Net Neutrality Policy Needs Much More Nuanced Approach

By Arpit Khosla

What is self-evident is that we are living in age of Digital transformation. Our lifestyle from bill payments to entertainment to learning has all gone digital. A confluence of factors ranging from Moor’s law , cloudification , hardware commoditization , plunging hardware costs , Ubiquitous connectivity , widespread content digitalization and a wave of Industrial and Enterprise operations digitalization have hastened the dawn of Digital Transformation. These transformational waves have not only touched most aspects of consumer’s lives, but also stimulated a sea change in the way in which the business valuechain stakeholders engage with each other. The result is that almost everything and anything is now available on Web/Mobile over Cloud. This meant new services and multiple new revenue streams.

If one was to earmark the key investments that were instrumental in bringing this digital era to life – one would not hesitate to say it is the Cloud Infrastructure Providers and Internet Service Providers. The reasons due to which I place these two stakeholders as majority investors are two. Firstly -these are the two key Infrastructure providers which have the lion share of costs across value chain and secondly these two industry segments are mostly consolidated and hence so are the risks and Investments.

When any company invests in enabling a particular service, it is only fair that it expects appropriate returns from the investment. In this context, the implicit expectation would be that  Internet Service Providers and Cloud Infra Providers should be able to price discriminate between customers opting for the premium services which they have enabled via these infrastructure investments.

However, this premium price for premium service strategy was alleged to be nearing a monopolistic behavior, violating the existing principles of Net neutrality. The tenet of Net Neutrality states that Communication service providers should treat all data on the Internet equally, and not discriminate or charge differently by user, content, website, platform, application, type of attached equipment, or method of communication. This scenario kindled the debate over Net neutrality and brought it to forefront on the agenda of all regulators globally.

One of the main arguments that a host of internet denizens quote is that, they do not want the Internet service provider to control the type of data which they have access to. Additionally they also do not want to allow the ISP’s the power to practice monopolistic price discriminatory strategies. The second key argument to which the proponents lend their voice is that, if an incumbent leader like YouTube is able to commercially reduce the access of competitive websites to prospective customers – this might kill the democratic fabric of internet which enthused all this innovation in first place. Last but not the least, as a third argument  some proponents also claim that connectivity is classified in category of lifeline or public utility  services and hence should not be allowed to be left at the mercy of few companies enjoying oligopolistic market power. Majority of regulators have supported this view and are strongly supporting introduction of Net neutrality regulation. As expected this view finds strong support from internet based companies such as Google, Facebook, Dropbox, Twitter, Snapchat, Microsoft, and Spotify. In February 2015, the FCC declared the Internet a public utility and placed net neutrality into effect.

Comcast, AT&T and other ISPs were obviously disappointed with such regulation. After all they had strong counter arguments against issues raised by proponents. The primary point which ISP’s offered against Net Neutrality regulation is that it seriously diminishes the attractiveness of investors in network Infrastructure investment. It is the ubiquitous connectivity that has led to innovation explosion; hence any attempt to curb its growth is an attempt to throttle innovation. Also ISP’s claim that such heavy handed government intervention is against the free market economy fundamentals of the developed world. They also offered multiple counterarguments to data control & monopolistic price discriminatory claims. First being that QoS control is not about blocking –its only about preferential treatment of certain packets over others. Secondly this is not a new practice, CDN which help in better response to one website over others are an integral part of internet even today. As a case in point, retrospectively CDN’s never did impede the growth of new comers like youtube or whatsapp. Additionally it is in ISP’s interest to allow users more of whatever it is that they like. More so, Consumer’s preferences cannot be coerced in this world of internet by anyone player, as it is a long value chain with fragmented customer base. Another key aspect that is usually missed by proponents is that the services are evolving and different services have different QoS, Latency and reliability requirements. Unless ISP’s are in a position to differentiate traffic, all services, irrespective of their QoS requirements will get same treatment. Such a scenario has direct impact on mission critical services. Lastly  ISP’s question the double standards of Net neutrality policy citing that, when OTT players can have premium plans offered over the very network provided by ISP’s why can’t ISP’s get their return on investments by offering premium plans.

Most of the ISPs are also Communication Service providers. On the question of Public utility services, they claim that voice is a public utility & lifeline service as well, then why are they charged insurmountable spectrum acquisition fees, spectrum usage charges. They also claim that despite of the fact that CSP revenues have been declining globally and Market penetration is already more than 100% - they are being further restricted by such regulatory constraints. On the other hand the OTT players like Whatsapp are already enjoying sky high valuations and growing by the day, yet OTT players can price discriminate but carriers can’t offer premium services. Additionally ISP’s any which ways pay universal access as additional charges to support connectivity in economically underprivileged geographies.

ISPs also completely debunk the claim of proponents that ISPs enjoy market power in oligopolistic market structure. They claim the relatively less number of players is attributed to high financial & regulatory barriers which are government controlled. At the same time they hypothesize that few players is a necessary but not a sufficient condition for market dominance. They believe the control over profitability is the key proxy for monopolistic behavior. They cite the consistently falling profitability and consolidating market to refute any claim of market power.

Lastly they claim that OTT players are even vying for connectivity revenues by setting up networks in unlicensed bands. By operating in unlicensed bands OTT players are also bypassing any regulatory hoops. Examples of such initiatives are Project Fi by Google and ARIES & Terragraph by Facebook.
As always, truth lies somewhere in between, we cannot have a broad stroked yes or no answer to Net neutrality. Net neutrality regulation needs to have fine grained response.  In my view, one of the ways to solve this conundrum is to take application based segmentation approach. For example certain application categories such as education, banking & communication can be declared as public utility, where in the ISP cannot differentiate or discriminate. However in other categories such as entertainment & e-commerce, the regulator should let the invisible hand of free market drive the economics. Hope the eco system balances the industrial forces to create a co-operative & just structure rather than the one that’s skewed in favour of one or other.