Net Neutrality to Digital Dynamism. Rohit Prasad MDI Gurgaon (joint work with Prof V. Sridhar)

Transcription

1 Net Neutrality to Digital Dynamism Rohit Prasad MDI Gurgaon (joint work with Prof V. Sridhar)

2 Orchha Weekly Bazaar

3 Marketplaces Bring buyers and sellers together More buyers attract more sellers and vice versa Conveniently located, only possible to have 2-3 such markets

4 Sellers often like to go to all markets but buyers usually stick to one market Who runs the marketplace? What should be the charge for the services of the marketplace? Who should pay?

5 The market has a monopoly on buyers (who only like to go to one market) Therefore it might charge the sellers a lot From a social point of view, is that good?

6 May not be a problem if there are lots of marketplaces But if there are only a few marketplaces, there is only limited competition We may need to regulate the market power of the marketplace vis a vis the sellers

7 But since the sellers have little choice but to be present at the market, it seems that transferring the burden on to them will affect the natural flow of activity the least This seems to be contrary to the spirit of net neutrality which says we should not charge the seller but the buyer

8 Ah! I forgot... We don t know what net neutrality is Lets leave the allegory of the ancient village haat and squarely face the reality of the internet

9 Some Terminology CAP Content and Application Provider ISP Internet Service Provider HSP Hosting Service Provider ECP End user connectivity provider

10 The Internet A Two Sided Market The two-sides and the platform in between Content/ App Provider ISP/ Mobile Broadband Operator Consumers

11 Net Neutrality The principle that content consumed should be decided by the end-user without any distortion by the connectivity provider. No traffic management No charge flat or tiered Tim Berners-Lee, Inventor of the World Wide Web : The neutral communications medium is essential to our society. It is the basis of a fair, competitive market economy. It is the basis of democracy, by which a community should decide what to do. It is the basis of science, by which humankind should decide what is true.

12 Traffic management Pricing Zero Flat Tiered None Service based Service provider based Pure net neutrality Blocking Pure non net neutrality

13 Static efficiency versus dynamic efficiency Barriers to entry

14 The Real Architecture of the Internet

15 The Layers within CAPs Content and Application provider Social media/ecommerce sites Search engine search referrals account for a sizeable chunk of traffic

16 The Internet Today is Not a Two Sided Market Search and social networks important gatekeepers Devices a critical node

17 Two sided markets - device Application developers apple End user

18 Two sided markets - ecommerce retailer amazon End user

19 Three sided markets search engine advertizer websites google End user

20 Vertical Integration TSP-HSP HSP-CAP CAP-CAP Device-CAP

21 Commercial model of the Internet Advertizing CAPs (with financial capability) pay to direct traffic toward themselves

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

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

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

25 Decision Matrix Hi Penetration of mobile Yes No Hi Penetration of fixed line Yes USA Bhutan No India Uganda Net neutrality on the dominant network

26 India ( 1 of 4) 1. The primary goals of public policy - achievement of developmental aims of the country by facilitating Affordable Broadband, Quality Broadband and Universal Broadband 2. Over-The-Top (OTT) application services should be actively encouraged and any impediments in expansion and growth should be removed. 3. Specific OTT communication services dealing with messaging should not be interfered with through regulatory instruments. For OTT application services, there is no case for prescribing regulatory oversight similar to conventional communication services.

27 India ( 2 of 4) 4. In case of Voice Over Internet Protocol (VoIP) OTT communication services, there exists a regulatory arbitrage. European Commission has made a policy pronouncement on May 6, 2015 for a Digital Single Market Strategy for Europe arguing, inter alia, that there is a need to review telecom rules to look at ways of ensuring a level playing field for players in the communications market to the extent that they provide competing services and also for meeting the long term connectivity needs of the European Union. 5. Under existing telecom licensing conditions, Internet Telephony is permitted under restricted conditions. However, pricing arbitrage of OTT domestic voice communication services has the potential of significantly disrupting existing telecom revenue models. With complete transition of Telecom Network to IP Network, the pricing arbitrage between voice communications by TSPs and OTT service providers would be substantially reduced

28 India ( 3 of 4) 6. The existence of a regulatory arbitrage in addition to the pricing arbitrage adds a degree of complexity that requires a graduated and calibrated public policy response to bring about a level playing field. In case of OTT VoIP international calling services, a liberal approach may be adopted. However, in case of domestic calls (local and national), communication services by TSPs and OTT communication services may be treated similarly from a regulatory angle for the present. The nature of regulatory similarity, the calibration of regulatory response and its phasing can be appropriately determined after public consultations and TRAI s recommendations to this effect. 7. Legitimate traffic management practices may be allowed but should be tested against the core principles of net neutrality. 8. Tariff plans offered by TSPs/ISPs must conform to the principles of net neutrality set forth in guidelines issued by the Government as Licensor. TRAI may examine the tariff filings made by TSPs/ISPs to determine whether the tariff plan conforms to the principles of net neutrality.

