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In the conventional world, finance professionals generally focus on the deal-making required to get a new product to the customer. These finance professionals are a little shocked when, in the NPS environment, incumbent manufacturers do not control the distribution. All distributors are equally keen to push all products; all manufacturers have equal access to all distributors.
Similar arguments are found in electricity, where governments have pushed in favour of breaking up monolithic electricity utilities into three distinct industries: generation, transmission and distribution. This creates opportunities for entrants in generation and transmission. Until this unbundling was done, the firm that owned the distribution was the only game in town when it came to transmission and generation.
Unbundling is a harsh intervention. What was the alternative, softer strategy? Suppose a new generation company came up, and was denied access by an old-style integrated electricity utility. It could have used conventional competition law to litigate, and could have won, on the surface. However, there are too many levers through which the monolithic utility could have rigged the game to disfavour the new entrant. It would take very high state capacity for a Competition Commission of India to track down such misbehaviour and enforce against it.
When state capacity is low, simple and transparent interventions are favoured. A simple unbundling rule is easier to articulate and enforce, when compared with the complexity of fighting with an integrated utility that is trying to hamper access to a new entrant.
At heart, net neutrality regulation is about forcing an unbundling between the content industry and the data pipes. The content industry is analogous to a manufacturer. What's best for society is that content firms slug it out against each other to produce better content. Under net neutrality, content firms are not allowed to do deal-making with the data pipes in order to create privileged distribution for themselves. Similarly, data pipe companies must slug it out against each other to give us fatter pipes at lower prices. But they are not allowed to do deal-making with content companies in order to create complicated bundles of content and pipes for customers. The separation protects competition in both industries.
A firm that invents a new biscuit puts 10 per cent of its effort into the biscuit and 90 per cent into figuring out distribution. Incumbents always have deep pockets, are entrenched in the distribution, and try to choke off competitors. Every practitioner living in this world treats these anti-competitive barriers as an everyday reality. The Internet is a unique open market; the moment a new storefront comes up, it is instantly connected to all customers who are on the Internet. This implies superior competitive conditions when compared with the old economy. A new e-commerce firm puts 100 per cent of its effort into innovation, as it knows that all pipes are equal access. Net neutrality regulation is about keeping it this way.
It is important to do such central planning with great hesitation. Most of the time, when governments try to do central planning, and design production arrangements, this goes wrong. I have been persuaded on such intervention three times: with the NPS, electricity, and net neutrality.
The writer is a professor at National Institute of Public Finance and Policy, New Delhi
