A fresh look at zero-rating

We provide an economic assessment of zero-rating offers in the context of mobile internet access services and draw six lessons: (1) Zero-rating can have several different characteristics that crucially affect their economic and welfare assessment. Thus, regulatory interventions must be based on a careful case-by-case analysis. (2) In the context of zero-rating offers, it is often crucial to evaluate the extent to which users are able to activate and deactivate a (throttled) zero-rated tariff option. If activation/deactivation is easy and instantaneous, a sound economic theory of harm for consumers will in many cases be hard to establish. (3) Similarly, if access to zero-rated partner programs is non-discriminatory and entails low barriers to entry, a sound theory of harm for content providers will usually not be given. (4) Zero-rating can be beneficial for consumers and (legal) content providers alike by contributing to a reduction of illegal content. Combined with throttling it can mitigate congestion problems. However, by requiring all content belonging to the same content category to be treated equally with respect to throttling, independent of whether a content provider opted for zero-rating or not, the existing regulation creates a negative externality on those content providers that do not wish to be zero-rated for some reason. (5) Particular attention should be paid to the impact of throttled zero-rating tariffs on the competition between mobile network operators (MNOs) and MVNOs. The latter may not be able to compete on equal footing with MNOs, because they benefit less from the traffic management aspects of zero-rating. (6) Competition among (infrastructure-based) ISPs provides a safeguard against severe rent extraction and, thus, an abuse of throttling and zero-rating as an exploitative device. Therefore, regulators should carefully account for the competitive environment and the existing tariff portfolio and options before deciding to intervene. Competition policy, rather than ex-ante regulation, may be more suitable for this task.     

Zero-rating arrangements of mobile Internet access service providers – An analysis of main factors shaping the need for regulatory interventions

Zero-rating is the practice of providers of radio-based Internet access for moving telecommunication devices of excluding traffic generated by specific online applications from usage counted towards capped allowances or strictly metered tariffs of their end customers. Worldwide and particularly in the European Union (EU), current regulatory frameworks for zero-rating arrangements (ZRA) imply that regulators have to examine on a case-by-case basis whether they prohibit a concrete ZRA or impose restrictions. Such conditions are set because regulators believe that a ZRA runs counter to the interests of end customers or application providers or impedes effective competition between application and Internet service providers. Thus, it is necessary to clarify which case features ought to be inspected in such zero-rating assessments and which feature levels speak against or in favor of regulatory measures linked to ZRA. The present article identifies nine design features of ZRA, three characteristics of customer groups targeted by such offers and three background characteristics of the markets for Internet access services and applications which are of special importance in decisions concerning the need to regulate (to abstain from regulating) zero-rating practices of mobile network operators. The analysis shows that in many instances interests of end customers, application providers as well as of politicians seeking to promote the competitive dynamics on mobile Internet access service and application markets are best served if regulatory authorities tolerate ZRA and control for potential harmful effects after their market launch. Moreover, the study reveals that empirical research on customer reactions to ZRA is urgently required.     

Prioritization vs zero-rating: Discrimination on the internet

This paper analyzes two business practices on the mobile internet market, paid prioritization and zero-rating. These practices allow the internet service provider to discriminate different content types. With prioritization, the ISP delivers content at different speeds; with zero-rating, the ISP charges different prices. In recent years these practices have attracted considerable media attention and regulatory interest. When the asymmetry between content providers is limited, in particular with regard to their ability to attract traffic or to monetize it, we first show that the ISP can extract more surplus from consumers by privileging the relatively weaker content and restoring symmetry between content providers. Next, we show that the ISP chooses prioritization when traffic is highly valuable for content providers and congestion is severe, and zero-rating in all other cases. Finally, we find that a policy banning prioritization can lead to zero-rating and a reduction in consumer surplus.     

Incumbency and market share within European mobile telecommunication networks

The structure of mobile telecommunication markets varies considerably across Europe, ranging from monopolies with a handful of subscribers to markets with five operators and many millions of subscribers. Where competitive markets occur, there is also an incumbent operator possessing substantial first mover advantages. This paper explores these advantages, asking whether the incumbent has remained the largest operator as the market has developed. This question is investigated using data from 49 European countries. The analysis finds that in most countries the incumbent continues to be the largest operator measured by market share. In some countries, later entrants into the market have struggled to gain market share, contributing to the highly concentrated nature of many mobile markets. The extent to which the geographical footprint of an operator influences its market share is also examined.     

