Zero-Rating: Kick-Starting Internet Ecosystems in Developing Countries

POLICY MEMO Zero-Rating: Kick-Starting Internet Ecosystems in Developing Countries BY DIANA CAREW MARCH 2015 The power of the Internet has redefined the The problems are multiple. Building a broadband global economy for the 21st Century. As of 2014, infrastructure to all homes, especially in rural over three billion people around the world were areas, is too costly for many low-income countries. connected. The corresponding boom in Internet- And mobile broadband service, while more broadly based retailers, news and information providers, available, is also relatively expensive to provide and online entertainment and video companies and high-priced compared to incomes. As a result, has been just as impressive.1 Businesses go where broadband markets are limited in many poor and the customers are, and increasingly the customers developing areas. In 2013, for example, there were are online or mobile. 20 mobile broadband subscriptions per 100 people in the Philippines, and just three for every 100 Unfortunately, the online revolution is lagging people in Kenya.4 in many of the least developed parts of the world. Consider that as of 2014, fewer than 30 At the same time, a low level of connectedness percent of Africa’s 1.1 billion population used keeps the local Internet ecosystems stunted. the Internet.2 At the same time, relatively few Entrepreneurs are unwilling to start new Internet- African businesses have participated in the based businesses because there aren’t enough Internet business boom. Less than one percent customers online. Conversely, without local of all existing domain name registrations in 2013 Internet-based businesses providing relevant originated from Africa, meaning African-based information, content, and services, potential businesses have very little local or global presence customers have less incentive to invest in on the internet.3 expensive data plans for their smart phones. About the author Diana G. Carew is an economist and director of the Young American Prosperity Project at the Progressive Policy Institute. POLICY MEMO PROGRESSIVE POLICY INSTITUTE Consider the obstacles facing a potential local provide its customers with access to certain online business that would collect agricultural prices content, or package of websites, for “free,” in that across a poor country, and post them online. Such such content does not count against monthly data Internet businesses have increasing returns to caps. There are several variations of zero-rating scale—expensive to collect the information in programs, many of which do not involve any the first place, but relatively cheap to provide it exchange of funds among firms. One type of zero- to more and more customers. That means such rating outside the scope of this analysis is where a business—which would be very beneficial content providers directly reimburse operators for to farmers—is far easier to start and far more foregone data costs is called ‘sponsored data.’ profitable if the pool of potential customers is This paper contemplates programs more like large. But if the pool of potential customers is Internet.org or Wikipedia Zero where content small, the business may never get started, and providers do not directly compensate operators there will be even less reason for poor mobile for lost data revenue. phone users to buy a data plan. It’s important to note here that this paper focuses mainly on the use of zero rating in poor and The online revolution developing countries, and the arguments are laid is lagging in many of out with those situations in mind. In future work, we will explore the ways that zero-rating is useful the least developed in developed countries, and especially among less- parts of the world. connected populations. The power of zero-rating to nourish an Internet In other words, developing countries can get ecosystem in poor and developing countries stuck in a low-connectivity equilibrium, where comes from its potential to increase connectivity there are relatively few broadband customers by both people and businesses quickly and and few local Internet-based businesses to serve at low-cost. First, free access to popular sites them. How, then, can we jumpstart the local like Google, Twitter, Wikipedia, and Facebook internet ecosystem in developing countries to encourages more people to sign up for data plans, move from a low-connectivity equilibrium to a and enables greater data freedom to explore local high connectivity equilibrium where the number content. Second, the increase in demand for local of users with data plans is higher and the country content spurs local businesses and entrepreneurs has viable local Internet-based businesses that to create new online products and services—for both generate jobs and provide relevant content example, information on Ebola outbreaks, typhoon and services to mobile users? As more people warnings, or even wait times at local stores and connect to the Internet, local content and service government offices. Moreover, the higher share of providers will create and expand existing content