Mark Goldberg


www.mhgoldberg.com





#CTS20

What we learned about differential pricing

Last week’s CRTC hearing to examine differential pricing practices related to internet data plans highlighted many areas of confusion among Canada’s regulatory professionals.

Outside of the ISP community, many people seem to think that data tiers (often erroneously called “caps”) were created for traffic management. The misunderstanding may arise from the CRTC’s approval of such retail pricing mechanisms as a traffic management tool. As described by Xplornet (among others) tiers are not defined by the network organizations; rather they are primarily a creation by marketing departments to create a range of product options for consumers at different price points.

Data tiers are a very coarse method of managing congestion, in that they can be seen, especially on the wireless side, to constrain demand. Rogers explained last week, “traffic incurs costs, causes costs. So if you had unlimited traffic, in effect you would have unlimited cost.” Data tiers are a means to monetize the network investment in a way that those who want the capacity for more traffic pay more toward those costs. Of far greater import is the popularity of data tiers when unlimited plans are available. for example, Eastlink told the Commission that the vast majority of its wireline internet subscribers had unlimited data plans. Rogers said 40% of its wireline internet subscribers are signing up for unlimited plans.

Despite wide availability and high levels of adoption of unlimited data plans, there are some consumers who choose a lower priced option. Such tiers existed before the CRTC’s internet traffic management decision in 2009 and continue to exist as a means of price differentiation so that consumers can select which plan is best suited for their situation.

Open Media wants to deny that choice to consumers, asking the CRTC to ban data tiers. That makes no sense. At any price point for an unlimited plan, there will be consumers who would benefit from a lower priced option that includes some lower level of data. How can consumers benefit from losing choice? And, as a number of parties indicated to the CRTC, eliminating data tiers would result in price increases for the majority of customers.

Another area of misunderstanding was whether negotiations were required in order for an ISP to cease charging “per byte” for a particular application, a practice known as “zero-rating”. The confusion may have arisen from a casual read of the submission by TBayTel, where it says “This type of arrangement is possible to negotiate when the ISP has sufficient scale and market power but not for small providers like Tbaytel and many others.” However, TBayTel was refering to “sponsored data” with that statement, the practice where “ISPs are compensated by the application providers”. To zero-rate a particular app or data stream, no negotiations are required. The ISP simply stops charging for those bytes for a certain class of users. TBayTel has offered zero-rating to its customers, with a $15 flat rate for Blackberry users to have unlimited social networking.

TBayTel had been cited by a number of parties as saying it was too small to negotiate arrangements for zero-rating plans. The Independent Broadcast Group told the CRTC that TBayTel said it doesn’t “have the resources really to go out and put together an unlimited music type service or similar things that the big guys could do.” In reality, any ISP could implement zero-rating plans as a promotion without consultation or negotiations with the relevant applications.

Videotron said:

Écoutez, on ne niera pas que certains de nos concurrents seraient peut-être plus rapides ou d’autres moins rapides à pouvoir nous copier ou pouvoir lancer quelque chose de semblable, mais je vous répondrais que c’est un peu la dynamique de marché et que tant mieux.

Differential pricing is a means of offering targeted promotional pricing to attract or retain a certain demographic of customers. In a competitive marketplace, differential pricing provides increased choice. Such plans are optional and do not limit customers from accessing any other content. As I wrote before (see A matter of choice), Open Media’s claim that the practice “makes websites they don’t like slower” is simply not true. This false claim was part of its campaign to solicit support for its position in the proceeding. Given the false premise, one might question the support it garnered to oppose a pro-consumer choice practice.

As I have said many times before, differential pricing does not inhibit access to any content, it raises prices for no one and reduces costs for some. Banning the practice will reduce choice in the marketplace, raise prices for some and lower prices for no one.

A matter of choice

My brother tells me that in law school, his litigation professor told the class that when a client says “it isn’t about the money; it’s about the principle,” that client is lying. It’s about the money.

That is important to keep in mind when so-called consumer groups like Open Media say that “zero-rating” is “unfair, and bad for innovation and free expression online.” Open Media claims the practice “makes websites they don’t like slower”.

No. That simply is not true.

Yet this false information was used to induce signatures on Open Media’s petition, which should raise questions about the validity of its statement that “approximately 39,371” people (of whom we have no idea how many are Canadians) “call upon the Commission to protect their interests through … banning zero-rating”

Zero-rating is a billing option. Nothing more.

Do certain bits of traffic get metered or not?

It has nothing to do with traffic management; it has nothing to do with blocking websites; it has nothing to do with restricting consumer access to internet content.

