Regulation of OTTs-Striking the Right Balance

This post is based on my paper  for the Workshop on the “Economic Impact of OTT on National Telecommunication/ICTMarkets” held in Geneva, Switzerland on Tuesday, October  1, 2019, at ITUHeadquarters

Introduction-Traditional vs. digital are they to be treated at par?

Most of us cannot imagine life without our favourite Over the Top Services (OTTs). We depend upon them to search for information (Google), shop (Amazon, eBay), plan holidays (Airbnb), commute (Uber, Lyft), keep in touch with our friends (WhatsApp, Facebook), stream music and video (iTunes, Netflix), improve our career prospects (Linkedin). 

While there is no disputing the tremendous consumer value created by OTTs, the issue of whether, how and how much to regulate these services remains a difficult one. Regulators must be cautious about the impact of their actions on innovation and competition. While issues like security, consumer protection, and taxation would need to be addressed, regulation of OTTs driven solely by the motivation of leveling the playing field between traditional and digital modes of service delivery would be detrimental to consumer welfare. Instead, a fresh look at regulation of the service concerned regardless of the medium may be the answer. The result of this exercise could well be an easing of the compliance burden on traditional brick and mortar firms while introducing more regulation for some digital firms such as large online platforms.

Self-Regulation & Cooperation may deter Over-Regulation

Security: Technology companies should voluntarily self-regulate and collaborate with governments to prevent online harms. This would reduce the tendency to over-regulate online services in response to real or perceived harm. A good example of the need for such cooperation is OTTs in the sphere of social media where security considerations have caused governments across the world to seek to regulate at least some of these OTTs at par with traditional means of communications. It is evident that given their popularity and international reach, they are susceptible to misuse and thus, governments will continue to demand interception for security purposes. However, it is also important to implement checks and balances that safeguard privacy and limit surveillance, at least at par with those that have existed for interception requests on traditional modes of communication. Given that OTTs cut across borders, this is also an important area for international collaboration.

Misinformation: The problem of fake news and misinformation is a grave one and it is related to the speed and scale of influence of social media platforms. Traditionally digital platforms have been treated as intermediaries with limited liability, but off late governments across the world have begun to consider regulation ranging  from adoption of self-regulation by intermediaries/platforms to regulatory enforcement of a code of ethics (UK), to imposing liability to screen out harmful content (UK, India[1]) are being examined[2]. It is being considered if new regulators need to be set up for this purpose. These bodies would also receive and settle consumer disputes and enforce accountability measures.

Technology itself can solve unique problems faced in relation to OTTs. India is WhatsApp’s biggest market. The Indian government has worked along with the firm to handle the menace of fake news or misinformation by limiting the number of forwards and displaying prominently the fact that the message is not original but forwarded. Further, consumers can check the veracity of information with the help of a tip line number.[3] Hence if digital technology firms providing OTTs cooperate with regulators and governments to find innovative solutions to address consumer protection issues, governments are less likely to overregulate.

Consent is overrated

Privacy and data protection are important concerns. Incidents of mining and misuse of sensitive consumer information have demonstrated equally the need for a sound accountability framework that digital firms must be held responsible to, as also, the acute need to create consumer awareness. International consensus on standards of data protection such as simplicity and clarity of consent is critical. Nations across the world are putting in place data protection frameworks, many of which lay emphasis on consent. However, consent, as it exists today, is complicated and asking a consumer to read/understand long agreements can be a meaningless exercise. There is a need to simplify and standardize disclosures to create greater transparency in use of personal data. Further, reducing the compliance burden for cross border OTTs also demands that international data protection regimes have some degree of harmonization. This is another important area for international consensus and collaboration.

Competition-Imbalance of Market Power

Competition authorities are already seized of the complexity of trying to apply traditional competition law tools to digital markets. Clearly, when services are offered free, the examination of anti-competitive behavior arising out of market power must shift focus from pricing to other measures of market power including how much personal data is collected as a part of the transaction/contract with consumers.  It is important to appreciate the imbalance of power between the supplier of digital services and its individual consumer. Economies of scale, network effects and lack of interoperability of platforms also call to question the countervailing power of substitutes. Thus, if a consumer does not like the fact that her personal data is collected for advertising can she switch from a prominent social media platform when almost everybody in her social circle uses that platform? Consumer awareness is necessary but not sufficient, as individual consumers do not wield sufficient bargaining power in such situations. Competition authorities and e-commerce regulators must also address B2B (business to business) malpractices. These include preferential treatment to in-house brands/services vis-à-vis third-party entities, and a variety of anti-competitive conduct ranging from tying and bundling, to exorbitant commissions for access to popular platforms.

New disruptive models of service delivery should not be regulated merely because they threaten an existing model, because such innovation and competition serve consumer interest. The OTT economy thrives on a business model that has no brick and mortar marketplaces, no physical records, less human labour, greater outsourcing and contracting.  However, when market power leads to consumer harm such as discriminatory pricing, anti-competitive conduct, counterfeiting, breaches of privacy, etc., regulators must step in.  India, through its draft e-commerce policy, is contemplating rules to ensure competition on online retail platforms as well as the protection of consumers using these platforms including anti-counterfeiting measures and steps to ensure the authenticity of ratings and reviews and better consumer redress.[4]

Should Regulation Lighten up to Attract Compliance

Interestingly, it can also be argued that if Governments were to design newer models of regulation that are light touch, flexible and recognize the scale and quantity of market impact of an OTT player, they may encourage more OTT players to conform to regulation. This would apply to various compliances such as licensing and taxation. In its National Digital Communications Policy[5], India has recognized the need for greater investment in digital communications and its positive multiplier impact on GDP growth as well as the need to rationalize levies on telecom service providers as one of the means to incentivize investment. The Department of Telecom has also recently approved more flexibility in the regulation of mobile virtual network operators[6]. It could be argued that OTT players may be more willing to submit, rather than resist if regulation regimes were less onerous.  It could also be considered whether the threshold for imposition of regulation on a service provider depended on market impact measured by market share regardless of the medium through which it operates. This would protect innovation by exempting startups/smaller firms while ensuring a level playing field between online and offline models. Why should a small taxi service or a small hotel chain have to bear different regulatory burdens compared with a large digital platform offering similar services? Singapore’s third-party taxi booking services Act[7] is one such example of light-touch regulation with a graded approach related to the size of business. Such an approach acknowledges the cost of regulation and that over-regulation of small firms can have a detrimental effect on innovation, both offline and online.