29 India ( 4 of 4) 9. A clause, requiring licensee to adhere to the core principles of net neutrality, as specified by guidelines issued by the licensor from time to time, should be incorporated in the license conditions of TSP/ISPs. The guidelines can describe the principles and conditions of net neutrality in detail and provide applicable criteria to test any violation of the principles of net neutrality. 10. National security is paramount, regardless of treatment of net neutrality. The measures to ensure compliance of security related requirements from OTT service providers, need to be worked out through inter-ministerial consultations. 11. An oversight process on Net Neutrality may be set up by the government to advise on policies and processes, review guidelines, reporting and auditing procedures and enforcement of rules.

30 questions

31 Agenda Economics Policy

32 Goals of Regulation Static efficiency Dynamic efficiency Equity

33 Economics of Net Neutrality Natural monopoly Congestion Two sided markets Vertical integration

34 Efficient point not viable

35 Tragedy of commons No. of cattle Price per cattle at the end of 1 year Average Revenue per cattle Total revenue from grazing Marginal revenue Excess over interest due to bank Exercise 1: How many cattle will graze? Exercise 2: How many cattle should graze?

36 Two sided markets Content and applications Service provider/platform End user

37 Two sided markets- ISP Google/ amazon/ facebook airtel End user

38 Economics of Two Sided Markets Cross-group externalities Waterbed effect Incentive to innovate Tragedy of the commons Fragmentation of internet Rent extraction versus access fees Asymmetry of content providers

39 Many commercial arrangements Business model of the internet payment for preferential viewing CAPs HSPs HSP-TSP CAP-TSP CAP-advertiser

40 Networks open and closed Internet developed in modular way Content and application developers ISPs Operating system Chip All interoperable Responsible for wave of innovation

41 ICT today seeing a mix of open and closed networks Apple walled garden approach Google/android open systems approach Non-Apple apps Apple apps apple End user

42 The phenomenon of vertical integration apps internet entertainment chip devices and os operator/isp chip devices and os operator/isp news entertainment apps internet news

43 Regulation of vertical integration Modularity responsible for growth of internet Competition in complementary market good for platform Chicago school Integration of complementary externalities Baxter doctrine platform may want market power to Cross-subsidize Competitor has to enter both markets

44 Convergence of telecom and IT Increased computing power of mobile devices Increased bandwidth of mobile networks Movement of applications on the cloud From homogeneous networks to two sided (multi-mode) networks

45 Power of gatekeepers Google 65% of search market in the US Facebook 55% of social network market

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

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

48 Decision Matrix Hi Penetration of mobile Yes No Hi Penetration of fixed line Yes USA Bhutan No India Uganda Net neutrality on the dominant network

49 India ( 1 of 4) 1. The primary goals of public policy - achievement of developmental aims of the country by facilitating Affordable Broadband, Quality Broadband and Universal Broadband 2. Over-The-Top (OTT) application services should be actively encouraged and any impediments in expansion and growth should be removed. 3. Specific OTT communication services dealing with messaging should not be interfered with through regulatory instruments. For OTT application services, there is no case for prescribing regulatory oversight similar to conventional communication services.

50 India ( 2 of 4) 4. In case of Voice Over Internet Protocol (VoIP) OTT communication services, there exists a regulatory arbitrage. European Commission has made a policy pronouncement on May 6, 2015 for a Digital Single Market Strategy for Europe arguing, inter alia, that there is a need to review telecom rules to look at ways of ensuring a level playing field for players in the communications market to the extent that they provide competing services and also for meeting the long term connectivity needs of the European Union. 5. Under existing telecom licensing conditions, Internet Telephony is permitted under restricted conditions. However, pricing arbitrage of OTT domestic voice communication services has the potential of significantly disrupting existing telecom revenue models. With complete transition of Telecom Network to IP Network, the pricing arbitrage between voice communications by TSPs and OTT service providers would be substantially reduced

51 India ( 3 of 4) 6. The existence of a regulatory arbitrage in addition to the pricing arbitrage adds a degree of complexity that requires a graduated and calibrated public policy response to bring about a level playing field. In case of OTT VoIP international calling services, a liberal approach may be adopted. However, in case of domestic calls (local and national), communication services by TSPs and OTT communication services may be treated similarly from a regulatory angle for the present. The nature of regulatory similarity, the calibration of regulatory response and its phasing can be appropriately determined after public consultations and TRAI s recommendations to this effect. 7. Legitimate traffic management practices may be allowed but should be tested against the core principles of net neutrality. 8. Tariff plans offered by TSPs/ISPs must conform to the principles of net neutrality set forth in guidelines issued by the Government as Licensor. TRAI may examine the tariff filings made by TSPs/ISPs to determine whether the tariff plan conforms to the principles of net neutrality.

52 India ( 4 of 4) 9. A clause, requiring licensee to adhere to the core principles of net neutrality, as specified by guidelines issued by the licensor from time to time, should be incorporated in the license conditions of TSP/ISPs. The guidelines can describe the principles and conditions of net neutrality in detail and provide applicable criteria to test any violation of the principles of net neutrality. 10. National security is paramount, regardless of treatment of net neutrality. The measures to ensure compliance of security related requirements from OTT service providers, need to be worked out through inter-ministerial consultations. 11. An oversight process on Net Neutrality may be set up by the government to advise on policies and processes, review guidelines, reporting and auditing procedures and enforcement of rules.