On the Net Neutrality Fracas...

Different stakeholders describe and/or define Net Neutrality differently. The concept of Net Neutrality itself has evolved from being only about upholding the end to end principle to a whole lot more.  In India, the campaign to force Regulators to impose Net Neutrality has been led by medianama.com . One balks at the audacity of the campaign to force regulatory action akin to Regulation by vote on India’s most successful sector in post-Independence India: The Telecom Sector.

Net neutrality (NN) is generally construed to mean that TSPs(Telecom Service Providers) must treat all internet traffic on an equal basis, no matter its type or origin of content or means used to transmit packets. All points in a network should be able to connect to all other points in the network and service providers should be able to deliver traffic from one point to another seamlessly, without any differentiation on speed, access or price. The principle simply means that all internet traffic should be treated equally.
                               -Telecom Regulatory Authority of India (TRAI) Consultation Paper on Net Neutrality.
(http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/OTT-CP-27032015.pdf)

‘ Net Neutrality is about:
– No telecom-style licensing of Internet companies
– No gateways (Internet.org, Airtel OneTouch Internet, Data VAS), censorship or selection;
– No speeding up of specific websites (that may or may not pay telcos)
– No “zero rating” or making some sites free over others (and that goes for you too, Wikipedia and twitter).’
                                        - Medianama.com which is leading the campaign for                                        Net Neutrality in India         
                                                         (More than 6 lac petitions sent to TRAI)
(http://www.medianama.com/2014/11/223-net-neutrality-simple-explanation/)

The campaigners have painted it as a question of life and death of the Internet’s openness and vibrancy. The language used to spread the message is pretty colourful too-
‘Airtel(India’s leading TSP) is killing the Internet’
‘ A battle to decide the fate of India’s Internet’
‘ Save the Internet’
‘Stop Screwing Up the Internet’
‘Stop raping consumer rights ‘ and much more…

Amidst all this righteous outrage, very few economists, investors, aware consumers, sector experts and journalists in India have stood up and spoke out against the campaigners ill-thought out demands and exposed the lack of economic logic in the systems they are demanding to be put in place by Regulators.

What troubles me the most is seeing some of my favourite opinion makers like Anand Ranganathan of Newslaundry , Mohandas Pai from the IT sector , Chitra Subramaniam of News Minute amongst others, who generally are pro- free markets , support Net Neutrality .

So what would Net Neutrality Regulation involve-
1) No Zero Rating (eg. Airtel Zero like services where Content providers like Flipkart or Facebook pay Airtel on behalf of Consumers so that their content is available to consumers for free over other players)
2) No Non-Discriminatory Access (A fancy way of saying TSPs wont be allowed to use price differentiation and ensuing Quality of Service i.e. QoS assurances on select content groups. They will have to give Porn and Communication between say two hospitals the same priority.) and TSPs would be barred from prioritizing their own apps over the rest by say- not charging for data charges on it.
3) No Throttling (Reducing or increasing the speeds of some when compared to the rest).
4) Telecom Service Providers are to be Dumb Networks and nothing more or less. Therefore Network Management wont be allowed. Network Management  is the process through which Networks prioritize various types of content to enable Network Decongestion and this concept is somewhat a continuation of Non- Discriminatory Access.

To enforce this, the Internet will have to be governed by the Regulators similar to say the Electricity Sector minus the price discrimination. I think this prospect will bring to your mind very fond memories of power outages wont it? This surely looks like it will help and incentivize innovation!!

A question which immediately comes to my mind is – How can government regulation increase or preserve the society’s freedom? Government Regulation can only ensure one thing- curtailment of freedom. If it does appear that it can increase freedom, you have not bothered to look – At whose expense?

By imposing regulations wherein you curtail the freedom of producers to price their products to conform to your wishes (Or the government on your behalf due to pressure put on it by you) is morally abhorring!! It is akin to legal plunder.
Bastiat was absolutely right in writing – ‘The law has been perverted by the influence of two entirely different causes: stupid greed and false philanthropy.’
(http://bastiat.org/en/the_law.html#SECTION_G014)

The Economics of Such Regulation-

Prophylactic/Preventive Regulation?

