Is The Net Neutrality And Telecom Pricing Dilemma For Real?

Sivakumar - Apr 04, 2015, 4:27 pm
Artboard 3 Created with Sketch.
Is The Net Neutrality And Telecom Pricing Dilemma For Real?

Indian Telecom service providers (TSPs) such as Airtel, Idea and Vodafone have been complaining about over-the-top service providers (OTT SPs) such as Whatsapp, Facebook and Viber for more than a year now. Their complaint is two-fold. First of all, these OTT SPs are able to provide competing services of voice calls/text messages without having to pay spectrum license fees, termination charges to other service providers or abide by other security/statutory regulations. Secondly, these OTT SPs are rapidly growing at the expense of, and as if to add insult to injury, on top of the very telecom infrastructure created by these TSPs.

Last year, Airtel proposed a policy of price discrimination, to charge data usage differentially for these communication services. But Airtel was taken aback by the big public outcry especially on social media on the principle of “Net Neutrality” and deferred the price discrimination scheme. Meanwhile, Telecom Regulatory Authority of India (TRAI) seized on the issue and produced a white paper. TRAI has invited suggestions/responses from public on questions raised by the white paper. The objective of this article is to review some of the grievances expressed by Indian TSPs and analyze some of the solutions discussed in the white paper / proposed by policy experts.

What are the grievances of telecom operators?

The primary grievance is the loss in revenue, owing to the competing services offered by these OTT SPs. Other issues such as national security, lack of audits are more beacon calls to attract attention of the regulator.

Is there merit in this grievance?

Definitely yes, all the public records show a sharp drop in TSP revenues particularly from STD/ISD calls and SMSs.

But if the consumers are getting benefited, should TRAI worry about it?

No, because technological innovations will always disrupt industries. It is for the incumbents to plan defensive strategies to thwart/co-opt disruptive forces. For example, in the pre-smartphone era, when people took a fancy to caller tunes/apps/games, Airtel came up with its own App store to monetize on downloads.

But what if the problem is so grave that TSPs stop investing in telecom infrastructure upgrades, thereby affecting both existing and future users from accessing the service?

Yes, then there is a case for the regulator to intervene and protect the welfare of the society. Indian TSPs are making their case for lost revenue, precisely on this argument, and this appears to be the justification on why TRAI has seized on this issue.

The secondary grievance of telecom operators (and some policy experts) is the inefficiency and inequity in the usage of the scarce resource; spectrum or telecom bandwidth. For example, a report says 90% of the bandwidth is consumed by just 10% of the users. Can certain price and non-price discrimination mechanisms be used to redress this inefficiency /inequity? There is certainly merit in TRAI examining this issue, assuming the constraints on scarcity of the resource cannot be addressed in the short to medium term.

If airlines do it, why can’t telecom operators?

Many voices that speak on behalf of the TSPs, use the analogy of airlines to justify price discrimination. Airlines routinely use revenue management algorithms to price the same ticket differently based on aspects such as lead time between booking and travel, day/time of travel etc. Their aim is to segregate business travellers from leisure travellers because of their differences in willingness to pay. If airlines can discriminate among passengers, why can’t telecom operators?

This type of discrimination is referred to as, 3rd order price discrimination. For example, movies are priced higher on the day of release, or over weekends. Cities like London, charge private cars for entry during peak hours. Even the Indian telecom sector differently priced STD/ISD calls, based on the time of the day, during the 90’s.

This form of discrimination is allowed by the regulator as it reduces peak hour congestion on a constrained resource and improves efficient usage of the installed capacity. More importantly, consumers always have a choice to beat the system by avoiding this peak. A cost conscious business traveller can travel the previous night, a leisure traveller can take an off-peak flight etc. Since this system provides everybody a choice by postponing the consumption of the good/service, to beat the system, it is deemed to be fair!

But what TSPs propose here is not an equivalent. It doesn’t provide consumers the choice to postpone consumption and avoid paying the premium. No matter when they use it, regular users of Whatsapp and Facebook will have to pay the premium. So how can it be considered as fair, to the consumer? This is only a part of the problem; the bigger worry is, it in fact allows TSPs to select winners! What happens if Airtel decides to promote its own instant messaging platform (or a rival to Whatsapp)? It can always drop prices on the rival app and push a particular OTT SP out of business.

Hence, allowing TSPs to discriminate in this manner can effectively empower them to select the winners! Some experts argue that this problem can be overcome by allowing discrimination only at a category level and not at the level of individual apps. But who defines these categories? To you WeChat is a communication service; to me a social media to check my friend’s status? To you Youtube is a media content provider; to me it is my video blog? This is where things can get really fuzzy to discriminate/arbiter even at a category level.