Customer retention,loyalty, and satisfaction in the German mobile cellular telecommunications market

Customer retention (CR), loyalty (CL), and satisfaction (CS) are important (intermediate) goals for telecommunication network operators on their way to superior economic success in the liberalised German market. Therefore, drawing on a sample of 684 residential customers of digital cellular network operators in Germany this study tests hypotheses suggesting that CR, CL, and CS should be treated as differential constructs which are causally inter-linked. LISREL analyses support a two-staged model in which overall CS has a significant impact on CL which in turn influences a customer's intention to terminate/extend the contractual relationship with his mobile cellular network operator (=CR). Mobile service price and personal service benefit perceptions as well as (lack of) number portability between various cellular operators were identified as supply-related variables with the strongest effects on CR. Mobile network operators’ perceived customer care performance had no significant impact on CR. The findings suggest that an important lever for regulators to promote competition in cellular markets is the enforcement of efficient number portability procedures between mobile network operators.     

Net neutrality and inflation of traffic

Under strict net neutrality Internet service providers (ISPs) are required to carry data without any differentiation and at no cost to the content provider. We provide a simple framework with a monopoly ISP to evaluate the short-run effects of different net neutrality rules. Content differs in its sensitivity to delay. Content providers can use congestion control techniques to reduce delay for their content, but do not take into account the effect of their decisions on the aggregate volume of traffic. As a result, strict net neutrality often leads to socially inefficient allocation of traffic and traffic inflation. We show that piece-meal departures from net neutrality, such as transmission fees or prioritization based on sensitivity to delay, do not necessarily improve efficiency. However, the ISP implements the efficient allocation when allowed to introduce bandwidth tiering and charge for prioritized delivery.     

Link between termination rates and retail prices in Namibia,Kenya and South Africa

This paper analyses the link between mobile termination rate reductions and retail prices. It draws on in-depth case studies of South Africa, Namibia and Kenya where regulators have reduced termination rates towards the cost of an efficient operator. To varying degrees these have all led to lower retail prices and significant market expansion. While retail prices in both Namibia and Kenya dropped following substantial termination rate reductions, the South African case demonstrates that termination rate reductions are not always passed on to consumers as is hoped by such regulatory interventions. In South Africa, it was only after the second reduction in March 2012 that smaller operators were able to reduce their off-net prices to a level that could tempt the subscribers to dominant operators to switch. All the case studies confirm nevertheless that retail prices do not go up in response to termination rates going down as contended by dominant mobile operators around the world. This is in contrast to a body of literature stating that termination rates and mobile retail prices constitute a two-sided market and that termination rate reductions will lead to a so-called “waterbed effect”.     

Competition in wholesale markets: Do MNOs compete to host MVNOs?

This paper extends previous research examining wholesale market shares of mobile network operators (MNOs). This study demonstrates that wholesale market concentration has decreased over time because of the increase of competition of MNOs for hosting mobile virtual network operators (MVNOs). However, differences in wholesale market shares between MNOs have not disappeared. We propose that those operators that are late entrants in a market and belong to an international group with a proactive attitude towards hosting virtual operators positively influences wholesale market shares of MNOs. The empirical analysis is based on a panel data from 2000 to 2010 corresponding to MNOs and virtual operators in five European countries with high development of the virtual mobile industry. By closely examining KPN we show how being an international mobile group specialising in the wholesale market across Europe has enabled it to exploit complementarities that exist between traditional and virtual businesses.     

An analysis of the disruptive impact of the entry of Free Mobile into the French mobile telecommunications market

The issue of disruptive operators has recently gained interest among researchers and regulators. From a regulator's perspective, disruptive operators can increase competitive rivalry in markets dominated by a handful of large companies, thereby allowing consumers to obtain more benefits in terms of price and quality. Largely overlooked in this discussion has been the impact that the specific identity, complementary assets of operators, and their strategies have on the marketplace dynamics. In this paper we explore the impact that one such operator – Free Mobile – has had on the French mobile telecommunications market. Drawing on a wide range of secondary sources, our analysis finds that the entry and subsequent growth of Free Mobile has had a complex and multi-faceted impact on the market. Their growth has been at the expense of the other three mobile network operators active in the French market, while their innovative business model, which enables it to compete on the basis of low costs, has been copied by its rivals. The specific characteristics of Free Mobile and of its strategy have contributed to a significantly alteration to how competition occurs in this market. This, in turn, triggers a strong incentive for restructuring, which is actually restrained by regulatory concerns.     

