How Tech Firms Expect Offering Free Internet Now Will Pay Off Later

Growing the market in order to lower costs and thus build demand. JL

Cecilia Kang reports in the New York Times:

The companies have set their sights on bringing free or cheap high-speed internet service to low-income and rural populations in the United States, spurred by the hope of turning Americans who are not online today into full-paying customers in the future.

There is an axiom in technology: New products typically go to wealthy customers first, before prices eventually fall to reach the masses.

With broadband now classified like a utility, telecom and tech companies, including Sprint, Comcast and Facebook, are increasingly working to make high-speed internet accessible to every American, not just a luxury. The companies are among those that have set their sights on bringing free or cheap high-speed internet service to low-income and rural populations in the United States, spurred by philanthropy and, for some, the hope of turning Americans who are not online today into full-paying customers in the future.

Those goals were on display Tuesday, when Sprint announced that it planned to give one million low-income high school students a free device and a free high-speed data plan until graduation. Facebook is also working to bring to the United States a service known as Free Basics, which gives people free access to certain websites, including Facebook. Comcast recently loosened requirements for its low-cost broadband service, expanding it to anyone in public housing.

These moves go toward closing what has been an intractable divide between broadband haves and have-nots. About 20 percent of Americans do not have a mobile data plan or broadband at home because the services are too expensive or because of where they live, among other reasons. That often leaves such households in a worse position for basic tasks like doing homework and applying for jobs, all of which have been moving online.

“The private sector has as much responsibility as the public sector to make devices and broadband available to millions of young Americans,” said Broderick Johnson, President Obama’s cabinet secretary and chairman of a White House task force that worked with Sprint on its new program.

Free and low-cost broadband programs have been around for a while, with Comcast rolling out one called Internet Essentials in 2011, Google offering free broadband in public housing, and Dell and Microsoft providing free or discounted devices to schools. But the new initiatives could reach much larger populations and are directed toward specific digital divide problems, such as the struggle for children without broadband at home to complete their homework.

Yet while telecom and web companies cite altruism as propelling free or low-cost broadband programs, what is often left unsaid are the benefits the services bring to the companies. It’s part of a textbook business strategy known as “loss leader,” when a company provides discounted or free goods to get customers to buy more once they are in the store.

The strategy is increasingly important for the telecom industry, where growth has slowed and new broadband customers are harder to find.

Internet service providers “are trying to go after those folks who are willing to pay less, but not to appeal to those willing to pay more,” said Robert Seamans, an associate professor at the New York University Stern School of Business and a former economist at the Obama White House.

Some of the companies acknowledged the business strategy involved in providing low-income products. But Sprint’s chief executive, Marcelo Claure, said the priority had been to work on a problem that telecom firms are best positioned to help solve. “The internet is one of the few things that doesn’t discriminate, but the one thing that does discriminate is who can get online and who can’t,” he said.

Sprint, the fourth-largest mobile carrier in the United States, typically charges customers about $60 a month for high-speed internet service. In the last six months, Mr. Claure, who emigrated from Bolivia as a college student, has made the digital divide an issue within the firm and assembled tech and nonprofit partners around the effort.

The mobile carrier is particularly focused on bridging the “homework gap” that exists for students without broadband, which Mr. Claure said particularly hurts low-income African-American and Hispanic children. “Being a Hispanic C.E.O., this bothers me,” he said.

Sprint’s new program, called the 1 Million Project, will provide high school students from low-income families free laptops, tablets or smartphones and three gigabytes of free high-speed data every month. After reaching that data limit, which is the equivalent of browsing for 60 hours or sending 3,000 emails, students will be switched to slower broadband speeds but still have free texting and calling.

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The program will be rolled out in seven to 10 cities, including Kansas City, Mo., early next year, before becoming more widely available in the 2017-18 school year. Nonprofits including My Brother’s Keeper Alliance and EveryoneOn will recruit students for the nine-year program, and Sprint will use its stores and customer service representatives to sign up and serve the students.

Mr. Claure plans to introduce the program to President Obama in a meeting on Tuesday in Greensboro, N.C., along with My Brother’s Keeper Alliance, of which Mr. Claure is a board member. The White House has started several programs in the last year with corporate partners to provide free or subsidized broadband to schools, libraries and public housing.

The new program’s cost to Sprint is minimal because it doesn’t require additional network upgrades; instead, it would be the equivalent of adding more cars to a highway, the company said. And there is social value for Sprint in doing this.

“People will look at Sprint as a good guy,” Mr. Claure said. “Brands that create social value by making a meaningful difference in people’s lives are in a stronger position to attract new customers.”

Comcast has also expanded its Internet Essentials program, which began by serving families with children in free- or reduced-cost lunch programs. It now targets low-income populations that live in public housing. Comcast offered the program in 2011 as a voluntary commitment to the Justice Department and the Federal Communications Commission to make its acquisition of NBCUniversal a public benefit, which was one of the requirements for approval of the deal.

David L. Cohen, senior executive vice president of Comcast, said in a statement, “The purpose of the program is not to convert Internet Essentials customers into paying customers.”

More recently, Facebook has been working to persuade United States officials to approve its Free Basics program, according to four people involved in the discussions, who spoke on the condition of anonymity because the conversations were private.

The Silicon Valley company, which has been vocal about connecting everyone on the globe to its site, has already introduced Free Basics in such countries such as Malawi and Indonesia. But it ran into issues in India last year, when public interest groups protested that the program discriminated against certain websites by providing free access only to Facebook and its partners. Regulators ended up blocking the service.

In the United States, Facebook has met with several members of the F.C.C. and officials at the White House to assure them that the service won’t disadvantage or block other websites, according to several people who have been at the meetings. The Washington Post reported about the meetings last week.

Facebook did not offer a timeline for a rollout of Free Basics in the United States.

“While we have nothing to announce, Facebook’s mission is to connect the world, and we’re always exploring ways to do that, including in the United States,” the company said in a statement.