Zero-rating and Network Favoritism: the beginning of the end of Network Neutrality

FeaturedZero-rating and Network Favoritism: the beginning of the end of Network Neutrality
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The relationship between content providers like Disney and ISPs like Verizon will change significantly in a post-Network Neutral world. But will there be more competition?

Network Neutrality and the problem of zero-rating

Anyone note the explosion of advertising for free access to content like Spotify or Netflix? This T-Mobile ad samples TV so much it could be mistaken for a Netflix promotion. But if we look past the smiling shots of our favorite TV characters high-fiving, we see the first signs of what life on the web will be like after Network Neutrality.

It is no coincidence we see these offers in the wake of weakened Network Neutrality principles. This practice, “zero-rating,” is a clear example of what NN advocates have feared. Zero rating is the practice of creating partnerships with content providers like Netflix and making access to content from certain providers cheaper. Those who control the network get to play favorites in choosing the content flowing through their “pipes.” In short, not everyone trying to reach users/customers is treated equally.

How is this anti-competitive? Imagine we want to launch a music service to compete with Spotify. We have a good tech team that worked hard developing a friendlier user interface and faster file access for the consumer. Spotify’s deal with T-Mobile means our start-up music service, regardless of our app’s superiority, will likely fail. Why? Incumbent market advantages:

  1. Access to customers. Spotify will have a guaranteed user base in T-Moblie’s subscribers. Big user bases attract revenue from venture capital and new media investors of the Silicon Valley sort.
  2. Advertiser appeal. A high number of users (high traffic) will mean increased interest from advertisers, another revenue stream.
  3. Data sales. High traffic also provides user data. User data is valuable to marketing firms and several new industries that lurk in the shadowy world of data brokers (one broker offering a “Rape Sufferers List” for targeted marketing).

All of these factors add up to tall barriers to entry for competitors. By preferring Spotify’s content over others, network owners will effectively pick and choose winners while stifling innovative startups. And what is the likelihood that T-Mobile will allow a Spotify competitor to use the T-Mobile network?

This glimpse of a post-Network Neutral internet shows how anti-competitive the legal environment can become. It is a sharp contrast with the early (network-neutral) internet that allowed a young Netflix to challenge cable providers. Even seemingly innocuous Netflix package deals could be harbingers of a significantly less competitive industry in which consumers and startups ultimately lose.

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Despite the upbeat Netflix vignettes, these growing and merging media companies are not friendly giants. Zero-rating is a first stage of dramatic changes in store for a post-NN world. Network Favoritism of this sort dampens the industry’s ability to produce innovations and removes incentives to improve customer services. Without Network Neutrality, we risk more concentration in ownership and the development of distribution-content trusts. These trusts are more likely to stifle innovation.

Internet service providers like Comcast argue they would suffer unfair market disadvantages, but Comcast’s position on NN is contorted. As T.C. Sottok noted in The Verge, Comcast’s incoherent NN policy goes something like: “We respect and abide by NN principles and that is why we want them removed.” It begs the simple question: If the company appreciates NN, why petition to change FCC rules?

Public relations speak has made Comcast’s position nonsense, but policymakers have maps for navigating these waters. Nineteenth century Americans fought the Standard Oil monopoly because trusts and monopoly violated American ideas of capitalism. Concentration led to market dysfunction and harmed the economy at large. Early in the 20th century, AT&T had bought up most of the nation’s phone networks but accepted substantial government regulation in exchange for becoming the nation’s sole telephone company. AT&T owned all the market and Americans had public interest (9-1-1, fair rates, equal access) hardwired into US telecommunications system.

Standard Oil’s J D Rockefeller was a strict, church-going man. Reporters of the era noted that he taught Bible school on Sundays, but, by Monday, he was as ruthless a business mogul as the Gilded Age could produce. Disney may have the veneer of progressive ice princesses and dancing tea sets, but the media business is, well, business.

Continue reading “Zero-rating and Network Favoritism: the beginning of the end of Network Neutrality”

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Foreign ownership of US broadcasting

Variety reports that the the Federal Communication Commission has relaxed longstanding prohibitions on foreign ownership of US broadcast stations. The move is a sign of the “global” times. It is also an opportunity for diversity, FCC officials were quick to point out. But what kind of diversity?

The restrictions had established a 25% cap on foreign ownership as a means to retain national control of telecommunications infrastructure. Advances in communication have made broadcasting less a concern for national security. The rule change points to the growth of international stakeholders and the growing pool of those with stake in US policy.

The move opens up the market for Spanish-language conglomerates to strengthen their holdings in companies like Univision, but it also changes the marketplace for the growth in foreign news broadcasting operations. Al Jazeera’s purchase of Current TV cable slot might indicate a the future of broadcast stations. The network reported $330,000 in lobbying expenses with the Senate Office of Public Records for 2013. And Al Jazeera is not alone. Foreign news broadcasters have a growing thirst for US audiences and the capital to reach them.

It is tempting to view this process as another example of ubiquitous “globalization,” but the relaxation of these caps comes at an interesting time for US national security. Even as this move frees transnational investment in communication infrastructure, the US Congress has veered in the other direction. In 2012, a House intelligence committee warned businesses to be wary of Chinese telecommunications companies Huawei and ZTE and questioned whether the firms’ equipment could spy for the Chinese Communist Party. Both tech firms have strong ties to their home government, but the House committee’s suspicion stems from the long-held belief that China tolerates patent and copyright violations. Industrial espionage is, in many cases, a national security priority.

This is an issue of shifting policy priorities. Will fear of Manchurian technology and surveillance of corporate networks displace older fears for radio? It remains to be seen. But these will be competing impulses as media and telecomm integration continues.