Dominant web services will often incentivize mobile phone carriers to provide their customers access to their services at zero cost to the customer’s data plan, also known as zero-rating. In new research, Bruno Renzetti argues that this behavior can be a form of exclusionary conduct designed to solidify the monopolies of dominant online platforms and services that ultimately harms consumers even if it appears to lower their data costs at first glance.
Zero-rated web services are those that end users can access without having data withdrawn from their mobile plan allowances or data caps imposed by their telecom carriers. Telecom carriers know that consumers spend more data surfing specific web services than others, such as Facebook or TikTok. To attract more consumers, the carriers will offer such services at no data charge to the consumers’ plans. This is particularly important—and attractive—to consumers who have a limited data plan. According to the Federal Communications Commission, “[a] zero-rated edge service therefore becomes more attractive to the consumer as compared to a non-zero-rated service, other factors held constant, because it costs less.”
Under a zero-rated contract between web services and broadband carriers, the carrier gets to offer their customers “free” access to the web service. The consumer does not spend any of their data while surfing the web service benefited from the contract. At a first glance, the zero-rating scheme may seem to only increase consumer welfare, because the consumer is receiving a “free” service. However, a closer investigation into the economics of zero-rating proves the contrary.
The total real cost of providing telecommunications services, holding usage constant, is of course no different under zero-rating. Therefore, if telecom carriers are competing on price and driving those prices down to costs, the total cost per user under a zero-rating agreement will not change (again, holding usage constant). Even while using zero-rated web services, users are still consuming data—and the cost of that data must be borne by someone. The costs for building infrastructure to deliver that same amount of data does not differ when the financial contract with the consumer changes. Without any changes, zero-rating is just a change from a small fixed fee and marginal price to a larger fixed fee and a zero marginal price. Why then are zero-rating contracts attractive to carriers, consumers, and digital platforms?
Both the user and the carrier are attracted to zero-rating because the digital business or platform provides a subsidy. The carrier is compensated directly by the web service out of its profits. The costs and benefits show up in the user’s phone bill as a lower monetary charge, but secondly through higher prices or lower quality for the web service. Why would the monopolist have to compensate the carrier? Because zero-rating raises the costs of the web service’s rivals, and the carrier is serving as an instrument to exclude competitors of the monopolist. This benefits the web service, and thus the carrier will be able to bargain for a share of the resulting monopoly profits. Likewise, some of those profits flow to the consumer in the form of lower cost data, so the consumer benefits in the telecom market. But the consumer may be harmed in the market now monopolized by the web service. This will manifest itself in lack of innovation and quality that would otherwise be present in a competitive market. Due to zero-rating contracts, the higher cost of the monopolized service is spread across all users of the service, including those that do not “benefit” from a zero-rating agreement between their carriers and the web service.
Moreover, it can be said that those consumers who “benefit” from zero-rating agreements still pay for the service, but not necessarily in a monetary way: users are faced with lower quality, less innovation, or can even pay in labor by watching ads shown by the zero-rated web service.
Under this scheme, the contract is profitable for the carrier and for the monopolist web service. The carrier gets compensated by the monopolist, and the monopolist gets help from the carrier in excluding rivals and raising their costs. Later, after the web service is dominant, it may not pay as large an amount to the carriers under the contract; yet the arrangement may still be appealing to the carrier because now the web service is an entrenched monopolist and attracts users to the carrier.
Note that this scheme can also help the carrier to exclude rivals. If the zero-rating contract is exclusive to a carrier and the web service has market power or is popular, then the contract will drive users to the carrier with the dominant platforms signed up with zero-rating. Rival carriers are effectively more expensive because accessing the platform through them does not come with a subsidy and will find it difficult to compete. Both the carrier and web service are in a position to gain, while the consumer is in a position to lose from the agreement between them.
From an antitrust perspective, zero-rating can be considered exclusionary conduct because it has the potential to foreclose the market for competitors by raising rivals’ cost (RRC). Contrary to the paradigm of predatory pricing, “RCC produces profits to the strategizer immediately, and nothing so catastrophic as a firm’s forced exit from the market need to happen.” RRC is an umbrella term that provides a framework of analysis for several kinds of anticompetitive conduct, including tying arrangements, concerted refusals to deal, exclusive dealing and discriminatory pricing. The basic claim under the RRC framework of analysis is that a monopolist or dominant firm engaged in action that deprived competitors from accessing critical inputs or customers, “causing them to raise their prices or reduce their output, thereby allowing the excluding firm to profit by setting a supracompetitive price, with the effect of harming consumers.”
Monopolist providers of web services have the incentive to raise rivals’ costs. A dominant social media company or streaming service would rationally want to keep as much of the market as possible. Zero-rating is an appealing strategy to achieve such a goal. A web service that is zero-rated by carriers will give that service a significant competitive advantage over services that are not part of zero-rated contracts. For example, zero-rated web services are usually the “default” services offered by carriers and may come pre-loaded in mobile phones. The user does not have to incur the costs of downloading an app to their new phone. As behavioral economics show, consumers are intensively drawn towards default options and are not prone to switch services once they incur sunk costs. Most importantly, any rival web service comes with a marginal cost of consumption for the carrier’s consumers while the zero-rated service is “free.” Additionally, risk-averse consumers may prefer the certainty of “unlimited” access to a given web service.
In the context of zero-rating agreements, the analysis is harder to follow because customers will likely initially experience lower prices from the incumbent wireless carrier while the harm appears in a different market, the web service. Therefore, antitrust enforcement against zero-rating should not be hidden behind the argument that zero-rating provides consumers with lower prices. A closer look at the dynamics of the market is sufficient to demonstrate that such argumentation is flawed, and consumers are paying higher costs as a result. The lack of competition in the markets for specific applications—such as social media—makes zero-rating pricing practices more appealing to dominant firms seeking to entrench their positions and foreclose the market for new rivals.
Zero-rating is an effective tool for dominant platforms to impose anticompetitive effects in the market, hurting competition and reducing users’ choices. Zero-rating contributes to the concentration of data, reducing competition and reinforcing dominant market positions. Banning zero-rating would promote a more competitive environment and would also have ancillary and non-economic benefits, such as reducing misinformation spread on a single social media platform.
A level playing field is essential to promote a competitive environment. Right now, there is no level playing field in social media. The field has been tilted towards dominant web services, and zero-rating contributes to this problem. Eliminating zero-rating or considering such a policy should be on the agenda of antitrust enforcers to promote a more competitive environment for firms in the market and provide a more inviting setting for new entrants.
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