population online justifies efforts of government to meet demand. This will boost growth in the agencies to go digital, which in turn encourages local economy, which in turn will generate greater more business and individuals to join the internet demand for local content and enable more people ecosystem. Taken together, zero-rating can to connect to the Internet. This is a transition that effectively jump start a virtuous feedback loop that many developed countries made in the late 1990s moves the local economy into a high-connectivity and early 2000s. How can we accelerate it in poor equilibrium. and developing countries? Zero-rating has already been adopted by mobile This paper explores one approach for jump- operators in poor and developing countries, starting local Internet ecosystems where including the Philippines, Turkey, India, and connectedness is low—a practice known as “zero- across Sub-Saharan Africa. And although these rating.” Under this program, mobile operators programs are relatively new, early indications show 2 POLICY MEMO PROGRESSIVE POLICY INSTITUTE more people are connecting to the Internet in accident that, of the estimated 4.5 billion these countries. people worldwide still unconnected to the Internet, 90 percent—over 4 billion—are in However, zero-rating has some detractors. Some the developing world.5 argue for banning the practice, claiming that it violates net neutrality principles by prioritizing With low-connectedness, businesses are limited select content. Others argue that free access to to their existing consumer base, and have little select content is too limited to provide the digital incentive to invest in creating online platforms for literacy skills needed to fully participate in the their products. Internet entrepreneurs have no data-driven economy. motivation to transform their ideas into new start- ups, lacking the promise of growing profits or the Still, this paper argues that given the promise of ability to get seed money. The dearth of business early indications, it seems bad policy to squash formation and growth traps the local economy in the potential of zero-rating, especially in countries an unconnected low-growth state, without access trapped in a low-connectivity equilibrium. Instead, to global online markets. this paper proposes several ways to enhance the potential effectiveness of zero-rating as a tool for growth for poor and developing communities. Advanced countries That includes being non-exclusive across mobile have about 84 active operators and transparent. We also suggest regular evaluation and reporting of zero-rating programs, mobile subscriptions per to better inform mobile operators and relevant 100 people, compared policymakers of the actual risks and rewards. to about 21 per 100 By banning zero-rating, poor and developing people in developing countries would deprive themselves of a possible countries. avenue for economic growth and prosperity. They are closing a pathway for their citizens and businesses to harness the power of the Internet, Similarly, government agencies have little moving them to a high-connectivity equilibrium. incentive to go digital if there are too few citizens In the language of economics, that would mean with the capability to connect online. Why should forgoing one of the greatest positive externalities of they spend precious resources setting up webpages having a vibrant Internet ecosystem: economic and and digital access to services if only a small social mobility. portion of the population have access? LOW CONNECTIVITY EQUILIBRIUM It is easy to see why some countries get stuck in In a low-connectivity equilibrium, people and low-connectivity equilibrium, even as the benefits businesses have little motivation to connect of being connected are great. A major reason for to the Internet. A lack of access to Internet- this is cost. Even in areas where fixed or mobile based consumers keeps businesses away from broadband is accessible, the price for a mobile online expansion and sidelines aspiring tech broadband subscription is simply too expensive for entrepreneurs. On both the consumer and many. According to one recent estimate, people business side of the market, being connected in developing countries with mobile phones pay comes at a high cost and low marginal return. between 8-12 percent of their average monthly income on mobile connectivity, and that is often A low-connectivity equilibrium is prevalent in just for voice and text.6 many poor and developing countries. People have little incentive to spend precious income on data Consider that a mobile data plan in the Philippines plans, given the lack of valuable content. It’s no costs on average the equivalent of $17 a month, 3 POLICY MEMO PROGRESSIVE POLICY INSTITUTE which does not seem like much. Yet this not been for a highly connected population. Some constitutes almost 10 percent of the per companies, like Apple and Samsung, produce capita monthly average national income, sophisticated smartphones and other Internet-able according to International Telecommunications devices.

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