The Europeans Union’s new Electronic Communication Code seeks to regulate certain categories of interpersonal services as Electronic Communication Services. This would encompass popular OTT services. The Indian telecom regulator too has issued a consultation paper on regulation of OTTs which inter alia asks if certain need to be regulated at par with licensed telecom service providers. The consultation process shall duly consider views expressed by various stakeholders.[8]

Conclusion

Ultimately, the answer lies in striking the right balance and international cooperation and capacity building can assist regulators across the world to find the golden mean.

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[1] https://www.meity.gov.in/writereaddata/files/Draft_Intermediary_Amendment_24122018.pdf

[2] Disinformation and ‘Fake News’: Final Report House of Commons Digital, Culture, Media and Sport Committee, Eighth Report of Session 2017–19, February 14, 2019

[3] https://economictimes.indiatimes.com/news/elections/lok-sabha/india/whatsapp-finally-has-way-to-handle-fake-news-during-elections/articleshow/68684237.cms?from=mdr

[4] https://dipp.gov.in/sites/default/files/DraftNational_e-commerce_Policy_23February2019.pdf

^[5] http://dot.gov.in/sites/default/files/EnglishPolicy-NDCP.pdf

^[6] trak.in/tags/business/2016/03/30/telecom-mobile-virtual-network-operators-mvno-approved/

^[7] ITU GSR 2016 discussion paper

^[8] https://main.trai.gov.in/consultation-paper-regulatory-framework-over-top-ott-communication-services

Better Late than Never-US Competition Law Agencies Join the Fray

After seeming to have been sitting it out while the EU and UK agencies have traversed miles regarding competition and privacy concerns surrounding the big digital platforms and regulation of these platforms, the FTC and DoJ are finally (reportedly) joining the fray to initiate probes in relation to possible anti-competitive conduct by the big tech companies.  Some of the news reports can be seen here and here.

Ignoring competition concerns is never in the interest of a nation in the long run even if the firms bring growth and jobs to the domestic economy in the short run. This is therefore a positive development and would hopefully spur more efforts on the part of digital platforms to self regulate too.

One of the areas of investigation will be Google's dominance in online advertising,

The EU has brought three cases against Google, including how it ranked shopping-comparison sites in search results, requirements for how customers use its display ads network, and its practice of requiring phone makers that used its Android software to pre-load those phones with other Google apps.

Google, Facebook and Amazon will also probably be under scrutiny for the manner in which they use data acquired from customers as also competitors. There have been several probes against Facebook's data collection and privacy practices. As regards, Amazon, already,

The EU is investigating whether Amazon uses data about the third-party merchants who sell on its retail site to give the company an advantage when it sells its own products. 

My previous comments and presentations can be seen here and here and under the labels big data, data protection and competition.

International Cooperation on Regulation of Digital Markets

I am sharing a contribution I had made during a meeting in relation to the UN's Digital Cooperation Initiative at New Delhi. I had stated that, today the old regulatory silos of  telecom (networks and services), IT (OTTs, internet content, cloud computing, cyber security etc.), financial services (e-payments), Information & Broadcasting (content)  etc. may actually be  impeding the efforts of governments across the world to address challenges emanating from digital economy. This is particularly relevant for developing countries.

Addressing the digital divide requires a holistic approach addressing both supply (infrastructure and services) and demand side (skills capacity building) initiatives. Then, there are many challenges emanating from e-markets such as data collection and processing, complex competition and consumer protection issues (e.g. those arising from market power of large e-platforms), which particularly developing nations may be ill equipped to deal with. This is all the more pertinent  given that developing country markets are among the biggest sources of data and revenue for the large global digital players but need capacity building to tackle these complex issues. This calls for international cooperation. Not only will the lack of uniformity in international approach harm the growth of digital markets which cut across borders (for e.g. mismatched approaches towards data protection, taxation and competition law), the lack of capacities can also be harmful from view point of exploitation of consumers.

This calls for global consensus on standards, principles and practices. As a senior  officer from the telecom department, I have participated in ITU deliberations and often seen how such bodies despite their tremendous contribution are handicapped by the aforementioned silos when it comes to progressing discussions on complex issues surrounding digital markets. Thus, while the ITU has been discussing data protection and privacy, OTTs and competition issues during the deliberations of the current cycle of ITU Development Sector's  Study Group 1, and I have personally made contributions and presentations on this matter, we are also stymied by issues of mandate.

As a method of dealing with the above mentioned challenges, I would like to suggest that the  UN could in fact help by encouraging nations across the world, to create an informal yet international body to address these challenges. From my experience of heading the Mergers & Acquisitions work at the Competition Commission of India and co-chairing the International Competition Network's (ICN) Merger Working Group with Canada and the EU,  I would highly recommend  the  model followed by the ICN. 

It is  an informal yet effective  institution  which does not make rules but arrives at best practices which member states are free to adopt. It is a professional, global organisation led by national governments (competition regulators). It is focused on real world competition issues and is relatively free from bureaucracy. It covers almost every facet of competition law  organised into relevant verticals. It has active participation from NGAs and academia and has contributed tremendously to voluntary internationally accepted standards, consensus building and capacity building and  has  promoted global business by facilitating  multi-jurisdictional competition compliance. At the same time it has served as a valuable forum for learning, collaboration, exchange and capacity building.

This model can very usefully be adapted to suit the multi-faceted needs of digital cooperation.

Big Data-Competition & Consumer Protection Issues, Falling between Regulatory Stools?

I recently gave a talk cum Presentation  during the  Forum on Challenges in the digital environment 2018, organised by the Instituto Federal de Telecomunicaciones on November 7-8 at 2018, Mexico City. It can be viewed here.

This presentation draws attention to the competition and consumer protection issues (such as privacy and discriminatory pricing) arising from the exploitation of big data and the fact that many of the concerns appear to fall between regulatory stools in the sense of not being easy to fit into any particular regulatory mandate, be it the competition authority or the consumer/sector regulator or the data protection regulator.

