The Economics of Zero Rating

02 March 2015
By Dr. Jeffrey A. Eisenach

Zero Rating plans enable mobile wireless customers to download and upload online content without incurring data usage charges or having their usage counted against data usage limits. Zero Rating has become increasingly popular in both developed and developing countries, but plays a particularly important role in developing countries, where the costs of mobile data services are higher relative to per capita incomes.

The obvious benefits of Zero Rating include lower prices for consumers, especially those who might otherwise have difficulty affording mobile data plans, and expanding Internet adoption, which has been demonstrated to generate substantial economic and social benefits. However, some have expressed concerns about whether such plans violate net neutrality principles by discriminating in favor of some content over other content. Critics of Zero Rating worry that it could harm competition in markets related to Internet access and/or online content, or interfere with consumers' unfettered access to online information (i.e., diversity of expression).

This study, by Dr. Jeffrey A. Eisenach, Senior Vice President and Co-Chair of NERA's Communications, Media, and Internet Practice, presents an assessment of the benefits and costs of Zero Rating. The study begins by describing the state of play with respect to both the types of Zero Rating plans currently in the marketplace and efforts by regulators in some countries to limit or prohibit their availability. Dr. Eisenach then presents a brief explanation of the economic characteristics (i.e., dynamism, modularity, and demand-side effects) that distinguish information technology markets from markets for other types of goods, and which affect both market performance and the nature of the competitive process. Based on this framework, Dr. Eisenach outlines the primary issues involved in assessing the impact of Zero Rating plans on economic efficiency, competition, and overall economic welfare. He then presents an assessment of the two primary criticisms of Zero Rating, namely the asserted potential for anticompetitive market foreclosure and concerns about diversity of expression.

Dr. Eisenach concludes that Zero Rating programs in general represent an economically efficient mechanism for increasing consumer welfare given the unique characteristics of information technology markets, which make it beneficial to offer lower prices and other incentives to expand the size of the market, especially in developing countries where incomes, and market penetration, are low. He argues that, with respect to diversity of expression and related concerns, it is difficult to construct a scenario under which increasing access to online information and adoption of digital communications services would be harmful to online speech. While regulatory authorities should remain vigilant in monitoring business practices, broad-based bans or restrictions on Zero Rating plans are far more likely to harm consumer welfare than improve it.