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Net Neutrality to Digital Dynamism

Rohit PrasadMDI Gurgaon

(joint work with Prof V. Sridhar)

Orchha Weekly Bazaar

Marketplaces

• Bring buyers and sellers together

• More buyers attract more sellers and vice versa

• Conveniently located, only possible to have 2-3 such markets

• Sellers often like to go to all markets but buyers usually stick to one market

• Who runs the marketplace? What should be the charge for the services of the marketplace? Who should pay?

• The market has a monopoly on buyers (who only like to go to one market)

• Therefore it might charge the sellers a lot

• From a social point of view, is that good?

• May not be a problem if there are lots of marketplaces

• But if there are only a few marketplaces, there is only limited competition

• We may need to regulate the ‘market power’ of the marketplace vis a vis the sellers

• But since the sellers have little choice but to be present at the market, it seems that transferring the burden on to them will affect the ‘natural flow of activity’ the least

• This seems to be contrary to the spirit of net neutrality which says we should not charge the seller but the buyer

• Ah! I forgot...

• We don’t know what net neutrality is

• Lets leave the allegory of the ancient village haat and squarely face the reality of the internet

Some Terminology

• CAP – Content and Application Provider• ISP – Internet Service Provider• HSP – Hosting Service Provider• ECP – End user connectivity provider

The Internet – A Two Sided Market

Content/

App Provider

ISP/ Mobile Broadband OperatorConsumers

The two-sides and the platform in between

Net Neutrality

• The principle that content consumed should be decided by the end-user without any distortion by the connectivity provider.– No traffic management– No charge – flat or tiered

Tim Berners-Lee, Inventor of the World Wide Web : “The neutral communications medium is essential to our society. It is the basis of a fair, competitive market economy. It is the basis of democracy, by which a community should decide what to do. It is the basis of science, by which humankind should decide what is true.

Traffic management

None Service based Service provider based

Blocking

Pricing

Zero Pure net neutrality

Tiered Pure non net neutrality

• Static efficiency versus dynamic efficiency

• Barriers to entry

The Real Architecture of the Internet

The Layers within CAPs

Content and Application provider

Search engine

Social media/ecommerce sites

search referrals account for a sizeable chunk of traffic

The Internet Today is Not a Two Sided Market

• Search and social networks important gatekeepers

• Devices a critical node

Two sided markets - device

Application developers apple End user

Two sided markets - ecommerce

retailer amazon End user

Three sided markets – search engine

advertizer

google End user

websites

Vertical Integration

• TSP-HSP• HSP-CAP• CAP-CAP• Device-CAP

Commercial model of the Internet

• Advertizing – CAPs (with financial capability) pay to direct traffic toward themselves

• Regulation has to go beyond regulating the market power of the ISP

Digital Dynamism• Digital Dynamism recognizes that simplistic notions of the

internet as a two sided market do injustice to the complex web of interconnections between different types of entities that constitute the reality of the Internet today. It replaces the anachronistic rule of zero pricing and the prohibition on traffic management with a framework of regulation that recognizes the power of other entities in the Internet eco-system, other than the TISPs while at the same time being pro-active about the need to reduce barriers to entry for new ventures, and firmly focused on creating an Internet driven by end users. It also recognizes the need to combine traditional economic concerns of efficiency and equity with issues of privacy and security

Policy

• US – full neutrality only in fixed line networks• Chile – no arbitrary blocking or discrimination• Netherlands – full net neutrality

Decision MatrixHi Penetration of mobile

Yes No

Hi Penetration of fixed line

Yes USA Bhutan

No India Uganda

Net neutrality on the dominant network

India ( 1 of 4)1. The primary goals of public policy - achievement of

developmental aims of the country by facilitating “Affordable Broadband”, “Quality Broadband” and “Universal Broadband”

2. Over-The-Top (OTT) application services should be actively encouraged and any impediments in expansion and growth should be removed.

3. Specific OTT communication services dealing with messaging should not be interfered with through regulatory instruments. For OTT application services, there is no case for prescribing regulatory oversight similar to conventional communication services.

India ( 2 of 4)4. In case of Voice Over Internet Protocol (VoIP) OTT communication

services, there exists a regulatory arbitrage. European Commission has made a policy pronouncement on May 6, 2015 for a Digital Single Market Strategy for Europe arguing, inter alia, that there is a need to review telecom rules to look at ways of ensuring a level playing field for players in the communications market to the extent that they provide competing services and also for meeting the long term connectivity needs of the European Union.