Economic and Regulatory issues in the Era of Free Services

This post is based on a presentation I made at the International Telecommunications Union. The presentation can be viewed here.

Introduction

Our lives today are greatly facilitated by modern telecommunications, the internet and various Over the Top (OTT) applications and services. By lowering costs, bringing us greater choice and innovative methods of service delivery, OTTs in particular have become an indispensable part of modern life. In the near future, newer technologies such as Machine to Machine (M2M) /Internet of Things (IoT) communications and Artificial Intelligence (AI) will confer further benefits such that we will be living in progressively smart societies. 

As can be expected, markets by themselves will not always deliver perfect outcomes and the transition to, and the management of smart societies will entail new regulatory challengers. Thus, even in the digital economy, with its multiplicity of players and where many services are delivered free at times rendering price irrelevant, both as an indicator of market power and as a regulatory tool, the role of regulation will continue to be vital.  

From a regulatory viewpoint, it will be important to protect innovation and competition and to empower customers through good regulation and greater transparency, so as to build trust in new applications and services. These are prerequisites for continued growth of new technologies, without which, the trend towards smart societies will not be sustainable in the long run.

In an increasingly converged environment where all types of services (not just communications) are facilitated by ICTs, it would be impossible to regulate without collaboration between the ICTs regulator on the one hand, and the competition regulator, data protection authorities and a host of sector regulators on the other.

Smart societies will call for a review of the regulatory approach in the areas of competition, security, quality of service (QoS) and interoperability and also demand much greater attention to inclusiveness, privacy and data protection, transparency and trust. 

In the era of OTTs, IoT and AI, some of the important areas engaging the attention of ICTs regulators across the world are the promotion of investment in new technologies and networks, appropriate methods of licensing and spectrum allocation, new competition issues, universal service, net neutrality, privacy and data protection and QoS. Many of these regulatory problems are interconnected.

Net Neutrality 

The issue of Net Neutrality for example, requires the regulator to express its stance on non-discriminatory treatment of internet traffic. While there may be no unique answer relevant to every regulatory context, the decision on Net Neutrality regulation will always involve examining questions of investment, competition, interoperability, transparency, trust, inclusivity etc. On due consideration of various aspects, India has taken a pro net neutrality position and forbidden zero rating of services.

Regulation of OTTs

When it comes to OTTs, the regulator while acknowledging the popularity and benefits of these applications and services must be wary of both the pressure from incumbent telecom service providers (TSPs) to regulate OTTs, and of ignoring the unique regulatory problems surrounding OTTs. The former arises in part from the asymmetric regulatory burden wherein TSPs are subject to requirements of licensing, taxation, law enforcement and security, emergency services, universal service, QoS etc., and OTTs players are not. The latter is less evident but significant. There are noteworthy competition and consumer protection issues surrounding OTTs, especially given the tendency towards creation of global giants such as Uber, Google, Amazon and Facebook. The theoretical explanation for the evolution of large, global platform operators is the reduction in transaction costs, uninterrupted economies of scale in comparison to brick and mortar firms, and strong network effects. 

Given the above, even though there are ostensibly a large number of players in digital markets and services appear to be free or relatively low priced, traditional competition problems of misuse of market power, barriers to entry, competition reducing mergers and acquisitions and unfair trade practices continue to exist, albeit in new forms in contemporary markets. This is evidenced by recent regulatory actions against global platforms in the areas of competition and data protection. 

While there may well be a call to correct the imbalance of regulatory burdens on existing operators vis-à-vis OTTs, any attempt to license/regulate OTTs must first and foremost address issues of fair competition and consumer protection, rather than focus per se on the protection of incumbents.  There may be in fact a case to move towards light(er) touch licensing regimes for both types of operators wherein the focus is on innovation, investment, security and consumer protection. Any decision on licensing will have to take into account taxation issues too. The positive multiplier effects of telecom penetration and digital services which tend to increase Gross Domestic Product (GDP) and hence, the tax base may justify less focus on direct levies and greater reliance on general budget for funding universal service interventions.

Regulation of M2M/IoTs

When it comes to licensing M2M / IoT operators it must be noted than many of these are not necessarily communication service providers. Apart from the danger of over regulating too early in the life cycle of this new technology area and thereby hampering innovation, there is also the question of regulatory burden and cost entailed when the number of players is so large. Added to this is the complexity of regulating entities which serve so many different sectors such as energy, transportation, health and agriculture etc. This is a challenge which calls for cross sectoral regulatory collaboration and newer, flexible regulatory approaches. India has recently decided on a policy approach which combines light touch licensing and cross sectoral regulatory oversight.

Privacy & Data Protection

An unquestionable facet of our lives in smart societies would be the threat to privacy and security of personal data emanating from the large scale disclosure and collection of data on a daily basis thanks to our digitally connected personal devices, homes and cities etc. As technology becomes increasingly pervasive and intrusive, timely legal and regulatory interventions to protect privacy and personal data become critical. This is not just a political, strategic or ethical issue, it is also important from the business perspective of consumer demand. In the absence of adequate protection of their rights to privacy and control over their personal data; in the absence of consumer trust; consumers will cease to subscribe to even the most innovative or useful applications. This would not only adversely affect the profitability of the digital communications industry, it would also impede further innovation and the scaling up and sustained growth of new technologies and applications. Such a scenario would deprive the world of their benefits. This requires industry and governments to come together to ensure adequate regulatory safeguards, privacy by design and to promote consumer awareness.

In fact, it is widely acknowledged that data is the hidden cost of free services and the new source of market power of Apps and digital platforms.  Going forward, the regulation of data shall occupy the attention of not just data protection authorities, but also ICT’s’ regulators, competition regulators, law enforcement authorities etc. From a competition viewpoint, data portability and anonymized data sets could be remedy the monopolization of data.

Competition

Data as a source of market power is also closely linked to contemporary issues of competition regulation as in multi-sided markets, it is consumer time/attention/data that attracts advertisers who are the major source of revenue for digital service providers. This is turn makes cross-platform operators who can accurately profile customers based on their consumption of email, messaging, banking services, transportation, social media and shopping services etc. very powerful and with market power comes the possibility of its abuse. While ICTs and competition regulators have recently started examining platform to business practices, there is in fact a need to review competition regulation of digital services on many fronts. The definition of markets and sources of market power are all changing and much more information about newer markets will need to be collected for a better understanding. This calls for partnership and cooperation among all stakeholders.