Yet all of these red flags are falsely being waved by Open Media in its comments to the CRTC regarding the practice:

…seemingly pro-consumer arguments that zero-rating proponents make are wrong, for a number of reasons. Some arguments involve conflating Internet access itself with the content that consumers choose to engage with after obtaining access. This then removes consumers’ freedom of choice and places that choice inappropriately with the ISP at the access level.

and

Zero rate data must not be acceptable in our country as it gives big telecom power to make websites they don’t like slower and more expensive to access.

Zero-rating isn’t about traffic management or slowing down traffic. It’s all about the money.

Should service providers have the flexibility to offer consumers pricing that differentiates their products?

There is a long history of mobile data services offering zero-rate plans, as I described in a blog post in February:

  • In 2011, WIND Mobile bundled its WINDworld service into many of its dataplans, giving users access to Facebook Zero, news, weather updates & free ringtones;
  • In 2013, Eastlink offered a Social add-on that offered unlimited Facebook, Twitter and BBM for a flat $10 monthly fee;
  • In 2014, in the US, Sprint offered a $12 add-on to provide unlimited access to a customer’s choice of Facebook, Twitter, Instagram or Pinterest, or for $22, the customer could have all 4;
  • The Mobilicity website still shows a $5 Light Data plan, giving unlimited access to Facebook, Twitter, MySpace, Google+, and LinkedIn, Google Talk, Yahoo Messenger, ICQ. Includes: Gmail, Hotmail and MS Exchange.

The logic behind Open Media’s position seems to be that the desire to offer zero-rating emanates from data caps; if the CRTC gets rid of data caps, then zero-rating has no meaningful purpose. Open Media actually says “both data caps and zero-rating appear to be symptoms of larger structural problems resulting from the highly concentrated nature of Canada’s telecommunications market, which may need more fundamental policies such as improved wholesale market rules and, ultimately, structural separation to resolve”, but those actions are clearly beyond the scope of the CRTC’s current process.

The CRTC proceeding, Examination of differential pricing practices related to Internet data plans, is being argued under the guise of lofty principles (net neutrality, consumer access to the content of their choice, ISP gatekeepers), but it really comes down to money. We already have regulatory safeguards in place to deal with any interference in all users having open access to the content of their choice.

So we can see the argument is about money. How much do we pay for mobile internet?

Removing data caps is a form of price regulation that limits consumer choice. Some service providers have plans available with unlimited data, others choose to monetize their networks through plans that charge different amounts of use. If all service providers are mandated to eliminate pricing of services based on tiers of usage, it eliminates options for consumers and results in increased prices being paid by people who are on lower tiers. Logically, some will find that the benefit of unlimited data just isn’t worth the increased price, and having no other option, will cancel their data plan altogether.

Flat rating access to certain applications by some service providers gives people additional choices in the market. Removing that choice results in no subscribers benefiting while others pay more or receive less.

Phrased positively, zero-rating delivers benefits to some consumers while it does not harm any others. Why would we want to reduce consumer choice?

Better none than some?

The Telecommunications Regulatory Authority of India (TRAI) has issued regulations [pdf] that prohibit “Discriminatory Tariffs for Data Services”.

As Jerri Ann Henry of Protect Internet Freedom writes in an article in India’s “Daily News and Analysis” (“dna”), the outcome of a fight between Google and Facebook is leaving India’s poor without access to any part of the world wide web: “Six of the twelve leading anti zero-rating activists have received funding from a Facebook competitor – Google – either directly to them or through the organisations they represent.”

It is worth noting that so-called “discriminatory” plans were commonly available in North America to help get people online in the early days of mobile broadband.

For example:

  • In 2011, WIND Mobile bundled its WINDworld service into many of its dataplans, giving users access to Facebook Zero, news, weather updates & free ringtones;
  • In 2013, Eastlink offered a Social add-on that offered unlimited Facebook, Twitter and BBM for a flat $10 monthly fee;
  • In 2014, in the US, Sprint offered a $12 add-on to provide unlimited access to a customer’s choice of Facebook, Twitter, Instagram or Pinterest, or for $22, the customer could have all 4;
  • The Mobilicity website still shows a $5 Light Data plan, giving unlimited access to Facebook, Twitter, MySpace, Google+, and LinkedIn, Google Talk, Yahoo Messenger, ICQ. Includes: Gmail, Hotmail and MS Exchange.

I have written about these kinds of plans in the past, such as last year’s “Zero is better than nothing” that cautioned “Regulators need to be careful imposing restrictions on the evolution of business models.” In “Tiger ice cream and the digital economy“, I wrote “The digital economy framework shouldn’t block service innovation and differentiation.”

