Zero-Rating and Net Neutrality in the Mobile Market: The Case of Japan

Abstract

Net neutrality has two aspects: how to efficiently allocate scarce network resources to each application, and how to discipline the dominant market power of Broadband Internet Access Service (BIAS) operators. These aspects are interrelated rather than independent. If the market is competitive enough, as the Japanese fixed broadband market is and as the FCC is attempting to ensure, market dynamism ensures efficient allocation of resources. However, direct intervention is required if the broadband market is not competitive. The Title II order implicitly assumed that the BIAS market is not competitive. One of the recently debated topics is “zero-rating,” which allows subscribers to access certain content or applications without having that traffic count against their data cap. By offering zero-rating, BIAS providers can prioritize certain content/applications, and thus distort content and application (CAP) competition. This distortion may hurt the business prospects of CAP startups, and benefit giant CAPs with financial strength. However, zero-rating can change the competitive framework in the BIAS market by widening the dimensions along which firms can compete, and can thus ultimately help small players take over part of the market share of incumbents. While the former impact of zero-rating gives additional reasons for governmental intervention from the viewpoint of net neutrality, the latter, if fully realized, calls for the adoption of a market-based, or light-touch approach. To the best of the author’s knowledge, most studies have hitherto focused on the former and ignored the latter. In order to analyze the latter impact of zero-rating, the author conducted two web-based questionnaire surveys, in May, 2016 and in January, 2018, and analyzed mobile broadband usage in Japan, in cases where mobile virtual network operators have not been able to compete well with incumbent mobile network operators. This paper focuses on how Internet users perceive “net neutrality,” how consumers design their mobile broadband usage, how users behave when they hit data caps, and so on. In addition, the author used random utility theory to empirically estimate the competitive impact of the introduction of zero-rating in the mobile broadband market. The preliminary outcome suggests that consumers may treat zero-rating as a substitute for an increased monthly cap, and not perceive any benefit in quality-degraded video services even if traffic is not counted against their monthly cap. Interestingly, Japanese consumers value zero-rated music more than zero-rated “not-degraded” videos, perhaps due to their commuting style and the popularity of free TV programs. It is also clear that zero-rating does significantly attract consumers, especially video/music lovers, but, on its own, is not strong enough to threaten the dominance of incumbent players. These findings will have direct impacts on mobile operators’ service configurations, and will help policymakers design a policy package to boost competitiveness in the mobile broadband market, which is crucial to maintain light-touch regulations for net neutrality. Although these findings are derived from the Japanese market, the author believes that stakeholders in other countries can also use this paper’s methodology to analyze the impacts of offering zero-rating and/or increasing data caps.