Conclusion

It is important for regulators to collaborate, learn, adapt and be flexible. It is also important for industry to bridge information asymmetries, to build consumer trust and to work together with regulators to ensure the continued growth of digital services in a manner that benefits all stakeholders.

Privacy & Data Protection-Not just a National Issue

This post seeks to draw attention to the important issue of privacy and data protection regulations, the need for sharing of best practices among regulators and international harmonization of rules.

New technologies like OTTs, IoT, Artificial intelligence etc. are already and will continue to improve our lives. However, they also entail the collection of vast amounts of data about us. There is a need to balance the benefits of big data and the threat to the right to privacy which is an integral human right.

This is not just an important issue for individuals and governments; it is also critical for businesses as they rely on continued consumer demand. In the absence of adequate protection of their rights to privacy and control over their personal data; in the absence of consumer trust; consumers will cease to subscribe to even the most innovative or useful applications. 

This would not only adversely affect the digital communications industry. It would also be tragic from the viewpoint of continued innovation and the  scaling up and sustained growth of new technologies and applications. Such a scenario would deprive the world of their benefits.

India is in the process of framing its laws on the subject of privacy and data protection. It is felt that especially developing countries could benefit from mutual learning and experience sharing. 

Further, it is important for industry, regulators and academia to come together to achieve the stated objectives of data protection, privacy, competition and security so as to ensure inter alia the continued growth of digital services in a manner that benefits all stakeholders. 

Developing an appropriate regulatory framework which will act as the foundation for good business practices and adequate consumer safeguards in the field of ICTs requires collaboration and international cooperation. The international harmonisation of these rules is necessary to protect competition and innovation and to allow data to be used fairly for innovation and growth in a  competitive manner-preventing monopolisation by a few entities. This requires consensus building on data portability and localisation rules. 

ICTs & SDGs: Sound Policy & Regulation required for beneficial effects of ICTs

I was deeply impressed with the ITU Publication 'ICT-centric economic growth, innovation and job creation.'

This book has many takeaways. My favourite ones are as follows:

The  publication captures the essence of the undeniable linkages between ICTs and the SDGs. It is both comprehensive and contemporary covering various aspects such as the digital divide, innovation and latest technologies and their connection with sustainable development

In particular, I  support and underline the contention in Chapter 2 that highlights that more emphasis needs to be placed on addressing inequalities in access and usage of ICTs between people and regions which if left unaddressed will exacerbate all other inequalities in development, growth and quality of life over time adversely affecting the progress in realizing the SDGs. The stress on ICT related Targets in SDGs (table 1.) is very important. The measures contained in sub goal 9c must include all disadvantaged persons including Persons with Disabilities (PwDs).

In this context, while governments have a very important role to play, the way forward is a multi-stakeholder model wherein private sector, academia and civil society are actively engaged and involved by governments. I wholeheartedly endorse the importance of good regulation that encourages and facilitates private sector innovation and government support (through inter alia innovative use of Universal Service Funds) to empower the poor, women and PwDs etc. such that they are provided the benefits of ICTs. 

The multi-stakeholder partnership model described in Appendix A to Chapter 2 is very relevant and tried and tested in India in its Sanchar Shakti project  for access to Mobile Value-Added Services for rural women. 

Chapter 4 with its emphasis on a conducive institutional and regulatory framework is highly relevant especially for policy makers and regulators in developing countries. Competition, liberalisation and innovation go hand in hand with sustainable growth. In particular, the trade-off between short term gains and long-term harm caused by policy decisions impacts all sectors including ICTs and has a very important bearing on achieving sustainable development. 

I also appreciate the stress on the capacity of ICTs to empower citizens by providing information and a feedback mechanism to express their views and preferences. The sections on competition, consumer regulation and State owned Enterprises (SoEs) are very well written and pertinent. Competition, credible governance, universal service regulation, privacy and data protection can have a critical impact on, long term growth of ICTs and hence overall socio-economic development given the intricate linkages between ICTs and the SDGs. This is an important precondition for overall balanced growth in international context.

Chapter 5 speaks about new data driven business models based on sharing and personalisation in the context of increasing growth of IoT, multi-sided platforms and the App economy, highlight the need for focus on  important issues such as privacy and data protection and cyber security which are critical to consumer protection, trust and hence uptake of ICTs and their continued contribution to sustainable development.

Arguing Against Net Neutrality for the Wrong Reasons

Off late opponents of Net Neutrality (“NN”) are using a new line of reasoning to convince regulators and policy makers, especially in developing countries, that NN is detrimental to socio-economic welfare of their constituents.

This belief rests on the fact that over-the-top (“OTT”) players are allowed to provide tax-free and uncontrolled access to consumers of their services (internet telephony, messaging, content etc.), while riding on the networks of tax-paying and regulated telecom service providers (“TSPs”). Consequently, such OTT players are depriving the government of revenue which can be used to expand networks and bridge the digital divide. To elaborate, this standpoint propounds that OTT players are snatching revenue from incumbent TSPs, depriving them of any incentive to innovate, improve their networks and expand into remote, unconnected areas. NN Rules which do not allow TSPs to impose differential charges on OTT players or favour their own in-house OTT services, and forbid them from earning revenue from exclusive deals such as through zero rating, reduce such TSPs to dumb pipes, commodifying them. When TSPs lose the ability to differentiate themselves and their profit margins shrink, they may stop investing as much; expansion of the telecom network will slow down or stop. Revenue from license fees and universal service levies which are often imposed as a percentage of TSP revenues will decrease. Bridging the digital divide will become challenging as universal service funds dry up and private networks don’t have incentive to expand.

Further, there are issues of security and privacy surrounding unregulated OTT access and the fear of  unregulated foreign OTT giants dominating the communications sector. 

