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.