There has been a lot of kerfuffle and reams of digital newsprint wasted over this strange phrase “net neutrality”.
Some people seem to say that without it, we would not have the internet anymore and all that remains would be cat memes and twitter trolls. Others seem to say that it is the one thing that stops the world from giving internet to the starving masses huddled in rural corners of the world. Somewhere in between these two views, the truth seems to have managed a vanishing act.
Now I approach most economic choices from viewpoint that people should be allowed to do whatever they want (As long as they don’t swing their arms right onto my nose). So let us try to imagine a few scenarios.
Warning: This is a long post and needs to cover a whole series of ideas. Here be many dragons, and most of them this writer has yet to scratch, let alone slay.
Part I — Telecom industry
Scenario number 1: Anything goes.
In this scenario, everything is a free for all. Everybody can open a telecom company with nothing more than a dream and sales pitch. Would it work? Not really. Why? Because of this unfortunate constraint of limited wireless spectrum for the wireless guys. And because laying wired internet through underground cabling is EXPENSIVE. You need more than a dream and a sales pitch.
When anything goes, people will make a beeline for scarce spectrum and squat on it, because it is valuable. Assuming that this anarchist utopia somehow also respects property rights, those with the spectrum rights would hoard this and charge the the maximum they can get away with. However, because there would ideally be a lot of small players grabbing spectrum, the amount of pricing power each of the small players would have would be quite small.
What would the downside be?
- Calls between two different networks would be hit or miss. With several different networks all competing with each other, it is very possible that some would not be up to scratch
- Profitability of operators: The joy of free markets is greatest when there are a very large number of service providers. However, the downside is that you get spectacular price wars. This is great for customers, but terrible for investors who will forever be on the edge of profitability.
- Investment: Which neatly brings up to the third point. Wireless telecom is still very fast changing. Speeds are available today which were not even dreamed of even a decade ago. Unfortunately, all this costs money. Firms which are marginally profitable would have great difficulty in investing for the long term.
Caveats: All of these downsides are solvable by enough free markets and time.
This is basically the scenario that faced telecom service providers in India in the mid 2000s (not really, but for our example it will serve). From a state monopoly in 1992 to 15 mobile phone operators in India by 2008, the industry had come a long way. But not the operators. Barring Airtel, which had been in business from the beginning most of the others were engaging in a brutal race to the bottom, with tariffs crashing from INR 24 per minute to INR 0.5 per minute. At the same time, technology had to be upgraded from 2G to 3G then HSPA and 4G.
We will pick up this story later in this article.
Scenario 2: Monopoly
The opposite of free markets is state control. I was barely into my teens when telecom monopolies were gradually pulled down, but even I remember the long wait for a telephone connection from the only provider there was. The downsides of monopoly, especially state controlled monopoly is one that is very easy to identify.
- The lack of the profit incentive means there are no objective ways to measure performance. This makes rational employees prioritize managing official relationships over managing customer relationships. This leads to customers getting terrifyingly bad service
- Lack of competitive alternatives leads to stagnation in development of new technologies or marketing strategies. Why change if there is no upside?
- No profits: Traditional monopolies tend to throw out cash. But Public sector monopolies cannot afford to be profitable because that would indicate price gouging, which would lead to an unpopular government. And no government would like to be unpopular.
- High operating expenses: Paradoxically, the lack of profits does not mean services are cheap. Instead, the surplus that a monopoly extracts from the customer goes to the third stakeholder: the management. Management builds empires, goes for moonshots, build legacies.
I am pretty sure I do not want to go back to a world where BSNL is the only service provider. Scenario 2 was the structure of Indian telecom since at least the early 80’s. One hopes those days never come back.
Scenario 3: The regulated free market with spectrum auctions + revenue sharing (after some years.)
Now this is approximately where we got to in the later part of the last decade. When 3G spectrum was to be released to the Indian telecom companies, the government decided to try something that was done at the end of the millennium in parts of the developed world: The Auction (Aside: This also marks my first attempts to follow business news.) For an excellent report of that event see here The result was a bonanza for the government. Over $20 billion dollars of revenue came in (mostly) one fell swoop. This also had the unfortunate side effect of making people sit up and wonder how much the state gave up when it gave away 2G spectrum along with telecom licences for a pittance.
The hypercompetitive players from scenario 1 had time before 3G became a thing. It was only by 2010 that the reality of the situation began to dawn on the players. The first to capitulate were the marginal players like Telenor and MTS. But the final blow was still to be struck.
Enter the 800 pound gorilla
India’s largest diversified conglomerate is Reliance Industries Limited (RIL). It has a huge cash cow in its oil refinery business that throws of cash by the billion every quarter. By 2012, it was clear that RIL was out to re-enter the telecom business (it had a telecom business, Reliance Communication, which had been given to the other brother in a family dispute). By opting for a fully 4G network and offering Voice + Data in an integrated manner, it had the capability to truly alter the digital landscape. But for 4 years, there were only rumours. RIL always said they were building up infrastructure and it was not ready to go to market yet.
This all changed in late 2016 and early 2017. RIL entered the game with a bang. With data being the only thing people had to pay for, and voice being free it squeezed the smaller players like Reliance Communication, Aircel, and Tata Docomo. These were already barely scraping by and this was the final nail in the coffin. Reliance and Aircel went on to explore a merger which appears to have imploded. The Tatas have sold their operations to Airtel, while Idea and Vodafone are merging to bulk up. Eventually it appears that India will finally have what the developed markets have had. 3 major players and a couple of minnows.
All this history serves to explain something which the knowledgeable reader already knows. Companies need to remain profitable to provide services. It may seem obvious, but it appears that many on either side of the net neutrality divide appear to forget this.