The entire gamut of such regulation will be a vertical anti- trust action. There is no conclusive evidence that Vertical Integration (Either through special deals or outright buys etc) results in reduction of economic welfare. There are models which predict that there is such a possibility but absolutely no empirical evidence. Nada.  Should the basis for such far- reaching regulation be non-existent proof ?Other Actions possible in the free market like Price Differentiation and Quality of Service assurances too haven’t been proven to be bad for economic welfare by empirical evidence.

So, in total, the campaigners are asking for Net Neutrality so that they have a preventive solution to a non problem?

Competition:-

Any such regulation ( which surely takes away Revenue Opportunities and freedom from producers) will impose huge costs on the Telecom Service Providers and thus decrease overall completion in the sector over time. This will ensure that consumers are left with lesser choices when choosing their TSPs. So are the campaigners trying to increase consumer welfare by decreasing the quantum of consumer choice ? Even I, a mere 1^st year B.Com Hons student know that this extremely foolish.  So foolish that it borders on the nonsensical.

Net Neutrality concerns in the USA were based on the assumption that there was little consumer choice for most consumers. Is it the same in India ? There are >100 ISPs and >6 TSPs (with Unified Access Service Licences ) in total all over India. Does this reflect the paucity of consumer choice?
(http://www.trai.gov.in/Content/ProviderListDisp/3_ProviderListDisp.aspx
http://www.trai.gov.in/Content/ProviderListDisp/7_ProviderListDisp.aspx )

I’ll prove it to you through an example:-

When Airtel announced its plans to charge VOIP(Skype, Viber, etc) separately, how many other TSPs followed? None. Why did it drop the plan? Definitely not because some activists like Mahesh Murthy spoke out against it . It was because there was a very real possibility of Airtel losing urban consumers to its competitors. So, weren’t Consumers still ‘saved’ due to the nature of the market?

Research on this topic by the professionals:-

As argued in Network Neutrality and Consumer Welfare; Becker, Carlton and Sider (2010) Alternatives to net neutrality regulation exist: (i) customer-level testing and transparency regarding questionable practices permits “naming and shaming” of firms that are doing things customers don’t like, which often leads to prompt corrective action; (ii) antitrust enforcement should firms engage in anticompetitive practices.
(http://www.researchgate.net/profile/Dennis_Carlton/publication/228199403_Net_Neutrality_and_Consumer_Welfare/links/02e7e5397145f50657000000.pdf)

Another interesting paper on this issue is Prevention of Competition by Competition Law: Evidence from Unbundling Regulation on Fiber-Optic Networks in Japan, Minamihashi (2011). It presents empirical evidence from  Japan to show that ‘Competition in the service market (ISPs), was “bought” /enabled at the price of decreased competition in the facilities market(TSPs). The author develops a dynamic model of competition that he is able to estimate empirically to demonstrate that unbundling (forced separation of Infrastructure and service providers) did indeed reduce entry, investment and competition in this market.’
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1775357)

I got to know about both the above mentioned papers through- Economics Of Net Neutrality: A Review -Gerald R. Faulhaber. (http://assets.wharton.upenn.edu/~faulhabe/Econ_Net_Neut_Review.pdf)

Impact on Future Possible Innovation

 An additional problem of such intrusive regulation on a market and network which is still very much evolving  is such regulation doesn’t consider the costs imposed by it on Future Possible innovation. An example given in (http://assets.wharton.upenn.edu/~faulhabe/Econ_Net_Neut_Review.pdf) is that of Remote Medical Sensing Services which would require quality of Service Assurance from TSPs/ISPs which would be barred by Net Neutrality.

Another example I can think of is Auction Markets. As they evolve, and an increasing no. of auctions take place online, won’t the absence of Quality of Assurance Service from TSPs or ISPs reduce market efficiency ? Another is the Education Sector. Should TSPs and ISPs be barred from prioritizing Real Time Video Conferencing between a teacher in Bangalore and students in a small private school in the rural hinterlands over a service like porn (I have to stress here that I have nothing against online porn).

