'Free Streaming' Offers From Internet Providers Ultimately Cause Price Hikes, Research Suggests

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They say nothing in life is free. Maybe that isn’t always the case, but when it’s your internet provider offering you a freebie, it’s best to assume there’s always going to be some hidden cost.

So-called zero-rating schemes have been long been a contentious point in the net neutrality debate. This is largely because, to the uninitiated, these deals appear to be purely beneficial to internet subscribers. Your internet provider says it won’t count the usage of some of your favorite apps and services against your monthly data limit. Great! Except, a recent analysis by an Austria-based digital-rights organization into the real-world consequences of zero-rating illustrates that its adverse effects may actually increase the overall cost of internet access for some consumers.

Zero-rating, which was essentially banned in the United States between 2015 and 2017 amid the Federal Communications Commissions’ short-lived adoption of net-neutrality regulations, is the commercial practice whereby an internet service provider such as AT&T offers preferential treatment to a specific app or service by not counting it toward the general data-volume limits imposed on its subscribers.


Hypothetically, Verizon may offer a mobile data plan that includes 1-terabyte (TB) monthly cap, but which excludes from that cap video streamed from, for example, Netflix. Such a promotion would ostensibly incentive Verizon’s subscribers to adopt Netflix as their preferred source of entertainment, while also possible motivating heavy Netflix users to become new Verizon customers.

At first blush, this so-called zero-rating deal would seem largely benign, if not generous. It has almost a philanthropic feel to it when it comes to customers facing economic hardship. After all, it’s free data! Unfortunately, what underlies these offers is often a lot of self-dealing that’s purposefully geared toward harming competition, and that ultimately detrimental for consumers.


In the case AT&T, for example, the company has offered plans that allow its customers to stream DirectTV without it counting toward their data cap. But AT&T owns DirectTV and, intentional or not, its zero-rating policy is bound to drive consumers to adopt the service. Conversely, subscribers of DirectTV’s competitors may face hefty per-gigabyte “overage” charges for streaming past their limit. This would be less of an issue, of course, if consumers were able to choose from a plethora of internet providers offering a variety of similar promotions; however, tens of millions of Americans live in areas where they only have one ISP to choose from. (Not everyone has noticed.)


The result of two or more companies having access to the same pool of consumers, while offering services that share similar usefulness or purpose, competition has a long-understood effect of increasing quality and lowering price. Monopolies, therefore, often push profit-driven corporations to ignore quality while jacking up prices. In the U.S., the regulations intended to encourage competition among ISPs—or otherwise limit the adverse effects of the de facto ISP monopolies scattershot across the country—were rolled back by the FCC in December 2017. (The FCC decision is currently under review by the D.C. Circuit court.)

The study of zero-rating’s effects in Europe, published by digital-rights group epicenter.works, details examples of the potential harms to both consumers and businesses, as analyzed by researchers in the European Economic Area (EEA). One of the chief illustrated consequences is that zero-rating schemes appear to warp the normal competitive tendencies of ISPs that typically benefit the consumer.


For example, in its examination of these differential pricing practices, the group found that, between 2016 and 2017, the price of internet service increased by 1 percent in markets where zero-rating offers existed, whereas the price decreased by 10 percent in markets without them. These figures also appear to closely mirror those of previous analysis into zero-rating effects between 2015 and 2016, which had been previously determined to be less statistically significant.

“[W]here we found statistically significant results, these confirmed the initial hypothesis,” the researchers wrote, “the existence or introduction of zero-rating offers is associated with markets which exhibit price developments that are adverse to consumers.”


Why? There’s a common-sense hypothesis and it’s not very complicated. Zero-rating schemes “distort” the normal effects of ISP competition, which is typically focused on two factors: data volume and speed. Instead, the number of apps and services offered under zero-rating plans becomes a significant factor influencing the price of broadband and mobile plans. The ability of a handful of large ISPs to offer these plans while their competitors could not negatively affected the market, at least for the end user.

For example, the researchers write: “Incumbent operators like Deutsche Telekom in Germany or Vodafone in the UK can attract more applications than smaller operators. Thereby, they create a ‘unique selling proposition’ to attract consumers and no longer need to compete on the dimension of data volumes...” To put it another way, while smaller ISPs could compete in terms of internet speed and how much data users could access per month, they could not compete when their larger competitors entered into exclusive partnerships with top content and application providers.


The report, which epicenter.works says it believes is the first of its kind to examine the correlation between “differential pricing practices” and the price of mobile data volume, also details some of the burdens placed on companies seeking to enter into zero-rating arrangements. These hurdles impact companies both large and small, but they would almost always exclude companies that lack the flexibility to drastically reorganize their subscription models.

“This can be demonstrated,” the report continues, “by the months-long efforts of the music streaming operator Spotify to separate the content distribution to their free and premium customers, in order to enter into the zero-rating programme ‘StreamOn’ of Deutsche Telekom while preserving their business model.” In other words, even the world’s largest music streaming service (in terms of global users) faced insurmountable hurdles while attempting to modify its own technology to meet the demands of Deutsche Telekom’s zero-rating offer.


Further, the researchers found that participation in a zero-rating plan would require companies like Spotify to take specific steps to aid the ISPs in differentiating between Spotify traffic and all other traffic attributed to the user. If they failed to do so properly, according to the researchers’ review of several contractual conditions, content providers would be held liable for “wrongfully billed data.”

Other contractual provisions involve requiring content providers to “give a one month or 30 day) notice about changes” to their platforms which “might affect the identification of the associated data,” and providing ISPs “access to unreleased beta versions of the application in order to enable them to test the identification of the service under laboratory conditions.”


On a less technical note, differentiating user traffic by application or service carries with it privacy implications that are not wholly insignificant. “To our knowledge the privacy policies of most operators do not properly inform about the privacy impacts from entering into such differential pricing programs,” the report states. “Even if one takes the view that informed consent of customers can solve this issue, it is insufficient to remedy the processing of information from non-consenting third parties communicating with users of such offers.”

You can read a complete copy of the epicenter.works’s report here.