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.

Mexico Earthquake-Lessons for Indian Authorities and Indian Telecoms

On the afternoon of September 19, 2017 Mexico City was struck by an earthquake of 7.1 magnitude that injured thousands, rendered thousands homeless and killed more than 200 people in and around the city. This earthquake was preceded by one in Chiapas, Mexico, twelve days earlier, that killed 100 people. Ironically the city had in fact commemorated at 11 AM on September 19, 2017 the terrible 8.1 magnitude earthquake of 1985 that also occurred on September 19, and killed 5000 people apart from causing widespread damage to property.  

As luck would have it, I was flying towards Mexico City on 19.9.2017 when the earthquake struck. As the Benito Juárez Airport was temporarily shut down, our airplane was diverted to Houston, Texas till it got clearance to land in Mexico City. By that time, about 7 hours had past post the occurrence of the earthquake. My colleague and I had some difficulty finding a hotel as the one we had a booking in had been evacuated. My first night there was disturbed by evacuation drills which the authorities had ordered and there was no air-conditioning. I could hear sirens throughout the night. However, even so, I was amazed at the calm I saw around me. The electricity was up as were the telephone lines and internet. 

The next morning, we visited the venue of the conference we had traveled to attend and as expected under the circumstances, we found that it had been cancelled. The Government had declared a national emergency. A tour of the city revealed that while there were relatively few cars and pedestrians to be seen, the city was quietly gearing up for rescue / relief work. I saw many volunteers walking, moving in cars and aggregated in and around the Zocalo or Main Square, where water and other rations were being organised. Even as the television relayed videos of the desperate ongoing efforts to rescue people trapped under collapsed buildings, in general, for a capital that had just been struck by a major earthquake I found that people were calm and there was no sense of panic or chaos, at least in the areas I had visited.

Reportedly,  as per preliminary estimates the cost of the damages may be around USD 2 billion. Its going to be a long haul for Mexico as far as reconstruction and recovery go, but it is well prepared. The government has already started making electronic transfers to the victims. I had in fact studied Mexico’s Disaster Funding as a part of my work at the National Disaster Management Authority of India.   India has statutory funds created for disaster relief and immediate rehabilitation (The National and State Disaster Response Funds (NDRF & SDRFs)), and has a statutory provision for a National Disaster Mitigation Fund (that has not been created), but unlike Mexico, India lacks a dedicated funding mechanism for post disaster asset reconstruction. Thus, in India, reconstruction would invariably come at the expense of forgoing other committed expenditure, including that earmarked for developmental activities. Further, the Indian Government does not tap into risk transfer through insurance of public assets or through reinsurance mechanisms. India is vulnerable to both water and climate related disasters as well as geologically related disasters. As indicated in the below mentioned Discussion Paper, a Lloyds study (2004-11) finds that 85% of disaster related losses are uninsured in India. The overall low penetration on non-life insurance generally implies dependence on government funding /subsidies in the aftermath of disasters and eventually, this translates into a burden on tax payers.

In contrast, Mexico has a comprehensive ex ante mechanism for funding post disaster relief and reconstruction by way of the FONDEN, apart from a funding mechanism for mitigation through FORPDEN.

FONDEN’s operation relies on a clear framework for damage and loss assessments, resource allocation, funding channels and implementation timelines between federal and state government agencies after a disaster. This allows the Government of Mexico to manage emergency response and reconstruction funds with efficiency and transparency, while generating trust and discipline…..[b]y Law, FONDEN and its related funds (FOPREDEN and CADENA, a vehicle for agricultural insurance) must receive no less than 0.4 percent of the annual budget (around US$800 million in 2011), including any uncommitted funds in the Trust from the previous fiscal year. 

As funding requirements can vary, apart from risk retention by way of above mentioned budgetary allocations, FONDEN is also allowed to pay risk premiums towards insurance as a means of risk transfer. The Mexican Government has also issued multi-catastrophe bonds and has an indemnity-based insurance for FONDEN losses. All government infrastructure is compulsorily insured.(source GFDRR)

In India, the post disaster relief expenditure of states is often more than funding available through SDRF and NDRF. Further as stated above, the Government meets reconstruction expenditure from the general budget. In the event of a major disaster this would be supplemented by aid or external borrowing. As suggested in a Discussion Paper on Disaster Relief and Risk Transfer  that I had co-authored while at NDMA, we could allow the states to use a portion of the SDRF to buy insurance  towards relief and rehabilitation (over and above that available through the SDRF scheme) and towards reconstruction of damaged infrastructure. Further, the National Government could buy parametric insurance to safeguard against rarer, high impact disasters by using a dedicated portion of NDRF funds for insurance premium. (For further information, please read my article on the subject Reference: Gulati, Archana G., Financing Disaster Risk Reduction - The Indian Context (November 1, 2013). Presentation to the Expert Group Meeting on Effective Strategies for Mainstreaming Disaster Risk Reduction in Asia and the Pacific, Bangkok, 26-28 November 2013. )

