Policy Dilemma over Zuckerberg's Free Internet

What is wrong with Free Internet? It seems that people all across the globe are eager to get many essential items free, particularly from the Government. If Zuckerberg wants to make Internet free for all, well reportedly to make the world a better place for his new daughter, what is wrong with us to accept it?

 It seems that policy makers are in dilemma over this matter. After allowing Facebook’s Free Internet to take off, India and Egypt have turned it off. 

Global work in this area started in 1980s to come up with economic rational to break up AT&T to counter the argument that vertical integration produces more economies of scale and scope benefits than disintegrated multi operator based competition. It took a quite bit of research to come up with basic principles to realize benefits from competition to be higher than that of monopoly, which used to be handled with cost&quality based regulation. Over the last couple of decades, intellectual challenge in governing this sector has become wider as well as deeper, primarily due to technological innovations, dynamic efficiency, scope of service convergence, growing potential of social welfare, and strong private investment appetite. As recognition, Nobel Committee rewarded pioneering work in this area by honoring Prof. Jean Tirole with Nobel prize in Economics, in 2014.

 Although, authorities in Egypt haven't announced a reason for the move, but despite offering free access to healthcare and other info online, theInternet.org initiative has garnered its fair share of criticism. In India, regulators argue that Free Basics violates the terms of net neutrality by favoring certain carriers, services, and websites.

 Let’s look into the value chain of Internet services to shed a bit of light. Internet service request originating from users goes through five major building blocks: 1. Local access networks, 2. Domestic Transmission network, 3. International connectivity, 4. IP Transit (including global transmission), and 5. Servers hosting applications and contents. For mobile based Internet services, more than 90% cost is in local access network. Only a small fraction, less than 1%, is for IP transit, applications and contents.

 Facebook, being an application provider, does not make money from users for accessing basic Facebook application; money is rather made from adds and other services (like boosting your post). Facebook’s revenue depends on number of users' Facebook accounts. From business point of view, it makes sense for Mr. Zuckerberg to subsidize other segments, particularly local loop, to ramp up Facebook accounts.

 For policy makers, what is wrong with it? 

Such move of Facebook appears to be vertical foreclosure strategy, i.e., in order to maximize profit in one segment, the operator is weakening the market force in another segment. Vertical segmentation of the Internet value chain is a key to govern competition in such an imperfect industry--having both supply side economies of scale and scope benefit, and demand side network externality behavior. This is a gross violation of competition behavior in an imperfect market. The acceptance of such free offer will create distortions in competition landscape of Internet service value chain. It has been found that instead of regulation and/or subsidy, competition and innovation serve the purpose much better: offer better product at lower price to customers.

 Therefore, it could be clearly stated that policy makers should not only decline the Free Internet offer of Mr. Zuckerberg, but also prevent any anti competitive intervention, even from the Government.

 Although, we welcome Mr. Zuckerberg’s intension to make the world better place--for our children, including his—but it should not be at the cost of market force. As a matter of fact, market force to nurture competition and innovation is much more powerful, particularly in the ICT/Telecom sector, than any amount of resource someone or a state could have now. It may be good idea for Mr. Zuckerberg to invest a bit of fund to research to optimize policy and regulation to empower the market to make Internet affordable for all.

 If Technology, Innovation and Policy matter to you, please share your views at this