A
search for “net neutrality” on Google throws up more than 16 million results;
“net neutrality in India” yields more than 200,000 hits. Quite clearly, the
issue has got people talking. Even Rahul Gandhi spoke about it in Parliament![i]
Almost a million emails in support of Net Neutrality (NN) have been sent to the
Telecom Regulatory Authority of India (TRAI).[ii]
Flipkart, after flirting with Airtel Zero which would have given preferential
treatment to certain content providers, backed out of the deal under public
pressure.
Whether
one knew it or not, we were all so far living in a world of NN. No content
provider was blocked, no content provider received preferential treatment; on
the users’ side, no user was given preferential treatment or faster access than
others who had paid the same subscription to the Internet Service Provider
(ISP). This NN environment was not legally ordained; it was, in fact, the
default setting of the internet. Of course, since it was not legally protected,
it was not immune to attack, as started to happen in the USA with Verizon
throttling Netflix but restoring speeds after Netflix paid up.[iii]
The TRAI consultation paper also lists violation of NN by Reliance and Airtel.[iv]
Hence, if NN is to continue, it would now need the protection of the law. This
is where the matter stands and this is what has led to much passionate
discussion on protecting NN.[v]
So, what is NN?
Economists have made significant contributions to this issue. I strongly
recommend the article by Niranjan Rajadhyaksha which provides a wonderful summary
of the economics of NN.[vi]
NN is understood as a regime that does not distinguish data delivered over the
internet in terms of price, in terms of the identity of who is providing these
data or who is using the data.[vii]
The ISP connects its customer (users like you and me) to the internet (which
includes all content providers such as Google, YouTube, Netflix, Skype,
Whatsapp and so on) and the ISP gives content providers the “last-mile access”
to its customers. Violation of NN would mean that the ISP offering the last
mile access would charge a fee to content providers to reach the ISP’s
customers. It will also allow the ISP to delay delivery of content from
non-paying content providers or expedite delivery of content from content
providers who pay a fee.
The
TRAI Consultation Paper
The Telecom Regulatory
Authority of India (TRAI) has also jumped into the debate with its 118 page
long consultation paper. In its urge to cover all aspects of NN, and the
internet in general, the paper bites off way more than it can chew and gets
into areas well beyond its remit. Consider this statement from the paper: “But,
the internet can also be a very dangerous place. Cyber-predators, bullies,
stalkers and con artists are all online waiting to find their next victim.
Children using the internet often don’t realize the risks they face online”.[viii]
And this gem: “Facebook depression and sexual experimentation, that has given
rise to problems such as cyber-bullying, privacy issues, and “sexting.” Other
problems that merit awareness include internet addiction and concurrent sleep
deprivation”.[ix]
All that is missing is some sinister music from a horror film and an ominous voice-over
which says: “Be afraid, very afraid”.[x]
Hopefully, TRAI will soon realize that it is an internet regulator and not an
internet nanny.
TRAI defines NN as:
“Net neutrality (NN) is generally construed to mean that TSPs [Telecom Service
Providers. In India, TSPs are ISPs] must treat all internet traffic on an equal
basis, no matter its type or origin of content or means used to transmit
packets”.[xi]
With this background, I
will now discuss the main issues in the debate.
Issue Number 1: ISPs v. Content
Providers
The interests of
content providers conflict with those of the TSPs/ISPs. The main grouse of the
ISPs is that content-providers free-ride on the investments of the ISPs. This
conflict is best captured in the quote of Ed Whitcare, CEO of SBC, a
communications company: “How do you think they’re [that is, Google, Microsoft
Messenger, etc.] going to get to customers? Through a broadband pipe. Cable
companies have them. We have them. Now what they would like to do is use my
pipes free, but I ain’t going to let them do that because we have spent this
capital and we have to have a return on it”.[xii]
The ISPs have the customers, but that is not of much value unless these
customers consume something from the internet. Hardly any of the ISPs are
content providers and, hence, depend on third-party content providers to provide
content to their customers. Right now, ISPs get their revenues from charging only
their customers for using the internet, but a change in that business model is
what ISPs are looking for.