This paper had also suggested other funding mechanisms such as compulsory disaster insurance for private homes, government property and revenue generating public utilities and extension of the scope of the existing public liability insurance to include public places such as hotels, cinema halls and other places where people congregate at events. Incentives by way of tax deduction for premiums could be provided. As the quantum of premiums would be linked to risk, compulsory insurance would also provide an incentive for disaster risk reduction or mitigation activities. This would also ensure that relief / reconstruction costs do not get passed on to the government in their entirety and that development related funds are not diverted for reconstruction activities.

Coming back to telecommunications, apart from the fact that in today's world, telecoms  are the lifeblood of economic and social activity, the government is also investing huge amounts in creation of public assets by way of Digital India and the National Optic Fibre Network. However, as per usual practice these assets are not insured. The Department of Telecommunication’s Crisis Management SOP 2017 and other disaster related documentation too are silent on funding for rehabilitation and reconstruction. Needless to say, disaster resilience of telecoms infrastructure is absolutely critical as disaster alerts, rescue efforts electronic funds transfers etc. all rely proximately on the unhindered continuation of telecoms connectivity. However, given the important role of telecoms and especially broadband in economic activity, we also need to evolve a comprehensive strategy for ex ante funding of damaged assets to avoid the adverse consequences of slow and expensive economic recovery, post disasters. This should invariably include a combination of risk retention (budgetary allotments) and risk transfer through insurance.

A presentation on the above can be viewed here.

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. 

Universal Service: Regulation, Competition and Contemporary Issues

Its been a long time since I wrote. An invitation to speak at a Conference on Universal Service in India in the context of India's broadband plan gave me the opportunity to put together some thoughts on Universal Service Regulation in India.  The use of Universal Service funding is in theory market friendly and complements liberalisation and competition. However, in practice, particularly in the context of roll out of national broadband networks, the design of USF interventions can do much harm to telecommunications sector by creating winners and losers, creating/exacerbating barriers to entry and distorting the competitive scenario. In the long run this would impede dynamic efficiency and harm the very objective of universal service.
Please see the slides here

Hitting the Nail on the Head

It was a delight to read an article titled, "Net neutral, shift gears" It reiterates strongly the reasons why hard won net neutrality must be preserved and safeguarded from anti-competitive attempts to introduce divisions within the internet. Yet, it urges India to bridge the digital divide and connect every Indian immediately.

The only point where I disagree is the present idea/version of NOFN. I believe that universal broadband coverage can be achieved much faster and in a much more cost efficient manner by sticking to the original USOF concept of bidding out districts/states/regions in a technology neutral , competitive process that enables interested telecom operators to provide connectivity as defined by the Fund, with a limited smart subsidy.

The creation of a huge administrative set up by way of a megalithic government organisation and funding it from USOF ; expecting it to deliver any better than a monopolistic government department  in pre-liberalisation India, is in my view a wasteful, pipe dream. Please see my previous blogs on NOFN/BBNL.

NOFN-Do we need PPP or plain USOF subsidy?

I reproduce below a news item regarding TRAI recommendations on NOFN 

I have previously pointed out that the simplest and fastest route to funding optic fibre roll out in rural areas would have been to faithfully follow the USOF model of bidding out service areas based on reveres auctions with open access conditions. This was done by USOF for the North Eastern states. That would have been akin to PPP based on BOO model rather than BOOT.

There is absolutely no reason for the ownership of the network to be with/transfer back to the government unless it is to justify the huge paraphernalia that has been created by way of BBNL.  The whole  idea of Universal Service Funds is to provide a minimal smart subsidy and let markets take over. 

Issues such as fair open access and Right of Way cannot necessarily be solved only by public equity participation. NOFN/BBNL  at present under public ownership has failed to deliver for past 4 years (including solving the RoW problem) and its cost has trebled. 

I have examined this debate earlier in my post "Broadband Networks through Infrastructure Sharing Route"  (also placed under the label NOFN). 

Its time we dusted the departmental files containing the original idea of universal service funding based on international best practices and allowed the Indian USOF to deliver as per its own original rules of competitive neutrality. 