The question of Zero Rating
Most Indians love Coupons. Especially the urban Consumer who loves Big Bazaar and Reliance Fresh’s discount coupons. Yet the very same urban consumer is busy campaigning for Net Neutrality which would bar Content Providers from giving out such coupons in the form of Zero Rating! Don’t you find it weird ? I certainly do. Don’t these coupon users realise that they are aiding ‘unfair competition’ by big players who issue such coupons to turf out smaller players in segments of the FMCG market (This is where such coupons are usually given out) ? Now are they going to rant on twitter against Big Bazaar?
The answer to that is a big No.

The campaigners demand that all forms of Zero Rating like Airtel Zero and even internet.org should be banned by Regulation. Do they have an answer to the fact that 45% of the worlds TSPs/ISPs use some form of Zero Rating or the other? (http://www.fiercewireless.com/europe/story/report-45-operators-now-offer-least-one-zero-rated-app/2014-07-15) So our dear internet revolutionaries want to restrict the earning capacity of TSPs/ISPs which would not only mean lower telecom infrastructure investment by these companies in India but also other countries where they are invested in as they will have lesser investing capacity than other MNCs – Financial loss in India, Loss in Market Share followed by Financial Loss outside India. Great way to enable Indian Companies to become MNCs !!

Another effect these campaigners ignore is that when TSPs/ISPs offer highly used sites as a part of their Zero- Rating Services, this empowers people to use much more of the Internet than they used to as the sites that ate up most of their data limits earlier are for free and this saves them more data to use at no extra cost. Another way to put it would be that the per unit cost of data for consumers will fall, enabling them to get more bang for every buck they spend. Who will this benefit the most – The poor consumer especially in Developing countries will benefit the most out of it. The TSPs get increased revenues which will incentivize them to invest more in infrastructure and thus enabling more internet penetration (currently at a dismal 20%- TRAI Consultative paper). The Content providers who will be paying for this will get increased traffic to their websites and thus increased advertisement revenues.

Another important impact of Zero Rating Services is that it helps those consumers access Internet who would otherwise not access internet at all. Unlike Net Neutrality proponents who mostly give slogans and theoretical models as evidence, there is empirical evidence to prove that Zero Rating Helps Increase Internet Access

The Impact of Zero Rating Services on Internet Usage (In terms of Data and not users)
Paraguay    -> +50%
Kenya          -> +50%
Ghana         -> +85%
Nigeria        ->+154% 
(http://www.brookings.edu/~/media/research/files/papers/2015/02/13-digital-divide-developing-world-west/west_internet-access.pdf)
Last time I heard, India is a Developing Nation.  Although Zero Rating’s impact in India will not be as big as Praguay, Kenya, Ghana or Nigeria, it will be big enough to warrant attention and have a lasting impact.

To show to you the extremely positive impact Zero Rating can have-
‘In Zambia, the Women’s Rights Application (WRAPP) compiles information on women’s health and legal rights. Before connecting with Internet.org, only 1,000 women had used its website. But through the broader partnership, 15 percent of the country’s population that had access to the Internet was able to connect to the site.’
( http://fortune.com/2014/08/14/for-facebook-access-to-womens-rights-information-is-a-basic-one/
 and http://www.brookings.edu/~/media/research/files/papers/2015/02/13-digital-divide-developing-world-west/west_internet-access.pdf )

Banning Zero Rating is also harmful to start-ups in many ways -

1) It bars them from using innovative pricing strategies to capture market share from their competitors.
2) Such Bans hinder Internet penetration in Developing nations like India thus keeping such prospective markets unlocked. New Businesses are born when entrepreneurs see an opportunity to earn profits through offering their services. And these opportunities increase when the size of the market increases. Therefore by hindering the growth of the market, you are hindering innovation.


Grouping and Price Discrimination

 A whole lot of hue and cry has been about the possibility of TSPs/ISPs bundling / grouping services and in the process indulging in price discrimination. My question to these people –  I cant for the life of me understand what is wrong with this ? Who doesn’t discriminate in Pricing if given the opportunity and costs are less than benefits?

