The blogosphere has been abuzz this week with AT&T's introduction of a new "sponsored data" service. Under this service, Internet content providers such as Google or Yahoo could agree to pay for the data that the customer would otherwise incur when accessing the provider's services on his or her mobile device. This allows the customer to consume sponsored content without it counting against the customer's monthly data limit. (My co-bloggers have examined the proposed service here and here.)
Although AT&T's announcement received much fanfare, it's only the latest in a long series of moves by wireless carriers to use pricing as a way to differentiate themselves from their competition. Over the past year, T-Mobile has made pricing reforms the cornerstone of its "uncarrier" strategy. Unlike most wireless providers, T-Mobile has decoupled handset purchases from service plans, and is offering service without an annual contract.
The strategy appears to be working, as the company is gaining share on its rivals and just posted its best quarter in eight years. And it's hard to believe that it's only been a year and a half since Verizon introduced the first shared data plan, a move that much of the industry has since emulated. One could also highlight the revolution spawned by the advent of prepaid service, which extended affordable wireless service to those unwilling or unable to sign up for traditional plans and helped build TracFone, the most successful wireless provider you've never heard of, into America's fifth largest carrier.
This partial list testifies to the fact that competition is alive and well in the wireless sector. But it also shows that new technology and faster speeds are not the only ways that broadband providers can innovate. Experimental new pricing models can be a form of innovation as well. One can define innovation as a purposeful change to existing activities that improves economic performance. By offering new and different pricing models, companies can provide better value to consumers or identify niche segments that are not well-served by dominant pricing strategies. As I've noted before, America Online's move from metered to unlimited flat-rate service helped the company gain market share from its rivals, and in the process transformed the market for Internet access in ways that we still feel today. In the race to provide better service to customers at lower rates, pricing innovations can be just as disruptive as technological innovation.
Federal Communications Commission Chairman Tom Wheeler seems to agree. When asked about AT&T's sponsored data plan, he replied that he was inclined to allow the company to proceed, but would intervene if "it develops into an anticompetitive practice." These comments reflect the chairman's general emphasis on competition as the primary driver of telecommunications innovation – including competition on the basis of experimental new pricing models. He has rejected calls by some public interest groups to regulate usage-based pricing, noting that "we are seeing the market evolve in such a way that there will be variations in pricing, there will be variations in service." And he has previously endorsed the development of two-sided market arrangements such as the AT&T sponsored data service, noting that "the marketplace is where these decisions ought to be made, and the functionality of a competitive marketplace dictates the degree of regulation." The regulator's role, he explained to Congress, is to make sure that any new payment plan does not interfere with access, is not anticompetitive and does not provide preferential treatment.
But this endorsement of experimentation and pricing innovation sits uneasily with Wheeler's ongoing support of the commission's net neutrality rules, a tension that has not been lost on anyone involved in this debate. Net neutrality is, at base, a rule designed to limit broadband providers' ability to experiment with different service plans and different pricing models to deliver broadband service to consumers unsatisfied with their current marketplace options. And although the rules apply a lighter hand to the wireless sector, they have in fact limited the options available to wireless consumers.
One need look no further than MetroPCS, which in 2010 sought to differentiate itself by offering a low-cost service plan that included unlimited voice and text service, plus access to YouTube, for one low rate. The plan appealed to price-sensitive customers who wanted some broadband service but could not afford, or were unwilling to pay for, the unlimited-access plans offered by larger carriers. But the company withdrew the plan after multiple public interest groups pressured the FCC to find that the plan violated net neutrality.
Consumers benefit when companies experiment with new and different ways to meet consumer demand. Companies like T-Mobile or MetroPCS, which lack the scale to compete head-to-head with larger players under the dominant pricing structure, may hit upon a more efficient way to serve consumers or discover a model that better serves niche customers.
Wheeler is exactly right that the government should intervene to stop anticompetitive behavior. But especially in a market as competitive as wireless service, this intervention should only occur when a particular practice actually harms consumers, and consumers are unable to remedy the problem themselves by switching providers. Rules like net neutrality, which impose ex ante limits on innovation, may ultimately harm both consumers and competition. The effect is to entrench existing market practices and limit a company's ability to differentiate itself and gain market share by offering potentially better options to consumers unsatisfied with the status quo.
Daniel Lyons is a visiting fellow at AEI's Center for Internet, Communications, and Technology Policy where he blogs at TechPolicyDaily.com and an assistant professor at Boston College Law School.