Several broadband Internet access service providers in the United States have introduced programs under which specific network traffic is excluded from end users’ data caps or otherwise treated differently from other traffic under a usage-based pricing policy. Such practices are often referred to as “zero-rating”. Such practices are sometimes accompanied by network practices that throttle, or exempt from throttling, the zero-rated network traffic.
Zero-rating practices and associated throttling practices have been an issue of intense public policy debate. In the United States, the practices of broadband Internet access service providers are regulated under the 2015 Open Internet Order. The FCC recognized that zero-rating practices may benefit consumers by increasing consumer choice, lowering costs, and increasing investment; and may benefit edge providers by allowing for increased differentiation. However, the FCC also recognized that zero-rating practices may harm consumers by monetizing scarcity and reducing consumer choice; and may harm edge providers by distorting competition and hampering innovation. The academic literature has provided similar arguments for and against zero-rating practices, but has yet to provide clear guidance on how such practices should be evaluated under the Order.
This paper begins with an overview of the academic literature and the arguments for and against zero-rating practices. We consider discrimination, end-user control, and broadband provider competition; edge provider competition; congestion, network capacity, and broadband provider investment; edge provider innovation; and consumer surplus.
The paper then presents an analysis of the application of the Order’s general conduct rule to zero-rating practices. We analyze the factors the FCC will use in assessing whether a network practice satisfies the general conduct rule:
We identify elements of a zero-rating practice that would positively or negatively impact each factor. We draw upon both the engineering and economics academic literature to estimate the potential impact on network congestion, network capacity, network management, price discrimination, competition, and application development. We thereby illustrate the spectrum of potential benefits and harms. We show how some forms of zero-rating practices unreasonably interfere with or disadvantage end-users or edge providers, and thus violate the general conduct rule, and how improvements to these zero-rating practices could result in a net benefit to end-users and edge providers.
We then propose a classification of zero-rating practices based on: (1) whether the practice is application-agnostic, (2) who chooses the traffic to which the zero-rated practice is applied, (3) whether specific edge providers are zero-rated, and (4) whether affiliated edge providers are zero-rated. For each class of zero-rating practices, we evaluate the potential benefits and harms under each of the four factors identified above. When some factors indicate potential benefits and other factors indicate potential harms, we analyze the aggregate impact. Based on the combination of these four factors, we identify the critical elements that are likely to determine whether a specific zero-rating practice violates the general conduct rule.