Can TSPs be allowed to do Quality of Service deals with OTT SPs?

Artboard 3 Created with Sketch.
click on image to enlarge
click on image to enlarge

Many experts propose another idea which allows TSPs to do deals with the content OTT service providers based on Quality of Service (QoS). The QoS programs work as follows. The content providers signing up for QoS program get preferential treatment in data transmission within the pipe. It is like a fast lane in the road with an assurance on travel time to the destination. Those OTT SPs who do not sign up for the QoS program would go through the normal lane, which may experience congestion /higher variability in travel times. Many articles including the white paper of TRAI, pitch for this idea. The idea is ill-advised for the following reasons.

As of today, there is no contractual relationship between the Content OTT SPs and the TSPs. They are intermediated by the internet infrastructure backbone providers. These intermediaries work broadly on the principle of net neutrality without discriminating traffic on the basis of its content.

So what is wrong if Whatsapp paid a fee and signed up for the QoS program offered by Airtel?

Airtel would at best be able to assure fast-tracking of Whatsapp data packets till the backbone. What happens after that? Can anyone guarantee end-to-end service times in this setting? Why should OTT SPs be charged for a service that cannot be legitimately delivered by the TSPs?

Secondly, what is to say that TSPs won’t prioritize traffic in such a manner that the non-QoS OTT providers aren’t unfairly penalized? What if the TSPs indulge in tactics of artificial congestion on the normal lane, to arm-twist everyone to move the fast lane? TRAI needs to be aware of its regulatory obligations to ensure TSPs don’t indulge in such extortion practices; especially for a service with dubious value.

Is Net Neutrality a strict no to all forms of price discrimination?

Absolutely not! Net Neutrality is not a Marxian pay packet. TSPs can always be allowed to do 2nd order price discrimination based on the quantity of data consumed by a user. This mechanism is prevalent in other resource constrained sectors such as energy/utilities. For example, state electricity suppliers have differential tariff bands; say from 0 to 50 units, 51 to 100 units, etc. The quantity used and unit price graph will typically be shaped like a stair case.

This tariff band mechanism allows companies to extract higher consumer surplus from heavy users and sometimes even subsidize entry level users. Hence, in addition to addressing the revenue loss, this mechanism can also address the grievance of congestion and inequity/inefficiency in the bandwidth usage. If there are heavy users for apps such as Viber, Whatsapp, Facebook, Youtube etc. they can be made to pay proportionate to their level of data use. At the same time, this mechanism can also induce segments hitherto untouched by the data boom to go digital. Therefore, it is a win-win for both TSPs and the regulator.

But isn’t it surprising that this simple idea does not feature in the narrative of the TSP lobby? Is this idea so radically new that they haven’tgiven it a thought? Impossible! This is where I begin to think that there is adequate headroom for conspiracy theories. If the real grievance of TSPs is to arrest their falling revenues that fund their infrastructure upgrades, is to reduce congestion/inequity in the pipe, then the above idea would suffice. In fact, there is no need to debate on net neutrality because this pricing solution doesn’t violate that premise at all. This makes one wonder if the real motive of this campaign is something else.

What if the real motive of TSPs is the greed to distort power structure in the digital supply chain? What if the real motive of TSPs is to start acting as gatekeepers of innovations succeeding in the market? However bizarre these suspicions may sound, it is the responsibility of the regulator to eliminate these possibilities.

Giving the benefit of doubt to the TSPs, can the real motive be something less sinister? Allow me to speculate on this real motive. We know that TSPs love the increase in revenues coming from increased data consumption. They don’t mind heavy data usage because there is no real congestion (still) on the pipe. Also, these heavy data users, although small in number, come with low CRM costs and raking in high ARPU.

They are otherwise mama’s boys, but alas, they are not indulging in the right mix of data usage. How sweet would the world be, if they use all the services TSPs provide, and go to OTT SPs only for complementary services? Given this scenario, why would TSPs even want to consider a solution that penalizes the digital junkies who are so valuable to the firm in comparison to the low volume users? Instead, how nice would it be, if they somehow can nudge heavy users towards adopting the desired data mix? Price discrimination based on the invoking apps is a perfect solution for this grievance of TSPs.

Isn’t this explanation perfectly plausible as the real motive of TSPs? So the real issue for TSPs may not be about the loss of revenue leading to under-investment in telecom infrastructure upgrades nor the congestion/inequity in the pipe, but nudging their valuable customers to adopt the desired data usage mix. They know, that by stating the real reason, they wouldn’t go very far in getting a regulatory approval. No regulator rewards providers for their incompetence in handling unexpected competition arising out of technological disruptions, and TRAI shouldn’t be doing it either.