5. Under existing telecom licensing conditions, Internet Telephony is permitted under restricted conditions. However, pricing arbitrage of OTT domestic voice communication services has the potential of significantly disrupting existing telecom revenue models. With complete transition of Telecom Network to IP Network, the pricing arbitrage between voice communications by TSPs and OTT service providers would be substantially reduced

India ( 3 of 4)6. The existence of a regulatory arbitrage in addition to the pricing arbitrage

adds a degree of complexity that requires a graduated and calibrated public policy response to bring about a level playing field. In case of OTT VoIP international calling services, a liberal approach may be adopted. However, in case of domestic calls (local and national), communication services by TSPs and OTT communication services may be treated similarly from a regulatory angle for the present. The nature of regulatory similarity, the calibration of regulatory response and its phasing can be appropriately determined after public consultations and TRAI’s recommendations to this effect.

7. Legitimate traffic management practices may be allowed but should be “tested” against the core principles of net neutrality.

8. Tariff plans offered by TSPs/ISPs must conform to the principles of net neutrality set forth in guidelines issued by the Government as Licensor. TRAI may examine the tariff filings made by TSPs/ISPs to determine whether the tariff plan conforms to the principles of net neutrality.

India ( 4 of 4)9. A clause, requiring licensee to adhere to the core principles of net

neutrality, as specified by guidelines issued by the licensor from time to time, should be incorporated in the license conditions of TSP/ISPs. The guidelines can describe the principles and conditions of net neutrality in detail and provide applicable criteria to test any violation of the principles of net neutrality.

10. National security is paramount, regardless of treatment of net neutrality. The measures to ensure compliance of security related requirements from OTT service providers, need to be worked out through inter-ministerial consultations.

11. An oversight process on Net Neutrality may be set up by the government to advise on policies and processes, review guidelines, reporting and auditing procedures and enforcement of rules.

questions

Agenda

• Economics• Policy

Goals of Regulation

• Static efficiency• Dynamic efficiency• Equity

Economics of Net Neutrality

• Natural monopoly• Congestion• Two sided markets• Vertical integration

Efficient point not viable

Tragedy of commonsNo. of cattle

Price per cattle at the end of 1 year

Average Revenue per cattle

Total revenue from grazing

Marginal revenue

Excess over interest due to bank

1 126 26 26 26 132 120 19 38 12 -13 114 14 42 4 -94 111 11 44 2 -115 109 9 45 1 -12

Exercise 1: How many cattle will graze?

Exercise 2: How many cattle should graze?

Two sided markets

Content and applications Service provider/platform End user

Two sided markets- ISP

Google/amazon/facebook

airtel End user

Economics of Two Sided Markets

• Cross-group externalities • Waterbed effect • Incentive to innovate • Tragedy of the commons • Fragmentation of internet• Rent extraction versus access fees• Asymmetry of content providers

Many commercial arrangements

• Business model of the internet – payment for preferential viewing

• CAPs –HSPs• HSP-TSP• CAP-TSP• CAP-advertiser

Networks – open and closed

• Internet developed in modular way– Content and application developers – ISPs– Operating system– ChipAll interoperable

Responsible for wave of innovation

• ICT today seeing a mix of open and closed networks– Apple ‘walled garden’ approach– Google/android open systems approach

Apple apps apple End user

Non-Apple apps

The phenomenon of vertical integration

devices and os

operator/isp

entertainment

internet

devices and os

operator/isp

entertainment

internet

Regulation of vertical integration

• Modularity responsible for growth of internet• Competition in complementary market good

for platform• Chicago school – Integration of

complementary externalities• Baxter doctrine – platform may want market

power to – Cross-subsidize– Competitor has to enter both markets

Convergence of telecom and IT

• Increased computing power of mobile devices• Increased bandwidth of mobile networks• Movement of applications on the cloud

From homogeneous networks to two sided (multi-mode) networks

Power of gatekeepers

• Google 65% of search market in the US• Facebook 55% of social network market

Policy

• US – full neutrality only in fixed line networks• Chile – no arbitrary blocking or discrimination• Netherlands – full net neutrality

Digital Dynamism• Digital Dynamism recognizes that simplistic notions of the

internet as a two sided market do injustice to the complex web of interconnections between different types of entities that constitute the reality of the Internet today. It replaces the anachronistic rule of zero pricing and the prohibition on traffic management with a framework of regulation that recognizes the power of other entities in the Internet eco-system, other than the TISPs while at the same time being pro-active about the need to reduce barriers to entry for new ventures, and firmly focused on creating an Internet driven by end users. It also recognizes the need to combine traditional economic concerns of efficiency and equity with issues of privacy and security.