Should subscription-revenue internet content providers adopt sponsored data plans by mobile telecom carriers in duopoly market?
Introduction
Mobile Internet has become a popular access for people to view online content through smartphones (Zhao et al., 2019). According to the Cisco® Visual Networking Index™ Global Forecast and Service Adoption for 2017 to 20221, end users’ (EUs) demand for mobile data traffic has been growing rapidly and will sustain a high growth rate in the near future. However, EUs’ monthly data caps (or bandwidth caps) are finite due to financial constraints, and more mobile data allowances are expected2. It is reported that 39% of EUs will use up data caps ahead of time every month, and 38% of EUs will carefully manage their data allowance in case of additional traffic costs, while only 28% of EUs have a surplus every month3. Particularly, the recently initiated 5G data plans are priced much higher than existing 4G data plans. Although the data cap of 5G data plan is larger than that of 4G data plan, it is still limited, and a larger bandwidth of the 5G mobile network will eat into EU’s data plan significantly faster than before4. To close the gap between consumer demand and limited monthly data cap, ICPs cooperate with mobile telecom carriers (MTCs) to provide sponsored data plans (or so-called zero-rating plans (Somogyi, 2017)) to give EUs access free of data traffic to online content, where ICPs pay the cost of data traffic consumed by EUs to MTCs as subsidization fees. The main providers and adopters of sponsored data plans are summarized in Table 15.
The sponsored data plan can be a win–win–win for MTCs, ICPs, and EUs (Andrews, 2013, Andrews et al., 2014, Andrews et al., 2013, Joe-Wong et al., 2015). A sponsored data plan creates a positive cycle: EUs are pleased to access more content without counting towards their mobile data caps; the ICP attracts more EUs; the MTC gains more profit through a sponsored data plan so as to sustain better performance and technology update (Zhang and Wang, 2014).
In reality, the WiFi coverage and access experience are still limited. According to Microsoft, 162.8 million people are not using the Internet at broadband speeds in the U.S. in 2019 (Iscrupe, 2020). Further, because the WiFi access is of a low quality in most public sites, users have to depend on mobile Internet networks to browse online content in high quality. Besides, mobile Internet traffic accounts for 55.64% of total global online traffic; the mobile access accounts for 79% of total digital minutes in the U.S., where app accounts for 88% of total mobile minutes (Clement, 2019).
Contrary to the offline context, online EUs actually enjoy the privilege of lower search costs and lower switching costs (Kim et al., 2013), which results in fierce competition among ICPs. Take the market of online video platforms as an example, there are more than 30 online stream video platforms in the U.S. (Deng, 2018), such as Netflix, HBO, YouTube, Hulu, Facebook Live, and IBM Cloud Video. The majority of people in the U.S. stream live videos on their phones frequently6. By 2020, live streaming is estimated to account for 82% of all Internet traffic7. The sponsored data plans can attract subscribers for ICPs in two dimensions: a greater number of subscribers consuming a higher amount of data traffic, which is referred to as the effect of sponsored data plan in this study. Prior research on sponsored data plan only focuses on the short-run game without considering the change in the number of EUs or the consumption of data traffic by EUs. In this study, we consider dynamic changes in both the total number of EUs and the average data traffic consumed per EU, that is, the effect of sponsored data plan.
Conventionally, ICPs earn revenue mainly through advertisements, such as YouTube, iQIYI, Tencent Video, Youku, Hulu, and HBO. Recently, the revenue of ICPs from subscription increases rapidly, such as iQIYI8 (see Fig. 1(a)) and Time Warner’s Turner (see Fig. 1(b)), and more web-based content or service sites turn to subscription-based business models (Punj, 2015, Wang et al., 2005, Xu and Duan, 2018). Besides, from the perspective of EUs, there exists a trend that paying for online content is being accepted by more and more consumers (Kumar and Sethi, 2009, Rong et al., 2019, Wang et al., 2005). To the best of our knowledge, we are the first to consider subscription-revenue ICPs under sponsored data plans, in contrast to existing research focusing on advertisement-revenue ICPs.
Sponsored data plans bring larger revenues to ICPs. For example, Fig. 2 illustrates the income of ByteDance (a hybrid-revenue ICP that earns revenue from both subscriptions and advertisements, and it is also the parent company of TikTok and Xigua Video) from 2016 to 2020. Particularly, in 2018, ByteDance adopted the sponsored data plan provided by China Telecom. As illustrated in Fig. 2, the income curve indicates a steep growth after 2018, which means that the sponsored data plan attracts more and more users to this ICP.
There exists second-degree price discrimination in pricing data traffic by MTCs (Economides and Hermalin, 2015): the higher the amount of data traffic consumed by EUs, the lower will be the per-packet price charged by an MTC (see Fig. 3). Under a sponsored data plan, EUs will consume a higher amount of data traffic than before, so the per-packet price charged by an MTC to ICP will be lower than that charged to EUs in the absence of a sponsored data plan. In other words, the MTC gives a discount on the usage-based per-packet Internet access fee (or a discount on the usage-based per-packet price of data traffic) to the ICP.
According to the Alexa Global Traffic Rankings9, the major destinations of Internet data traffic are ICPs such as Google, YouTube, Baidu, QQ, and Facebook. MTCs deliver the content of these ICPs to EUs through mobile networks, only servicing as pipes, which are considered over-the-top (OTT) services (Green and Lancaster, 2007). These OTT companies (ICPs) transfer their online content to EUs through the mobile networks of MTCs, acting as free riders (Antonopoulos et al., 2016). In order to earn additional revenues, some MTCs have invested in ICPs, or established subsidiary ICPs to provide their own online content to EUs (Hwang et al., 2004) (e.g., AT&T acquired Time Warner in 201810). Therefore, how sponsored data plans affect a system’s strategy involving both an MTC and an ICP is worth investigation as well. In this study, we analyze a system’s optimal strategy under sponsored data plans.
