Net Neutrality to Digital Dynamism
Rohit PrasadMDI Gurgaon
(joint work with Prof V. Sridhar)
Orchha Weekly Bazaar
Marketplaces
• Bring buyers and sellers together
• More buyers attract more sellers and vice versa
• Conveniently located, only possible to have 2-3 such markets
• Sellers often like to go to all markets but buyers usually stick to one market
• Who runs the marketplace? What should be the charge for the services of the marketplace? Who should pay?
• The market has a monopoly on buyers (who only like to go to one market)
• Therefore it might charge the sellers a lot
• From a social point of view, is that good?
• May not be a problem if there are lots of marketplaces
• But if there are only a few marketplaces, there is only limited competition
• We may need to regulate the ‘market power’ of the marketplace vis a vis the sellers
• But since the sellers have little choice but to be present at the market, it seems that transferring the burden on to them will affect the ‘natural flow of activity’ the least
• This seems to be contrary to the spirit of net neutrality which says we should not charge the seller but the buyer
• Ah! I forgot...
• We don’t know what net neutrality is
• Lets leave the allegory of the ancient village haat and squarely face the reality of the internet
Some Terminology
• CAP – Content and Application Provider• ISP – Internet Service Provider• HSP – Hosting Service Provider• ECP – End user connectivity provider
The Internet – A Two Sided Market
Content/
App Provider
ISP/ Mobile Broadband OperatorConsumers
The two-sides and the platform in between
Net Neutrality
• The principle that content consumed should be decided by the end-user without any distortion by the connectivity provider.– No traffic management– No charge – flat or tiered
Tim Berners-Lee, Inventor of the World Wide Web : “The neutral communications medium is essential to our society. It is the basis of a fair, competitive market economy. It is the basis of democracy, by which a community should decide what to do. It is the basis of science, by which humankind should decide what is true.
Traffic management
None Service based Service provider based
Blocking
Pricing
Zero Pure net neutrality
Flat
Tiered Pure non net neutrality
• Static efficiency versus dynamic efficiency
• Barriers to entry
The Real Architecture of the Internet
The Layers within CAPs
Content and Application provider
Search engine
Social media/ecommerce sites
search referrals account for a sizeable chunk of traffic
The Internet Today is Not a Two Sided Market
• Search and social networks important gatekeepers
• Devices a critical node
Two sided markets - device
Application developers apple End user
Two sided markets - ecommerce
retailer amazon End user
Three sided markets – search engine
advertizer
google End user
websites
Vertical Integration
• TSP-HSP• HSP-CAP• CAP-CAP• Device-CAP
Commercial model of the Internet
• Advertizing – CAPs (with financial capability) pay to direct traffic toward themselves
• Regulation has to go beyond regulating the market power of the ISP
Digital Dynamism• Digital Dynamism recognizes that simplistic notions of the
internet as a two sided market do injustice to the complex web of interconnections between different types of entities that constitute the reality of the Internet today. It replaces the anachronistic rule of zero pricing and the prohibition on traffic management with a framework of regulation that recognizes the power of other entities in the Internet eco-system, other than the TISPs while at the same time being pro-active about the need to reduce barriers to entry for new ventures, and firmly focused on creating an Internet driven by end users. It also recognizes the need to combine traditional economic concerns of efficiency and equity with issues of privacy and security
Policy
• US – full neutrality only in fixed line networks• Chile – no arbitrary blocking or discrimination• Netherlands – full net neutrality
Decision MatrixHi Penetration of mobile
Yes No
Hi Penetration of fixed line
Yes USA Bhutan
No India Uganda
Net neutrality on the dominant network
India ( 1 of 4)1. The primary goals of public policy - achievement of
developmental aims of the country by facilitating “Affordable Broadband”, “Quality Broadband” and “Universal Broadband”
2. Over-The-Top (OTT) application services should be actively encouraged and any impediments in expansion and growth should be removed.
3. Specific OTT communication services dealing with messaging should not be interfered with through regulatory instruments. For OTT application services, there is no case for prescribing regulatory oversight similar to conventional communication services.
