Subsidizing Creativity Through Network Design: Zero Pricing and Net Neutrality

Abstract

Today, through historical practice, there exists a de facto ban on termination fees - also referred to as a “zero-price” rule (Hemphill, 2008) - which forbids an Internet service provider from charging an additional fee to a content provider who wishes to reach that ISP’s customers. The question is whether this zero-pricing structure should be preserved, or whether carriers should be allowed to charge termination fees and engage in other practices that have the effect of requiring payment to reach users. This paper begins with a defense of the de facto zero-price rule currently in existence. We point out that the Internet, as an intermediary between users and content providers, exhibits pricing dynamics similar to other intermediaries in “two-sided markets.” In particular, we posit that the Internet’s absence of payments from content creators to users’ ISPs facilitates the entry of content creators. In that respect, the rule provides an alternative implementation of the policy goals provided by the intellectual property system and achieves functions similar to copyright and patent law. The rule also helps avoid the problems of Internet fragmentation, in which content providers who do not reach agreements with ISPs cannot access all customers, and consumers on a single ISP are foreclosed from proccessing their content.