Zero Rating: The Power in the Middle

Abstract

Many flavors of differential data pricing are being practiced in different telecom markets. One popular version is zero-rating, where customers do not pay for consuming a certain basket of “zero-rated” content. These zero-rated services are in turn sponsored by payments to the Internet service provider (ISP) by the corresponding content providers (CPs). In this paper, we provide an analytical treatment of a zero-rating platform, highlighting the effect of zero-rating on the structure of the CP market and also on the surplus of ISPs, CPs, and users. A leader–follower game is assumed with the ISP setting the prices for users (for non-sponsored data) and CPs (for sponsored data), CPs making a binary decision on sponsorship and users consuming content based on the resulting data charges. User consumption is determined by a utility maximization, the sponsorship decision is determined by a Nash equilibrium between the CPs, and the ISP sets prices to maximize its profit. Several scenarios mimicking real-life practices are analyzed. Our results indicate that zero-rating grants the ISP significant power to determine the mix of content consumption and the profitability of the CPs. Furthermore, the ISP can also take away a significant portion of the surplus in the system.