In 2015, Facebook announced with some fanfare the rollout of its “Free Basics” service in India.1  Partnering with the wireless telecom Reliance, customers that downloaded the Free Basics app onto their smartphones could use the service without incurring data usage charges.

Less than six months later, the India regulator (the Telecommunications Regulatory Authority of India (TRAI)), “effectively banned” the service,2 in a Decision that finds that the Free Basics offering violates “net neutrality” principles.3 

This piece provides some background on this seemingly counter-intuitive story.  How could Facebook – the leading content / edge-provider in the world, and well known as an advocate of “Open Internet” policies4 -- run afoul net neutrality? 

At the outset, it should be noted that the Decision is not addressed to Facebook directly.  Rather, it is a generic order that deals with the service offerings (tariffs) of mobile, wireless carriers that enter into “zero rating” partnerships with content providers (like Facebook).  These arrangements make the sponsored content available to consumers over their mobile devices without incurring data charges.  The Decision prohibits zero rated offerings by the wireless carriers across the board.  While the Decision is broadly applicable and reaches beyond Facebook, it was clearly prompted by Facebook’s actions and had Facebook squarely in mind.  Thus, this piece analyzes the story from Facebook’s perspective.

Overview

There are several possible explanations for the outcome in India.  First, the case can be made that the TRAI simply got it wrong.  As discussed below, the TRAI’s Decision is inscrutable in places and analytically suspect in others. 

Second, it would be a mistake to discount the sociological forces and negative public relations angle that Facebook seems to have mishandled received. Despite its publicly proclaimed good intentions, many Indians – especially in the ’Netizen crowd – portrayed Facebook as an imperialist intruder seeking to corner the market at this early stage of Internet adoption in the country.5  Given their history, Indians are rightfully sensitive about Westerners telling them how things should be done, and that sentiment is reflected in the Decision. 

Finally, it at least seemed to the TRAI –  that Facebook’s conception of “net neutrality” is too self-servingly constricted.  Facebook says that it is a proponent of rules that prohibit “blocking and throttling content.”6  But the Decision’s holding that the rates, terms and conditions of mobile carriers’ data plans should not “vary on the basis of the website / application / platform or type of content being accessed,7 reflects broader considerations.  Free Basics makes only some content available to end-users, and restricts access to other content.  Facebook’s argument that free, but limited access is better than no access at all simply did not carry the day. 

This article briefly reviews the Free Basics program and the TRAI’s Decision to reject it.  A subsequent article will examine U.S. and other governments’ policies toward zero rating Internet access programs.

The Free Basics Program

The United Nations estimates that some 57 percent of the world’s 7.3 billion people still do not use the Internet regularly or actively.  Of those four billion unconnected people, approximately one-quarter of them live in India.  With a total population of 1.3 billion, India’s Internet penetration rate (approximately 30 percent) is among the lowest in the world. 

Free Basics is billed as a way of correcting that problem.  As we understand it, the program works as follows:

  • It is available to all wireless operators on the same terms and conditions.  Any operator can sign-up and launch the service. 
  • Only end-user customers of participating operators can use Free Basics.  Free Basics is accessed through an app available from the Google Play (for Android users) and the Apple iTunes App Store (for iPhone or iPad users).  
  • From the user’s perspective, Free Basics looks like any other app.  After it is launched, it operates like a portal to specific (Facebook-curated) content (discussed further below).  Users are not supposed to be charged for any data or content accessed through the Free Basics app.
  • Free Basics is free to both users and content owners.  No user is charged for accessing Free Basics.  Wireless operators do not pay Facebook to participate, and Facebook does not pay the operators. 
  • Facebook says that it does not make any money from Free Basics, “as there are no advertisements within the Facebook experience on Free Basics” and it is not paid by content providers.8 
  • Free Basics is billed as a “low bandwidth” service.  It offers access to certain news services, messaging, and a stripped-down version of Facebook itself.  Streaming video, VoIP, and other bandwidth-intensive applications are not available. 
  • Non-Facebook content is available from third-parties through a curated process that is not unlike the process by which independent developers place their apps on the iTunes store.  Facebook explains the process on the Internet.org website.  Facebook’s advocacy says that “Free Basics is an open and non-discriminatory platform.  Any content owner can participate as long as it meets the same technical criteria, which are openly published.”

The Controversy

If Free Basics is really free, it is reasonable to ask, why does Facebook offer it?  Further,  what is the incentive of the wireless carriers to participate, if they also don’t get paid? 

First, there is clearly an altruistic motive at work.  There is no question that Mark Zuckerberg believes that Internet access is a social good and he is willing to spend some of his personal fortune to advance it. 

