On Net Neutrality: Against The Consensus

If the speed & bandwidth capacity is limited, then why shouldn’t Internet Service Providers prioritize between bandwidth application of, say a hospital, versus the bandwidth application of someone who is streaming porn? 

With the AIB video on Net Neutrality being circulated almost feverishly on the social media & IMs and with AIB getting their fair share of publicity on the News Networks under #SaveTheInternet, it is not difficult to see why the video has caught people’s imagination.

The AIB video about “Over the Top” services, curiously or perhaps not so curiously, itself goes over the top by displaying the lack of appreciation for the various facets involved in the #NetNeutrality issue. For starters, Net Neutrality hasn’t been passed in the U.S. ‘definitively’. FCC (the U.S. Regulator of communications services) has passed the Net Neutrality regulations on a 3-2 vote, which itself is being challenged in courts. Assuming we have sufficiently entertained ourselves with AIB explaining the nuances of the Net Neutrality Policy, let us turn to more credible views of the domain experts, many of whom are pioneers of the Internet Age, to examine the regulatory and the technological nuances of Net Neutrality.

Net Neutrality debate is an not a new debate that has emerged in the U.S. In Jan 2007, Robert Kahn, popularly called the “Father of Internet” strongly opposed the legislation over ‘Net Neutrality’ calling it a “slogan” and cautioned against dogmatic views of Network Architecture. While more recently, Nicholas Negroponte, the co-founder of MIT Media Labs, opined:

“The term net neutrality has a little bit of a pejorative ring. How would you want something not to be neutral….. But the truth is all bits are not created equal….. And so to argue that they’re all equal is crazy….. What I can assure you on the topic is those of us who were there at the beginning of the Internet never imagined that Netflix would represent 40% of it on Sunday afternoons. It was just off the chart”

And therein lies the crux of the debate in the U.S. The Net Neutrality debate came into the public limelight because of the dispute between Comcast and Netflix (which incidentally has been resolved). With streaming services catching the fancy of consumers and gaining prominence over the years, the pressure on the data networks due to explosive data consumption has been large. By some estimates, today ~70% of Internet traffic is on account of streaming services in the U.S of which Netflix alone consumes ~35% . Outside the romanticized view of the Internet lie the practical bandwidth constraints of the localized data networks. Bandwidth, after all is not a product of Garden of Eden with an unlimited supply. Upgrading data networks and augmenting bandwidth requires large capital investments.

Given the constraints on bandwidth, views of David Farber, a member of Pioneers Circle of the Internet Hall of Fame, need closer attention:

“When traffic surges beyond the ability of the network to carry it, something is going to be delayed. When choosing what gets delayed, it makes sense to allow a network to favor traffic from, say, a patient’s heart monitor over traffic delivering a music download. It also makes sense to allow network operators to restrict traffic that is downright harmful, such as viruses, worms and spam…. Pricing raises similar issues…. Blocking premium pricing in the name of neutrality might have the unintended effect of blocking the premium services from which customers would benefit. No one would propose that the U.S. Postal Service be prohibited from offering Express Mail because a “fast lane” mail service is “undemocratic.” Yet some current proposals would do exactly this for Internet services”

So what do these insights about Internet and its recent evolution, primarily with respect to Streaming and IM/VoIP services, imply for the regulations? “Public policy should intervene where anti-competitive actions can be identified and the cure will not be worse than the disease. Policymakers must tread carefully, however, because it can be difficult, if not impossible, to determine in advance whether a particular practice promotes or harms competition. Antitrust law generally takes a case-by-case approach under which private parties or public agencies can challenge business practices and the courts require proof of harm to competition before declaring a practice illegal. This is a sound approach that has served our economy well” writes David Farber.

Many commentators assume innovation to be a variable indifferent to regulations. In their view, claims about the threat to innovation due to Net Neutrality regulations are exaggerated fear mongering by ‘Greedy’ telecom operators. Jeff Pulvers, the VoIP industry pioneer, addresses such views by elaborating on how the legal uncertainty about the Title II rules was proving to be one of the greatest impediments to innovation, the resolution of which, made FaceTime and Skype ‘realities today and not just the stuff of science fiction movies’. Pulvers further cautions:

“Today, the echoes of the fight can be heard in present policy debates over Net Neutrality, with certain groups arguing that utility-style regulation is the only way to ensure that ISPs won’t block Internet sites or create discriminatory fast lanes. Not only are they wrong to think that utility-style regulation is the only way to ban discrimination, but they also completely fail to understand the collateral damage that would be caused by flipping our current model to Title II rules”

While it is greatly comforting to be seen outraging with the crowd against the telecom companies, a more considered approach would be to appreciate that creating telecom data networks infrastructure is not a public service. Acquisition of spectrum, investments in radio equipment (2G, 3G, 4G etc), installing telecom towers requires prohibitively large capital intensity and hence acts as a barrier to entry. NOT due to the greed and ability to conspire with regulators with an objective to fleece the consumers. So while telecom service providers incur the costs of rolling out data services, contribute to the revenue of the public exchequer (spectrum auctions); the Streaming Services (Netflix, Spotify, Saavan etc) & OTT services (Whatsapp, Viber etc), while brilliant innovations in their own right offering great convenience to the consumers, neither bear costs of network rollouts nor contribute to the public exchequer through spectrum auctions. Moreover, their explosive growth is threatening to disrupt the revenue models of telecom operators. Is such a situation tenable over the long term under the current norms?