Issue Number 2: Externality of
Streaming Video
Viewership of streaming
videos has grown by leaps and bounds. It is estimated that, worldwide, 70% of
bandwidth is consumed for video streaming; in India, the estimate is 36%.[xiii]
In economics terminology, a person viewing streaming video imposes an
externality (an unintended cost imposed on others by one person’s actions) on
others since it reduces the bandwidth available for other customers and slows
down the speeds available to them. This is much like congestion on highways
where each driver’s individual decision to use the car adds to the congestion
and reduces the speed for other drivers. Economics suggests that the person
imposing the externality should be made to bear its cost.[xiv] On
the other side, providers of video streaming (e.g. Netflix, Youtube) also consume
a huge share of the bandwidth: Netflix accounted
for 34.2% of all downstream usage during primetime hours, up from 31.6% in the second half of
2013.[xv] With such massive
consumption, internet’s version of the Gresham’s law will operate: video
streaming could drive out (or, at least, slow down) the content of other providers.
Braham Singh makes a strong case for a “video track” which would involve
payments from video content providers.[xvi]
Can additional payment be extracted from consumers of streaming video?
ISPs already charge
different prices for different classes of service.[xvii]
For example, Airtel’s plans range from (a) 3GB data transfer quota at 2MBPS
download speed at Rs. 799 per month to (b) no quota for data transfer but
download speed of 16MBPS till 30 GB download and 512 KBPS after that.[xviii]
Economides and Hermalin argue against even such differential tiers of service
on the grounds that it violates NN and welfare is reduced due to such
differentiation.[xix]
The paid-for “video track” mentioned above could be imposed over and above
tiered services that are already in place. But, who should make the additional
payment for video content: users or providers? In a sense, since both “pollute”
the internet by excessive use of bandwidth, the polluter pays principle should
apply to both. Of course, being fewer in number, as compared to users, it would
be easier to charge video content providers. Besides, if a fee is imposed on, say Netflix, the
content provider would, possibly, pass on these charges to its subscribers,
depending on the extent of competition it faces.
Issue Number 3: Stealing ISPs
Revenue
The interests of
content providers who provide communication services (e.g. Skype and Whatsapp)
conflict with those of the TSPs/ISPs. The TSPs provide calling and messaging
services which are facing a losing battle with Skype and Whatsapp. With prices
of Whatsapp messages and Skype set at zero in India, there has been a
tremendous migration of users away from standard text messaging (SMS) and calls
over the mobile networks. In India, Whatsapp has 70 million users leading to an
18% fall in SMS traffic over 2013-14.[xx]
Likewise, Skype calling is eating into international mobile telephones
revenues. Airtel, Idea and Reliance have lost international outgoing calls to
Skype and Viber.[xxi]
Despite this challenge from internet-based communication services, the revenues
of ISPs are expected to grow by 75% by 2020, rising from a level of $28 billion
in 2013.[xxii]
The TSPs fear
that allowing unregulated communication services like Whatsapp and Skype will
disrupt their businesses and “derail their investment capabilities”.[xxiii]
The contention of the TSPs is that they have invested in building the
infrastructure (capital costs) and incurred other costs associated with
operation of the network (cost of spectrum, License Fee, Spectrum Usage Charge,
etc.) but with the communication service providers free riding on their
networks, the loss of revenues will adversely impact the rates of returns to
ISPs.[xxiv]
This has, of course, been disputed. Big telecom companies like Vodafone, which
operates in Europe and India, have been seen to be quite profitable.[xxv]
Issue Number 4: Recovering from
Spectrum Bidding Orgy
The recent
auction of spectrum earned for the Government of India Rs. 109,874 crores ($18
billion).[xxvi]
There has been much appreciation for this, especially when contrasted with the
allocation of spectrum under the UPA. There were two problems with the allocation