The news article:

The Telecom Regulatory Authority of India (Trai) has recommended a public-private partnership (PPP) model for BharatNet, an ambitious project involving setting up a broadband network in rural India.

A model with private incentives and long-term service delivery similar to the build-own-operate transfer or build-operate-transfer models of implementation would be the preferred means of implementation, Trai said in its recommendations announced on Monday.

“PPPs seek to combine the private sector’s capacity for delivery with the Government’s role as an enabler and regulator to overcome market failures. PPPs must be viewed as not just an instrument for easing finance and capacity constraints, but as an effective tool towards ensuring competition in service delivery and improvement in quality of service,” Trai said.

A special purpose vehicle, the Bharat Broadband Network Limited (BBNL), under the telecom ministry is now handling rolling out the optical fibre network being executed by BSNL, Railtel and Power Grid.

The previous government had approved a project cost of Rs 20,000 crore for laying optical fibre network in 2011 but progress has been poor. It is expected that BharatNet will be completed by 2017-18, after missing many deadlines. Even the project cost has increased to about Rs 70,000 crore over the years. The project was earlier named the national optical fibre network but later renamed BharatNet by the current government.

Trai said the concessionaires should be given the job of deploying the optical fibre cable and other network infrastructure as well as operating the network during the period of contract. The contract period should be of 25 years which can be further extended in block of 10, 20 or 30 years.

The national optical fibre network (NOFN) project had failed in achieving its original objective of increasing broadband subscription in the country. The task of rolling out a broadband network should be given to a concessionaire selected through reverse bidding. Funding should be done to bridge the loss incurred due to higher operational expenses and lower commercial accruals, Trai said.

It can be safely concluded that the NOFN has failed in achieving its original objectives, the regulator said. Focusing on the design of the finance and investment model for future roll-out of broadband is critical.

The National Telecom Policy of 2012 (NTP 2012) envisaged broadband on demand by 2015, and 175 million broadband subscribers by 2017 with a minimum speed of 2 Mbps and up to 100 Mbps on demand. As of September 2015, the total number of broadband (defined as download speeds >=512 Kbps) subscribers stood at 120.88 million (largely concentrated in Andhra Pradesh, Delhi, Karnataka, Kerala, Maharashtra and Tamil Nadu), with only 27.20 million rural subscribers. This “internet divide” between rural and urban India has become more relevant as the scope of activities carried out on the Internet has expanded beyond what was previously imagined, Trai said.

Moreover, rural broadband access will help address multiple service deficits that arise due to other infrastructure related constraints widespread among the rural population. The potential gains from increasing such access are tremendous — the Report of the Committee on NOFN in its projections of the economic benefit from BharatNet estimated that an additional 25 million Internet users by 2018-19 would result in economic benefits of Rs 66,465 crore due to the direct, indirect and spillover benefits of Internet access.

It also recommended that the central and state governments become anchor clients of this project and purchase a bandwidth of 100 megabytes per second at market rate.

To ensure that the concessionaire does not discriminate between service providers in granting access of optical fibres, Trai has recommended arm's length relationship between concessionaire and service providers, adding that 50 per cent of the optical fibre should be reserved for telecom and cable service providers.

Besides, the government should become a minority partner of the concessionaire with 26 per cent stake as this would lower financing cost and risk. "In addition, this can help the government check monopolistic behaviour on the part of the concessionaire," Trai added.

Free Basics-Do we need Facebook to (selectively) connect India

I have read extensively and written previously on net neutrality. However, my pleasure in reading critics of breaching net neutrality principles has increased manifold since Facebook started placing full page ads in leading dailies. The quality of comments has improved. They are now more focussed and incisive. By Indian standards this is a desperate (and may I say vulgar display of desperation) attempt to patronisingly suggest that we need Facebook to connect India.

I am not denying that we have failed miserable in doing so, My entire blog is about how we have wasted opportunities to correct market failures and to correctly utilise universal service funds(USOF) in India. I have also pointed out regularly, the deficiencies in our approach to NOFN/BBNL.

The fact that we have multiple mobile operators in mobile/broadband does not tantamount to competition. Statistics suggest that our markets are far from competitive. This is reflected in high tariffs, low speeds and poor service quality. I place below evidence based on my own analysis of data.

Yet Facebook's blatant attempt to mislead the public and confuse the issue is something that I cannot stand by.  I reproduce below some excellent articles on the subject.

 The Hindu carries,firstly,
..Free Basics is not free, basic Internet as its name appears to imply. It has a version of Facebook, and only a few other websites and services that are willing to partner Facebook’s proprietary platform.