Part 2 — Net Neutrality
Now we come to the topic of the moment. First, what is net neutrality? One sentence definition: All content in the internet should be treated equally. In theory this means that my hypothetical bit-torrent download of the latest episode of Game of Thrones (No. I do not watch it. I still forlornly wait for the books) should load just as quickly as Ms. N’s cat videos on Facebook. Is this currently the case? The telecom service providers insist that it is. Based on my anecdotal experience, it is almost certainly not true.
But if this were all the fight was about, it would be fought by some tech guys in hoodies along with some engineers in telecom companies. But its not only about downloads. There are a few things to conside
1. Netflix and Video Downloads
When someone opens Netflix and starts to watch the latest season of “The Crown”, how does it get to your screen? It starts its journey on a Netflix server somewhere in the world. Since Netflix video content is so bandwidth intensive, if enough people in your apartment are watching it simultaneously your local network will start feeling the strain. Streams will start to buffer if your ISP did not expect everyone in your building to stream 4k video at the same time. If it happens often enough, you will call your ISP and tell him/her that you are going to switch providers. ISP’s don’t like that too much so they will then be forced to install more infrastructure to feed your Netflix habit. As you may imagine, they feel a bit aggrieved and would like Netflix to defray some of that cost. As things stand today, they should not be allowed to ask this. Why? Because carriers are supposed to be content agnostic. It should not matter to them if you are streaming netflix video or video from youtube, or even if you are streaming the backup copy of your steam library (currently at over 200Gb).
We will look at this argument first, as its quite easy to put down. Netflix should not be made to pay twice. They are paying their ISP anyway. Getting the links between their ISP to the customers computer is what you, the consumer are paying your ISP for. If your provider (say Airtel Broadband) is not able to convince you to pony up more money for the privilege of high speed UHD video, then surely Netflix should not be made to subsidize your yen for it. If Airtel Broadband can make those investments profitably with you as the paying customer, then so be it. Else, they can abandon you to your fate of buffering video (and your switch to ACT Fibernet if in Bengaluru).
2. Facebook Zero and the walled garden
This is a case which is more complicated. A hypothetical Facebook zero encapsulates it, where you get free Facebook and Whatsapp which will be sponsored by Facebook. But because the consumer does not want (or can afford) anything more, he/she will not be allowed access to anything else (like Wikipedia). Is this truly such a bad thing? Could we not allow for independent businesses to slice and dice the internet in this way? The wisdom of the marketplace would suggest that this should be tried out, and if the internet has truly to be transformed into Facebook likes of cat videos, then so be it. If people believe that this is not a valuable tool, then perhaps a LinkedIN zero will be more remunerative.
My own take on this is slightly more nuanced. I see no real problem with a walled garden commercially, though my personal views on “Free Amazon” is that anything that is too good to be true probably is. However, this sort of slicing and dicing also imposes costs on consumers. These costs are borne in variety of plans that ISP’s would necessarily need to increase. One example would be the “Facebook + LinkedIN zero plan” or perhaps a “Youtube + Netflix” one. In the quest for customization, the original internet plan of 500 rupees for 30 Gb of data may well fall by the wayside, because the market for Steam download plan or Linux distribution download plans are just too niche for the market to ever provide such plans. Personally, I think this would be a low probability outcome, but one that is still possible.
Should regulators ban such commercial transactions? I honestly think that an Amazon only product is anti-competitive enough that a Flipkart should feel aggrieved (and vice versa). I also believe that such products would mean the end of new startups as the barriers to entry would be enormous in the form of capital requirements. While these sort of plans may help the telecom market through higher revenues from marginal customers, the long term impact on the broader economy is definitely negative. I also think that the best way to learn is through mistakes, and setting up such plans will demonstrate their folly.
3. Fast and slow lanes for services
This one is where I tend to explicitly disagree with the net neutrality theory. Some services require very low latency or very high bandwidth. An example would be self driving cars, or robotic surgery. You need to have the capability to prioritize such bandwidth which is “Socially Useful and Productive”. How does one decide what is socially useful, and what is fluff? Again, I am not sure who will, but I am totally sure the answer is not “Free markets”. This is an area where thoughtful regulation can actually provide gains to both industry as well as the broader society that exists around it.
There are other issues which while being peripheral to the main net neutrality case are not insignificant. One of them is deep packet inspection and the role of ISP’s in monitoring consumer consumption of data. I will leave it to the reader to learn more about such things (not to mention, my own knowledge of this is sorely lacking).
We live in a world of blacks and whites. The idea that regulation is a spectrum and not a bright line is one that has lost believers.
Part 3 — Regulators, Revenues and Auctions — Is it a free market at all?
Now, the careful reader has obviously noted something. Part 1 and Part 2 are totally different topics. They have had nothing to do with each other. Why bundle them up into the same post?
Because the whole net neutrality debate is also one that affects telecom company bottomlines. Companies that are on the brink of solvency are justifiably concerned that the chaos of new business models may tip them over. Companies that are already over the brink (Looking at you, RCOM) have nothing to lose. While a company like RJio, that is capable of massive investments in content as well as business models is probably salivating at the prospect of bundling services in a fully walled garden.
India’s net neutrality guidelines have very neatly kept the door of intranet content bundling ajar while batting for net neutrality across the remainder of the internet. I suspect that that little opening will be enough for a full scale content war. The outcome of this war is uncertain. RIL and its free cash flow can fund an enormous amount of content, while Airtel and Vodafone are also pushing forward. The future will however be decided by the consumer, who is now used to not paying a high price for any data.