*Question 1. What very close or perfectly substitute applications accessible over the ISP's connection, costing the same to deliver, are likely to be foreclosed by the zero-rated application(s)?*

The closer are the non-zero-rated application(s) to the zero-rated one(s) in the perception of the end users, then the more likely it is that the non-zero-rated applications will be crowded out. However, there are very few applications meeting this requirement that are truly close substitutes. For the most part, CAPs such as Netflix and Hulu are not close or perfect substitutes for each other because they contain different bundles of content for which end users have distinct preferences. The applications themselves are differentiated; even if it costs the ISP the same to deliver a Hulu movie and a Netflix one of equivalent specifications. If a consumer preferring Netflix is not prevented from paying the higher usage fee to watch Hulu content if the content available only on Hulu is sufficiently highly valued, then Hulu will not be foreclosed, even in respect of the subset of Hulu-preferring consumers on the discriminating ISP's network.

It might be a concern, however, if the applications in consideration were, for example, two identical cloud storage applications. The zero-rated application will have an unequivocal advantage over the non-zero-rated one, leading to all consumers with a non-zero valuation of using cloud storage opting for the lower-cost one. However, for foreclosure to occur, it is necessary for the applications to be undifferentiated—that is, homogeneous products. Foreclosure of differentiated products will be a function of the degree of differentiation—the more similar they are, the more likely it is that foreclosure will occur.

The logic applied in this simple illustration leads to the conclusion that without some non-neutral pricing signals, over-much (inefficient) investment in CAP variety is possible if equalising the prices faced by consumers and application providers conceals underlying real differences in costs and user preferences.

#### **4.2 Equalising prices conceals underlying cost and valuation differences**

Assume now that the two applications are perfectly homogeneous, but one actually costs less to deliver than the other. This could be because the ISP has been able to customise the delivery of one application within its own networks so that it costs less (or causes less congestion) than an otherwise-equivalent one that has not been customised. It could also be that one class of applications can be processed via a different operational process that is less costly, as occurred in Australia and New Zealand in the mid-1990s, when the internet was first becoming popular. At the time, international bandwidth capacity on the PACNET sub-oceanic cable was constrained. Due to asymmetric data flows, Australian and New Zealand ISPs

purchased PACNET capacity under transit arrangements rather than peering. Traffic to and from end consumers over PACNET was more costly to handle than traffic handled under local peering arrangements. The original retail internet plans metered international (PACNET) traffic by volume, but offered unmetered (i.e., zero-rated) local traffic.

In this instance, zero-rating low-cost local traffic but metering high-cost international traffic reflected real differences in underlying costs. Zero-rating that diverts consumers' usage of substitutable applications towards lower cost applications raises efficiency.

#### This leads to our second question for regulators and adjudicators. *Question 2. Does usage of the zero-rated applications actually cost the ISP less than equivalent usage of non-zero-rated applications?*

If the answer to this question is 'yes', then zero-rating would be less harmful to total welfare than the alternative of requiring all usage to be charged at a single price. Under the two-price arrangement, more usage than efficient would be made of the low-cost application, and the high-price usage tariff would have to be above cost to subsidise the additional low-cost usage. Arguably, this could lead to some low-cost applications surviving that would not otherwise be viable if their usage was charged at cost—that is, inefficient over-supply of application variety [11].

However, the alternative of a single positive usage price that does not signal the different underlying costs will lead to more usage of the high-cost application than if it was charged at cost. This usage would have to be subsidised by users of the low-cost application. Increasing the price of using the low-cost application above its cost to subsidise the high-cost usage leads to less usage of the lower-cost application, and at the margin some consumers will give up their internet connections entirely because they no longer receive utility higher than the combined price of access and usage. Without the fixed revenues of these low-cost consumers to offset the higher usage costs of the consumers paying below cost, the average usage cost per unit of traffic handled increases, leading to even higher usage fees and a second depressing effect on the usage of and fees generated by low-cost users. That is, a 'waterbed effect' emerges [23].

Hence, zero-rating of applications with lower costs than non-zero-rated applications is not equivalent in its effects to zero-rating applications with the same costs as their zero-rated counterparts. The difference is material. In a perfectly competitive market, it is necessary for the price signals associated with lower costs to be sent to consumers so that efficiency-raising changes in purchasing behaviours can take place. Concealing information about cost differences (e.g., by averaging the prices for two or more applications) prevents consumers making efficiency-raising choices.