Today, there are nearly 1 billion websites. If we consider that there are 3.5 billion users of the Internet, 1 out of 3.5 such users also offers content or services. The reason that the Internet has become such a powerful force for change in such a short time is precisely because anybody, anywhere, can connect to anybody else, not only to receive, but also to provide content. All that is required is that both sides have access to the Internet.

All this would stop if the Internet Service Providers (ISPs) or telecom companies (telcos) are given the right to act as gatekeepers. This is what net neutrality is all about — no ISP or telco can decide what part of the Internet or which websites we can access. Tim Wu, the father of net neutrality, has written that keeping the two sides of the Internet free of gatekeepers is what has given a huge incentive for generating innovation and creating content. This is what has made the Internet, as a platform, so different from other mass communications platforms such as radio and television. Essentially, it has unleashed the creativity of the masses; and it is this creativity we see in the hundreds of millions of active websites.

Facebook’s ads and Mark Zuckerberg’s advertorials talk about education, health and other services being provided by Free Basics, without telling us how on earth we are going to access doctors and medicines through the Internet; or education. It forgets that while English is spoken by only about 12 per cent of the world’s population, 53 per cent of the Internet’s content is English. If Indians need to access education or health services, they need to access it in their languages, and not in English. And no education can succeed without teachers. The Internet is not a substitute for schools and colleges but only a complement, that too if material exists in the languages that the students understand. Similarly, health demands clinics, hospitals and doctors, not a few websites on a private Facebook platform.

Regulate price of data
While the Free Basics platform has connected only 15 million people in different parts of the world, in India, we have had 60 million people join the Internet using mobiles in the last 12 months alone. And this is in spite of the high cost of mobile data charges. There are 300 million mobile broadband users in the country, an increase fuelled by the falling price of smartphones.

In spite of this increase in connectivity, we have another 600 million mobile subscribers who need to be connected to the Internet. Instead of providing Facebook and its few partner websites and calling it “basic” Internet, we need to provide full Internet at prices that people can afford. This is where the regulatory system of the country has to step in. The main barrier to Internet connectivity is the high cost of data services in the country. If we use purchasing power parity as a basis, India has expensive data services compared to most countries. That is the main barrier to Internet penetration. Till now, TRAI has not regulated data tariffs. It is time it addresses the high price of data in the country and not let such prices lead to a completely truncated Internet for the poor.

There are various ways of providing free Internet, or cost-effective Internet, to the low-end subscribers. They could be provided some free data with their data connection, or get some free time slots when the traffic on the network is low. 2G data prices can and should be brought down drastically, as the telcos have already made their investments and recovered costs from the subscribers.

The danger of privileging a private platform such as Free Basics over a public Internet is that it introduces a new kind of digital divide among the people. A large fraction of those who will join such platforms may come to believe that Facebook is indeed the Internet. As Morozov writes, the digital divide today is “about those who can afford not to be stuck in the data clutches of Silicon Valley — counting on public money or their own capital to pay for connectivity — and those who are too poor to resist the tempting offers of Google and Facebook” (“Silicon Valley exploits time and space to extend the frontiers of capitalism”, The Guardian, Nov. 29, 2015). As he points out, the basic delusion Silicon Valley is nurturing is that the power divide will be bridged through Internet connectivity, no matter who provides it or in what form. This is not likely to happen through their platforms.

The British Empire was based on the control of the seas. Today, whoever controls the data oceans controls the global economy. Silicon Valley’s data grab is the new form of colonialism we are witnessing now.

The Hindu also carries another article which is close to my heart as it focusses also on the issue of competition in telecoms.

If the objective is to connect the whole world to the Internet, then Free Basics by Facebook (previously known as internet.org) is a controversial method to achieve it. The company wants to provide a subset of the Internet free of charge to consumers, with mobile telecom operators bearing the costs of the traffic. Facebook acts as the unpaid gatekeeper of the platform.

This kind of arrangement has come to be called “zero rating” and attracted criticism from Internet civil society groups like the Electronic Frontier Foundation. It argues that the Free Basics scheme has “one unavoidable, inherent flaw: Facebook’s central role, which puts it in a privileged position to monitor its users’ traffic, and allows it to act as gatekeeper (or, depending on the situation, censor)... there is no technical restriction that prevents the company from monitoring and recording the traffic of Free Basics users. Unfortunately, this means there is no guarantee that the good faith promise Facebook has made today to protect Free Basics users’ privacy will be permanent.”