Every Tom, Dick and Harry started talking about Net Neutrality after the All India Bakchods’ video on this subject came out. The gang(AIB makers) lashed out against TSPs/ISPs saying that they want to ‘carve up the internet into a bunch of different sections so that you have to pay to access every single one of them separately. ‘

They then gave the analogy of a children’s park where the ‘consumer needs to pay Rs.100 to get in, Rs. 100 more to access the slides set –pack, Rs. 150 for the swing set pack, Rs. 200 for a high speed swing pack  ‘ . The end the analogy by saying ‘in a nut-shell, this is exactly what the telecom operators want to do right now.’

They then move on to specifics-
‘A Snapchat Pack for sending naked pictures to strangers on Snapchat’,  ‘Instagram Pack to click and post Kichidi pictures in Instagram’ and then go on to explain how ‘Zero Rating will be dangerous,etc’ if there is no Net Neutrality, an argument which I just debunked.

They go on to rant against TRAI for having put a ‘118 page long consultation paper’ and hinting that it was a deliberate attempt to hinder awareness about the subject. They then move on to fault the TSPs/ISPs for trying to earn more revenue from their investments. After their brilliant argument on how that is bad, they move on to specifics. They point out that Airtel’s Revenues from Data are increasing rapidly Quarter to Quarter and give the following figures.
Q1 2014- Near 1500 Crore
Q2 2014- Near 1800 Crore
Q3 2014- Near 2100 Crore
I will give you another set of figures and you can then decide -
Net Profits for these Quarters-
Q1 2014- 2,160.40 Crore
Q2 2014- 4,937.30 Crore
Q3 2014- 2,278.80 Crore
(Figures from moneycontrol.com)

I have used Standalone Figures for better accuracy on India operations. You have to see these figures in the light of the fact the Call Tariffs are increasing and the TSPs are slowly gaining Market Power in that segment of the market. Minting money in data eh ?

To illustrate how idiotic the video was, I will quote some more data to you-

Ticket Rates in the GRS Fantasy Park.
Admissions before 3.30 pm:

Adults (above 4'6" in height)	Rs. 575/-
Children (3' to 4'6" in height)	Rs. 475/-
Infants (below 3')	Free
Senior Citizens (above 65 years)	Rs. 300/-

Admissions after 3.30 pm:

Adults (above 4'6" in height)	Rs. 425/-
Children (3' to 4'6" in height)	Rs. 325/-

Ticket rates are valid for a one time use of all rides. Subsequent rides if ticketed will be charged separately.

 (http://grsfantasypark.com/pages/tickets-and-reservation/ticket-rates/ )

Wonder La-( http://www.wonderla.com/bangalore-amusement-park/park-timings-and-rates/ticket-prices.html )

Essel Amusement Park – (http://www.esselworld.in/entry-rates.html )

The video makers then go on to demand-
1. Freedom of Consumers to use the Internet the same way as the last 20 years i.e.to not be pushed into decisions by large companies.
2. Equality as the Internet is the last frontier where everybody are equal.
3. It is about the Future as Internet is a utility and not a luxury .And they give the example of other countries where net neutrality is ‘implemented’
   - USA, Brazil, Chile, Netherlands .

To me, these demands reflect 2 things- The video makers have not bothered to look into their subject and examples properly. They are to be ignored on serious issues as much as possible.

For the purpose of rebutting Point 1-
‘With the exception of Google's man in Washington DC, Vint Cerf (with whom Kahn developed TCP/IP), most of the senior engineers responsible for developing the packet switched internetworking of today oppose "Neutrality" legislation. Dave Farber, often called the grandfather of the internet, has been the most prominent critic.

Engineers fear rash legislation would inhibit the ability of systems engineers to improve latency and jitter issues needed to move data at speed.

