Venkat Goli: Avoid another market failure

Minimum government and net neutrality rules cannot coexist

The Department of Telecommunications (DoT) recommendations on net neutrality go against the very grain of the Bharatiya Janata Party's (BJP) election campaign slogan of 'minimum government and maximum governance'. The DoT paper on net neutrality clearly builds a case for regulatory arbitrage in the case of voice over internet protocol (VoIP) over the top (OTT) communication services. In simple words this recommendation implies that mobile or broadband telecom service providers such as Airtel, Vodafone, Idea and others can charge subscribers for using OTT services such as Viber, Skype and WhatsApp while making voice calls. Additionally, these charges would be fixed or regulated by the telecom regulator.

It is important to start by looking at existing arguments against net neutrality rules. In a 2010 paper in the Journal of Competition Law & Economics titled "Net Neutrality and Consumer Welfare", Nobel laureate in economics Gary S Becker along with Dennis W Carlton and Hal S Sider argued against net neutrality rules. They felt the imposition of net neutrality rules is not justified due to the existence of competition. Becker and his team concluded that such problems "can be better addressed by antitrust enforcement and/or more limited regulatory mechanisms". However, the DoT recommendations allow wider government fiat to seep into a domain that has largely been free of regulation.

The Telecom Regulatory Authority of India (Trai) in its July 2015 report on telecom subscribers provides insights on the market shares of various service providers in the broadband (cumulative market shares across wired and mobile devices) and mobile telecom wireless segments.

Using this, one can tabulate the Herfindahl-Hirschman Index (HHI), an indicator widely used to assess market concentration, for the telecom sector in India. The US Department of Justice considers a market with an HHI of less than 1,000 to be a competitive marketplace; an HHI of 1,000-1,800 to be moderately concentrated; and an HHI of 1,800 or greater to be highly concentrated. In India, the broadband HHI, with the current market shares, cannot exceed 1,663, while the wireless mobile telecom HHI cannot exceed 1,553. An HHI below 1,800 implies that firms in the telecom market in India do not have the market power to dictate pricing over a sustained period of time.

In such a situation, Becker's approach to net neutrality of allowing the invisible hand of the market to perform should be given serious consideration. If mobile telecom service providers wish to charge for OTT services it should be left to their discretion. Subscribers can switch to service providers who do not charge for OTT, thus allowing the market to calibrate itself. The regulator must ensure that switching costs do not escalate by ensuring that mobile number portability (MNP) is allowed seamlessly without any artificial blockades by telecom service providers. Trai's report suggests that at the end of May 2015, a cumulative total of 160 million MNP requests have been made. This is about 17 per cent of the subscriber base (975 million total wireless telecom subscribers) assuming each subscriber made one request. This suggests that MNP is, by and large, serving its purpose and is an effective tool to address switching costs. The other aspect the Trai needs to ensure is prevent the formation of a telecom cartel. The anti-competition clauses available at the disposal of the Competition Commission of India should in principle deter any behaviour by telecom companies to form cartels or to discriminate between OTT services.

The net neutrality rules would mark the government's debut in staking its claim on the internet after airlines and making watches. Regulation must be seen as an option when markets fail; it can't be seen as a policy prescription praying for market failure.

The author is founder, Yudofud Public Strategies