of spectrum by the UPA. The first problem was the process was opaque and open
to manipulation, both of which led to massive corruption. The second problem
was the feeling the spectrum was given away cheaply leading to a revenue loss
of Rs. 176,000 crore as (over) estimated by the Comptroller and Auditor General
of India.[xxvii]
Of the two, the real problem was the corruption and manipulation of the
allocation process and not the supposed loss in allocating the spectrum because
making the spectrum available at a “loss-making” price led to the spectacular
explosion of mobile telephony in India.[xxviii]
The presumed losses to the exchequer need to be balanced out against the gains
from the expansion of mobile telephony. An ICRIER study has shown that mobile
phones have improved the productivity of agriculture in India.[xxix]
Kathuria and others estimate that every 10% increase in mobile penetration rate
raises economic growth rate by 1.2%.[xxx] [xxxi]
In view of the
massive expansion witnessed by mobile telephony in India over the last few
years, I am not convinced that raising $18 billion in the recent spectrum
auction is unambiguously a good thing. The winning bids that were made by the
telecom companies are likely to leave them with bloated debts for some time.[xxxii]
A winning bid that cripple the winner is often dubbed the “winner’s curse”! It
is expected that debt servicing is likely to go up as a consequence of the
spectrum auction.[xxxiii]
Naturally, the telecom companies would like to raise mobile call rates.[xxxiv]
However, the Telecom Minister has warned the telecom companies that they should
not raise call rates and that the quality of service should not suffer.[xxxv]
How is all this
related to NN? The TSPs/ISPs find themselves in a bind: rising debt levels due
to their winning bids for spectrum, the inability to raise call rates and the
insistence that the quality of service not suffer. The way out for these
companies is to (1) increase internet usage charges paid by its customers or
push them to higher tiered service and/or (2) permit last mile connectivity to
only those content providers who pay fees to the TSPs/ISPs. I have stated above
that additional charges for customers of streaming video are efficient in an
economic sense in view of the externalities involved. Charging streaming video
providers, such as Netflix, might also have some merit given their excessive
use of a scarce resource. However, charging other (non-video) content providers
is likely to compromise customer welfare quite significantly as I discuss in
the next issue.
Issue Number 5: Charging Fees for
Last Mile Connectivity
Apart from the
paid “video track” mentioned above, any further restriction on content
providers, in the form of fees and, perhaps, slowing down the speeds of content
providers who do not pay these fees, would amount to serious discrimination
among content providers. It is possible that the big content providers e.g. Google,
Whatsapp and Skype, might well be able to pay fees to all ISPs to be present in
their bouquet of content providers, but smaller ones might be priced out
completely or they may pick and choose ISPs where they would like to be
present. So, you might find, say Flipkart, on one ISP but not another. From a
consumer’s point of view this would be an added restriction (apart from the tiered
service restriction) on their choices. Consumers would find that while they are
able to get their fill of Google and Skype, availability of other content
providers would be severely rationed and in some cases arbitrarily set to zero
(when a content provider refuses to pay fees to the ISPs). Clearly, this
violation of NN will wreak havoc with the choices of users, business plans of
smaller content providers and development of new content providers.
Fragmentation of the internet is the real danger here.
[v] The AIB group came in for much
criticism for its roast of Ranveer Singh and Arjun Kapoor. However, this video
on NN is getting welcome attention: https://www.youtube.com/watch?v=vxaFnc-MoVE
[vii] Nicholas
Economides and Joacim Tåg: “Network neutrality on the Internet: A
two-sided market analysis”, http://www.stern.nyu.edu/networks/Economides_Tag_Net_Neutrality.pdf
[x] A line from the film ‘The Fly’
spoken by Geena Davis’s character; http://www.imdb.com/title/tt0091064/trivia
[xx] http://www.trai.gov.in/Content/ConDis/10743_0.aspx;
pages 23-24
