Why 'zero rating' is the new battleground in net neutrality debate

The term "zero rating" may conjure thoughts of a movie or album review – a score a critic might assign to a terrible effort.

But it's also an internet pricing strategy and the latest battleground in the net neutrality debate.

• Net neutrality passes in landmark FCC decision
• CRTC backs net neutrality in ruling against apps that favour certain content

Zero rating enables internet service providers to give customers a reprieve on broadband or mobile data caps for certain internet uses. While most online activity, such as web browsing, counts against your cap, a service provider might decide to exempt a specific video streaming or messaging app from your monthly limits.

In one way, zero rating is indeed like a bad movie: it's getting poor reviews.

"It's an attempt to perpetuate the cable TV model in the open internet context," says Susan Crawford, a visiting professor at Harvard Law School and a former telecommunications advisor to U.S. President Barack Obama. "It puts the gatekeeper firmly in control of what applications reach consumers the most successfully."

Many internet providers are trying to establish zero rating as their preferred business models. There were at least 92 zero-rated services in the developed world as of November, according to Finnish consultancy Rewheel.

Of those, 36 mobile phone operators were exempting their own video services from usage caps and 10 were doing so for their cloud storage offerings. Third-party applications such as YouTube, HBO Go, Spotify and Facebook got the special treatment in just a handful of cases.

No outright bans in Canada, U.S.

Canada has been part of the trend. Bell and Videotron were both zero-rating chosen mobile video services until a decision by the Canadian Radio-television and Telecommunications Commission (CRTC) earlier this year ordered them to stop.

Videotron has discontinued the practice and Bell has until April 29 to follow suit. The company had its request for a stay of execution denied last week, but is still asking a court to overturn the ruling.

Participating companies say zero rating is beneficial for consumers because it gives them access to services they couldn't otherwise get or afford.

"Consumers will end up losing access to a service they really value, or pay more for that service," Bell's chief regulatory officer, Mirko Bibic, said in a BNN interview. "Consumers don't benefit when prices go up or when innovative services stop being offered."

Regulators in both Canada and the U.S. have stopped short of outright bans on zero-rated services, but have signaled that such practices will be closely scrutinized.

In Canada, the CRTC has essentially banned carriers from zero rating their own services, but it remains open to the practice being applied to third-party applications.

The Dutch response

The Federal Communications Commission is taking a similar approach in the U.S. with recently issued net neutrality rules.

Officials say zero rating by carriers of their own services, or of third-party applications for a fee, will likely run afoul of the rules. Zero-rating third-party services with no charges to the providers, however, may be found acceptable.

A few countries have taken a more hardline stance, with the Netherlands, Slovenia and Chile explicitly banning zero rating.

Dutch policy makers were initially considering light-touch net neutrality rules that would have allowed the practice. They changed their mind after KPN, a major wireless carrier, proposed a new plan that would have allowed subscribers to pay five to 10 euros for unlimited usage of messaging services.

Competing carriers Vodafone and T-Mobile liked the idea and quickly announced plans to copy it.

"By that time, all political parties in parliament had aligned themselves behind strong net neutrality rules," says Rudolf van der Berg, policy analyst at the Organization for Economic Co-operation and Development.

"It was clear to all parties that normal competition rules wouldn't be strong enough to counter this type of tacit cooperation between the operators."

The Dutch ban has been good news for consumers, according to Rewheel. Faced with the possibility that subscribers wouldn't be able to use its mobile video services because of restrictive caps, KPN doubled its data limits while keeping prices the same.

A Netflix betrayal?

At the other end of the spectrum, there are countries without zero-rating rules, which are forcing companies normally identified as champions of net neutrality into making compromises.

Netflix, for example, recently came under criticism for announcing zero-rating deals with ISPs in Australia. Some saw the move as a betrayal, given that Netflix has lobbied fiercely for strong net neutrality rules in the United States.

The company admits to having to fight fire with fire, given the prevalent zero rating in both mobile and wired broadband in Australia. Several competing streaming services there are exempted from usage caps.

"Zero rating isn't great for consumers, as it has the potential to distort consumer choice in favour of choices selected by an ISP," Netflix spokesman Cliff Edwards says. "We'll push back against such efforts, but we won't put our service or our members at a disadvantage."

Not all internet companies find zero rating distasteful. Facebook, for one, is leading a movement called "Internet.org," which seeks to connect mobile phone users in developing countries to its social network for free. The idea is that Facebook can act as a sort of gateway drug.

"If we can provide people with access to these services, then they'll discover other content they want and begin to use and understand the broader internet," says a Facebook white paper on the issue.

The net effect for consumers?

Some policy experts don't like the idea. While it looks altruistic on its face and provides some benefits to users, its main payoffs still go to big companies.

"It allows you onto a piece of the internet, but not onto the whole thing. People aren't technically blocked, but they're blocked by the business model. It's an economic boundary," says Catherine Middleton, Canada Research Chair in Communication Technologies in the Information Society at Ryerson University.

Ultimately, zero rating is likely to exist only where artificial internet scarcity is imposed in the form of usage caps.

Canada is one of the most restrictive countries by that measure, with some of the highest per-gigabyte mobile data costs in the developed world, according to Rewheel. A 2GB service from Bell, for example, costs $45 a month, while a comparable amount of data costs $24 in the United Kingdom or $8 in Finland.

Canada also has the fourth-highest prevalence of data caps in wired broadband among 34 developed nations, after New Zealand, Iceland and Australia, according to OECD statistics from 2012. About 90 per cent of Canadian plans had explicit caps, compared to the OECD average of 68 per cent.

A total ban on zero rating by regulators could force internet providers to raise their caps significantly, as the Dutch example illustrates, says Harvard's Crawford.

"They would be trying to offer as much capacity to users as possible. The net effect for consumers is positive where zero rating is absent."