We note, however, that in the New Zealand case, discounting local applications did not crowd out content from foreign origins because they were not substitutes. Indeed, foreign content and applications were overwhelmingly preferred by end users, even though they were more costly.

#### **4.3 Differentiated price and product offers to low-valuers**

We now turn to the argument of pro-net neutrality advocates that zero-rating should not be allowed when it enables free or discounted access to a narrow range of internet applications or applications with some functionality removed, when the ISP charges a higher fee for unrestricted access to the 'full service' applications. This restriction is claimed for ISPs, even though the same practice is widespread in the software industry—for example, Microsoft's Office available as a low-price, restricted student version and a high-price, full service professional version.

The advocates claim that restricted offer users cannot participate equally with unrestricted users in a supposed 'right' to access the full potential benefits of all

**119**

*Strategic Use of Zero-rating of Mobile Data DOI: http://dx.doi.org/10.5772/intechopen.84130*

frequently cited as such an infringement.

sions rather than internet access regulation.

analysis rather than prescriptive prohibitions.

applications and content available on the entire internet. Any arrangement that allows differentiated access to that content is seen as an infringement of that right. Zero-rating that reduces access charges in exchange for reduced functionality is therefore 'unfair discrimination'. Free Basics, where potential internet users in developing countries are offered free access to a restricted range of applications, but can access the full versions when paying a monthly internet access subscription, is

In principle, zero-rating access to a restricted-functionality application is no different to an application provider choosing to make some content available freely, and releasing other content only when some other obligations—for example, paying a fee, or sharing personal information—have been met. Access providers can set different tariffs for using different versions of the application if they really do invoke lower costs (e.g., stripped-down versions with lower data consumption), as per question 2. However, these versions may also be associated with compensation from the CAP to the ISP, especially if the low-cost version stimulates more low-value consumers to purchase connections, increasing the value available to the CAP from advertising. Furthermore, it is the application provider and not the ISP who makes the decision about restricting the application range to self-selecting end users. Preventing application providers from offering these discount arrangements appears at odds to the net neutrality argument that edge providers and not ISPs exercise control over internet content. If the range of content is restricted by applications providers—for example to foreclose other application providers—then it would seem more properly a matter to be addressed by generic antitrust provi-

Moreover, the presumption that all end users should pay identical prices to access the same applications ignores economic realities. The expectation that all consumers pay the same price for a product is an artefact of perfectly competitive markets. If all consumers pay the same price, then those with higher valuations of the bundle receive more surplus than those with lower valuations. Perfect equity in access prices for homogeneous good cements in place extreme inequities in surplus distribution. Price discrimination (different prices for the homogeneous good) effectively transfers surplus from high-valuers to low-valuers and leads to higher total consumer numbers without reducing total welfare. Where scale economies are present (as occurs in both ISP services and most CAP products, as they are mostly digital products with near-zero reproduction costs), then total welfare increases as well. Product differentiation (e.g., offering a subset of functionality for a lower price) leads to higher consumer numbers in total than with a single price for the undifferentiated good. Price discrimination and product differentiation therefore both appear consistent with (or at least are not per se harmful to) increased product variety, larger total numbers of internet users and ongoing innovation in the internet ecosystem. That does not mean that the practices might not, in some circumstances, lead to negative outcomes. Rather, it reinforces the merits of a case-by-case

Price and product differentiation are important ways of enabling individuals with low valuations of internet use, or facing significant financial constraints, to become internet users, The former case occurs in mature markets, when the last-remaining individuals have not yet connected because the value they place on the connection is less than even a very modest single price charged. The latter case arises in developing economies, where income constraints pose significant barriers to purchase for large numbers of individuals. While subsidising connection fees through a tax and redistribution system may induce purchase in the former group, subsidising via applications may be more effective because the application is the primary determinant of the value derived. It also offers a superior means of

#### *Strategic Use of Zero-rating of Mobile Data DOI: http://dx.doi.org/10.5772/intechopen.84130*

*Strategy and Behaviors in the Digital Economy*

zero-rated) local traffic.

tions raises efficiency.

purchased PACNET capacity under transit arrangements rather than peering. Traffic to and from end consumers over PACNET was more costly to handle than traffic handled under local peering arrangements. The original retail internet plans metered international (PACNET) traffic by volume, but offered unmetered (i.e.,

