Research Notes

Are mobile operators’ subsidies for iPhones a violation of net neutrality and the Open Internet?

Network neutrality, which has been defined differently from country to country, is essentially the idea that all data should move at the same speed across the internet—and that laws should be passed require operators to manage their networks accordingly. Traffic management was less of an issue in the narrowband era when it mattered little if an email arrived with a few seconds delay. In the broadband era, however, different applications require different qualities of service. Latency makes voice over internet protocol (VOIP) and video application unworkable, but the signal from a coffee machine connected to the internet can be delivered with less than best efforts service.

There is a huge challenge to manage networks for variety of needs and to ensure revenue for network upgrades, especially as video applications such as Netflix and YouTube take a disproportionate share of bandwidth. Operators want flexibility to find solutions, such as AT&T with its Sponsored Data program in which content/application providers help to cover the cost of traffic delivery (Essentially their data is not counted toward a customer’s data cap.). Supporters of net neutrality claim that prioritizing applications, regardless of their requirements, is discriminatory, and furthermore, that programs such as Sponsored Data are unfair. Se the research note AT&T’s Sponsored Data is nothing new. Why it’s hypocritical to allow paywalls but not data caps.

As the decision from the U.S. Court of Appeals on the Open Internet rules nears, the debate on net neutrality is heating up. AT&T’s Sponsored Data has received undeserved criticism. See Strand Consult research note. The number of people who abuse the net neutrality debate to further their views is growing. In the report Understanding Net Neutrality and Stakeholders’ Arguments Strand Consult looks at net neutrality and its stakeholders. The same critics of AT&T probably fail to see how the practices of Apple are discriminatory.

In 2007 Apple launched the first iPhone. Since then the company has sold some 400 million iPhones. Apple has made deals with mobile operators worldwide. In 2009 Strand Consult made the report The moment of truth, a portrait of the iPhone exposing how Apple works, including the many requirements Apple demands of mobile operators for the privilege of selling of iPhone, including massive subsidies.

Put simply, Apple created a unique product that many consumers demand. To get the privilege to sell the iPhone, mobile operators had to agree to subsidize the phones and force their customers to buy mobile apps in Apple’s App Store under the conditions that Apple dictates. NTT Docomo in Japan had a big business in their own app marketplace, but Japanese Apple users were directed to Apple’s App Store.

Many of those who claim that operators abuse net neutrality rules don’t mention that Apple tethers its customers to a specific platform. It’s not just that customers are forced to buy in a certain store, but it is also the case customers who want to leave the platform can’t take their purchases with them. They are forced to buy the same apps again from a new platform.

To be sure, Apple would argue that the App Store is part of the unique “experience” of Apple, what it defines as its competitive edge. That may be the truth, but this same ability to differentiate and innovate is being denied to operators. Under net neutrality rules, operators are highly restricted about the kinds of packages and partnerships they can bring to market. In any case, Apple will probably never be part of Sponsored Data. It wants to ensure that its users pay for maximum data and go to the App Store.

In its research note Google, Apple and Microsoft discriminate in many ways, Strand Consult looked at how players such as Apple, Google, Facebook do things that the Open Internet rules would never be allowed with operators. It’s blatant hypocrisy. Should net neutrality stay on the books, then it should apply to all the players on the value chain, including handset makers, website platforms, and operating systems. But should the DC Court strike down the Open Internet rule, antitrust law can prosecute discriminatory behavior. There is a worldwide army of competent competition authorities who can recognize abuse in the marketplace. They don’t need net neutrality rules to do their job.

Strand Consult’s report on net neutrality includes a chapter on how competition policy can address issues raised by net neutrality including non-discriminatory access to the Internet. It discusses the characteristics of a good regulation and whether net neutrality passes the test. It describes the risks of bad regulation and regulatory errors. It reviews competition rules in various countries and outlines the advantages of using competition law to address net neutrality. It provides a list of key digital law cases where competition law prevailed. To order the report, contact Strand Consult.

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