In the past, all of Canada’s wireless carriers have offered variants of these kinds of plans, providing customers with an incentive to try using their devices for more than just phone calls. In the US, Sprint’s Virgin Mobile brand offered a $12 flat rate add-on to give unlimited access to the customer’s choice of Facebook, Twitter, Instagram or Pinterest, or for $10 more, the customer could have all 4.

These kinds of programs whet the appetite of consumers to try to get more from their devices and their mobile services. According to Internet.org, Free Basics saw half its users progress from the free sample service to begin subscribing to a paid full internet service:

data from this program shows that it works to open up the full internet to people who use Free Basics. 50% of people who use Free Basics are paying for data – and access the internet outside of free basic services – within 30 days of coming online for the first time.

Yet, India has banned the practice, with a regulation that simply states “No service provider shall enter into any arrangement, agreement or contract, by whatever name called, with any person, natural or legal, that has the effect of discriminatory tariffs for data services being offered or charged to the consumer on the basis of content”.

Once again, we see activists claiming to be acting in the consumer interest, reducing consumer choice. In some economies, this means monthly bills go up for some and go down for no one. In India, it means that the poor have access to no service, rather than having a choice of trying out some connectivity.

Ken Engelhart summarized this as:

As Jerri Ann Henry writes:

Those caterwauling the loudest that offering anything less than full access to the Internet is “poor Internet for poor people” are being highly disingenuous. After all, ideological purity is easy when it costs you nothing. It’s akin to a debate among the well fed about whether the starving should be given soup that isn’t organically sourced.

Investing in arbitrage

A couple weeks ago, I was speaking with Howard Thaw of Iotum. Howard works with Alec Saunders and both have sung praises about a Montreal-based mobile services company that has been saving them money on their considerable cell phone bills. On Friday, Alec wrote about how he has found ways to save considerable amounts of money when travelling to VON last week, spending only $4.16.

Mobivox seems to be attracting some attention lately, with new funding and a new COO. A couple weeks ago, Mobivox closed $11M in funding from IDG Ventures, Brightspark and Skypoint. Last week, Mobivox announced a new COO, Nitzan Shaer, formerly of IDG Ventures and former head of Skype’s mobile products group.

I have been trying out Mobivox for the past couple weeks and I think it is an interesting application.

How does Mobivox work? When you sign-up, you build an address book. The system can help by importing your Outlook, Gmail or Skype contacts. Then, you place a local call to the Mobivox access number nearest you – there are access numbers in major cities in 36 countries already. You speak to an automated attendant and just say the name of the person you want to reach.

If that person is a Mobivox or Skype user, the call is free. Well, for the cost of an outbound local call. Of course, there are lots of mobile calling plans out there that would allow customers to make their Mobivox access number one of their unlimited free destinations, such as Rogers My 5 or TELUS’ My Faves .

If the person you are trying to reach isn’t a Mobivox user, the call goes through at rates we have come to expect from VoIP. If you live in a place where there isn’t an access line, there is a call-back option – just send a text message and the system calls you.

Now, I have never been crazy about investing in arbitrage – at some point, the cellular companies will decide that they don’t really need 97% margins on their long distance calling rates and make North America part of their local calling. Say good bye to long distance arbitrage.

On the surface, Mobivox is just a sophisticated prepaid card / call-back company for mobile phones. Only worse for investors – a lot of the calling is for free. I seem to remember from the demand curves in my first year Economics course that it is easy to attract customers when the price is zero.

So how does Mobivox move onto the radar screens for venture capital? How does the business plan to make money?

Look at the marketing approach. Part social networking. Part viral. Look at the intelligent interface with voice recognition that drives enhanced features. Instant conference calling. Instant group calling. Transfer calls in progress from your mobile phone to a fixed line. Convenience features that will still be valuable to end users even when the savings aren’t as important.

All of these capabilities could be offered by the carriers, if they wanted to. That is a big “if”, because it puts LD revenues at risk, with an uncertainty that the elasticity will drive sufficient increases in total airtime to make up for the potential revenue shortfall.

That day will come. In the meantime, Mobivox is building out a global following. There are lots of places on the planet to arbitrage mobile long distance, even if carriers in any one country try to cut down the opportunity.

That is precisely what Hutchison appears to be doing with a recent announcement from 3UK, its upstart operating unit in the UK. In a deal done directly with Skype, 3UK is offering free calling and free messaging between Skype branded customers. An interesting acquisition strategy – but how do they make money?