In this instance, zero-rating low-cost local traffic but metering high-cost international traffic reflected real differences in underlying costs. Zero-rating that diverts consumers' usage of substitutable applications towards lower cost applica-

*Question 2. Does usage of the zero-rated applications actually cost the ISP less* 

Hence, zero-rating of applications with lower costs than non-zero-rated applications is not equivalent in its effects to zero-rating applications with the same costs as their zero-rated counterparts. The difference is material. In a perfectly competitive market, it is necessary for the price signals associated with lower costs to be sent to consumers so that efficiency-raising changes in purchasing behaviours can take place. Concealing information about cost differences (e.g., by averaging the prices for two or more applications) prevents consumers making efficiency-raising choices. We note, however, that in the New Zealand case, discounting local applications did not crowd out content from foreign origins because they were not substitutes. Indeed, foreign content and applications were overwhelmingly preferred by end

We now turn to the argument of pro-net neutrality advocates that zero-rating should not be allowed when it enables free or discounted access to a narrow range of internet applications or applications with some functionality removed, when the ISP charges a higher fee for unrestricted access to the 'full service' applications. This restriction is claimed for ISPs, even though the same practice is widespread in the software industry—for example, Microsoft's Office available as a low-price, restricted student version and a high-price, full service professional version.

The advocates claim that restricted offer users cannot participate equally with unrestricted users in a supposed 'right' to access the full potential benefits of all

If the answer to this question is 'yes', then zero-rating would be less harmful to total welfare than the alternative of requiring all usage to be charged at a single price. Under the two-price arrangement, more usage than efficient would be made of the low-cost application, and the high-price usage tariff would have to be above cost to subsidise the additional low-cost usage. Arguably, this could lead to some low-cost applications surviving that would not otherwise be viable if their usage was charged at cost—that is, inefficient over-supply of application variety [11]. However, the alternative of a single positive usage price that does not signal the different underlying costs will lead to more usage of the high-cost application than if it was charged at cost. This usage would have to be subsidised by users of the low-cost application. Increasing the price of using the low-cost application above its cost to subsidise the high-cost usage leads to less usage of the lower-cost application, and at the margin some consumers will give up their internet connections entirely because they no longer receive utility higher than the combined price of access and usage. Without the fixed revenues of these low-cost consumers to offset the higher usage costs of the consumers paying below cost, the average usage cost per unit of traffic handled increases, leading to even higher usage fees and a second depressing effect on the usage of and fees generated by low-cost users. That is, a 'waterbed effect' emerges [23].

This leads to our second question for regulators and adjudicators.

*than equivalent usage of non-zero-rated applications?*

users, even though they were more costly.

**4.3 Differentiated price and product offers to low-valuers**

**118**

applications and content available on the entire internet. Any arrangement that allows differentiated access to that content is seen as an infringement of that right. Zero-rating that reduces access charges in exchange for reduced functionality is therefore 'unfair discrimination'. Free Basics, where potential internet users in developing countries are offered free access to a restricted range of applications, but can access the full versions when paying a monthly internet access subscription, is frequently cited as such an infringement.

In principle, zero-rating access to a restricted-functionality application is no different to an application provider choosing to make some content available freely, and releasing other content only when some other obligations—for example, paying a fee, or sharing personal information—have been met. Access providers can set different tariffs for using different versions of the application if they really do invoke lower costs (e.g., stripped-down versions with lower data consumption), as per question 2. However, these versions may also be associated with compensation from the CAP to the ISP, especially if the low-cost version stimulates more low-value consumers to purchase connections, increasing the value available to the CAP from advertising. Furthermore, it is the application provider and not the ISP who makes the decision about restricting the application range to self-selecting end users. Preventing application providers from offering these discount arrangements appears at odds to the net neutrality argument that edge providers and not ISPs exercise control over internet content. If the range of content is restricted by applications providers—for example to foreclose other application providers—then it would seem more properly a matter to be addressed by generic antitrust provisions rather than internet access regulation.

