Saturday, December 26, 2015

The business of ZeroRating

ZeroRating conversations are dominating Network Neutrality issues these days, whether it is the FreeBasics controversy in India, Binge On by T-Mobile, or Verizon's recent announcement of a plan similar to AT&T's sponsored data. Here are a few thoughts to consider about ZeroRating and why it makes no sense (to me).

If ISPs Zero Rate content, somebody has to pay for the bandwidth. Suppose the Content provider pays for it. Then there is a pricing problem:

  • ISPs cannot charge the content provider a price above the price they charge consumers. Suppose they charge consumers X per MB of data, and they charge content providers X+Y per MB of data. Then, for sufficient traffic where overheads are accounted for, it is cheaper for content providers to send recharge coupons back directly to the customers who used their services. Long term, pricing above the consumer price is not sustainable.
  • ISPs cannot charge the content provider a price below the price they charge consumers. Suppose they charge consumers X per MB of data, and they charge content providers X-Y per MB of data. Then if the plan is truly open, a company like Gigato can come along, buy data in volume and become a virtual ISP. They can funnel traffic to services via their servers (they can remain good guys and not decrypt or store private data), sell the bandwidth to consumers at X-Y/2 and pocket the difference. The ISPs lose out.
Or alternately, the ISP pays for the bandwidth of the content.
  • This opens the possibility of vertical integration, where ISPs ZeroRate their own content, and that is extremely bad for competition. Or ISPs ZeroRate only a select group of content providers, for non-transparent reasons (FreeBasics or Binge On "technical" requirements that make the walled gardens implicitly closed), leading to a fractured experience/Internet for their consumers.

It is not clear to me what the business model is for ZeroRating, where the ISPs make money and provide an Open and Neutral Internet experience for their consumers. Economic issues are really the core of Network Neutrality, and nobody has explained to me how the economic model of ZeroRating remains consistent with Network Neutrality


18 comments:

  1. This comment has been removed by the author.

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  2. Good points. If ZR is meant for the unconnected, i.e. those with low purchasing power, that's the target group of little interest to advertisers.
    ISPs also lose in the long term by replacing individual customers with with bulk buyers who have higher bargaining power.

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  3. Take a look at Mozilla Position

    https://blog.lizardwrangler.com/2015/05/06/zero-rating-and-the-open-internet/

    https://blog.mozilla.org/netpolicy/2015/05/05/mozilla-view-on-zero-rating/

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    1. Hi Anivar,

      Am aware of the Mozilla position. It is a mix of philanthropy and adhering to net neutrality principles (equal rating) and is a good approach. Aircel is making a bet with their equal rated plan that users will convert, and they are not being selective like Reliance (FreeBasics) or T-mobile. Vertical integration is the biggest danger of ISP paid zero rating and we should be watchful there.

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  7. Realistically assuming that ISP can only charge as much as market price to the consumers, it has an incentive to increase market price upto the point where it strangles all revenue out of the Content Provider. Consumers consume zero of paid content as the prices are too high and rely on zero rating.
    Such a situation though will not arise practically shows that ISP's have an incentive to increase market prices

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