Impacts of Sponsored Data on Infrastructure Investments and Welfare

Abstract

With increasing demand for wireless data and new requirements to uphold “net neutrality,” internet service providers try new methods to ensure their profits. Sponsored content, the archetype of “Zero-Rating,” allows the content provider to pay for the accrued traffic instead of the consumer. This paper shows, using a theoretical model, that allowing sponsored content has ambiguous results both on infrastructure investments and net welfare. Sponsored content may be used by the ISP to internalize additional profits of the content provider and thus motivate higher infrastructure investments, especially given very high network costs. However, given a sufficiently high profitability of the content provider, the internet service provider might be more interested in optimizing the income stream from the content provider than in the satisfaction of the consumer. This not only decreases effective network capacity but might also lead to a decrease in net welfare.