Moreover, the presumption that all end users should pay identical prices to access the same applications ignores economic realities. The expectation that all consumers pay the same price for a product is an artefact of perfectly competitive markets. If all consumers pay the same price, then those with higher valuations of the bundle receive more surplus than those with lower valuations. Perfect equity in access prices for homogeneous good cements in place extreme inequities in surplus distribution. Price discrimination (different prices for the homogeneous good) effectively transfers surplus from high-valuers to low-valuers and leads to higher total consumer numbers without reducing total welfare. Where scale economies are present (as occurs in both ISP services and most CAP products, as they are mostly digital products with near-zero reproduction costs), then total welfare increases as well. Product differentiation (e.g., offering a subset of functionality for a lower price) leads to higher consumer numbers in total than with a single price for the undifferentiated good. Price discrimination and product differentiation therefore both appear consistent with (or at least are not per se harmful to) increased product variety, larger total numbers of internet users and ongoing innovation in the internet ecosystem. That does not mean that the practices might not, in some circumstances, lead to negative outcomes. Rather, it reinforces the merits of a case-by-case analysis rather than prescriptive prohibitions.

Price and product differentiation are important ways of enabling individuals with low valuations of internet use, or facing significant financial constraints, to become internet users, The former case occurs in mature markets, when the last-remaining individuals have not yet connected because the value they place on the connection is less than even a very modest single price charged. The latter case arises in developing economies, where income constraints pose significant barriers to purchase for large numbers of individuals. While subsidising connection fees through a tax and redistribution system may induce purchase in the former group, subsidising via applications may be more effective because the application is the primary determinant of the value derived. It also offers a superior means of

subsidising in the latter case, because surpluses generated by users in developed economies can be transferred via the application and access bundle to subsidise those in developing economies. Thus, wealth transfers across national borders can occur without the need for government intervention.

This gives rise to our third question for regulators and adjudicators.

## *Question 3. Is zero-rated access to a subset of applications primarily intended to increase the number of individuals using the internet?*

The purpose of this question is to separate out instances of zero-rating that are more likely to lead to positive network effects arising from larger total numbers of internet connections from instances that may arise from other motivations—for example to change the range and usage of applications by individuals already purchasing internet connections.

#### **4.4 Relaxing the constraints: perfect information and no transaction costs**

Having considered the implications of relaxing the constraints of product (and consumer) homogeneity, we now turn to the assumptions of perfect information and zero transaction costs that attend the perfect competition model, and their effects on barriers to entry and exit.

Imposing the assumption of consumer homogeneity reduces the amount of information available to both ISPs and CAPs to customise their offerings to individual consumer preferences. Information that would otherwise have been efficiently signalled or screened in customised offers can only be obtained subsequently by other means—inevitably with higher transaction costs. In the long run, this would seem to impose impediments to, rather than incentives for, the development of new applications and contracting arrangements. That is, banning zero-rating because the practice may pose entry barriers for new application providers must be balanced against the entry barriers that will be created if information about underlying consumer heterogeneity that would be efficiently signalled, screened and shared if zero-rating proceeds cannot emerge due to regulatory intervention banning the practice.

While banning zero-rating has been justified by the potential for ISPs to raise the costs for new application providers, it is equally plausible that banning prevents both application developers and ISPs from learning about and creating offers that cater to these underlying differences. Thus, existing ISPs and CAPs might prefer the information not to be surfaced if in doing so, opportunities were created for new entrants to take advantage of consumer heterogeneity to create new offers, attract consumers away from the exiting providers and appropriate a disproportionate share of the new consumers yet to purchase internet connections. Likewise, existing end users obtaining high surpluses under a single price might be unwilling to share those surpluses with new consumers who will participate only with implicit subsidies.

This gives rise to our fourth question for regulators and adjudicators.

*Question 4. Who has requested that an instance of zero-rating be investigated?*

If the request has come from existing ISPs, then it is plausible that the motivation may be to foreclose competitive entry by rival ISPs. If it has come from existing CAPs, then the motivation may be to foreclose competitive entry by new applications provides. If it comes from existing end users, then the motivation may be to lock in existing surpluses and not have to share them with new or future internet consumers. On the other hand, if the request to investigate has come from new or potential ISPs or CAPs then the claim that it creates an entry barrier may be credible. It seems most unlikely that a non-end user would ask for an inquiry about the legality of a zero-rating offer that would cost less than the alternative price. Similarly, it is also unlikely that a low-valuing existing end user who would be better-off using the restricted zero-price offer would request an inquiry.