Monopolists vs free market

In India, Internet civil society activists are opposing Facebook’s scheme for additional reasons. While the attempt to introduce new users to the Internet is a good thing, they argue, the scheme risks breaking the network into many smaller ones and skewing the playing field in favour of apps and services that enjoy privileged pricing.

Zero rating in general and Free Basics by Facebook in particular has many defenders among advocates of free markets and capitalism. They argue that if the mobile operator wishes to lose money or cross-subsidise some users at the cost of others, then it should be allowed to do so. Government intervention in pricing usually has bad unintended consequences, and it should be no different in the case of Internet traffic.

The Telecom Regulatory Authority of India (TRAI) has re-engaged in a public consultation seeking submissions on which path it should take: the conservative path of insisting on net neutrality, a laissez-faire approach of non-intervention in the decisions of private firms, or other options in between these two.

What seems to be taken for granted but should really surprise us is that companies and policymakers accept that getting the developing world online requires methods that are different from how the developed countries got there. So, how did the hundreds of millions of people around the world become Internet subscribers? Not because of government schemes, but because they could afford it. They could afford it because market forces — competition — drove prices down to levels that made an Internet connection affordable. Unless government policies get in the way, there is no reason why the same forces will not reduce prices further to make the service affordable to ever more people, with lower disposable incomes.

There is empirical evidence for this: the 980 million mobile phone subscribers in India are able to make phone calls because they can afford the charges. Even after some price capping by TRAI, most mobile telecom operators are doing well. Despite persistent call drops and atrocious customer service, consumers enjoy reasonably good service and the industry as a whole is fairly healthy.

All this happened without a mobile phone operator providing free calls to a limited set of numbers in order to demonstrate the value of mobile phones and to encourage more people to take up subscriptions. Operators did, however, innovate in retailing, launching prepaid packages and recharging these connections. On the flip side, they also cut costs by skimping on customer service, overloading spectrum and sharing tower infrastructure.

Competition is the key

TRAI should reflect on its own success in transforming India from a low teledensity country to a moderately high teledensity one. This happened not due to “no-frills services for poor and developing country users” but by ensuring that market competition is allowed to take its course. There is no reason why mobile Internet services will not become as popular as mobile phone services as long as there is adequate competition.

Therefore, the debate on whether or not to permit zero rating is beside the point. What TRAI ought to be asking is whether there is sufficient competition in its current policy framework. Should it be licensing more telecom operators? Has the government made enough spectrum available so that mobile operators can lower prices and ensure adequate service quality? Are there bottlenecks in the hands of monopolists that raise the costs of service?

The path to achieving the dream of Digital India lies not in foreign companies deciding on what basic services India’s poor ought to access free of charge, but by encouraging ever greater competition and a level playing field. This calls for the regulator to have a hawkish approach towards anti-competitive behaviour by existing market players.

Now, let’s say that the government really wishes to make the Internet affordable to citizens whose incomes are too low to pay for it. There is a good case for this based on positive externalities: that some benefits of an individual’s connection to the Internet accrue to society as a whole. Much like primary education, an Internet connection allows a citizen to participate in the modern economy. Just as society as a whole benefits if all citizens are educated, it benefits if all citizens are connected. To be clear, this is not an argument for the government to run telecom businesses. Rather, it is to say that it is in the public interest for nearly everyone to be connected to the Internet.

Growth as a force multiplier

While it is tempting to provide free or subsidised services — like we do in India for many such things — the best method to achieve this outcome is to raise people’s incomes. If the Indian economy grows at 8 per cent over several years, the income effect will make Internet connections more affordable even if prices do not fall.

In other words, the best scheme to bring the Internet to all involves boosting competition to bring down prices and pursuing economic growth to raise people’s incomes. This is the formula that has worked elsewhere in the world, has worked in India and will continue to work. Schemes like Free Basics by Facebook and Airtel Zero are unnecessary from the perspective of connecting the unconnected.

Now, Facebook is not a charity. So, it probably must have a good explanation to its shareholders why it is spending so much of its time and resources in promoting a good cause. That explanation is likely to go: “more Internet users in the world means more users for Facebook, which we monetise in our usual ways”. It might also hint that being the gatekeeper, however open, of Internet content for hundreds of millions of people will give it a lot more market power. This is important, for as Chamath Palihapitiya, venture capitalist and an early Facebook executive says, the company worries that it will lose out if it does not capture most of the world’s Internet content on its own platform.

TRAI must take a call on whether such business strategies are anti-competitive. But in dealing with the question, the regulator must not allow itself to be persuaded that such schemes are necessary for bringing the Internet to the masses.