A unified regulatory framework

A unified regulatory framework

By V. Sridhar and Rohit Prasad, Professors at IIIT Bangalore and MDI respectively

It is self-evident that the success of Internet firms and telcos goes hand in hand. However, the ownership of approximately 18% of Jio by Facebook and Google provides a hint that new dynamics are on the horizon - with the evolution of 5G technologies, we are seeing the growth of an integrated sphere of cooperation as well as competition between telcos and Internet companies on account of substitute services, and competition in complementary value networks.

Substitutability of Services

The growth in Over-The-Top (OTT) messaging service provided by the Internet firms, has been accompanied by significant reductions in the revenues of text messaging services provided the telcos in the past years. For instance, the quarterly SMS volume in the UK has declined by half to 10 billion by 2021 in the past 5 years. Similarly, the growth of Voice Over Internet Protocol (VoIP) services offered by the OTT service providers is also a threat to the telcos. 

Competition in Walled Gardens

Complementary value networks or ‘Walled Gardens’ comprise a bouquet of services provided by network operators, handset manufacturers, platform vendors, and content providers. A notable example is the one created by Apple with exclusive wholesale agreements with AT&T Wireless in early 2000s for its iPhones. By subsidising the iPhone with long tenure contractual agreements, and creating a proprietary app store, Apple created a walled garden. Way back in 1999, NTT Docomo, the leading mobile operator in Japan created its own ecosystem of application and content providers for its iMode service. Recently in India, RJio has forged arrangements with Google for its JioPhone Next to create an ecosystem of handsets, connectivity and applications. On the other hand, Facebook introduced its Free Basics Internet service with many mobile operators around the world to provide a restricted suite of applications and content for free.

More often than not, these walled gardens have a “platform captain” (i.e. Apple, NTT DoCoMo, RJio, Facebook) who provides coordinating mechanisms, rules, key products, intellectual property and financial capital. Platform captains generally derive business benefit from their pole position. Hence, members of a walled garden may aspire for the position of captain. This brings a new element of competition into the relationship between telcos and Internet companies.

Despite a growing substitutability in services and increasing competitive pressures within walled gardens, there is an asymmetric regulatory stance with respect to telcos and Internet companies. Some of this asymmetry stems from fundamental differences in the nature of business such as jurisdictional nature of operation, technology used and so on. However, the asymmetry partly reflects a certain world view with regard to the regulation of competition across telcos and the Internet firms. An example is net neutrality regulation. 

When net neutrality was conceptualized in the early 2000s, it was meant to stem the significant market power of telcos, an entity that provides an essential service. Obviously, a dominant telco can hinder competition in a downstream market by a vertical merger with content and application providers. For instance, a telco with its own marketplace for apps (such as iMode owned by DoCoMo), can increase barriers to entry for other application marketplaces who are not part of the ecosystem. Net neutrality regulation that prohibits discriminatory treatment of Internet companies– either with respect to pricing or traffic management – in a sense eliminates any incentive for vertical integration.

Net neutrality regulation can also be explained as a way of preventing telcos from extracting all their revenues from Internet companies. This possibility arises because such firms have no choice but to make themselves available via all telecom service providers. On the other hand, subscribers restrict themselves to one service provider.

However, over the past decade, the Internet has evolved to a point where many Internet companies also provide an essential service and enjoy significant market power. For instance, web search has become the starting point for virtually everyone to navigate the World Wide Web. By integrating search across text, image and video, Google search engine has direct control over what and how we access on the Internet. Without search neutrality, it is possible that search results can be manipulated to cater to the vested interest of certain firms. This concern becomes heightened in the presence of vertical integration between the search engine company and some of the companies appearing in search returns.  Similarly, Amazon, with its powerful rating and review mechanism could influence success and failure of sellers in its marketplace. Hence, net neutrality principles need to be applied to Internet companies as well. 

Beyond net neutrality, just as it is mandatory for telcos to provide “equal access” for interconnecting with other telcos’ networks, social media networks, instant messengers, and indeed any internet service that exhibits critical mass dynamics need to be governed by interconnection regulation.

In sum, there is an element of competition between telcos and Internet companies in the context of overlapping services and walled gardens.  Hence there is a need for a measure of regulatory parity between the two types of entities. In the U.S. as well as in India, while the sector regulator makes rules for telcos, the competition regulator oversees the behaviour of the Internet firms. It is time for a unified regulatory framework. A semblance of this convergence is visible in the EU where the Body of European Regulator for Electronic Communications (BEREC) is paving for regulating digital gatekeepers. India too needs an integrated perspective.

(This article first appeared in The Hindu dated 25 November 2021)