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Summary:

When telcos zero-rate data used by their apps and their partners’ apps, they are engaging in price discrimination and threatening net neutrality. The practice should be banned in U.S. and Europe.

The net-neutrality provisions adopted by the European Parliament earlier this month ruled that specialized services like “fast lanes” can’t be used by telcos to the detriment of the availability or quality of internet access services. On the other side of the Atlantic, Americans are less fortunate. The FCC said this week that it would propose new rules that allow companies like Disney, Google or Netflix to pay internet service providers like Comcast and Verizon for special, faster lanes to send video and other content to their customers.

This is the price the U.S. pays for delegating such crucial policy decisions to an unelected ex-lobbyist rather than delegating to Congress. Meanwhile, the open internet isn’t safe yet in Europe: The Council hasn’t spoken and the devil is in the details.

What zero-rating is and why it matters

According to Digital Fuel Monitor data, eight incumbent telcos are sabotaging net neutrality with an orchestrated launch of “zero-rated” apps over their mobile networks in nine European Union markets. This means they’re favoring their own or their over-the-top partners’ apps by “zero-rating” the data volume — not counting it against the end user’s data volume allowance.

In the U.S., AT&T has flirted with zero-rating with its “Sponsored Data,” which lets developers and brands pay to deliver content to consumer smartphones outside their data caps. Earlier this week, AT&T announced a $500 million investment to create a video streaming service similar to Netflix. Will AT&T zero-rate its video streaming app or let it compete on equal terms with Netflix and the rest?

Zero-rated mobile traffic is blunt anti-competitive price discrimination designed to favor telcos’ own or their partners’ apps while placing competing apps at a disadvantage. A zero-rated app is an offer consumers can’t refuse. If consumers choose a third-party app like Dropbox or Netflix, they will either need to use it only over Wi-Fi use or pay telcos hundreds of dollars to use data over 4G networks on their smartphones or tablets.

Photo by Bruce Rolff/Shutterstock

Photo by Bruce Rolff/Shutterstock

A problem worsened by volume caps

Zero-rating isn’t new. Telcos have been zero-rating their fixed broadband IPTV offerings from day one. The difference is that the overwhelming majority of fixed broadband connections were, and still are, volume uncapped. Deutsche Telekom in Germany tried to cap the volume of fixed broadband while exempting its IPTV app, but the German courts screamed foul.

Mobile internet connectivity is different from fixed. Firstly, it requires the use of spectrum, which is a scarce public resource. It is one thing if telcos zero-rate their IPTV app over their cables, but quite another when they use a licensed, scarce public resource to foreclose the communication, media and cloud storage markets.

Secondly, contrary to fixed-lines, internet over smartphones and tablets comes with very restrictive volume caps in most markets. Moreover, in protected markets like the U.S. and Germany where incumbent telcos face no challengers, the gigabyte price of open internet access is prohibitively expensive. DFMonitor tracking data shows that U.S. and German consumers pay 25 times more per smartphone GB than Finnish consumers. In Finland and the U.K., you can buy smartphone plans that come with truly unlimited data (no tethering or any other application restrictions) for €20. In markets like the U.S. and Germany, where open mobile internet gigabytes are excessively overpriced by all telcos, zero-rating bandwidth intensive apps like video streaming is a game changer. Can consumers watch HD movies on a 2GB monthly data allowance?

Zero-rated mobile traffic doesn’t need to be delivered at higher speeds and with a higher quality of service, nor does it need to be prioritized. The European Parliament must, on its second reading, adopt provisions that explicitly prohibit the practice. The U.S. should not go down the slippery road and allow the creation of a two-tier internet. Like the EU, it should ensure that fast lanes are not used to the detriment of open internet access, and should ban zero-rating.

Antonios Drossos is a managing partner at Rewheel, a Helsinki-based boutique management consultancy specializing in pro-competitive telecom strategies. At Digital Fuel Monitor, Rewheel tracks prices, quality, adoption and consumption of open mobile internet connectivity in EU and OECD countries.

  1. “Delegating to Congress?” Geez, not that “Constitution” shite again!

    Who needs Congress when you have an Executive Branch that just does whatever the hell it wants? And whom do you think Disney and those folks contributed to in the Presidential campaigns?

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  2. Well, that’s a new spin on “two-tier Internet”. All this weeping and gnashing of teeth just means that companies that have depended on consumer subsidization for their business plans will actually have to start INNOVATING in order to attract paying customers willing to pay the additional cost of streaming their services.

    In the US the FCC says it doesn’t want the ISPs to give themselves unfair advantages over the big companies that have, so far, gotten a free ride on the backs of consumers who haven’t been using their services.

    Pay-as-you go is the only fair way to pay for the Internet’s infrastructure.

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    1. Outofsight. That’s absolute nonsense. The competitive internet content/app/commerce providers operating at the core have been paying the bulk of the cost of the core over the past 10 years. As a result they have driven the cost per minute of voice to $0.0000004 vs $0.001 in the non-competitive last mile. That is the biggest issue. How to reprice the last mile and make it more generative. Not how to push the WAN/MAN demarc towards the core as last mile monopolists have been wont to do for 100+ years.