Some ICPs in the U.S., such as Netflix, HBO, Hulu, ESPN, Amazon Video, DIRECTV, and YouTube Red, have raised subscription fees since they adopted sponsored data plans. However, the subscription fees of ICPs in China such as Tencent Video, iQIYI, and Youku, remain unchanged for years even under sponsored data plans. Hence, it is rational to analyze the above two scenarios regarding whether to raise subscription fees or not respectively in this study.
To sum up, in this study, we focus on competing subscription-revenue ICPs’ adoption of sponsored data plans by an MTC. We analyze four possible scenarios wherein neither ICPs, only one ICP, and both ICPs adopt sponsored data plans, respectively. We consider the dynamic change in consumer behavior (or the effect of sponsored data plan) in terms of two dimensions: the changes in both the total number and the average data traffic demand of EUs. The second-degree price discrimination in pricing data traffic is also considered. Particularly, we discuss the following key research questions:
1) What market conditions drive the adoption of sponsored data plans by competing subscription-revenue ICPs, and how should ICPs set subscription fees?
2) How do the sponsored data plan effect and the discount on the usage-based per-packet price exert decisive influences on the decisions of ICPs?
3) What is the optimal strategy for the MTC on providing sponsored data plans?
4) Will an ICP become better off when merging with an MTC? Will the competing ICP become worse off?
5) What are the equilibrium results if ICPs do not raise prices by fixing subscription fees?
Research contributions of this study are as follows. First, this study contributes to the literature on sponsored data plan by considering subscription revenue models of ICPs. Second, this study considers the effect of sponsored data plan. Third, we consider the second-degree price discrimination in pricing data traffic by MTCs. Fourth, this study contributes to the supply chain literature by analyzing the situation wherein an MTC and ICP merge as a system. At last, this study contributes to the research on revenue models of platforms by analyzing subscription-revenue ICPs’ decisions under sponsored data plans.
The rest of this paper is organized as follows. In Section 2, we review the literature closely related to our study. To analyze competing subscription-revenue ICPs’ adoption of sponsored data plans, we present our main model in Section 3. In Section 4, we analyze the results under four subsidization scenarios. Then, in Extensions, we analyze MTC’s optimal strategies on providing sponsored data plans and extend our discussion to the system scenario and the fixed price scenario. In Section 6, we discuss the theoretical results, managerial insights, and policy implications. Finally, in Section 7, we summarize and present our conclusions and limitations, and provide directions for future research.
Section snippets
Literature review
Our study is mainly related to three streams of literature. The first stream focuses on sponsored data plans provided by an MTC to ICPs. Extant literature assumed that ICPs earn revenue through advertisements (Andrews et al., 2014, Andrews et al., 2016, Andrews et al., 2013, Cho et al., 2016, Jin et al., 2015, Joe-Wong et al., 2015, Somogyi, 2017, Wang et al., 2019, Zhang and Wang, 2014, Zhang et al., 2015). However, as mentioned in the Introduction, subscription revenue is becoming the main
Model
In this study, we consider a monopoly MTC, two competing ICPs, and EUs. In fact, there exists relatively less competition among MTCs in local geographies (Cho et al., 2016), and hence it is rational to assume a monopoly MTC in our model. To focus on ICPs’ optimal strategies regarding adopting sponsored data plans, the two competing ICPs are assumed to have equal intrinsic values. Table 2 provides a list of notations in this study.
Case (R, R)
We start with the benchmark case wherein neither ICP adopts the sponsored data plan. This case actually corresponds to the scenario wherein sponsored data plans have not been initiated by MTCs.
Lemma 1. In the benchmark equilibrium without data subsidization, the optimal subscription fees of ICPs are summarized in Table 4.
The proof is presented in Appendix: Proof of Lemma 1. It reveals that the subscription fees of the two ICPs are the same and the marginal EU is always . Deviating from
Mobile telecom carrier’s decision
In the main model, we assume that both ICPs are provided with sponsored data plans. However, in fact, MTCs may not choose to provide sponsored data plans. Hence, in this subsection, the MTC can decide on providing sponsored data plans and focus on optimal decisions of the MTC, as illustrated in Fig. 16. We assume that the MTC has zero marginal cost, which is consistent with existing research (Cho et al., 2016, Vyavahare et al., 2019). When the MTC provides a sponsored data plan, we label the
Theoretical contributions
This study contributes to the literature on sponsored data plan mainly in three ways. First, advertising and subscription fees are the most popular means of generating income for ICPs (Kumar and Sethi, 2009). Existing research considers only advertisement-revenue ICPs. However, the subscription business model plays a more and more important role in the total revenues of ICPs, such as iQIYI, Netflix, and ESPN. To the best of our knowledge, this study takes the first step toward filling this gap,
Conclusion
A sponsored data plan enables the win–win–win situation for MTC, ICPs, and EUs. Consumer demand for data traffic is becoming much larger, which has forced MTCs to stop unlimited data plans. In the future when 5G is commonly adopted, super-high bandwidth will make data traffic consumed by EUs grow much faster. Hence, the sponsored data plan is likely to continue its popularity as an MTC’s strategy in the future. Moreover, more consumers begin to subscribe to online content, which brings
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
Acknowledgments
This work was supported by the Key Program of the National Natural Science Foundation of China (No.71631003), the General Program of the National Natural Science Foundation of China (No.71871155 and No.71971153), and the National Science Fund for Distinguished Young Scholars of China (Grant No.70925005). It is also supported by the Program for Changjiang Scholars and Innovative Research Teams in Universities of China (PCSIRT). Authors are very grateful to the editor and all reviewers whose
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