WTF is zero-rating?

This article is a WTF explainer, in which we break down media and marketing’s most confusing terms. More from the series →

If you’ve been following the media and tech company acquisitions that have been happening lately, you’ve probably noticed a pattern: Mobile Network Operator A (think Verizon, AT&T) buys Media Company B (think AOL, Yahoo, Time Warner), often at a fine premium.

That’s a good thing for media company shareholders, especially those that are getting acquired. But why has this picked up so much in the past couple years? It’s because media companies are a valuable thing for a mobile network operator, particularly because of something called zero-rating.

In fact, zero-rating, which has pretty much only been on the minds of telco people until recently, has gotten so important that it could wind up playing a role in whether AT&T’s acquisition of Time Warner gets approved.

Here’s a primer on what it means, both literally and figuratively.

OK, so what is zero-rating?
Zero-rating is a term used to describe the practice of mobile operators offering customers the chance to consume content from certain apps or services without that consumption counting against their data plans. Think of T-Mobile’s Binge On plan, which allows subscribers to stream unlimited amounts of streaming video on their phones without worrying that they’re going to burn through their monthly data. Another example would be Facebook Zero, a bare-bones version of that platform it rolled out in developing regions like Africa and southeast Asia. More than 200 million of Facebook’s users get Facebook this way, and it doesn’t cost those users anything.

Is it new?
New-ish. Facebook Zero launched in 2010, but the kind of zero-rating that gives someone unlimited mobile Netflix or Spotify first arrived in 2014. But recently, it’s become much more popular. T-Mobile offers two separate zero-rated promotions, Verizon has its own in the form of Go90 and FreeBee, and a couple weeks ago, AT&T announced that DirecTV Now, its brand-new over-the-top streaming TV product (AT&T owns DirecTV), will be zero-rated too.

Why is it becoming so popular?
Because when it comes to attracting new subscribers, or reducing churn among current users, zero-rating works. Over the past two quarters, T-Mobile has gained nearly 2 million subscribers at AT&T’s and Verizon’s expense, and its top brass attribute those gains chiefly to Binge On and its other zero-rated programs.

Doesn’t this violate net neutrality or something?
While a number of countries, including Norway and Japan, have outlawed zero-rating, it’s not technically illegal in the United States. Under FCC rules, zero-rating promotions are evaluated on a case-by-case basis to determine whether they create unfair conditions for consumers, competition, and so far most of these promotions have gotten a stamp of approval.

In late November, the FCC wrote AT&T a letter saying it thought its plans to zero-rate DirecTV Now, its recently launched over-the-top video channel, were anticompetitive, but it’s unclear how the arrival of a Trump administration might change that.

So what does this mean for publishers and content companies?
If you’re a publisher that makes content, particularly video content, it could mean a lot. If you don’t make something that can be consumed in a zero-rated way, you’re limiting the number of contexts in which someone might consider watching something you made and distributed. As more and more content consumption, especially video, moves to the supercomputers we carry in our pockets, having one’s content load quickly is of the utmost importance.

“It’s really about the pitch of the playing field,” said Peter Kreisky, a media consultant, “toward those who can leverage their distribution clout to support content that they own. This is of concern to content players that are independent of distribution players.”

So does this mean everyone who doesn’t make content for AT&T or Verizon is screwed?
Not necessarily. A few of these promotions, like T-Mobile’s Binge On, include unlimited data streaming of digital video of any kind. So your Instagram Stories (and your Snapchat Stories, and your Facebook Live broadcasts, and your Periscope broadcasts, and …) won’t count against their customers’ data caps.

What’s next for zero-rating, then?
This might be a near- to medium-term problem. Over the next few years, as 5G connectivity comes into being, the maximum upload and download speeds possible over wireless networks will increase by a factor of 10. In plain English, that means you’ll be able to download a full-length movie, in HD, in under 10 seconds.

Nothing wrong with that
On the one hand, that’s going to make people even more impatient when it comes to content loading quickly. But it may also mean that wireless companies will simply give people as much as they want. “They’re making this, potentially, a moot discussion five years from now,” said David Sanderson, the global leader of Bain & Company’s media and entertainment practice.

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