For broadband 'zero rating,' it doesn't have to be all or nothing

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"I don't always complain about companies giving things away for free. But when I do, it's when they give free stuff to poor people."

That might be how Dos Equis beer's "Most Interesting Man in the World" would sum up the opposition to so-called "zero rating" — where content from selected websites does not count against data caps on a subscriber's (typically wireless) broadband plan.

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More accurately, and less glibly, some groups contend that programs like Facebook's Free Basics violate net neutrality by treating content differently based on whether the site participates in the program. But the economics are clear: Giving people an additional option for accessing websites they value at a lower price — zero in this case — makes them better off. And while it would be naive to think that Facebook has purely altruistic motives, it makes sense that a program to bring the poorest online would focus on a service like Facebook, for which there is extraordinary demand, at least at a nominal price of zero.

Additionally, for broadband providers, finding business models that appeal to different groups of consumers is key to financing investment. Broadband networks entail large fixed costs and, typically, low marginal costs of use. Because carriers must recover fixed in addition to marginal costs, average prices must exceed marginal costs if providers are to continue investing in their networks. The efficient way to recover those fixed costs is to charge different types of consumers different prices. In principle, that means charging high prices to consumers willing to pay a lot for broadband and low prices to consumers who are not willing to pay much for it.

Low prices, of course, might mean zero. Especially in poor countries, a large number of people may not be willing to pay much, if anything, for broadband access, especially before having used it. Zero-rating programs can be attractive to a wireless (wireline) provider by making it possible to sell even a minimal service to someone who might not have purchased anything otherwise.

Alternatively, such a program can be a way to differentiate service from competitors. In India, Facebook's partner is Reliance Communications, the fourth-largest wireless provider in the country behind Bharti, Vodafone and Idea. It is probably not a coincidence that the first provider offering the service is not the market leader. Reliance may have seen Free Basics as a way to differentiate itself and gain market share.

Of course, just because the economics make sense doesn't necessarily mean that it will be a successful business model or have the desired effect of bringing additional people online. It is not clear that the service has, in fact, benefited Reliance. In February 2015, when Reliance launched Free Basics, the company served 11.23 percent of wireless subscribers, according to the Indian regulator. By September 2015, the latest data available, its market share had decreased to 11.08 percent.

In principle, it is possible that a broadband provider could use zero-rating to favor its own content over competitors'. Similarly, a content provider could leverage its own market power to cause providers to degrade competitors' content. But those cases are inherently antitrust issues, at least in part because even then the practice could make consumers better or worse off. And it does not appear that any such behavior has occurred.

At its heart, net neutrality is about how best to provide access to networks. It's a debate that's been going on for more than a century, back to the days of the railroad barons, and probably will continue for another century. Part of the answer will depend on the goal society is pursuing in the context of the service or product. But policymakers should allow content and infrastructure providers to experiment with business models, especially when those business models focus on encouraging new connections. To ban such a practice outright would mean a lost opportunity.

Wallsten is a senior fellow and vice president for research at the Technology Policy Institute (TPI), a nonprofit research and educational organization that focuses on the economics of innovation, technological change and related regulation in the United States and around the world. More information is available here. The opinions expressed here reflect those of the author only, and not necessarily those of TPI, its staff or its board.

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