Zero Rating Becomes 'Hot Potato' in EU Net Neutrality Debate

Zero rating is increasingly popular in developed and developing countries but plays a more important role in the latter, where the costs of mobile data services are higher relative to per capita incomes, Eisenach said in a March NERA paper on the economics of zero rating (see 1503030055). The "obvious benefits" of zero rating include lower consumer prices and expanding Internet adoption, but some worry whether such plans violate net neutrality principles by favoring some content over other content, he wrote. Current zero rating programs "are easily explained as market-driven mechanisms for capturing economic efficiencies associated with the characteristics of information technology markets," the economist wrote. "Concerns that Zero Rating could serve as a means of foreclosing competition, or limit freedom of expression, appear misplaced and lacking in both theoretical and empirical support."

The notion that any form of price differential is bad is wrong, Eisenach said in an interview. In competitive markets, companies find ways to distinguish their services by, for example, offering discounts, he said. Zero rating is just a discount to consumers who otherwise couldn't get online, he said. T-Mobile's decision to offer 25 streaming music services at zero rating is the case of a nondominant company offering services it hopes more people will like, Eisenach said. He acknowledged that such behavior could be anti-competitive, saying regulators must be vigilant. A service provider that launched a zero-rated service and then imposed data caps against services that directly competed with its offering would be an "interesting antitrust case," he said. But "there's a remedy there in the antitrust laws," he said. The naive position that "thou shalt not discriminate under any circumstances" is dangerous, he said.

Zero rating "is a game changer for online video in markets where volume caps are overly restricted," said Antonios Drossos, managing partner of Finnish pro-competitive telecom strategy consultancy Rewheel. ISPs want a share of the online video revenue from Google, Netflix and others on top of their access revenue, he emailed. "And they could take their share by favouring their own telco film stores with zero-rating and forcing the Netflixes to cut deals with them."

Zero-rated traffic is "blunt anti-competitive discrimination designed to favour mobile operators' own or their partners' services while placing competing internet services at a disadvantage," Drossos wrote in a Feb. 17 World Wide Web Foundation blog post. "A zero-rate app is an offer consumers can't refuse." By zero-rating their own mobile TV and movie services, operators are foreclosing the mobile Internet video market by putting all other rivals at a disadvantage, he said. Rewheel's Digital Fuel Monitor showed in November that in many Organisation for Economic Co-operation and Development markets where operators launched zero-rated film and TV services, "consumers are either not allowed to buy more than a few (5-10) gigabytes at all or most likely, they cannot afford to buy more because the price of additional gigabytes is prohibitively expensive (e.g. [10 euros] per gigabyte)," he wrote.

"It's a tricky issue" and everyone is in "waiting mode" to see what others do, said Maël Brunet, director of European policy and government relations for OpenForum Europe, which advocates for "open, competitive choice for IT users." Zero rating can seem like a pure consumer benefit, but it raises problem questions on the supply side, he said in an interview. It creates bars to market entry for competitors that are difficult to control under antitrust law, because companies that are blocked from entering a market in the first place aren't in a position to complain, he said. Zero rating also could force new entrants to come up with high upfront costs to be able to participate, he said. Zero rating also throttles other services, Brunet said. Providers that offer zero-rated services deny it, but effectively, if a company is giving free and faster access to some services, it can decide not to raise normal speeds even when it expands its infrastructure, he said.

Net Neutrality

With EU net neutrality negotiations about to begin (see 1503040011), the zero rating debate is rising to the surface, various commentators said.

The text under discussion lets Internet access providers enter into commercial agreements with end users, said Hogan Lovells (Paris) telecom attorney Winston Maxwell. It's not clear whether this would let ISPs apply zero rating, he said. "Zero rating is particularly contentious." The regulator in the Netherlands recently found that zero rating breached national net neutrality rules, he noted. Mobile operators in Slovenia also have been punished for zero-rating practices, said telecom consultant Innocenzo Genna, who advises smaller players. That's because the two countries are the only ones with net neutrality legislation in force that prohibits price discrimination such as zero rating, he said.

Slovenia, the Netherlands and several other EU governments wanted the Council of Ministers to bar zero rating in its net neutrality draft, "but the vast majority opposed," Genna told us. The compromise includes generic wording that gives Internet access services providers and end users the right to make deals on commercial and technical conditions and characteristics of access service, such as price, volume and speed. "Such agreements, and any commercial practices conducted by providers of internet access services, shall not limit the exercise of the right of end-users" to access and distribute information and content, and to use and offer applications, and use terminal equipment of their choice, the text said.

The issue is very much open, Drossos said. One determining factor will be what happens with the net neutrality debate in the European Parliament, he said. The parliamentary debate last April pitted one set of very loose net neutrality amendments against a second set of more restrictive ones that prevailed, he said. Last year, zero rating was on the table, but the only way for the main political parties to agree on language was to not mention it, he said.

The only difference in the zero rating debate between the U.S. and the EU is the direct state ownership and indirect control of incumbent EU telcos such as Deutsche Telekom and Orange by big EU members, Drossos said. Without genuine net neutrality, including zero rating, "telcos from big EU members states will become gate keepers of the internet across the EU and control what people see and hear" in the smaller countries, he said. The EU net neutrality debate is not only between consumer freedom, anti-competitive practices and gatekeeping, but it also spills over into who gets control of Europe's digital economy, "which will soon become the real economy," he told us. "The most striking thing about 'zero rating' right now is that neither the FCC nor the EU seems to have a clue what (if anything) to do about it," emailed David Cantor, a Brussels attorney who advises on telecom law and strategy.