India ( 2 of 4)4. In case of Voice Over Internet Protocol (VoIP) OTT communication
services, there exists a regulatory arbitrage. European Commission has made a policy pronouncement on May 6, 2015 for a Digital Single Market Strategy for Europe arguing, inter alia, that there is a need to review telecom rules to look at ways of ensuring a level playing field for players in the communications market to the extent that they provide competing services and also for meeting the long term connectivity needs of the European Union.
5. Under existing telecom licensing conditions, Internet Telephony is permitted under restricted conditions. However, pricing arbitrage of OTT domestic voice communication services has the potential of significantly disrupting existing telecom revenue models. With complete transition of Telecom Network to IP Network, the pricing arbitrage between voice communications by TSPs and OTT service providers would be substantially reduced
India ( 3 of 4)6. The existence of a regulatory arbitrage in addition to the pricing arbitrage
adds a degree of complexity that requires a graduated and calibrated public policy response to bring about a level playing field. In case of OTT VoIP international calling services, a liberal approach may be adopted. However, in case of domestic calls (local and national), communication services by TSPs and OTT communication services may be treated similarly from a regulatory angle for the present. The nature of regulatory similarity, the calibration of regulatory response and its phasing can be appropriately determined after public consultations and TRAI’s recommendations to this effect.
7. Legitimate traffic management practices may be allowed but should be “tested” against the core principles of net neutrality.
8. Tariff plans offered by TSPs/ISPs must conform to the principles of net neutrality set forth in guidelines issued by the Government as Licensor. TRAI may examine the tariff filings made by TSPs/ISPs to determine whether the tariff plan conforms to the principles of net neutrality.
India ( 4 of 4)9. A clause, requiring licensee to adhere to the core principles of net
neutrality, as specified by guidelines issued by the licensor from time to time, should be incorporated in the license conditions of TSP/ISPs. The guidelines can describe the principles and conditions of net neutrality in detail and provide applicable criteria to test any violation of the principles of net neutrality.
10. National security is paramount, regardless of treatment of net neutrality. The measures to ensure compliance of security related requirements from OTT service providers, need to be worked out through inter-ministerial consultations.
11. An oversight process on Net Neutrality may be set up by the government to advise on policies and processes, review guidelines, reporting and auditing procedures and enforcement of rules.
questions
Agenda
• Economics• Policy
Goals of Regulation
• Static efficiency• Dynamic efficiency• Equity
Economics of Net Neutrality
• Natural monopoly• Congestion• Two sided markets• Vertical integration
Efficient point not viable
Tragedy of commonsNo. of cattle
Price per cattle at the end of 1 year
Average Revenue per cattle
Total revenue from grazing
Marginal revenue
Excess over interest due to bank
1 126 26 26 26 132 120 19 38 12 -13 114 14 42 4 -94 111 11 44 2 -115 109 9 45 1 -12
Exercise 1: How many cattle will graze?
Exercise 2: How many cattle should graze?
