There’s a fog over net neutrality

An unseasonably warm new year has been substituted by a densely spewing fog over the concept of net neutrality.

Net neutrality is a specific approach to the economic regulation of the internet. It is based on the premise of the ‘end to end design principle’, in which traffic on the internet is determined by decisions at the edges of the network: Over The Top firms (OTTs) that provide content and end users.

According to the dogma of net neutrality, the telecom (and internet) service provider (TSP) should not discriminate in the form of either pricing or traffic management with respect to OTT-supplied content. The focus on discrimination by TSPs stems from the unique position they have traditionally held in the internet value chain. The TSP is a bottleneck monopoly: it is a conduit for an OTT to access its customers.

In the case of wired broadband, there is often a limited or single service provider in a customer’s geography. In the case of wireless there may be multiple providers. Nevertheless, wireless access means market power on account of switching costs incurred by subscribers. The discussion of net neutrality ignores the reality that the internet is a multi-layered value network with many entities impinging on the relationship between OTTs and end-users. Hence the definition of net neutrality propounded by Tim Wu way back in 2003 needs to be revisited.

For instance, AdWords — the sponsored search platform of Google — connects advertisers and search users. While advertisers pay an access charge, users are subsidised.

Smartphone operating systems are also multi-sided platforms that connect developers of apps and users. Google’s Android and Apple’s iOS accounted for more than 92 per cent of smartphones in 2015, indicating their market power in the OS platforms.

The internet today, with significant levels of vertical integration, walled gardens, and network economies, is very different in structure and scope from the modular internet of the 1990s in the context of which the concept of net neutrality was forged. The economic goals of static efficiency (minimum distortion of traffic by intermediaries implying that the burden of payment should be on the OTT), dynamic efficiency (promotion of innovation that implies that barriers to entry for startup firms should be low), and equity (universal access to the internet that implies that barriers to entry for new end-users should be low) have to be balanced in the context of new realities.

Net neutrality’s time has passed. A new credo — digital dynamism — needs to take its place. This credo comprises some guiding principles and governance frameworks.

Digital dynamism recognises 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 recognises the power of entities in the internet eco-system other than the TSPs, while at the same time being pro-active about the need to reduce barriers to entry for new ventures, and to remain firmly focused on creating an internet driven by end-users.

1. Zero rating TSPs charging only OTTs and offering both content and bandwidth free of charge for the end-user is too extreme as it militates against dynamic efficiency. Hence it should not be allowed.

2. Free Basics An industry consortium setting up a bouquet of what it thinks are the basic web services to be made available free of charge to end-users, centralises the control of internet innovation and is likely to negatively impact dynamic efficiency. It should not be allowed.

3. Free basic internet The provision of basic internet (defined with minimum speed and quantum of bytes) free of charge to the end-user is worth consideration; however it should be managed by a government body, rolled out across all TSPs, and paid for from the Universal Service Obligation Fund.

4. TSPs not being allowed to charge OTTs This works against static efficiency. TSPs may be allowed to charge OTTs with the usual caveats implied by competition law. Vertical integration along the internet value chain should be looked at closely and any threat to competition should be curbed; this holds good equally for TSPs and OTTs.

The net is not ‘neutral’. It is neither feasible nor desirable to return to an imagined state of original innocence. At the same time, the ideal of an internet driven by innovation and directed by consumer choice remains as valid as ever. What we need is not net neutrality, but digital dynamism.

Prasad and Sridhar are professors at MDI Gurgaon and IIIT Bangalore, respectively

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