      A good proxy for how the last mile can be repriced is Google Fiber in KC, which, depending on one’s assumptions for services and demand is moving the decimal 2-3 places to the right; or $0.00001. This in turn will drop the cost of wireless by 80-90% as 50% of the cost is based on backhaul and site costs, which are a direct function of how much fiber is in the last mile. We all know vertically integrated mobile networks are inefficiently setup to meet demand that is both wanted and expected.

      But another major issue is something the author fails to realize: the TCP/IP stack lacks effective price signals. There is no way (at scale) to clear supply and demand north-south in the informational stack (between the aforementioned apps/content/commerce cos and the lower layer access providers) nor east-west between end-users and/or said content/app providers. A perfect example is the inability to move to IPv6 in concerted fashion and realize the efficiency of jumbo-frames and jumbo-grams as we move to a 2-way HD video future. The PSTN world had settlements, which overtime became inefficient subsidies, taxes and takings on the part of regulators and monopolies.

      So both sides are right and both sides are wrong. If, in fact, a grand compromise can be fashioned (more likely in the US than EU) then we will see a world where 4K VoD, 2-way HD collaboration, mobile BB, and internet of things become universal and inexpensive. The last 3 in particular require significantly greater upstream capacity, lower latency, QoS and security that doesn’t exist today. In a converged approach taking the best aspects of both models, nearly all parties will will succeed as ROI can be generated even on rapidly depreciating capex and opex. In today’s world there is clearly wasted capacity and opex leading to inefficient and overpriced services open to inevitable arbitrage.

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  3. “Hey, the internet is a great thing for our citizens, it empowers them and educates them.

    We can’t have any of that.”
    - United States

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  4. Bob Jacobson Sunday, April 27, 2014

    Unlike in Europe, in the USA with its federal system, state PUCs and regulatory commissions can play a countervailing role vis-a-vis the FCC “seek and destroy mission” — and should.

    In California in the 80s, as the Reagan FCC was destroying the unitary national telecom network, our CPUC and Legislature working together succeeded in repelling its attack, winning substantial regulatory autonomy in the US Supreme Court. Thus we saved our state’s most unique and vital infrastructure, its telecom network, from fracturing. It’s since become one the contributors to Silicon Valley’s and California’s prominence dominance in high tech innovation and services as actual or de facto home to Apple, IBM Google, eBay, Facebook, Wikipedia, Vidyo, PARC, SRI, two dozen great universities, the media industry, and on and on — plus it serves the needs of 35 million residents).

    Faced with Wheeler’s duplicity, the states (including California, still the busiest and most telecom-dependent economy in the world per capita) should challenge “his” FCC. There’s no doubt now that the FCC is going to throw the game again. The FCC’s allegiance will continue to be to the telecom industry and not its business, government, and consumer customers — the 95% “rest of us.” The states should pick up the gauntlet and run with it, exercising their power in concert, right up to the US Supreme Court if necessary. This is one of those times where “states’ rights” really matter.

    Robert Jacobson, Ph.D.
    Principal Policy Consultant
    Telecom & Information Policy
    Assembly Utilities & Commerce Committee
    California Legislature, 1981-1989

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    1. Bob Jacobson Sunday, April 27, 2014

      Two edits:

      Line 9. “prominence and dominance”

      Line 10. “IBM Almaden Laboratory, Google”

      The rest I stand by.

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    2. Bob, arguably the 1983 divestiture (not an FCC, rather judicial act) was just the thing to sow the seeds of competition in the WAN and turbo-charge the silicon revolution concentrated in CA. I would argue that the CPUC (or any state) had little to do with it. Sorry, but network effect (aka Metcalfe’s law) wins out all the time. That’s been proved out in the wireless, wired and application markets.

      Value is both concentrated and driven from the core; not the edge. Now that TCP/IP is the dominant layer 3-4 standard, not sure what an individual state can do. The real power lies with those that have achieved scale in the control and app layers (Apple, Google, FB, Netflix, etc…). Given the lack of north-south or east-west settlements to replace the byzantine rate-setting of past, the FCC naively believes they are helping the balkanized edge access providers by pushing the WAN/MAN demarc closer to the core and extending the moat around last mile layer 1-2 access.

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  5. What about the millions of people around the world who cannot afford Internet access – mobile or wired?

    Providing low cost, or free, access in exchange for the user accessing certain content providers (or other businesses) is better than no access at all.

    This would accelerate connecting the unconnected which is good for all.

    MIke Gulett
    FreeBand Technologies

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  6. Alicia Levine Monday, April 28, 2014

    I wrote an article about the impact of zero-rating applications like Facebook and Google in emerging markets. Take a look here – https://medium.com/tech-talk/7136fc3e5925

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  7. Yes, but the important thing is you have a choice of ISPs and they all offer something different in terms of the content offerings they favour. You’re not just buying internet, you’re buying Pay TV.

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  8. There is a case before the CRTC – Canada’s broadcasting and telecom regulator – to determine whether this exact practice by several vertically integrated wireless providers should be allowed or not. Crossing my fingers for the latter.

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