Research Notes

AT&T’s Sponsored Data is nothing new. Why it’s hypocritical to allow paywalls but not data caps

Over the last few days there have been some negative stories about AT&T’s new Sponsored Data program which enables certain mobile applications to avoid being counted toward a subscriber’s data cap. AT&T compared the product to the toll-free 1-800 services with which Americans are familiar. However this product is very common with dozens of mobile providers around the world that regularly offer data plans where certain content and applications are not counted toward the data cap. Consumers in these countries don’t complain of net neutrality violations, rather they look for mobile providers to offer them value for money.

For example with certain plans in the Nordics, Telenor does not count Facebook toward the data cap; with Telia, the music service Spotify is also exempt. Similarly one of the world’s most popular mobile browsers with over 250 million users Opera Mini, has a technology that compresses data so that content and applications can be enjoyed on 2G networks. Mobile operators, content/application providers, and handset makers pay Opera a license fee to use this technology so that more data can be consumed on a limited subscription, or specific applications are waived from the data cap. Anyone can download the Opera Mini and economize further on their mobile data plan, and this program is enjoyed in India, Indonesia, Russia, Nigeria, China, Brazil, South Africa, Bangladesh, Mexico and Vietnam. Opera’s State of the Mobile Web report describes many such exciting developments.

One would think that a product that offers more data for the same price would be welcome, but a number of pundits and journalists have protested, claiming that AT&T’s plan is in violation of net neutrality rules. The argument is that AT&T’s sponsored data gives preferential treatment to content application providers that pay more, makes content application providers that don’t pay worse off, and deters consumers from discovering content and apps on their own.

However, it is doubtful that net neutrality drives the app discovery process. Even Lemley and Lessig in their seminal paper “The End of End-to-End: Preserving the Architecture of the Internet in the Broadband Era” note, “As we have said, no one fully understands the dynamics that have made the innovation of the Internet possible.”

That being said, before jumping to conclusions that AT&T’s sponsored content is a violation of the Open Internet, it may be helpful to review the academic literature on innovation, which includes thousands of scholars and leading lights such as Schumpeter, Rogers, Christiansen, and Teece. While it may be true as net neutrality supporters claim that the end-to-end principle creates innovation on the internet, it has never been proven empirically, and many other issues are recognized as more important for innovation.

As detailed in Strand Consult’s report, Understanding Net Neutrality and Stakeholders’ Arguments an app’s success may be best explained by David Teece whose 1986 paper “Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy” is a touchstone in the innovation literature. Teece observed that most innovations are not products themselves. They have to be combined with complementary assets before they can be a marketable product. Such partnerships lower barriers of entry for the innovator and can provide rewards to an innovator upfront. It is therefore ironic, if not counterproductive for those who support innovation, that net neutrality by creating embargoes for bundling, may limit the ability of application developers to find those complementary assets to make their applications known.

On a practical level Christina Moazed, CEO of ApproStar, an award-winning New York marketing agency devoted to app developers explains, most app developers fail to develop a marketing strategy when they release their app. ”Just putting it on the internet is not enough, ” she says. ”In order to get your app known in the sea of competitors and gatekeepers such as app stores and Google, you need to do SEO and keyword modification for your app.” If developers need to market their apps so that they are found, then net neutrality is not driving the app discovery process.

Contrary to the fears of many of the pundits, the offer from AT&T is not going to change the competition in the fiercely competitive app market. Those app companies that already have the money for marketing are not sitting around waiting for AT&T’s latest gambit. App developers and companies compete in many ways, by deploying disruptive business models, poaching competitors’ employees, and innovating their product development.

To be sure, selecting an app based on its data consumption might be one factor to consider should information be readily available. CTIA, the Wireless Association, has created a website called Know My App where consumers can evaluate how much data a particular app will consume. It’s a great tool to help consumers manage their bandwidth and avoid the surprise of overage.

That apps should have better design to improve economy with data plans, network resources, and handset battery life is something to be encouraged. The Federal Communication Commission’s Open Internet Advisory Committee (OAIC) looked into these issues in detail. Case studies are available from the Mobile Broadband Working Group chaired by Jennifer Rexford, professor of computer science at Princeton, point out the challenges posed to mobile networks by poorly designed and bandwidth-hungry apps.