"The internet is still pretty fragile today," said Kahn.’( Robert Kahn was one of the most senior
figures in the development of the internet ).
(http://www.theregister.co.uk/2007/01/18/kahn_net_neutrality_warning/?mt=1429030817614. )

I asked another veteran engineer who played an important part in the design of Internet as we know it today and also Wi-fi – Richard Bennet (He also has a deep interest in Indian Philosophy and Swami Vivekananda) a few Questions on the subject of Net Neutrality and it’s impact on Twitter. This is what he had to say-

SB(Shreyas Bharadwaj)- Any comment on India’s planned imposition of Net Neutrality?
RB(Richard Bennet) -Satpathy & Chandrasekhar think they’re members of Monaco’s Lok Sabha. Zero rating gets people online; may as well ban beef...

SB- Would you be ok with OTT services being brought under the regulatory ambit of TRAI as proposed ?
RB- Lesser Regulation of both will be ideal.

SB-Would Net Neutrality have any impact on internet penetration in India?
RB-Zero- Rating encourages adoption by providing users incentives and low prices. It’s cool that SMS promotes literacy by the way. Literacy isn’t a problem for Kerala but is one for the rest of India.

SB- Would Net Neutrality harm TSP’s ability to invest in the hinterlands?
RB – It can’t help. Foreclosing revenue opportunities and limited co-operative financing hurts deployment.

You can view the twitter conversation here- (https://twitter.com/iPolicy/status/587764879785795584)
He has also written an eloquent piece on the same - Net Neutrality in India: Missionary Zeal v. Zero-Rating quoting from Swami Vivekananda’s speech in the Parliament on World Religions in Chicago in 1893.
- (http://hightechforum.org/net-neutrality-in-india-missionary-zeal-v-zero-rating/ )

Moreover, when these comedians talk about freedom, just like the rest of the internet revolutionaries, they should realise that to augment their freedom to choose, they are diminishing the freedom of the Telecom Service Providers on gunpoint- through regulation. I’m yet to find an instance where Excessive Regulation of this sort has augmented the society’s freedom on the whole.

And they then say- ‘It is about the Future as Internet is a utility and not a luxury .And they give the example of other countries where net neutrality is ‘implemented’
   - USA, Brazil, Chile, Netherlands .’ just after speaking about equality.

Prof Daniel Lyons has documented how the Net Neutrality laws in Chile are widening the Digital Divide in this nation and forcing consumers to cough up more for less data and ultimately resulting in less data usage by the poor as well as the possibility of decreasing the number of low- income consumers due to unaffordability. All in the name of equality !!
(http://www.techpolicydaily.com/communications/chile-net-neutrality-widens-digital-divide/ )

Something similar is happening in Europe too-

‘Supporters have tried to paint net neutrality as a fight to stop the two-tiered internet.  But net neutrality can only guarantee one thing: all internet experiences are equal and dismally sub-optimal.  That is, net neutrality ensures that the lowest common denominator becomes the standard for all internet service.’
http://www.techpolicydaily.com/communications/eus-roaming-net-neutrality-vote-puts-path-digital-crisis/#sthash.meaBVOm1.dpuf

And Utility style governance of Networks in Europe has ensured this -
‘A decade ago, the EU accounted for one-third of the world’s investment in communication networks. That amount has plummeted to less than one-fifth today.  Many parts of the EU are woefully behind in next generation networks. New entrants take the easy path to lease existing networks, and established operators are reluctant to invest because they have to share their infrastructure with competitors. –‘

http://www.techpolicydaily.com/communications/eus-roaming-net-neutrality-vote-puts-path-digital-crisis/#sthash.meaBVOm1.dpuf

So how can Net Neutrality achieve equality? By making it unaffordable for the most poor to access the internet, by increasing the digital divide, By making the Internet Experience- in terms of speed, access, choice and price equally sub-optimal ? Great way to achieve Digital India aint it?