But there is a business angle, as well, and Facebook is unapologetic about billing Free Basics as a loss-leader.  As the company explained in its advocacy to the TRAI:

Most [Free Basics users] upgrade to paid access [and] the majority of Free Basics users pay to access Internet content outside of Free Basics in their first month of use, and the number keeps rising over time. These arrangements therefore act as an on-ramp to the Internet.  It is this on-ramp that Facebook has an interest in seeing flourish.9

How strong is this on-ramp effect?  Facebook says that new users in markets where Free Basics has launched are coming onto mobile networks 50 percent faster than they would otherwise.10  And once on Free Basics, almost one in 10 begins using paid services.11 

So, why did “fierce opposition” build against the service in India and why did the TRAI ultimately reject it?12 

As noted above, the Decision is ostensibly the product of a generic investigation into whether Telecom Service Providers (“TSPs”) “should be allowed to have differential pricing for data usage for accessing different websites, applications or platforms.”13  In rejecting such pricing schemes, the Decision is (purportedly) based squarely on broad, net neutrality principles:  “Allowing price differentiation based on the type of content being accessed on the internet would militate against the very basis on which the internet has developed and transform[] the way we connect with one another.”14  The TRAI also expressed concern that zero rating pricing models would segment the market for Internet usage, which – according to the TRAI – would hurt the positive network effect benefits provided by the universal connectedness of the traditional Internet.15  Finally, the TRAI was concerned about perceived competitive harm to smaller / new entrant content providers that could result from the potential for vertical integration between TSPs and content providers.16

In so ruling, the TRAI rejected the cost-benefit arguments made by the proponents of zero rated offerings.  For example, the Decision says that the benefit of increased Internet usage was outweighed by the harm that would result from “allowing service providers to define the nature of access, [which] would be the equivalent of letting TSPs shape the users internet experience.”17  While this analysis implicitly concedes that zero based pricing would increase usage (though it hedged, as we’ll see), the Decision says that this short-term benefit “can prove to be risky in the medium to long term as the knowledge and outlook of those users would be shaped only by the information made available through those select offerings.”  Thus, the TRAI was unpersuaded by Facebook’s “on-ramp” argument that almost 90 percent of Free Basics users quickly (within one month) move to unlimited, but not free, usage options. 

Indeed, the “on-ramp” argument goes unmentioned, except for a note of skepticism: “Further, to the extent that affordability of access is noted to be a cause for exclusion, it is not clear as to how the same users will be in a position to migrate to the open internet if they do not have the resources to do so in the first place.”  There are several possible responses to this challenge.  One is that consumers might choose to reallocate their expenses to give Internet access higher priority than they did before they knew anything about it.  Internet access is what economists call an “experience good,” which simply means that the more people experience it, the more of it they want.  Letting people try a stripped-down version of the Internet for free could well have the effect of encouraging people to move up to a fuller version of the Internet, even if that costs money.  Moreover, if advocates of broader access rights are to be believed, wouldn’t even limited Internet access allow poor users to participate more fully in the economy than they did before, which would lead to them being able to afford to pay for more robust services down the line?  And then there is the fact of wireless operators’ participation in the Free Basics service, which also goes unmentioned.  They are not getting paid either and cannot, one presumes, afford to be as altruistic as Zuckerberg.  So their participation must be based on the bet that the vast majority of users will eventually migrate to full-pay offerings.  

The TRAI, however, was unconvinced that this migration was likely to take place. In a passage that reflects (to this reader) a patronizingly low view of the average prospective user, the TRAI found that,

the “information asymmetry” between service providers and users leaves users with inadequate information to make an informed choice. Secondly, internet access is not a “search good” but rather an “experience good” which can be understood properly only after being used.  Thus, the “information asymmetry” problem cannot be adequately solved through disclosure or transparency requirements, as many consumers may not be in a position to understand the information being presented to them.18

In other words, the TRAI appears to believe without the “experience” of the full Internet, end-users will not know to go in “search” of it.  It is hard to accept this logic: presumably getting experience with part of the Internet would alert users to the kinds of things that are available and motivate them to take steps to gain fuller access.  Or, stated differently, to the extent that the TRAI agrees that the Internet is an “experience good,” isn’t some experience of this good—experience that Facebook wants to deliver consumers for free—better than zero experience?  Moreover, the power of word-of-mouth, and the fact that the power to reach the full Internet resides on the same phone used to access the Free Basics portal, seems not to have factored into the TRAI’s analysis.

There is good reason to wonder to what extent the TRAI’s Decision was driven by politics--and perhaps unfavorable optics that Facebook was unable to sufficiently rebut—rather than objective legal reasoning. Skepticism about the altruistic motive behind Free Basics is reflected in the press coverage of the Decision, as are undertones of perceived imperialistic hubris.  As Christopher Mims writes in the Wall Street Journal, “the problem with Free Basics is that if it had been allowed to play out ... it would have given Facebook the power to determine which companies, both indigenous and multinational, win or lose on India’s still-nascent domestic Internet.”  Mims’ claim is based largely on Facebook’s control of the content that would be accessed through Free Basics and the possibility that a “walled garden” of proprietary content, controlled by Facebook, would develop over time.  Although there is little in the record that supports that hyperbolic view, Mims’ reporting / editorializing seems to reflect a widely held view.19  This amounts to the claim that even though Facebook states that any edge provider can get onto the Free Basics app by meeting certain (presumably content- and application-neutral) criteria, in fact Facebook would use its control over the app to favor some content over others based on something other than purely technical/bandwidth-related concerns. 

Which highlights another curious aspect of the Decision.  Rather than waiting to see if Facebook’s promises about Free Basics proved correct, the TRAI issued a blanket, across-the-board ban on zero rating programs. 

Conclusion

So zero rating is dead in India, at least for the time being.  A subsequent article will examine the prospects for zero rating services in the U.S. and elsewhere around the world.