It is worthwhile evaluating few questions:

1. Why shouldn’t the telecom operators protect their revenues and profitability? In India, voice revenues still constitute more than 80% of telecom operators revenues. While it’s true that telecom operators earn handsomely from the data consumption of Streaming/OTT services, the incremental threat of sudden disruption to the 80%+ of revenues can be greater than than the incremental revenue accrual from data consumption. While technology is headed towards making ‘Voice’ just an ‘App’, if enforced prematurely through legislative actions, telecom operators might have to increase data rates consistently to compensate for loss of voice revenues. In the worst case, the burden of ‘voice subsidization’ could fall disproportionately on data users. Thus it is important that DoT and TRAI allow businesses to experiment and evolve a measured glide path towards evolving their revenue models in conjunction with the evolving voice/data consumption of their subscriber base.

2. The AIB video mentions that the fears of telecom companies are unfounded since data revenues are growing every quarter. Undoubtedly. But don’t those revenues have costs associated with them? How should those network rollout costs be recovered? The comparable figure of streaming services contributing to traffic is ~35% in India as per some estimates and thus the pressure of traffic management on Indian operators is intensifying.

3. Should corporations stop making profits and operate like NGOs on a no profit basis? To extend that analogy to those vociferously opposing ‘greedy profit making’ intent of telecom companies, will they be willing to work without salaries? Or work on a bare minimum pay which covers for their elementary existential costs? Why aspire personally for high earnings and savings if one is ideologically opposed the ‘savings’ of corporations popularly called profits? Is the disconnect between these position so hard to conceive?

Perhaps the most important aspect that needs to be understood while ‘in-sourcing’ the outrage from the US to India is that the Indian Telecom & Cable industries are structured very differently than the U.S. or for that matter most other nations. In most nations, there are 3–5 telecom operators while the comparable figure for India 7–8 (or even more depending on the circles). Indian cable market has far more players (~6000 MSOs & ~50,000 LCOs as per TRAI estimates) than the telecom market. India, thus has a hugely fragmented market with weak pricing power unlike the U.S. where the market share is concentrated with high pricing power. Thus the fears of Indian telcos fleecing subscribers are driven more by hype than what facts would bear out. Understanding of elementary economics is sufficient to realize that hyper competitive markets don’t allow for super normal profits.

Readers can verify themselves. In a hyper inflationary economy over last 8–10 years, have the mobile/cable bills inflated (adoption of newer services notwithstanding)? Spending on handsets/STBs has inflated but has spending on monthly subscription inflated in line with inflation of other household costs? Most likely these costs have deflated on a constant unit basis. This can be further cross checked with call rates and profits of telecom operators. Most Indian telecom companies have seen their profits decline since 2007-8. After many years, it is only now with spectrum repricing and period of extreme regulatory uncertainty behind, that the outlook for profitability of the sector is improving. Instead of getting flustered by the noise around, readers should base their opinions on hard evidence at hand.

Another important facet that needs consideration is — shouldn’t India be more worried about Net Penetration before Net Neutrality? Large percentage of the population still has no access to the Internet in the first place. Government programs can’t improve connectivity and hence private corporations are India’s best bet. History of rising telecom penetration in India is well documented after opening of the sector to private operators along with an investment friendly regulatory regime. Hostile regulatory environment prohibits investments as is evident since 2008. Indians should ideally encourage a profitable private telecom sector which can undertake large investments to improve the data penetration and quality of data networks on the lines of the success of voice penetration in the last decade.

Alternatively, even if one doesn’t want to take into consideration the point of view of telecom operators or cable companies, consumers should think for themselves. During my interaction with @c_aashish & @sanity_3 on this issue, @c_aashish drew an analogy which hit the nail on its head. If the speed & bandwidth capacity is limited, then why shouldn’t ISPs prioritize between bandwidth application of say a hospital (or the bandwidth application of a patient who wants to send data to his doctor) versus the bandwidth application of someone who is streaming porn? Shouldn’t the data ‘requirement’ of the hospital (or patient) take precedence over the data ‘requirement’ and the ‘right’ of the person streaming porn? Why should these two applications of the “scarce bandwidth” have the same priority? Why is price discrimination between these two data types wrong?

I would extend the analogy to the absence of policy in India about prioritization on our road networks. It is for this reason that ambulances struggle to maintain their deadlines and time commitments. Since “We The People” place disproportionate importance on what Celebrities (Bollywood bandwagons, Celeb Journalists or anyone who is famous) have to say on Public Policies (outside the sphere of their domain expertise. Their views on their craft are well appreciated), perhaps an analogy from a film might help drive home the point. We clap ‘in derision’ when the movie 3 Idiots makes reference to the pizza gets delivered within 30 minutes in India but an ambulance struggles to arrive in time. However, we are challenged to draw a similar analogy when similar mistakes are being sought to be repeated in other areas of public policy.

To summarize:

1. Investing in creating, developing and maintaining telecom & data networks is highly capital intensive and has to be incentivized by profits.

2. The data speeds we take for granted are due to innovations and investments made possible due to a non intrusive and investment friendly regulatory regime.

3. Internet and telecom networks have bandwidth capacity constraints due to the quantum of spectrum (low in India compared to global benchmarks), number of subscribers and technology constraints (hence 3G,4G, 5G etc).

4. Look beyond the current hype over OTT apps and think about data guzzling streaming services. As traffic explodes with the proliferation of these services, it is unreasonable to expect ISPs to provide limitless bandwidth on a non-discriminatory (pricing) basis. Traffic regulation will become necessary due to exponential growth in data consumption, primarily on account of streaming services.