Price discrimination by the ISPs and TSPs are extremely beneficial and I will point out how -
1) It will help those consumers who don’t use VOIP and don’t watch a lot of you- tube pay less, thus increasing their surplus as well as enable them to spend more on normal data plans and use a lot more non- VOIP/Video data than usual at much lower rates.
2) You will find VOIP and Youtube like services innovating to better compress data to enable their consumers to use more of it, as price discrimination would be in play. The different, higher price is in itself an incentive for such players to innovate as their advertising revenues depends on the number of users accessing such sites as well as them finding it economical to do so.
3) You wont find such services excessively priced as the telecom sector in India is a highly competive sector and competition will ensure that prices are the lowest possible. Moreover, the TRAI is there for nudging TSPs/ISPs to reduce these prices too.
4) AIB’s example vastly exaggerated the impact. The TSPs/ ISPs at most will bundle services in such a way that the user is able to easily understand as they don’t want to lose revenues too. So you may have to pay extra for Social Networks in general and not Instagram or Snapchat in general. Video Players in general and not Youtube and Vimeo in particular. Some players may decide not to bundle at all as they would want to use the fact that they don’t bundle in marketing their services.
5) If bundling happens, the base prices will come down by a significant extant as here too competition will take place. And here too there will be price discrimination in terms of size of the pack.

Innovation in the Present and Near Future :-

The most common argument in favour of net- neutrality regulation is that it hinders innovation and it will enable Telecom Companies to pick winners and make losers out of good products. This is a bogus argument and I will explain why (with the help of Robert Kahn)-

1. Telecom Service Providers don’t have that much Market Power to exercise in the first place. They need all the help they can get to hold on to their existing subscriber base. If the user finds the internet experience better in some other TSP/ISP, they will shift there.

2. Consumers, once they get a taste of choice wouldn’t not exercise their ‘Information Advantage’ and therefore would take a look at both the free services provided through zero-rating as well as the ones that are not free to use.
The New subscribers once they are signed on through Zero-Rating will slowly gain this ‘information advantage’ and wouldn’t want to be penny-wise pound foolish by using only those internet services offered through zero-rating.

3. "If the goal is to encourage people to build new capabilities, then the party that takes the lead is probably only going to have it on their net to start with and it's not going to be on anyone else's net. You want to incentivize people to innovate, and they're going to innovate on their own nets or a few other nets," "I am totally opposed to mandating that nothing interesting can happen inside the net," So called "Neutrality" legislation posed more of a danger than fragmentation – Robert Kahn.
(http://www.theregister.co.uk/2007/01/18/kahn_net_neutrality_warning/?mt=1429030817614.)

Solutions-

The debate has been won by Pro- Net Neutrality Internet Revolutionaries by framing it on their terms. The term itself sounds so egalitarian like @righteconomist suggested on twitter- Garibi Hatao, Secularism .Most want to be on the right side of the argument and hence many start hash tagging Net Neutrality without knowing the difference between price- discrimination and throttling.

The same people (mis)guided by the likes of Mahesh Murthy on the internet have shifted the debate so far to the left that it is increasingly becoming difficult to indulge a dose of sanity into the debate.

Solutions to this conundrum are fairly simple
1) Decrease Regulation for TSPs at the same time don’t think about imposing any such regulation on OTT service providers.
2) To allay some concerns of these Internet Revolutionaries, mandate Zero- Rating platforms to be opened to all those ready to pay and qualify for a minimal set of specifications. This rule has to be temporary though.
3) Encourage Best-Efforts Network Management by TSPs/ISPs through moral suasion.
4) Redesign the spectrum allocation process to enable better competition and resource allocation as well as reduce inefficiencies in the process.
5) Privatize BSNL. It is an extremely inefficient user of spectrum and other infrastructure and acts as a poison pill to the entire sector thereby burdening both consumers as well as TSPs.


Conclusion -

 Net Neutrality Regulation is an extremely dangerous concept and the need for Net Neutrality Regulation is as much as the need was for Rahul Gandhi to return to India. This assault by Net Neutrality activists on freedom and property is immoral and counterproductive.

Heed Swami Vivekanada’s advice – ‘They ask us for bread, but we give them stones. It is an insult to a starving people to offer them religion; it is an insult to a starving man to teach him metaphysics.’

The poor Indian aspires to be digitally connected. They ask for cheaper Internet. Don’t give them stones. It is an insult to these people that you dare to offer them your religion (Net Neutrality). Keep your Net Neutrality-metaphysics with yourselves and allow these people to have internet. (I thank Richard Bennet for this )