This reminds me (in a convoluted way) of the arguments that were used by wire lines service providers (many of which were state owned incumbents), to convince regulators to subsidise them and tax the then new kids on the block – the mobile service providers. It was argued that the former were serving the rural areas and providing cheap services while the latter were catering to only the elite clientele who could afford mobility. As it happens, many governments did accede to this demand. However, as we know, it is mobile services that proved to be more cost-effective and it is mobile services that grew exponentially and finally connected the unconnected- something that the protected wire lines never could achieve.

The history of telecom has and always will record how disruptive technologies continuously breed both new innovative challengers and new incumbents, and how consumers continue to benefit from these welcome revolutions. However, as new technologies also come with potentially harmful aspects (e.g. security and privacy concerns), the stakes are high and governments, regulators and policy-makers must proceed carefully. 

It is important to protect national and consumer interests in terms of assuring secure communications, lawful interception and privacy of data, and to guard against the creation of new monopolies. But the reasons for regulating OTT players should be these, and not the misguided notion of protecting incumbents to expand networks or the preservation of existing sources of revenue.

The creation of a level playing field requires that the Government look simultaneously at easing the regulatory burdens on incumbents and bringing OTT players within the realms of regulation and taxation, without harming innovation or competition. The need of the hour is the progressive movement towards an evolved and lighter mode of regulation. This should be done gradually by easing the regulatory burden on TSPs while slowly bringing OTTs within the ambit of regulation without stifling innovation. A good example is Singapore’s class license which is a deemed license for internet content.

New forms of regulation would also entail building in security by design and through technology itself, and focusing on consumer education and awareness to empower consumers. One example is simpler, more transparent methods of ensuring consumer consent to guard against misuse of personal data coupled with consumer education.

When considering real or hypothetical revenue losses from existing sources, it is important to factor in the the OTT/application-based eco-system's (Uber, Airbnb, local Ola, Flipkart, OLX, Paytm etc.) overall contribution to a country’s GDP by way of  new markets, employment opportunities and decreasing transaction costs. In fact, the most economically efficient (and least market distorting) method of funding universal service is through the budget, rather than sector specific taxation.Thus, the reduction of revenues from telecom levies if offset by overall increase in budgetary resources requires a rethinking of methods of funding Universal Service rather than measures aimed at protecting incumbents which would end up hampering growth of OTTs, 

NN ensures that the internet continues to grow and flourish as a source of innovative, new services and provides a platform where consumers are free to choose and markets free to respond to this consumer choice. 

The new-age telecom regulator has to evolve sophisticated regulatory models that place the onus of compliance on the regulated (e.g. industry Code of Practices), and deter noncompliance through swift and exemplary punishment. The new-age telecom regulator should ideally be a converged regulator that handles IT, telecom, broadcasting and content, and collaborates effectively with other regulators such as the competition regulator to ensure that every part of the new OTT eco-system remains competitive (see for example, competition cases against Google) and a range of other regulators (health, financial services, data protection etc.), to ensure that the increasing volume of online transactions does not endanger individual safety, privacy or national security. 

The answer certainly does not lie in dismantling NN thereby killing the 'Goose that Laid the Golden Egg,' because of misguided notions of protecting incumbents’ revenue or the incumbents themselves. 

A similar approach is needed when considering regulation in other contemporary areas of ICTs such as internet telephony or the Internet of Things.

TRAI's views on Predatory Pricing

TRAI in its recent Telecom Tariff Order (TTO) dated 16.2.2018 has sought to lay the grounds for ex ante determination of dominance and predatory pricing and in the process, linked it to the concept of Significant Market Power (SMP).

I had  in my earlier blog post titled 'CCI, TRAI and Regulation of Predatory Pricing'  written that,

the concepts of Significant Market Power in telecom regulation mostly apply to ex ante regulation of bottleneck facilities such as EU's erstwhile regulation of leased lines. This concept based on percentage of ownership of resources is simplistic and too crude to handle a complex issue such as predatory conduct / abuse of dominance.

It is generally understood that given the existence of a Competition Regulator namely, Competition Commission of India whose jurisdiction includes telecommunications, TRAI's role is ex ante facilitation of competition; CCI's role is ex ante as far as merger control/review is concerned but ex post as  regards anti-trust matters such as abuse of dominance including predatory pricing.

However, though in its consultation paper TRAI had quoted from EU law to state significantly that, market definitions for the ex ante regulation of the electronics communication sector would differ from markets defined in individual competition law cases as the purpose of the former is an overall assessment of the structure and functioning of the market under examination to determine whether or not to impose ex ante regulation, the Telecom Regulator has not perhaps appreciated the EU stance/international norm properly. 

In fact an EU working paper states that,

Under the Framework, the definition of relevant markets and the assessment of significant market power should be based on the same methodologies as under EU competition law. This ensures that it reflects the applicable jurisprudence of the Court of Justice of the European Union and the Commission Notice on the definition of relevant markets for the purposes of Community competition law ....When NRAs consistently apply established methodologies to define markets and assess significant market power, they contribute to ensuring regulatory predictability and limit regulatory intervention to cases of market failures identified by analytical tools......

........Similarly, the designation of an undertaking as having significant market power in a market identified for the purpose of ex ante regulation does not automatically imply that this undertaking is also dominant for the purpose of Article 102 of the Treaty or for the purpose of application of Council Regulation 139/2004 or similar national provisions. Moreover, a significant market power (SMP) designation has no direct bearing on whether that undertaking has also abused a dominant position under Article 102 of the Treaty. It merely implies that, within the scope of Article 14 of the Directive 2002/21/EC, from a structural perspective, and in the short to medium term, in the relevant market identified the operator has and will have, sufficient market power to behave to an appreciable extent independently of its competitors, customers, and ultimately consumers.....................................................In this respect, ex ante obligations imposed by NRAs on undertakings designated as having significant market power aim to remedy market failures identified and fulfil the specific objectives set out in the Framework. On the other hand EU competition law instruments serve to address and remove concerns in relation to illegal agreements, concerted practices or unilateral abusive behaviour which restrict or distort competition in the relevant market.

This paper also states that,

...The SMP Guidelines do not in any way restrict the rights conferred by EU law on individuals or undertakings. They are without prejudice to the application of EU law in general, and of competition rules more specifically, and to their interpretation by the Court of Justice of the European Union. The SMP Guidelines do not prejudice any action the Commission may take or any guidance the Commission may issue in the future with regard to the application of EU competition law.

