[Editorial] Regulating Telcos & Internet Firms
What is the relationship between telcos and internet firms?
- There is a growth of an integrated sphere of cooperation and competition between the telcos and internet firms.
- This is on account of substitute services and complementary value networks.
- There has been a growth in OTT (over-the-top) messaging services from the internet companies. WhatsApp and Facebook Messenger are some examples.
- At the same time, telcos saw a significant drop in revenue from text messaging services. For eg: In the UK, the quarterly SMS volume dropped by 50% in the last 5 years to 10 billion (by 2021).
- There has been a growth in VoIP services from OTT service providers. VoIP or Voice over Internet Protocol enables voice calls over the internet, instead of a regular phone line.
- This is also threatening telco’s income from voice calls.
Complementary Value Networks:
- Complementary value networks are also called ‘Walled Gardens’.
- It is a bouquet of services provided by:
- network operators
- handset manufacturers
- platform vendors
- content providers
- An example for complementary value networks is the one created by Apple in early 2000s for the iPhones. It involved exclusive wholesale agreements with AT&T Wireless.
- Apple created a walled garden by subsidizing the Apple iPhone with long tenure contractual agreements and by creating a proprietary app store.
- In India, RJio is to create an ecosystem of handsets, applications and connectivity through an arrangement with Google for the JioPhone Next.
- Such walled gardens have a ‘platform captain’ which provides the rules, coordinating mechanism, key products, financial capital and intellectual property. Eg: Apple, RJio.
What are the implications of these developments?
- The platform captains enjoy a pole position in this setup. Consequently, they derive business benefits from this position.
- This leads to an element of competition in the relationship between the telcos and the internet firms as the walled garden’s members aspire for the platform captain position.
Role of regulation:
- There is an asymmetry in the regulation of the telcos and internet firms that adds to this equation.
- This asymmetry is partly due to fundamental differences in the businesses’ nature, such as- jurisdictional nature of operation and the technology that is used.
- It also partly reflects a certain perspective of the regulation of competition among the telcos and internet companies.
What is net neutrality?
- Net neutrality or network neutrality is the principle that all internet communications must be treated equally by the internet service providers. It requires the ISP to not discriminate based on the content, user, website, application, platform, etc. with respect to traffic management or pricing.
- It was conceptualized in early 2000s– especially to stem the market power of the telcos.
- It was introduced because a dominant telco can undertake a vertical merger with content providers and application providers and hence, hinder competition in downstream market .
- Since the net neutrality principle requires the telcos to not discriminate among the internet communications, it eliminates the incentive for such vertical mergers.
What is the significance of net neutrality here?
- Net neutrality concept can be seen as a way to prevent telcos from extracting all their revenue from internet firms.
- The telcos hold the upper hand because, while the internet firms have to make themselves available via all service providers, the subscribers restrict themselves to just one telecom service provider.
- Over the last decade, the internet has developed such that internet firms now enjoy a significant market power. Eg: web search is a market dominated by Google and it is the starting point for navigating the Web (WWW).
- Now there is a situation where, without search neutrality, certain internet firms may manipulate search results to favour certain market players.
- An additional concern is the vertical integration between such search engine companies and the downstream companies.
What is the way ahead?
- Evident that the success of telcos goes hand-in-hand with the success of internet firms.
- However, Facebook and Google owning some 18% of Jio throws a hint of the new dynamics on the horizon.
- The principle of net neutrality must be extended to internet firms too, in the form of search neutrality.
- Interconnection regulation, like how telcos are required to mandatorily provide equal access for interconnection with other telcos’ networks, must govern internet services, such as instant messengers and social media networks, that have critical mass dynamics.
- In India and in USA, the telcos are governed by rules set by the sector’s regulator but the behaviour of internet firms are under the purview of competition regulator. This too needs to be addressed.
- India needs an integrated perspective similar to the convergence visible in the EU.
The competition between the telcos and the internet firms arise in context of walled gardens and overlapping services. The changing dynamics of the scene requires a unified regulatory framework from the government’s side.