Forget fast lanes. The real threat for net-neutrality is zero-rated content

The net-neutrality provisions adopted by the European Parliament earlier this month ruled that specialized services like “fast lanes” can’t be used by telcos to the detriment of the availability or quality of internet access services. On the other side of the Atlantic, Americans are less fortunate. The FCC said this week that it would propose new rules that allow companies like Disney, Google or Netflix to pay internet service providers like Comcast(s CMCSK) and Verizon(s VZ) for special, faster lanes to send video and other content to their customers.
This is the price the U.S. pays for delegating such crucial policy decisions to an unelected ex-lobbyist rather than delegating to Congress. Meanwhile, the open internet isn’t safe yet in Europe: The Council hasn’t spoken and the devil is in the details.

What zero-rating is and why it matters

According to Digital Fuel Monitor data, eight incumbent telcos are sabotaging net neutrality with an orchestrated launch of “zero-rated” apps over their mobile networks in nine European Union markets. This means they’re favoring their own or their over-the-top partners’ apps by “zero-rating” the data volume — not counting it against the end user’s data volume allowance.
In the U.S., AT&T has flirted with zero-rating with its “Sponsored Data,” which lets developers and brands pay to deliver content to consumer smartphones outside their data caps. Earlier this week, AT&T announced a $500 million investment to create a video streaming service similar to Netflix(s NFLX). Will AT&T(s T) zero-rate its video streaming app or let it compete on equal terms with Netflix and the rest?
Zero-rated mobile traffic is blunt anti-competitive price discrimination designed to favor telcos’ own or their partners’ apps while placing competing apps at a disadvantage. A zero-rated app is an offer consumers can’t refuse. If consumers choose a third-party app like Dropbox or Netflix, they will either need to use it only over Wi-Fi use or pay telcos hundreds of dollars to use data over 4G networks on their smartphones or tablets.

Photo by Bruce Rolff/Shutterstock

Photo by Bruce Rolff/Shutterstock

A problem worsened by volume caps

Zero-rating isn’t new. Telcos have been zero-rating their fixed broadband IPTV offerings from day one. The difference is that the overwhelming majority of fixed broadband connections were, and still are, volume uncapped. Deutsche Telekom in Germany tried to cap the volume of fixed broadband while exempting its IPTV app, but the German courts screamed foul.
Mobile internet connectivity is different from fixed. Firstly, it requires the use of spectrum, which is a scarce public resource. It is one thing if telcos zero-rate their IPTV app over their cables, but quite another when they use a licensed, scarce public resource to foreclose the communication, media and cloud storage markets.
Secondly, contrary to fixed-lines, internet over smartphones and tablets comes with very restrictive volume caps in most markets. Moreover, in protected markets like the U.S. and Germany where incumbent telcos face no challengers, the gigabyte price of open internet access is prohibitively expensive. DFMonitor tracking data shows that U.S. and German consumers pay 25 times more per smartphone GB than Finnish consumers. In Finland and the U.K., you can buy smartphone plans that come with truly unlimited data (no tethering or any other application restrictions) for €20. In markets like the U.S. and Germany, where open mobile internet gigabytes are excessively overpriced by all telcos, zero-rating bandwidth intensive apps like video streaming is a game changer. Can consumers watch HD movies on a 2GB monthly data allowance?
Zero-rated mobile traffic doesn’t need to be delivered at higher speeds and with a higher quality of service, nor does it need to be prioritized. The European Parliament must, on its second reading, adopt provisions that explicitly prohibit the practice. The U.S. should not go down the slippery road and allow the creation of a two-tier internet. Like the EU, it should ensure that fast lanes are not used to the detriment of open internet access, and should ban zero-rating.
Antonios Drossos is a managing partner at Rewheel, a Helsinki-based boutique management consultancy specializing in pro-competitive telecom strategies. At Digital Fuel Monitor, Rewheel tracks prices, quality, adoption and consumption of open mobile internet connectivity in EU and OECD countries.