Net neutrality is net democracy, net equality

Net neutrality is net democracy, net equality

Net neutrality has come to mean non-discriminatory access to the objects sourced by customers through the internet and not charging them for specific objects sourced through the internet. Already they are charged for the internet usage by charging for Wi-Fi or data through 2G or 3G. Perhaps ‘Net Democracy’ or ‘Net equality’ may have been more accurate.

The debate has come about because the various apps are seen to freeload on the telecom service providers by using their network and not paying them anything, while the apps themselves have some sort of revenue model to make money. On the contrary, economic theory says that there are a class of goods called public goods, which are characterised by non-excludability and secondly, non-rivalry. The first means that it is impossible or non-optimal to exclude a nonpaying user.  

The second means, A’s consumption of the good does not inhibit B’s consumption.  The telecom networks by and large possess both these attributes and thus qualify being called a public good. Though it is possible to exclude nonpaying users, it is not optimal to do so, since in that case, benefit to society is not maximised. An example would be a highway. It is possible to toll that road and exclude nonpaying users, but you would be restricting the use and keep the asset underutilised. This sort of privatising the public good does happen in practice, but it is not in the best interest of the society.  

The theory further says that the non-excludable feature of public good will lead to   nonpaying users having a free ride on it and so private companies will not be able to collect revenue from all users and thus, there will be market failure. The prescription in that case is for the government to fund such projects. The government has funds from taxation while private sector has only revenue as its anchor for viability.

Besides, for getting maximum welfare, the government should price it at marginal cost – cost of producing one additional unit of output – which in the telecom case, would be close to zero. However, in the present case, mobile telecom companies have constituted what is called an oligopoly with price competition. Oligopoly, because there are entry barriers like spectrum acquisition and investment in towers, and they compete with each other on price and product quality to gain ever greater share of the market.  

Also, the telecom industry is characterised by what economists call ‘network externalities’. This means that bigger the network, more disproportionately higher the benefits; and, every consumer wants to be part of the bigger network. In this situation, the biggest network owner reaps the maximum profit - the winner takes the most.  

The regulators try to reduce this externality by mandatorily providing open access between all networks, number portability etc, but the bigger network firms try to increase the externality by differential prices for calls within the network and outside it, and also  providing poor quality connection to calls from others’ network.

Now, we are ready to analyse the net neutrality issue. Users use various apps through the internet. The internet backbone is connected to various telephone networks and thus rides on the infrastructure provided by phone companies. However, the internet itself has been free, as also the various apps, though the app suppliers make their money through other means. The free apps often pinch the revenue from telephone companies even while free riding on their phone network infrastructure. This is what makes the phone companies’ claim to charge or provide discriminatory access to various apps seemingly legitimate.  

However, it must be remembered that the phone companies do collect their access charge, either as a Wi-Fi fee or 2G or 3G connection fee. It is also possible that there may be some collusion in fixing the retail tariff in order to boost the profit which has escaped the radar of the regulator.

Price regulation

As public utilities, phone companies are subject to price regulation, but because of competition in mobile market, TRAI, the regulator, has exercised forbearance. However, the interconnection usage charges that one operator has to pay to another is regulated, as that is not open to competition. The phone companies were divided into two groups, one that received payment and the one that made payment on a net basis.  

Obviously, the first group argued for full cost reimbursement while the latter argued for marginal cost reimbursement, which was close to zero. Taking a welfare enhancement and level playing field position, the TRAI imposed the marginal cost based charge. The critical argument for the first group in this case is that all firms have the freedom to charge more since the final retail tariff is not regulated.  

Information goods are characterised by high sunk costs and near zero marginal costs. The pricing rule in such a situation is to adopt a low price to gain market share and serve a large market with low margin.  Price competition in such a situation brings benefits to consumers in the form of low price, but may drive some firms out of the market. No one need to shed a tear for that. The regulator should only make sure that the firms do not collude to get out of some of them going out of the market.   

The telecom firms making deals with content providers and providing discriminatory access to them amounts to anti-competitive practice and should be disallowed by the TRAI. The TRAI and the DoT had earlier disallowed firms sharing their 3G spectrum. Both the internet and the apps which ride on it, qualify as public goods and TRAI should mandate zero price for them, for maximising society’s use. If, in the process, the telecom firms protest that they are forced to make losses, the government can even give them subsidy like the UK government which pays shadow tolls.

(The writer is former member, TRAI)

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