February 17, 2014

Companies Subsidizing Consumption Is Good for the Market, Innovation, and Users

Brent Skorup

Senior Research Fellow
Summary

The practice of one party subsidizing a customer’s consumption is common in many industries. Particularly for media, information, and publishing, companies — a business model that represents or touches every major tech company these days.

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The practice of one party subsidizing a customer’s consumption is common in many industries. Particularly for media, information, and publishing, companies — a business model that represents or touches every major tech company these days.

ISPs and carriers like AT&T, Comcast, and Verizon face what economists call a “two-sided market.” In this case, they — and other tech firms — can receive revenue from two major sources: content providers (through sponsorship or ads), and consumers (through subscription fees). While TV broadcasters traditionally relied almost entirely on the former, cable programmers like HBO and Showtime rely almost entirely on the latter.

But most technology firms use a combination of both ad support and subscription fees. So it makes sense for AT&T, Comcast, Verizon, and others to do what most media firms (and that includes app creators) do: develop a balanced revenue stream from both the content side and the customer side to ensure profitability while making the service affordable.

These kinds of two-sided models are a pro-consumer way to encourage people to use online services. Content-side companies like Amazon, for instance, already pays wireless carriers for customer data charges via its virtual Whispernet network. By agreeing to pay for customers’ Kindle downloads, Amazon makes its ebooks more accessible; instead of paying onerous international data roaming charges, Amazon foots its customers’ wireless bill for downloads while traveling.

Other companies like Facebook and Google have also paired up with wireless carriers abroad to make online content free, providing access to their products to millions of new users. Facebook offers Facebook Zero, a text-only offering of the social media service for people with basic cellphones. Similarly, Google offers Free Zone access to Google services on cellphone plans in places like the Philippines — no data plan needed. Closer to home, U.S. customers can access Facebook without a data plan by using T-Mobile’s prepaid GoSmart brand.

Sometimes the carrier pays the content provider, sometimes the content provider pays the carrier, and sometimes there’s no money exchanged at all since the partnership improves the attractiveness of both companies. Such agreements are a delicate balancing act dependent on changing consumer preferences.

Unfortunately, this kind of market innovation is viewed as controversial or even harmful to consumers by some policy and internet advocates. But these concerns are premature, unfounded, and arise mostly from status quo bias: Carriers and providers haven’t priced like this before, so of course change will create some kind of harm!

Yet it’s important to remember that subsidy programs are a conventional business practice that brings down the cost of services for consumers. Nobody’s access is degraded. In an increasingly connected world, it’s a welcome development that carriers and ISPs are proposing market-oriented solutions to bring more people online while gaining a new revenue stream for network upgrades.