Have you ever attended a sporting event where billboards flashed advertisements? Quite likely. Have you ever been to a conference with sponsored events, shuttles and meals? Happens all the time. In these cases, and many more, advertisers in effect help subsidize your ticket purchase. The practice is so common as to be unremarkable.
And yet the Federal Communications Commission (FCC), prodded by self-styled consumer interest groups, is seeking to ban sponsored data on the Internet. Spotify and Pandora may want to help pay for part of your T-Mobile subscription, and Facebook may wish to defray the cost of getting online for cash-strapped young people, but these groups insist these consumer subsidies are secretly dangerous. Free data, they are hoping the FCC will declare, is bad for you.
But wait, you reply, doesn’t the FCC talk urgently about getting more people online and trying to reduce the cost of broadband? Aren’t regular mobile subscribers tired of bumping up against their data limits? And, therefore, might not free data sponsored by content and app firms help resolve these challenges? Let’s hope the FCC can see past the hollow claims of the shadowy online activists and encourage free data for consumers.
Opponents of free data plans don’t argue they are bad for consumers. Rather they’ve adopted a convoluted rationale: Free data is bad for the sponsors. Or at least for potential sponsors. Not every app and content firm, they say, has the resources to sponsor data. Those that can pay may enjoy an unfair advantage. Therefore, no app or content firm should be able to sponsor data.
Yes, and not every firm has equal resources to pay luxurious office rent or high salaries, or to invest in cutting-edge machinery. It’s a fact of life. But even life’s inherent unfairness misses the point. Banning free data means both denying consumers lower prices and also denying small firms the ability to gain access to those consumers through innovative partnerships.
Magazines are another good example of what are known as multisided markets. So are online newspapers such as WSJ.com and NYTimes.com. These publications are supported by both consumer subscriptions and advertisers. The cost of producing the magazine or website is split between consumers and advertisers (sponsors), who each find value in this platform, which brings multiple parties together. If federal law banned advertisements in magazines, websites or sporting events, the entire cost of the product would fall on consumers, and consumers would have to pay much higher subscription and ticket prices.
But that’s exactly what the effort to ban free data would do: force consumers alone to bear the burden of mobile broadband networks, which cost hundreds of billions of dollars to build and maintain. The second harmful effect may be less intuitive, but it directly contradicts the FCC’s oft-stated goal of increasing competition in the Internet ecosystem. You see, a sponsored data ban could also block upstart firms with new apps or innovative content from reaching new audiences.
Think about the ways that new firms often attract new customers by giving away free samples or subsidizing their products. Uber and Lyft, for example, have used subsidized rates to attract a vast new ridership and improve transportation options in underserved markets. Numerous Web content firms are now signing up for the sponsored data programs of T-Mobile, Verizon and AT&T, at least until a federal agency tells them to stop. Far from helping small upstarts, a sponsored data ban could impose a crucial obstacle to Internet innovation and consumer choice.
If new mobile business models are restricted, all consumers may be forced to buy an all-you-can-eat package at a single price. There would be no disincentive for consumers to grab as much of the available capacity as possible. Heavy users will hog the data, while light users suffer the effects of an overloaded network. Prices will rise for everyone, regardless of usage. The endgame will look like the heavily regulated old telephone network: high prices, few choices and little innovation.
Opponents of free data are also ignoring a third consideration: the need to build a new, fifth-generation (5G) mobile network to keep up with massive consumer demand for video and the immersive Internet of Things. The impetus for 5G is to serve a much wider array of users, devices, content and industries than the traditional mobile phone market. Yes, 5G will provide faster data speeds for smartphones and tablets. But the new network will also serve connected cars and transportation networks, remote sensors, appliances, industrial machines and super-high-definition interactive entertainment. It will also provide a competitive connection for residential and enterprise broadband.
The whole point of 5G is building a single network to serve numerous markets. These applications and verticals — virtual reality, retail apps, connected cars, autonomous trucks, health care monitoring, industrial maintenance, supply chain and smart city services — will all require distinct data capabilities and price points and thus business models. Some will require high data throughput at certain times of day. Some won’t need as much data capacity but will require high reliability and low latency. Some will be unpredictable. As the variation in use cases explodes, so will the business models needed to build sustainable solutions.
Limiting the evolution of business models in the mobile ecosystem will not only make today’s 4G services more expensive, but also make it difficult to invest in 5G networks, content, apps, devices and services.
Bret Swanson is president of the technology research firm Entropy Economics LLC and a visiting fellow at the American Enterprise Institute’s Center for Internet, Communications, and Technology Policy.