This key aspect is ignored by TRAI when equating a primarily structural analysis in terms of ex ante definition of Significant Market Power ( to decide whether to impose tariff restrictions or open access requirements etc.) with a different concept of abuse of dominance (which is essentially an anti-competitive  'conduct') as a precondition to determine predatory behaviour which is internationally the subject matter of competition law and involves mostly ex post analysis by the competition regulator. There was really no need for TRAI to foray into the domain of  Competition Commission of India which is well equipped to deal with cases of predatory pricing. Certainly TRAI would not be in a better position than CCI to determine intent which is a complicated exercise.

Another  interesting aspect of this TTO is that of TRAI  dismissing without adequate explanation the other criteria of arriving at determination of SMP in a market,  namely, switching capacity and traffic volume. Thus if a Service Provider has the lion's share of switching capacity/infrastructure  and then proceeds to use predatory pricing to drive out its competitors and acquire their customers, this would not amount to predatory behaviour based on  ex ante measurement of dominance in terms of market share by subscribers/turnover.

Finally, it is again reiterated that determination of relevant market to establish dominance is far more nuanced than methodology laid down by TRAI based on market share and the present licensing regime. It would have been better if TRAI had consulted CCI on the matter and ultimately left predatory pricing to the latter.

CCI, TRAI and Regulation of Predatory Pricing

Recently there was a news item about a letter written by CCI to TRAI highlighting the role and expertise of CCI in post facto assessment of occurrence predatory pricing in any sector. This was in response to TRAI's consultation paper on Regulatory Principles of Tariff Assessment. 

This paper  seeks to address inter alia the issue of regulation of promotional offers and prevention of anti-competitive conduct in this regard.

TRAI's jurisdiction as regards telecom tariff is outlined in 

 Section 11(2) of the Chapter III of the Telecom Regulatory Authority of India Act, 1997 [that] lays down that: “(2) Notwithstanding anything contained in the Indian Telegraph Act, 1885 (13 of 1885), the Authority may, from time to time, by order, notify in the Official Gazette the rates at which the telecommunication services within India and outside India shall be provided under this Act including the rates at which messages shall be transmitted to any country outside India: Provided that the Authority may notify different rates for different persons or class of persons for similar telecommunication services and where different rates are fixed as aforesaid the Authority shall record the reason therefor.”

As brought out in the consultation paper,

 Currently, except for the tariffs for national roaming, fixed rural telephony and leased lines, tariffs for other telecommunication service are under forbearance

TRAI's recommendation (not binding on government) powers include inter alia measures to facilitate competition. 

The concepts of Significant Market Power in telecom regulation mostly apply to ex ante regulation of bottleneck facilities such as EU's erstwhile regulation of leased lines. This concept based on percentage of ownership of resources is simplistic and too crude to handle a complex issue such as predation / abuse of dominance.

It is generally understood that given the existence of a Competition Regulator namely, Competition Commission of India whose jurisdiction includes telecommunications, TRAI's role is ex ante facilitation of competition; CCI's role is ex ante as far as merger control/review is concerned but ex post as  regards anti-trust matters such as abuse of dominance including predatory pricing.

Yet the Consultation paper after quoting liberally from various sections of the Competition Act  including those relating to delineation of relevant markets and abuse of dominance, (inexplicably)  still seeks views of stakeholders on inter alia:

 What should be the different relevant markets – relevant product market & relevant geographic market – in telecom services? 

 How to define dominance in these relevant markets? Please suggest the criteria for determination of dominance.  

As someone who has several years of telecom policy experience and some degree of expertise in Competition law, I would agree with CCI's viewpoint that  definitions of product and geographic markets and post  facto analysis of abuse of dominance including predatory pricing are best left to CCI. The Competition regulator has sophisticated tools and relevant expertise at its disposal, as also ample experience in these matters. It would conduct analysis on a case by case basis. This would include an appropriately nuanced approach to delineation of markets rather than being tied down by rigid  definitions based on percentages and technologies which are not only too simplistic, crude and blunt, but easily rendered irrelevant and obsolete. 

A multiplicity of definitions and approaches could also create a real danger of forum shopping by service providers to avoid effective regulation of competition. In any case, the already beleaguered telecom sector in India could do with less ambiguity and more clarity and certainty on regulatory matters. 

The Net Neutrality Debate in the Indian Context-A Pinch of Salt

I reproduce here my article on the subject, also available at this link

 It is easy to get swept away in the maelstrom of views and counter views, but difficult to arrive at an informed decision on the subject of net neutrality -- the uninhibited access to legal online content without broadband service providers (BSPs) being allowed to block, degrade, or create fast/slow lanes to this content that rides over the internet (OTTs).

The fundamental question is why fix the internet when it is not broken and that too for the wrong reasons? These include inter alia India's overwhelming dependence on mobile broadband due to abysmal wireline penetration, coupled with scarcity and high cost of spectrum and congestion of the internet due to bandwidth hogging free riders. 

To meet these challenges BSPs need tools to prevent congestion and shore up their revenues through levies on content or tie-ups with OTT providers so as to invest in infrastructure, improve service quality and make surfing affordable for the poor and bridge the digital divide. These theories demand a pinch of salt.

Reason One: India depends on wireless broadband. It is true that we have an abnormally high mobile to fixed broadband ratio of 4:1 and only 15.2 million wired broadband connections in a country of 1.2 billion. This has arisen from a legacy of overprotection of PSU incumbents (BSNL & MTNL) who would not allow private operators to access their infrastructure and neither was this mandated.

As PSU monopolies led to inefficiencies, but regulatory barriers made investing in wirelines unattractive, innovation driven, privately provided, wireless services took over. India has a fixed broadband penetration ratio of 1.2 per 100 as against the world average of 9.4 per 100. The incumbents continue to lose 2-3 million landline connections every year. 

However, this imbalance needs to be rectified through regulatory reforms rather than accepted as permanent; nor should it become a reason for interfering with net neutrality. It's important to note also that in terms of competition and performance, we don't fare too well in the wireless broadband space either, ranking 113th in the world with a penetration ratio of 3.2 per 100, performing worse than Nepal and Sri Lanka. 