It is premature to build a regulatory regime enshrining the end-to-end principle and furthermore to prosecute a service before it is even tried. Should some content or application have a hard time getting on the web as a result of AT&T’s Sponsored Data, that would be a great case to bring to court. There’s no harm in trying out the service first, and then see what happens. From his comments at the Consumer Electronics Show, FCC Chairman Wheeler appears to may take the evidence-based approach when asked about whether the Sponsored Data package should be allowed. Commission Pai added, “We need to let things develop. The FCC shouldn’t a priori declare business models out of bounds.” Operators launch new products every day, and many never succeed. Just because an operator puts something in the marketplace does not mean consumers will buy it.

Why it’s hypocritical to allow paywalls but not data caps. Newspapers are allowed sponsored content, why not mobile operators?
Strand Consult’s report explains the 30 arguments for and against net neutrality including the charge that AT&T’s plan is “double-dipping” by charging both subscribers and content providers. However, this is no different from what newspapers have done for over a century, charging both readers and advertisers. Transacting with both sides of the market is a perfectly normal and rational business model in a two-sided market, of which the newspaper is the textbook example. The newspaper sits in the middle of a marketplace and offers stories to readers on the one side, and space to advertisers on the other. Some papers are funded only by advertisements; some only by subscriptions, but many newspapers have both. In fact newspapers employ a number of revenue strategies including targeting advertising, paywalls, and “sponsored content”, space on their websites where they offers links to stories from other media. The business models in the marketplace are simply a reflection of what the market will bear: supply and demand.

A paywall is essentially a data cap on news articles. Readers get access to a set number of articles, e.g. 10 stories per month, and thereafter, pay a fee to get access. Some stories, whether by editor choice or advertiser subsidy, don’t count against the paywall; that is exactly the same model as AT&T’s sponsored data in which some apps, subsidized by an app maker or advertiser, don’t count toward the data cap.

There are a lot of good reasons to have paywalls. For one, they provide a means to pay journalists to write quality stories—one can’t expect good news for nothing. Good salaries are necessary to attract skilled professionals. A paywall is also a signal from the paper to the reader that premium content has value and is worth paying for. Similarly, a companies may partner with newspapers to create exclusive content and conferences, and the paywall is borne by the advertiser.

It’s interesting that many journalists have no problems with paywalls and sponsored content on their own websites—business models which pay their salaries—but react negatively when other parties try the same thing. Apparently the “free internet” is one which does not apply to them. Indeed in a truly “free” internet would be one in which all content would be provided for free and no party, especially a news website, would be allowed to make money.

Just as newspapers have looked at both sides of the market to foot the bill for the costly news-making enterprise, and rightly so, so should internet service providers (ISPs). The worldwide expenditure on internet infrastructure was $340 billion in 2013, according to Infonetics. It’s an amount that equals the revenue of the world’s 25 largest internet companies, 15 of which are based in the USA. It’s also interesting that for the last decade nearly a quarter of this expenditure was borne by American ISPs alone. That ISPs should ask content and application providers, particularly video providers with growing bandwidth needs, to participate in the cost of the infrastructure is only reasonable.

There is nothing to fear from allowing two-sided markets to operate. They are alive and well in many industries including credit cards, operating systems, night clubs, video game consoles, dating websites, job websites, search engines, social networks, and scores of internet companies including Google, Facebook, Ebay, and LinkedIn.

One of the key issues of the net neutrality case in Court of Appeals of the DC Circuit is whether two-sided markets should be allowed. If there is any indication from the judges’ comments in the oral arguments, it is inconsistent to allow ISPs to contract with every part of the value chain—backbones, exchanges, peering points, and end users, but not with content/application providers.

If the critics should complain about anything, it should be that AT&T had to wait so long to provide a product to the American market that has been available to the rest of the world for almost a decade.

For more information about net neutrality as applied to sponsored content and related issues, request more information of Strand Consult’s report _Understanding Net Neutrality and Stakeholders’ Arguments.

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