**121**

*Strategic Use of Zero-rating of Mobile Data DOI: http://dx.doi.org/10.5772/intechopen.84130*

**4.5 Positive search costs and barriers to entry**

In markets with heterogeneous products, consumers with different preferences, and information asymmetries that make it costly, if not impossible for consumers to identify the attributes of the products or the fit with their preferences before they have been consumed, a more appropriate model for analysing interaction is monopolistic competition. In this model, within a range of products there will be one that will be the best match for a given consumer with given preferences. At any

However, the consumer cannot identify in advance, which is the best match. Nor can the provider accurately identify the best consumers for the offer. The consumer can select one offer at random—so long as the surplus from this purchase is not negative, the consumer has gained at least some increase in surplus. Where the consumer will use a service multiple times (or make multiple purchases), the gain from purchasing the same product/service is known. There may be a better match available (higher gain) from buying a different product next time—but there is also a risk that the different product is a worse match than the existing one. The consumer could have had higher surplus if instead the first product had been purchased. There may also be switching, learning and adjustment and other investment (transaction) costs associated with each product. Buying from a second supplier means a second set of these costs—which is avoided if second and subsequent purchases are made from the first supplier. Together, these comprise 'search costs' (a form of transaction costs). The larger are the search costs, and the smaller is the expected benefit of the second product over the first, the less likely it is that the consumer will try to find a better match, even though there is definitely a better one out there. Thus, high search costs lead to suppliers having some market power over their existing customers—akin to monopoly—even though there are many different variants of the product—competitors—available for consumers to choose from. Almost certainly, the markets for internet application adoption and usage are monopolistically competitive. Customers make investments in using specific applications (learning costs, emotional investments, etc.) that make them reluctant to try new variants. When a new application enters a market where customer preferences are already well established, overcoming these high search costs is likely one of the most significant barriers faced. The more mature is the application market, the more established are these preferences and the harder it will be to overcome them. Even if the new product is superior to all others in the market, customers will be reluctant to try it, because they do not know that it is better for them until they have tried it. If the same price is charged for the new and existing products, the new product will attract very few new customers, because of the high search costs customers face. In this case, the only way that the new product will attract new customers is by charging less than the existing products—that is, undertaking to meet the search costs incurred by the customers. For this reason, new products in markets exhibiting these characteristics are typically introduced with free trials.

However, if a new internet application is offered free of charge to consumers, because the costs are recovered from advertising or other sponsored revenues (e.g., donations, tax funding), it is not possible to discount the application cost to encourage switching. The only way that potential customers' search and switching costs can be reduced is by reducing the internet access charge. Hence, zero-rating may be the only viable way of inducing existing consumers to try a new application. Not being able to offer zero-rating thus constitutes an entry barrier to new applications seeking to compete with established ones. Just as in question four, it will be existing applications providers, and not new entrants, who would prefer that zero-rating not be allowed. However, it is important to

note that there are two different reasons for coming to this conclusion.

given price, this product gives the consumer the highest possible surplus.

*Strategy and Behaviors in the Digital Economy*

purchasing internet connections.

effects on barriers to entry and exit.

occur without the need for government intervention.

*to increase the number of individuals using the internet?*

subsidising in the latter case, because surpluses generated by users in developed economies can be transferred via the application and access bundle to subsidise those in developing economies. Thus, wealth transfers across national borders can

*Question 3. Is zero-rated access to a subset of applications primarily intended* 

The purpose of this question is to separate out instances of zero-rating that are more likely to lead to positive network effects arising from larger total numbers of internet connections from instances that may arise from other motivations—for example to change the range and usage of applications by individuals already

Having considered the implications of relaxing the constraints of product (and consumer) homogeneity, we now turn to the assumptions of perfect information and zero transaction costs that attend the perfect competition model, and their

Imposing the assumption of consumer homogeneity reduces the amount of information available to both ISPs and CAPs to customise their offerings to individual consumer preferences. Information that would otherwise have been efficiently signalled or screened in customised offers can only be obtained subsequently by other means—inevitably with higher transaction costs. In the long run, this would seem to impose impediments to, rather than incentives for, the development of new applications and contracting arrangements. That is, banning zero-rating because the practice may pose entry barriers for new application providers must be balanced against the entry barriers that will be created if information about underlying consumer heterogeneity that would be efficiently signalled, screened and shared if zero-rating

proceeds cannot emerge due to regulatory intervention banning the practice.

with new consumers who will participate only with implicit subsidies. This gives rise to our fourth question for regulators and adjudicators.