We have one of the lowest broadband speeds in the world, both in wired and wireless broadband and broadband prices as a percentage of per capita incomes are higher in India than in Pakistan or Sri Lanka. The top four players command about 75 percent of the wireless broadband market. They are the new incumbents and predictably, they too would like to protect their turf. 

Applications like WhatsApp and Skype represent Schumpeterian creative destruction offering much cheaper messaging and voice services over the internet. To avoid going the landline way, mobile service providers must embrace technological progress, adapt, innovate and compete, rather than being allowed to thwart consumer access to applications or OTT providers' access to consumers. 

Reason two: Scarcity of spectrum. The scarcity of adequate and contiguous spectrum must be solved by better spectrum planning in the long run and the use of technology to enhance spectrum efficiency in the short run. The former includes freeing up spectrum held by defence and railways, and allowing spectrum trading and sharing. 

The latter includes employing techniques like multiple small cells to support more users with the same amount of spectrum and creating Wi-Fi hot spots to shift users from mobile broadband to unlicensed Wi-Fi spectrum, whenever feasible. If additional infrastructure costs must be borne to this end or if BSPs must be incentivised to do so by rationalizing indirect taxes or through subsidies, then so be it. Meddling with net neutrality is not the right solution. 

Reason three: Bandwidth hogging applications should cost more. BSPs in India offer multiple tariff plans with different browsing speeds and download limits. Beyond the download limit, the speed goes down drastically (fair usage). BSPs offer top ups, to maintain speed, albeit at a cost. 

While OTT players respond by continuously innovating to make their applications more bandwidth efficient, users are certainly not enjoying a free lunch at the cost of BSPs. The more they download, the more they pay. Also, growing data usage is a source of revenue for BSPS. Data revenue has nearly doubled, from Rs.3,057.83 crore in June 2013 to Rs.5,910.28 crore in September 2014.

Reason four: BSPs need a share of OTT players' revenues to fund universal connectivity. There are more transparent and less harmful ways to encourage investment in broadband infrastructure. India has a Universal Service Obligation Fund (USOF) to subsidise and promote rural telecom services. As per USOF rules, subsidy is available to both public and private sector players and is discovered through a transparent bidding process. This makes it the ideal means to bridge the digital divide.

Reason five: Free, or cheap content to allow a taste of the internet. The utility of the internet cannot be reduced to a few applications. Notwithstanding the harm this would do by way of discouraging innovation and distorting consumer choice, do we really want our price sensitive, digitally uninformed masses' internet experience to be limited largely to Facebook or Bing? 

We already rank below 11 African countries and among the Least Connected Countries on the ICT Development Index which includes ICT skills, usage and access. For deserving users, USOF can subsidise access to important applications (e-health, e-education etc.) in a transparent manner, leaving them to explore the rest of the internet as they please.

The transformative power of the World Wide Web lies in externalities created by its scale and scope - billions of users and a mindboggling array of information, products and services. Should we curb the freedom of this open exchange and that too for the wrong reasons?

Competition as an Integral part of Regulation

This post is inspired by an article that appeared in The Mint on January 7, 2014.Written in the context of the aviation sector in India (applauding a move to set price caps on domestic airfares) and telecom sector (problems of net neutrality), it was surprisingly simplistic in its assuming that what cannot be handled by post facto application of competition law can effectively be tacked through regulation. This view ignores the fact that regulation itself needs to be aligned to sound and well enunciated competition policy principles and bad regulation can do more harm than good.

Also available in the public domain recently are excellent articles about the problems of the Indian aviation industry which focus on poor regulation and the need for reforms. These are Spice Jet lessons for aviation  and another article on destructive effects of lobbying by private airlines. What becomes clear from the  views of sector specialists is that inept regulation that is not competitively neutral and interferes necessarily with markets, combined with regulatory capture can and has, done great harm to a liberalized sector like aviation in India with negative consequences for the entire economy.

I write mostly about telecommunications but the arguments in favour of competition, both ex ante (through policy and regulation) and ex post (through the application of competition law), are equally valid across sectors. Please see my previous posts and my article titled, "Why India Needs a Robust Competition Policy Framework."

Competitive Neutrality in Liberalized Sectors of the Economy

I have been blogging about the need for competitive neutrality mostly in the context of  broadband networks. However, the importance of regulatory neutrality would apply equally to any other liberalized sector be it say, power or airlines. I have written about this in a paper titled,

"Of Airwaves, Incumbents and Good Governance - The Urgent Need for a Robust Competition Policy Framework"

Interestingly, though seldom do papers in India comment on this problem in the context of telecommunications, I find mention of the issue in the context of power transmission. Thus the Financial Express has reported that,

The central power regulator’s bid to end public sector dominance in the transmission sector by putting in place a system to award new projects based on tariff-based competitive bidding (TBCB) is threatening to unravel with the power ministry deciding to virtually persist with the previous regime where the projects are given on a platter to the state-run Power Grid Corporation (PGCIL).

According to sources, the ministry has invoked a provision in the relevant Central Electricity Regulatory Commission (CERC) rules to give eight new transmission projects with an estimated cost of Rs 36,000 crore to PGCIL....The provision of “compressed time schedule” vests discretion with the ministry to nominate PGCIL for executing projects if it is convinced that the bidding route could delay projects that are of critical nature, requiring time-bound execution.

An industry official said: “Any incumbent that continues to have 70-80% market share will have a natural advantage over new entrants in terms of winning even future projects being bid out. Moreover, if that incumbent is a PSU, then it will have clear financing advantages which private players cannot match under current circumstances.”...

Criticising the government’s decision, an executive of a private firm involved in the transmission sector told FE on condition of anonymity that it was the need of the hour to encourage private participation in transmission so that it can bring global technologies to complete projects in compressed time schedules. 