Good intentions,poor outcomes: Telecommunications reform in South Africa

As the first decade of democratic rule draws to a close in South Africa, this paper reviews the telecommunications reform process in terms of the performance of the sector against the twin national policy objectives of affordable access to communications services and accelerated development to meet the needs of a modern economy. It critiques the implementation of international reform models which have in practice tended to emphasise privatisation at the expense of other reform mechanisms—including competition and, in particular, regulatory measures. It argues that this has impacted negatively on affordable access and has inhibited market innovation.This paper identifies the root of the problem as the market structure. Designed around the vertically integrated incumbent operator, it induces inherently anti-competitive impertives that demands a resource-intensive regulatory response. The regulator has often not had the statutory powers, and seldom the capacity, to circumscribe the behaviour of the incumbent so that it does not impact negatively on new entrants. Without effective regulation, the assumed benefits of liberalisation—including more affordable access through improved management of the incumbent and more efficient allocation of resources in the market through competition—do not materialise.The paper argues that developing country telecommunications markets demand more from a regulator than simply meeting the threshold requirements of transparency and predictability via so-called international “best practice” models. Such a limited approach will not be sufficient to meet the challenges facing most developing countries. The highly imperfect nature of developing country markets, and the enormous income disparities and inequities that exist, require strategic regulation. This is necessary to enable innovative service provision, especially to under-serviced areas, and to facilitate fair competitive markets that promote the viability of the new entrants needed to build the information infrastructure—the infrastructure necessary for a country's participation in the global network economy.Simply removing all market-entry restrictions, however, is likely to place an even more onerous burden on already-struggling regulators and is unlikely to contribute to universal access and other developmental goals. A new policy approach involving the fundamental restructuring of the market is needed to remove the anti-competitive incentives that exist in the vertically integrated market structure that generally accompanies privatisation in developing countries. While a more horizontally structured market will not remove the incumbent advantage entirely, it is likely to reduce the need for constant adjustment of anti-competitive behaviour on the part of the incumbent, freeing up regulatory resources for more strategic regulation towards achieving national developmental objectives.     

Effective competition and ineffective mobile industry regulation in South Africa

The most striking feature of South Africa’s mobile market is the skewed allocation of spectrum and a seemingly endless sequence of failed attempts to hold an auction for it. A shortage of spectrum (or the inefficient assignment of it) is blamed, among other things, for South Africa’s relatively slow LTE 4G speeds. Through historical accident, the country has two mobile data networks in addition to the four licensed mobile operators. The response of operators has been to innovate using roaming and network sharing agreements; as we explore in this paper, these have become the de facto spectrum allocation process.This paper looks at how the de facto industry structure has been moulded by spectrum holdings and sharing arrangements and asks how spectrum management could be improved. We observe that, although the number of mobile operators has effectively been reduced to 3 (a number which would raise concern in some circles), there exist a variety of arrangements between those three and other spectrum and network operators. The smallest of the current three mobile operators is still not able to offer a nationwide mobile service without a roaming agreement but, at the same time, the two larger operators depend critically on spectrum and roaming agreements themselves, mainly with the two physical data network operators that function as wholesale providers.The Independent Communications Authority of South Africa (ICASA) was established as a consequence of a new constitution that was adopted in 1996 and it helped to create new institutional arrangements for the burgeoning mobile industry. The authority has nevertheless continued to be hampered, as we shall demonstrate, by political imperatives. This has been pointed out by other authors over the past twenty years and we add to this body of evidence by considering the spectrum auction planned (again) for 2021.The “2021” auction is in fact an iteration of the auction originally announced in May 2010 and then abandoned (Song, 2011). The same thing happened again in 2016 (Paelo & Robb, 2020). Late in 2020, the regulator again announced an auction, due to take place during 2021 but by the second quarter of the year, two of the four national operators had already obtained a court injunction to stop it. The process is intertwined with a political imperative to establish a public wireless open-access network, which we discuss in detail.We describe how the industry has navigated around policy and regulatory dysfunction and how competitive interaction among the South African operators has managed to prevail. Following Hausman & Taylor’s (2013) lead in their work on the United States, in this paper we provide a commentary on apparently perverse outcomes from significant regulatory, judicial and legislative actions (or, perhaps more accurately, inactions) governing the South African mobile telecommunications industry from the commencement of the current constitutional arrangements in 1996 to the present.     

Surplus extraction by network providers: Implications for net neutrality and innovation

This paper looks at surplus extraction by network providers who control the medium of information transfer between application developers and consumers, and addresses the following questions: is net neutrality beneficial to society? and does providing network providers flexibility in pricing stunt innovation in the long run? To answer the first question, it looks at a market consisting of a monopoly network provider and two application providers with non-substitutable products, using a simple single period model. It shows that net neutrality is necessary to ensure maximal benefit to the society. To answer the second question, the paper shows that a monopoly network provider, if allowed complete flexibility in pricing, does not necessarily stunt innovation. Looking at a market that consists of one network provider and one application provider, and using a simple multi-period model, it shows that given maximum flexibility the network provider not only encourages innovation when the potential benefits are sufficiently high but also maximizes surplus. This paper takes the view that the topic of net neutrality is not only controversial but also complicated, and suggests that policy makers use a balanced approach based on sound analysis.     

