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Zero Rating: Slows down innovation, distorts competition & fractures the Internet

vishal misra

By Vishal Misra (@Vishalmisra)

The false equivalence of Zero Rating with Toll Free lines

The debate over Net Neutrality and Zero Rating rages on, and one common analogy that is brought forward by pro Zero Rating advocates is that “it is just like a Toll Free line”. I request you to stop making that analogy. I have already made the case earlier that Toll free lines are used as a support mechanism and entire businesses don’t run on it, and Amod Malviya has written an excellent piece as well pointing out the different nature of Telephony and Internet businesses. He also writes about the potential of abuse and conflict of interest by ISPs if they start offering services that compete with those offered by content providers.  However, even if we assume that by regulation we make sure that ISPs remain “dumb pipes” and are not allowed to offer competing “OTT services” (e.g. Airtel Wynk or Reliance Jio Messaging), the concept of Zero Rating remains a problem and it has to do with the notion of “termination charges”. This is more subtle and nuanced and has much to do with how the Internet has evolved differently from the Telephony world and is especially relevant in a world where telcos (phone operators) have become ISPs. Let me elaborate:

Toll Free in the telephony world: Termination Charges

The telephony world has had this notion of a “termination charge”. The International Telecommunications Union, a regulatory division of the United Nations defined the rules by which telephone systems connected internationally. Not too long ago, when I called India, my local telephone company paid the telephone company in India to deliver the call and this is called a “termination charge”, regulated by ITU. This termination charge was actually the bulk of the price of overseas calls, and there were no real costs involved for the telephone companies. Domestically, calls between mobile operators work pretty much the same way. So when I setup a “Toll Free line” with my provider Airtel, it remains Toll Free for Vodafone customers as well, the termination charges are handled in the background by Airtel and Vodafone and are transparent to the customer. Domestically in India, TRAI has helped matters a lot by regulating the termination charges and so the cost of domestic calls in India have gone down significantly.

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Zero Rating on the Internet

The advent of Skype, FaceTime etc. have meant that I rarely use the telephone line to call India and the “termination charge” revenue stream has dried up for local operators in India. The Internet has never had this notion of a “termination charge” and this has been a big part of its success and growth. As soon as Skype came out, people all over the world could start to communicate with each other and they did not have to wait for termination charge agreements to be hashed out. While this revenue stream is drying up, data usage and revenues for telcos have continued to grow significantly as Deepak Shenoy has shown in detail.

However, the telcos want to have their cake and eat it too and they are promoting this scheme of Zero Rating where the idea is when a content provider has to send packets to you, the telcos set the rate and charge the content providers directly. This rate is unregulated and fills the coffers of the telcos. Unlike the Toll Free phone line example, now content providers have to sign Zero Rating deals with all telcos, as there is no regulated, background termination charge arrangement amongst the telcos. A Zero Rated service on Reliance is not Zero Rated on Airtel and vice versa. It is no longer the case that as a content provider you sign up for one Toll Free line with one provider and then the “free” part of it extends to the customers of all other providers. This is additional work for the content providers (or “OTT services”) in an unregulated, opaque market. Additionally, when you have to compete globally you will need to go around signing Zero Rating deals with telcos around the world if it became prevalent. Customers everywhere will naturally prefer a free (of bandwidth charge) service to a new one where you have to pay for bandwidth and every content provider will have to sign Zero Rating deals just to maintain viability. Zero Rating will create a fracturing of the Internet into a “free bandwidth” portion and a “non-free bandwidth” portion and it creates an artificial regulatory hurdle for Internet businesses to enter new markets. Stopping Zero Rating on the other hand, levels the playing field again where Airtel’s Wynk competes on quality with Saavn or Gaana.

I am paying for data per byte, isn’t that implicitly “Termination Charges”?

Yes, it is. So why is Zero Rating being pursued? The answer is not difficult to arrive at. Under the Zero Rating scheme, the termination charge is paid by the Internet businesses. Established players already know that they will get a return on investment on what they pay for the bandwidth. At the other end, for consumers it is not as easy to quantify the benefits or assess the value of paying for the bandwidth. Google and Facebook know exactly the revenue they are getting per byte, so the willingness for them to pay for the bandwidth is much higher than that of a customer trying out a new service. Even a startup that is trying to acquire customers will spend for bandwidth, but this is an encumbrance forced upon them that they can do without. The net effect is that the content provider paying termination charges is a much surer bet for telcos than getting the consumers to pay for bandwidth. Moreover, it is easy to show mathematically that under reasonable assumptions that the bandwidth usage will strictly increase with Zero Rating. So it translates to higher and more stable revenues for the telcos. The fact that it is unregulated and opaque makes it even more attractive. Saying that the platform is non-discriminatory and open to everyone including startups is just paying lip service to the concept of Net Neutrality. I daresay the PowerPoint presentations that executives at the telcos prepared internally pitching the concept of Zero Rated services to management were a lot more honest about the intent!

Please stop Zero Rating and do not equate it to Toll Free lines.

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Zero Rating is not the same as a Toll Free line, it is a clever and benign name given to unregulated termination charge extraction. Just as the facade of Internet.org hides Facebook.com.

Internet has thrived because the speed of innovation on it has been breathtaking. Zero Rating is a bad idea that will slow down that pace, distort the competitive landscape and can fracture the Internet if nations start practicing tit-for-tat termination charge arrangements.

Please stop Zero Rating in its tracks. The short sightedness of Zero Rated plans will kill the goose that is laying golden eggs for the telcos via dramatic increases in data revenue. Let a thousand flowers bloom, let the next Facebooks and Googles emerge.


About the author: Vishal Misra is a faculty in the Computer Science Department of Columbia University where he has been looking at the issue of Internet Economics and Net Neutrality for a number of years. He is also a serial entrepreneur, being part of the founding team of Cricinfo and is now the founder and chief scientist of the data center storage startup Infinio.

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