This echoes what I have written about NOFN/BBNL. I particular in my paper titled,  "The State of Broadband in India: A Call for Regulatory Neutrality" wherein I have specifically mentioned that,

"Public funding in a developing nation has to  be undertaken with particular care on account of the opportunity cost of allocating scarce resources. Subsidy schemes are designed to minimise costs and avoid duplicating expensive infrastructure. This could explain BSNL’s nomination in the Wireline Broadband scheme, its winning the bid in the Assam OFC scheme and its role in the forthcoming NOFN.  While this approach makes apparent sense in terms of short term financial prudence, its impact on the long term growth of the sector is unlikely to be positive given that it stifles competition and all its concomitant benefits. From a bureaucratic perspective, relying on public ownership or funding the incumbent is also perhaps more attractive in the short run in terms of relatively less time and effort estimated to commence roll outs (as against tendering/auction), even if we were to assume that public sector could and would deliver. However, the long term impact of monopoly ownership of even open access networks (on competition and accompanying aspects such as innovation/customer service/technological neutrality) merit consideration. If nothing else, our experience with monopoly in wire lines should have cautioned us. USOF had almost got it right with its regional OFC schemes, but it needs to be rescued from over specification of technology and incumbent -centric scheme design through regulation which insists inter alia on competitive neutrality. Thus, rather than doing away with USOF as is the demand of the aggrieved private sector, a relook at its regulatory structure and a focus on competitive neutrality would be the order of the day..." 

NOFN-Better Late than Never?

My last post was about NOFN and the government considering private sector involvement. Not much has been reported about that realization being actually put into practice. Today's Financial Express does report however that,

 Industry analysts have all along being critical of the project from the point of view that its implementation is being done by PSUs rather than awarding work to private sector agencies on a turnkey basis.

In fact, with the delays and a realisation in the top echelons that the deadline would be missed, DoT is also considering roping in private agencies. Under it, the plan is to divide the the entire country into zones and allocate private players to lay the network. In this outsourcing model, [USOF model] the role of the government would be only supervisory, setting benchmarks, providing incentives for completion of work on time and levying penalties in case of delays.

Well what can one say, I have blogged about this a lot. In my view such expensive mistakes are a problem of the (lack of) regularity neutrality problem we face.  Please see my recent paper titled,  "The State of Broadband in India: A Call for Regulatory Neutrality" at
http://circ.in/pdf/Regulatory-Neutrality-in-Broadband-India.pdf

Broadband Planning in India-Missing the Wood for the trees

I reproduce below the text of my article with the same title. It was published in the Financial Express today.

In the recent TRAI consultation paper titled Delivering Broadband Quickly: What do we Need to do?, the issues delineated for stakeholder consultation give the impression that the solution lies in controlling or influencing technological choices or costs. In a liberalised sector, healthy competition accompanied by efficient regulation would mean that market dynamics guide appropriate technological and cost choices, without government intervention. When regulatory interventions go beyond what is necessary to correct market failure, they create and exacerbate market distortions, doing more harm than good. India’s abnormally low ratio of wirelines to wireless connections is part of the broadband problem. While the paper has fleetingly mentioned public sector monopoly in this segment, it has not related the same to poor and falling wireline penetration in our country. Nor has it mentioned the abysmal state of rural broadband penetration, which persists in being negligible in spite of billions of rupees of funding to the incumbent in support of its wireline services by way of access deficit charges and universal service funding.

The relationship between competitive service provision and innovation, quality, and long-term growth in telecommunications is too well known to ignore, and unless efforts are made to correct underlying regulatory problems and consequential market distortions, we may not be able to move forward.

Sadly, one of the most market-friendly initiatives of the government which is key to promotion of broadband—the Universal Service Obligation Fund (USOF)—has also fallen prey to the same lack of understanding. The USOF subsidy is given to willing market players (universal service providers or USPs) to cover the viability gap and hence encourage them to provide services in commercially unviable areas. The USOF subsidised facilities are owned by USPs rather than by the government. Thus, USOF is potentially a valuable tool for minimalistic, targeted interventions to achieve greater penetration of broadband in a competition friendly manner.

A very important aspect of preventing market distortion is ensuring technological neutrality and competitive neutrality. The former would imply defining deliverables to be achieved through the USOF subsidy, while leaving specific technology choices and configurations to USPs’ wisdom. The latter implies that no entity operating in an economic market should be subject to undue competitive advantages or disadvantages.

It is well known that while the government as regulator is supposed to ensure a level-playing field, the government as owner of public enterprises may face difficulties in balancing various conflicting commercial and non-commercial interests.However, regulatory neutrality, which encompasses both technological and competitive neutrality, is a sine qua non for economic efficiency or welfare maximisation.

From data available on the USOF website, it would appear that USOF’s present regulatory framework has been unsuccessful in this regard. USOF had disbursed R17,580 crore of subsidy up to January 31, 2014, of which rural fixed line telephony and broadband based schemes taken together account for about 95%. Yet rural teledensity at 43% is made up almost entirely of private sector wireless connections. Rural wireline teledensity is less than 1% and broadband penetration negligible. BSNL’s monopoly in the rural wireline and optic fibre segment has meant that majority of the USOF support (focused disproportionately on fixed lines) has been given to BSNL on nomination basis. The other technologies mentioned in the Trai paper would perhaps have been deployed by USPs long ago, had USOF’s schemes been technologically neutral.

The USOF website reveals that the roll out of deliverables by BSNL as USP has been delayed consistently. For example, against a target of approximately 8.8 lakh broadband connections and 28,000 broadband kiosks by January 2014 under the Wireline Broadband Scheme, BSNL had provided only about 4.3 lakh broadband connections and less than 11,000 kiosks. Despite its poor track record, BSNL was chosen as one of the three PSUs to partner in the National Optical Fibre Network (NOFN) project through the creation of Bharat Broadband Network Limited (BBNL).

NOFN’s tardy progress has been documented in the consultation paper. While dwelling on which model to adopt for rural OFC backhaul, the USOF model of reverse bidding with the lowest bidder (public or private) setting up open access networks under contract was considered, but rejected as being tedious and long drawn, as it involves subsidy benchmarking. Instead, the BBNL route was chosen. The result of this choice made three years ago is out there for us to see. BBNL has not made even a dent in the targeted roll out (2.5 lakh gram panchayats by 2014) and what’s worse is the reported doubling of estimated costs from Rs 20,000 crore (A crore is 10 million) to more than Rs 40,000 crore. 

Going forward, a focus on regulatory neutrality would be the order of the day and a major part of what needs to be done.