Technical innovation and 3.5 mobile phone generation: Lessons from Korea

In 1996, the Korean mobile communication market was the first in the world to commercialize the code division multiple access (CDMA). Since then, the voice-based mobile phone market has continued to grow and has now reached near saturation. Having recognized the potential of the mobile data service as a new source of profit, telecommunication operators are scrambling to evolve 3.5 generation (3.5G) technology in order to lead market competition. Recently, the Korean 3.5G mobile telecom market has faced stiff competition from CDMA-based EVDO Rev.A and global system for mobile telecommunications (GSM)-based high-speed downlink packet access (HSDPA). In addition, the world's first wireless LAN-based wireless broadband internet (WiBro) service was commercialized in June, 2006. This paper reviews the current status of the 3.5G technology and analyzes the service standardization strategies from the viewpoint of technological evolutions. This paper also suggests implications for Korea's specific circumstances where different mobile telecom technologies complement and compete with one another. Korea's experiences may serve as important lessons for other countries or operators who try to introduce the 3G and look beyond mobile telecom technologies.     

Network effects and preference heterogeneity in the case of mobile telecommunications markets

This paper demonstrates how revealed- and stated-preference analyses can be used for modeling network effects in the field of mobile telecommunications. The aim of this study was to verify if network effects may still play a role in the Polish mobile telecommunications market, measure their strength, identify their sources and variability across consumers by accounting for consumers' observable and unobservable preference heterogeneity, evaluate their monetary value to consumers, and finally, to verify if the marginal utility associated with network effects is constant. The analysis of consumers' revealed choices (currently used mobile telephone operator) allowed the identification of major differences between customer bases of incumbent and new entrant operators, and insight into the business strategies adopted in the presence of asymmetric regulation of mobile termination rates. The second part of the study—the analysis of the consumers' stated choices (made in carefully prepared and designed hypothetical choice situations, known as the choice experiments) made it possible to directly model consumers' utility functions and, in this way, investigate the nature of network effects in mobile telecommunications markets. From the results, the presence of strong network effects, which are related to the ratio of consumers' social network group using the same operator, and to the magnitude of on-net price discounts, is confirmed. These network effects can be disaggregated to pecuniary and non-pecuniary effects. Through the utilization of the random parameters multinomial logit model, consumers' observable and unobservable preference heterogeneity can be accounted for, which proved a scientifically revealing and potentially policy-relevant approach. The results might be of a particular interest to other researchers aiming at modeling consumers' preferences as well as to mobile telephone operators and regulatory authorities—it is shown that capacity for vigorous price competition between mobile operators is limited by non-price factors, which affect subscriber's choices, especially in the presence of asymmetric mobile termination rates.     

Mobile cellular communications in the Southern African region

The Southern African Development Community (SADC) countries have mobile markets ranging from one of the world's largest GSM networks to fledging new services. Market structures, the extent of competition and the scope of regulation also vary widely. South Africa dominates regional cellular development with over 90% of SADCs nearly three million subscribers. Major factors driving cellular growth are:

• 1.Substitution for fixed line for customers on waiting lists.
• 2.The attractiveness of “prepaid”, especially for people without credit options.
• 3.The potential for roaming.

Regulation has been light-handed and not consistent across the region, missing a number of opportunities to boost mobile cellular access through license conditions, competition and tariff limitations. If all tariffs fell to the lowest level in the region, then the number of subscribers (excluding South Africa) by the year 2005 could be nearly four times the estimate at current tariffs. With the effective regulation and market stimulation, the region's mobile subscribers could exceed the number of fixed subscribers in only a few years.     

Network liberalization and developing countries: The case of Chile

The opening of Chile's telecommunications infrastructure to private and foreign investment has led to a rapid modernization of the network and to improvements in universal service. In 1994 all remaining regulatory entry barriers to the local, long-distance and international markets were removed for both service providers and network operators. Full digitization of switches and specific characteristics of the Chilean network structure have led to fierce price competition in the market. In spite of the small market size the strategic behaviour of the main market players is unlikely to succeed. As a result the market is likely to remain highly competitive. While the liberalization process has so far spurred the universal service goal, further improvements will mainly depend on whether entry takes place in the local market.