Less Than Zero? The Economic Impact of Zero Rating on Content Competition

Abstract

One emerging business model for Internet service providers (ISPs) is to allow content providers (CPs) to subsidize Internet access for end consumers. In the present study, we develop a game-theoretical model to analyze the effects of this sponsorship of consumer data usage. The findings indicate that for an ISP, its optimal network management choice of data sponsorship largely hinges on specific market conditions such as the revenue rates of CPs and the fit cost for consumers. If the fit cost is low, the ISP will either allow both CPs to subsidize consumers’ Internet access, or allow only the more competitive CP to subsidize, depending on the CPs’ per-consumer revenue generation rates. If the fit cost is high, it is in the ISP’s interest not to allow any subsidization. The study also identifies the conditions under which an ISP’s network management choices of data sponsorship deviate from the social optimum. By identifying additional revenue models, these findings have direct implications for the telecom industry, for online content providers competing for customer loyalty, and for policymakers vested in this issue.