet Order and the Body of European Regulators for Electronic Communication’s Guidelines on Implementation reflect this activity. The importance of the topic is reflected in the panel session devoted to it today at the International Telecommunications Society’s European Regional Conference in Passau, Germany, where academic, policy, and industry representatives will discuss the range of economic, legal, and technical challenges posed to regulation and how regulatory authorities around the world are responding.
The underlying premise of the network neutrality debate — of which zero-rating forms a part — is the belief that all bits of data on the internet should be treated equally (or neutrally) in respect to their physical handling (i.e., no blocking, throttling, etc.) and financially (i.e., no price discrimination). However, the internet is replete with examples of price discrimination, which do not appear to have attracted the same political attention as zero-rating. Yet arguably zero-rating is just a variation of bundling — a form of price discrimination.
Almost certainly, most of the ardent proponents of zero-rating purchase their fixed internet access in a bundle with some other service — such as a cable television subscription, a voice telephony connection, or even a mobile subscription. The discounted price for the bundle immediately creates price discrimination as the consumer effectively pays less for a bundled element compared to those who purchase the same element separately. Offering one more element for free in a bundle of items already purchased has hardly created a ripple amongst regulators — indeed, the Telecommunications Regulation Handbook produced by the World Bank, International Telecommunications Union, and others clearly states “bundling is generally a pro-competitive and customer-friendly strategy. As such, bundling does not call for regulatory intervention.”
Rather, the matter that exercises the Telecommunications Handbook authors is the question of tying — in which a service provider makes the purchase of one product or service over which it has market power (the tying good) conditional on the purchase of a second competitively supplied product or service (the tied good). Tying may allow a provider with market power in one market to give itself an advantage in another.
Tying is primarily a strategy employed to maximize profits. However, there are only limited circumstances where profits will be enhanced — for example, in which the demands for the two products are complementary, end users consume the two products together (e.g., network subscription and calls). Tying will not increase profits above the level already possible for the single goods when two products are consumed in fixed proportions (e.g., one mobile connection and one fixed-line connection) or when the demands for the two products are independent and consumers are unlikely to consume them jointly (e.g., telephone calls and television subscriptions). Thus, firms with market power will often have no incentive to engage in a tying strategy.
Furthermore, tying is only likely toexclude competitors from the market if they are unable to overcome the loss of sales to customers who have been successfully tied. This may occur when competitors face economies of scale and the loss of sales causes their average costs to increase, or when the tied good is associated with network externalities and the loss of sales to some customers causes others to leave. And even when tying does have an exclusionary effect, it is likely to arise not as an explicit objective but as an unintended consequence of a profit-maximizing strategy.
In light of these regulatory recommendations, it is apposite to consider the cases of zero-rating when the interest groups called for regulatory intervention. They are almost always examples of bundling rather than tying. For example, consumers are not typically forced to buy Binge-On with their T-Mobile subscription, and Binge-On subscribers are not forced to use T-Mobile capacity to access Binge-On content. They can access content using a tablet or laptop via Wi-Fi (including accessing the internet over a fixed-line connection) or roaming without even having to use T-Mobile’s LTE network (albeit that the resolution defaults to the highest available based on the terms of the ISP or roaming partner concerned).
So under these circumstances, it begs the question of where the competitive harm from zero-rating might arise. Is the relevant market power that of the mobile operators or of Binge-On over its consumers (given that there is only one Binge-On, just like there is only one Adobe Acrobat)? If the networks over which Binge-On can be accessed are effectively competitively supplied (i.e., consumers can choose between T-Mobile and another ISP to access Binge-On content by opting to use Wi-Fi), the market power that matters is that of Binge-On rather than the mobile networks. It is not specifically a concern of telecommunications regulation but, more properly, one dealt with under the provisions of competition (antitrust) law.
As the Telecommunications Regulation Handbook says, bundling is customer friendly and as such does not call for regulatory intervention.
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