Two sided markets
Content and applications Service provider/platform End user
Two sided markets- ISP
Google/amazon/facebook
airtel End user
Economics of Two Sided Markets
• Cross-group externalities • Waterbed effect • Incentive to innovate • Tragedy of the commons • Fragmentation of internet• Rent extraction versus access fees• Asymmetry of content providers
Many commercial arrangements
• Business model of the internet – payment for preferential viewing
• CAPs –HSPs• HSP-TSP• CAP-TSP• CAP-advertiser
Networks – open and closed
• Internet developed in modular way– Content and application developers – ISPs– Operating system– ChipAll interoperable
Responsible for wave of innovation
• ICT today seeing a mix of open and closed networks– Apple ‘walled garden’ approach– Google/android open systems approach
Apple apps apple End user
Non-Apple apps
The phenomenon of vertical integration
chip
devices and os
operator/isp
news
entertainment
apps
internet
chip
devices and os
operator/isp
news
entertainment
apps
internet
Regulation of vertical integration
• Modularity responsible for growth of internet• Competition in complementary market good
for platform• Chicago school – Integration of
complementary externalities• Baxter doctrine – platform may want market
power to – Cross-subsidize– Competitor has to enter both markets
Convergence of telecom and IT
• Increased computing power of mobile devices• Increased bandwidth of mobile networks• Movement of applications on the cloud
From homogeneous networks to two sided (multi-mode) networks
Power of gatekeepers
• Google 65% of search market in the US• Facebook 55% of social network market
Policy
• US – full neutrality only in fixed line networks• Chile – no arbitrary blocking or discrimination• Netherlands – full net neutrality
Digital Dynamism• Digital Dynamism recognizes that simplistic notions of the
internet as a two sided market do injustice to the complex web of interconnections between different types of entities that constitute the reality of the Internet today. It replaces the anachronistic rule of zero pricing and the prohibition on traffic management with a framework of regulation that recognizes the power of other entities in the Internet eco-system, other than the TISPs while at the same time being pro-active about the need to reduce barriers to entry for new ventures, and firmly focused on creating an Internet driven by end users. It also recognizes the need to combine traditional economic concerns of efficiency and equity with issues of privacy and security.
Decision MatrixHi Penetration of mobile
Yes No
Hi Penetration of fixed line
Yes USA Bhutan
No India Uganda
Net neutrality on the dominant network
India ( 1 of 4)1. The primary goals of public policy - achievement of
developmental aims of the country by facilitating “Affordable Broadband”, “Quality Broadband” and “Universal Broadband”
2. Over-The-Top (OTT) application services should be actively encouraged and any impediments in expansion and growth should be removed.
3. Specific OTT communication services dealing with messaging should not be interfered with through regulatory instruments. For OTT application services, there is no case for prescribing regulatory oversight similar to conventional communication services.
India ( 2 of 4)4. In case of Voice Over Internet Protocol (VoIP) OTT communication
services, there exists a regulatory arbitrage. European Commission has made a policy pronouncement on May 6, 2015 for a Digital Single Market Strategy for Europe arguing, inter alia, that there is a need to review telecom rules to look at ways of ensuring a level playing field for players in the communications market to the extent that they provide competing services and also for meeting the long term connectivity needs of the European Union.
5. Under existing telecom licensing conditions, Internet Telephony is permitted under restricted conditions. However, pricing arbitrage of OTT domestic voice communication services has the potential of significantly disrupting existing telecom revenue models. With complete transition of Telecom Network to IP Network, the pricing arbitrage between voice communications by TSPs and OTT service providers would be substantially reduced
India ( 3 of 4)6. The existence of a regulatory arbitrage in addition to the pricing arbitrage
adds a degree of complexity that requires a graduated and calibrated public policy response to bring about a level playing field. In case of OTT VoIP international calling services, a liberal approach may be adopted. However, in case of domestic calls (local and national), communication services by TSPs and OTT communication services may be treated similarly from a regulatory angle for the present. The nature of regulatory similarity, the calibration of regulatory response and its phasing can be appropriately determined after public consultations and TRAI’s recommendations to this effect.
7. Legitimate traffic management practices may be allowed but should be “tested” against the core principles of net neutrality.
8. Tariff plans offered by TSPs/ISPs must conform to the principles of net neutrality set forth in guidelines issued by the Government as Licensor. TRAI may examine the tariff filings made by TSPs/ISPs to determine whether the tariff plan conforms to the principles of net neutrality.
India ( 4 of 4)9. A clause, requiring licensee to adhere to the core principles of net
neutrality, as specified by guidelines issued by the licensor from time to time, should be incorporated in the license conditions of TSP/ISPs. The guidelines can describe the principles and conditions of net neutrality in detail and provide applicable criteria to test any violation of the principles of net neutrality.
10. National security is paramount, regardless of treatment of net neutrality. The measures to ensure compliance of security related requirements from OTT service providers, need to be worked out through inter-ministerial consultations.
11. An oversight process on Net Neutrality may be set up by the government to advise on policies and processes, review guidelines, reporting and auditing procedures and enforcement of rules.
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