While banning zero-rating has been justified by the potential for ISPs to raise the costs for new application providers, it is equally plausible that banning prevents both application developers and ISPs from learning about and creating offers that cater to these underlying differences. Thus, existing ISPs and CAPs might prefer the information not to be surfaced if in doing so, opportunities were created for new entrants to take advantage of consumer heterogeneity to create new offers, attract consumers away from the exiting providers and appropriate a disproportionate share of the new consumers yet to purchase internet connections. Likewise, existing end users obtaining high surpluses under a single price might be unwilling to share those surpluses

*Question 4. Who has requested that an instance of zero-rating be investigated?* If the request has come from existing ISPs, then it is plausible that the motivation may be to foreclose competitive entry by rival ISPs. If it has come from existing CAPs, then the motivation may be to foreclose competitive entry by new applications provides. If it comes from existing end users, then the motivation may be to lock in existing surpluses and not have to share them with new or future internet consumers. On the other hand, if the request to investigate has come from new or potential ISPs or CAPs then the claim that it creates an entry barrier may be credible. It seems most unlikely that a non-end user would ask for an inquiry about the legality of a zero-rating offer that would cost less than the alternative price. Similarly, it is also unlikely that a low-valuing existing end user who would be better-off using the restricted zero-price offer would request an inquiry.

This gives rise to our third question for regulators and adjudicators.

**4.4 Relaxing the constraints: perfect information and no transaction costs**

**120**

## **4.5 Positive search costs and barriers to entry**

In markets with heterogeneous products, consumers with different preferences, and information asymmetries that make it costly, if not impossible for consumers to identify the attributes of the products or the fit with their preferences before they have been consumed, a more appropriate model for analysing interaction is monopolistic competition. In this model, within a range of products there will be one that will be the best match for a given consumer with given preferences. At any given price, this product gives the consumer the highest possible surplus.

However, the consumer cannot identify in advance, which is the best match. Nor can the provider accurately identify the best consumers for the offer. The consumer can select one offer at random—so long as the surplus from this purchase is not negative, the consumer has gained at least some increase in surplus. Where the consumer will use a service multiple times (or make multiple purchases), the gain from purchasing the same product/service is known. There may be a better match available (higher gain) from buying a different product next time—but there is also a risk that the different product is a worse match than the existing one. The consumer could have had higher surplus if instead the first product had been purchased. There may also be switching, learning and adjustment and other investment (transaction) costs associated with each product. Buying from a second supplier means a second set of these costs—which is avoided if second and subsequent purchases are made from the first supplier. Together, these comprise 'search costs' (a form of transaction costs). The larger are the search costs, and the smaller is the expected benefit of the second product over the first, the less likely it is that the consumer will try to find a better match, even though there is definitely a better one out there. Thus, high search costs lead to suppliers having some market power over their existing customers—akin to monopoly—even though there are many different variants of the product—competitors—available for consumers to choose from.

Almost certainly, the markets for internet application adoption and usage are monopolistically competitive. Customers make investments in using specific applications (learning costs, emotional investments, etc.) that make them reluctant to try new variants. When a new application enters a market where customer preferences are already well established, overcoming these high search costs is likely one of the most significant barriers faced. The more mature is the application market, the more established are these preferences and the harder it will be to overcome them. Even if the new product is superior to all others in the market, customers will be reluctant to try it, because they do not know that it is better for them until they have tried it. If the same price is charged for the new and existing products, the new product will attract very few new customers, because of the high search costs customers face. In this case, the only way that the new product will attract new customers is by charging less than the existing products—that is, undertaking to meet the search costs incurred by the customers. For this reason, new products in markets exhibiting these characteristics are typically introduced with free trials.

However, if a new internet application is offered free of charge to consumers, because the costs are recovered from advertising or other sponsored revenues (e.g., donations, tax funding), it is not possible to discount the application cost to encourage switching. The only way that potential customers' search and switching costs can be reduced is by reducing the internet access charge. Hence, zero-rating may be the only viable way of inducing existing consumers to try a new application. Not being able to offer zero-rating thus constitutes an entry barrier to new applications seeking to compete with established ones. Just as in question four, it will be existing applications providers, and not new entrants, who would prefer that zero-rating not be allowed. However, it is important to note that there are two different reasons for coming to this conclusion.

## This gives rise to our fifth question for regulators and adjudicators.

*Question 5. Do consumers of the zero-rated application and its rivals make payments to applications providers separate from their payments to ISPs?*

If the answer to this question is 'no', then the party with the most plausible reason to use a zero-rating strategy may be a new entrant. Preventing zero-rating then may lead to barriers to entry that protect incumbents. If the answer is "yes', then the situation is more complex, and further investigation is warranted.
