Net neutrality choke on telecom service providers

The government is willing to explore options to make telecom companies reach beyond the cities to make India’s ambitious digital plans come alive, said Manoj Sinha, the minister.

For one, he wanted companies to invest more in setting up telecom towers. For the industry, in a bruising rate war that has locked up ~8 lakh crore of investment, more money to invest in these is difficult.

The options for Airtel, Reliance Jio, Vodafone and Idea on the one hand and for the Telecom Regulatory Authority of India (Trai) on the other have consequently narrowed, say experts. One way is to regulate the rates for voice and data, something the sector rules do not allow. Or these telecom service providers (TSPs) have to be offered flexibility to raise revenue from alternative sources.

“Realistically, the regulator will have to revisit its order on not allowing price discrimination,” loosely referred to as net neutrality, said Rajat Kathuria, director of think tank ICRIER.

In its absence, as other speakers repeatedly pointed out at a recent conference on infrastructure connectivity (organised by business chamber CII), the government might have to take over the entire investment on building the passive infrastructure. As developments in the finance-starved railway sector shows, such a demand on the government could kill the incipient digital revolution.

Speaking after the minister at the same event, Trai chairman R S Sharma said among the options was to allow independent Wi-Fi companies to offer broadband, plausibly bypassing the TSPs. Likely to be resisted by the latter, with all their mega investment at risk.

At the heart of the telecom sector’s cash problem is an asymmetry in the telecom regulator’s mandate. Trai has no authority to check lowering of prices — when the rules were framed, none foresaw such an outcome. So, there are only price ceilings, to cap the risk that these could rise too high and price mobile connections out of reach of many.

As rates for voice calls have crashed, the TSPs potentially have the option to recover their cost by loading data traffic with a compensatory (higher) price. But, there are rules to forbid them from profiting via content sharing with, say, a Google or a Facebook. Which means they cannot set off the loss in their rates for customers from these options. In this picture, even as the government wants these TSPs to step up to invest in more towers and fibre optic cables, to take internet to the unconnected 950 million Indians (Deloitte-Assocham study), it is time, say experts like Mahesh Uppal, telecom analyst, and director, Com First India, to “remove these constraints from the operators”.

The companies are reluctant to speak on record on the topic. While a Reliance Jio spokesperson said they stood for net neutrality, the Cellular Operators Association of India, speaking for the others, has also emphasised this. With the caveat that the rules should apply for internet service providers, too. Opinion on letting prices drop is, however, divided.

As a result, the TSPs are reduced to intense squabbling for retaining their market share, in the hope of reversing their cash drain. The past two quarters have seen a fight, where Reliance Jio initially offered free voice and data services, to grab customers from rivals like Airtel, Vodafone and Idea. And, taking advantage of there being regulatory forbearance on price cuts, kept extending its deadline to close the promotional offers, till the regulator intervened.

Their offer had netted it a subscriber base of 72.16 million, as on end-December 2016 (Trai data). To put this in perspective, of the 93.74 million who bought a mobile subscription from April to December 2016, 76.9 per cent opted for Mukesh Ambani’s offer. This week, it has begun to walk back, though very slowly, from this longest-ever run of free voice and data services that began in September last year.

Analysing the impact, CARE Ratings noted the sector’s net margin was only 0.34 per cent for the December 2016 quarter. “The profitability reported was weakest compared to each of the past six quarters.”

Airtel, Vodafone and Idea have described the Jio offers as predatory pricing. Airtel, in its complaint to the Competition Commission of India (CCI) in February this year, said this pricing plan was launched “with the objective of eliminating competition”. This is unlikely to hold. Geeta Gouri, former CCI member, says: “It depends on how the market is defined. Without a clear definition, it is hard to establish charges of market dominance.”

In other words, even if Reliance Jio did set up a dominant position in the market, as long as there are rivals to which customers can move without any cost, this position will not sustain.

Ahead

But, irrespective of this outcome, the battles are likely to further ratchet up costs for the sector and delay the government’s overall aim of ramping up digital connectivity.

Uppal says Trai had erred in coming out with its regulations to prohibit differential pricing for accessing the net, in its net neutrality order. There has been no change in the market conditions since it was issued, he adds. “The order must count as one of the most ineffective, ever, from the regulator.”

Kathuria says any change in this will have to be nuanced, “since no regulator will stick its neck out to create a controversy”. Essentially, what the regulator decided in February 2016, which followed a sustained campaign from segments of ISPs, was to block TSPs from charging a discriminatory price from the content providers of data, like a Google or Facebook, for accessing their wires. The TSPs can offer free data or charge for it only under this restriction.

But, more content companies are now around and not only multinationals but even domestic ones such as payment companies like Paytm are beginning to offer more and more services. So, the TSPs, as the pipeline, feel they are left out of the gravy train. Content companies will only pay, Kathuria says, if they get priority in access from customers. And, the department of telecom is without a full time secretary since J S Deepak was suddenly asked to leave at the beginning of March. Power secretary Pradeep Kumar Pujari is holding additional charge since then.

There is a similar challenge abroad. In America, the TSPs (including Verizon, AT&T and Comcast) want the same set of rules introduced by their regulator, the Federal Communication Commission) to be loosened. Ranged against them are the internet content providers Other than Google and Facebook, such as Netflix, Snap and Amazon. They want to preserve the Open Internet rules signed into law by former President Barack Obama in 2015. President Trump has weighed in favour of the TSPs.