Research Notes

The EU blessed zero rating in energy markets to address climate change. Why does BEREC oppose it in internet markets to create competition?

Addressing climate change through diversification in energy sources is an EU priority. The strategy supports diversification in energy sources away from incumbent providers of oil, gas, and coal to alternatives such as solar, wind, hydropower, geothermal, biofuels etc. This strategy has also included massive subsidies to alternative fuel development.

On top of that, price discrimination is practiced–indeed encouraged–as a means to make alternative energy more attractive and encourage adoption. Pricing can vary by energy source, time of day, congestion, personal consumption, and other factors. Consumers can even choose the mix of energy sources for which they pay. Moreover, when the wind blows, power from mills is frequently zero rated to end users, meaning they get it for free. It’s strange then why the Body of European Regulators for Electronic Communications (BEREC) would deter the very same dynamics to foster competition and innovation in internet markets.

The report Understanding Net Neutrality and Stakeholders’ Arguments explores these inconsistencies and why mobile telecom markets are subject to “open internet” rules not supported by real world evidence.

When competing against incumbents, alternative energy providers need to develop a service infrastructure, earn a customer base, and teach consumers how to use the new service (e.g. electric cars require plug-ins for recharging). By zero rating the power, the alternative energy supplier reduces one of the many barriers to users adopting the service, that is, reducing the price to try an alternative service. But even with price reductions, users don’t necessary switch. Many maintain their current energy suppliers because of habits, switching costs, and so on.

The energy industry today has highly advanced and flexible models for pricing, owing to years of competition and innovation. The inspiration of this liberalization is in fact the telecom industry. Privatizing the state-owned telephone companies and creating service-based competition on telecom infrastructure was the model used to deregulate the energy industry. The notion is that pipe or wire to the home can be the basis of reselling to multiple providers.

It is ironic however that one of the world’s most competitive industries is now under siege by regulators and activists wanting to impose price controls by banning zero rating or free data. Rather than unleashing the power of markets to allow providers and consumers to decide how to value and price internet access and services, regulators are imposing one-size-fits-all models on operators that commoditize their service, allowing only speed and volume as pricing parameters. Consumers are thus denied the oppor

Any competitive internet service, provider, or application has the same barriers to entry as an alternative energy supplier. They too must build a service infrastructure, grow a user base, and educate the user on how to use the product. If there is a fee on top, this is yet another barrier to adoption. Reducing access fees is one incentive to get people to switch. It doesn’t always work, but it can help at the margin to create opportunities for entrants.

In practice Internet companies are built on zero rating. Google zero rates its search to end users by having advertisers pay for the cost. Similarly if offers its operating system to device manufacturers as a means to create an install base for its apps. Similarly internet companies use freemiums to price discriminate across users. A basic level of service is offered to all for free, but this is subsidized by a small set of users who pay a premium to get special features and enhanced functionality. Spotify, Dropbox, and LinkedIn are leading examples of freemium companies.

The radio, TV and print industries have used zero rating as a means to lower costs to end users. Advertisers pay for the cost of content delivery so end users don’t have to. But in today’s model for mobile access in which ads can comprise 20 percent of data (even up to 40 of video data), end users are subsidizing ad delivery. This is not how its supposed to work. Instead advertisers should reimburse users for advertising. That is just one benefit which zero rating offers.

Similarly radio, TV and print companies have underwritten the cost of content as a means of public service, for example for elections, announcements, education and so on. There is a tremendous opportunity to stimulate egovernment by zero rating public sector websites. When major EU nations such as Germany and Italy lag on egovernment measures according to the EU’s Digital Agenda Scoreboard, zero rating offers a win-win to lower data costs for consumers and stimulate adoption of egovernment services.

But this innovation and competition will not be allowed by BEREC, at least in their current guidelines, which come into effect on August 30. Flexible pricing is part and parcel of the success of the alternative energy industry and internet companies. It is not logical why such dynamics should be encourged in one part of the digital ecosystem (platform services) but banned in another (internet access).

There is no doubt that many are dissatisfied with internet access, particularly the price. But BEREC is limiting the very competition and consumer choice that could remedy the situation. Operators themselves are willing to offer data for free, and companies are willing to sponsor it so end users don’t have to pay. This is frequently a cheaper, more effective way to get to the audience than buying a Google ad.

There are many benefits to using Google to be sure, but many consumers would like alternatives. With some 200 apps, Google enjoys monopoly on many markets in the EU, including search, maps, online advertising, operating systems, and so on. Any time that users don’t spend on a Google app, Google loses out on valuable behavioral data, as well as the opportunity to show an ad. It’s understandable why the company and the activists it funds Save the Internet, Access Now, and EDRi want to kill competitive programs such as zero rating in the cradle.

To ensure this, activists have put tremendous pressure on BEREC, making it known that if regulators don’t give in, they will overwhelm the agency with computer-generated emails and humiliate its leaders in the media. BEREC, having seen what this mob can do in the US and India, has decided to surrender from the beginning. As such, they invited Google’s key activists to inform their guidelines. It’s not a surprise to see that the resulting guidelines contains the language and provisions that Google and its activists want. BEREC has introduced terms and definitions that are not in the EU laws themselves.

Operators have played by the rules in this proceeding, and they have lost. They have tried to be nice and tip-toe around the regulators. The sad fact of rulemaking today is that the regulators’ fear of humiliation by activists is greater than their call of duty to be expert and independent.

EU governments embrace price flexibility and zero rating as means to create competition in the energy industry and address climate change. The same should be allowed in telecommunication. That BEREC wants to outlaw the very dynamics that create competition and innovation show that they are not interested in the liberalization that can bring a freer, competitive market the EU. That would just give them less to regulate, and then they would be out of a job.

To learn more about the status of net neutrality rules around the world and why activists succeed to make rules which hurt consumers and innovation, see Strand Consult’s report Understanding Net Neutrality and Stakeholders’ Arguments.

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