Regulatory convergence -I

For some years now, we have been talking about the inexorability of convergence between the telecom and media sectors, arising from technology developments in the former and the ability of the latter to take advantage of them.

Well, perhaps the announcement made by the government a couple of weeks ago that the cable television industry would now be brought under the purview of the Telecom Regulatory Authority of India (Trai) indicates how close we are to that state of affairs.

Clearly, the government has been on the defensive on the Conditional Access System (CAS) for several months now, during which it has encountered enormous problems with the limited roll-out of the system in Chennai and, particularly, Delhi.

Its decision to bring Trai into the picture is more a sign of its desperation to resolve the issue than anything else, but, for all that, this may well prove to be the best course of action.

Of course, we must keep in mind the critical differences in industry structure between telecom and television, which will determine the optimal regulatory strategy. Regulatory convergence at the institutional level does not necessarily mean regulatory convergence at the implementation level.

Trai's Consultation Note on Issues relating to Broadcasting and Cable Services is its first step in developing the framework for this sector. The document sets out a list of eleven issues on which it is seeking stakeholder reaction. From an economic analysis perspective, the answers to some of the questions raised are obvious, others not so.

The eleven issues can be categorised into four groups: product definition and pricing; service quality; technological development; limits to advertising time.

This is a reasonable spread of issues for Trai to kick off the consultation process, but before we get into appropriate regulatory approaches for each of these, we need to appreciate the structure of this industry as it has evolved in India and the limits and challenges that it imposes on the regulator.

In this article, the first of a two-parter, I try and set up a context of industry structure within which I explore the first set of issues. In the follow-up to appear on February 2, I shall look at the other sets.

Cable television in India has evolved in a bottom-up manner. The first phase was the setting up of satellite dishes by neighbourhood operators, each of whom serviced a minuscule number of viewers. Prices as well as channel selection varied enormously between neighbourhoods, even ones quite close to each other.

Quality was shoddy, with frequent interruptions and, inevitably, a phone line that was always engaged. The second phase was characterised by the partial consolidation of this fragmented structure, as local operators plugged into standardised feed provided by the multi-service operators.

Channel selection, pricing and quality became far more standardised across different local markets as a result. However, the critical factor here is that the local operator still owns the 'last mile', i.e, he controls the link between the broadcasters and multi-service operators and the consumer. He is the only person who knows exactly how many subscribers there are. All decisions made by the other two players in the game depend on feedback received by him.

This is in striking contrast to both the prevalent telecom industry structure in India and the 'top-down' model of cable television in the USA. Both of these structures are based on a direct link between the provider and the consumer.

Just as there are circle licences for telecom providers in India, there is a monopoly licence for one cable operator for each region in the USA. In both instances, these operators own their respective last miles, while being large enough to be amenable to direct regulatory supervision.

It was this 'information asymmetry' inherent in the Indian cable model, which provided the basis for the introduction of CAS. The system addresses the asymmetry in two ways: since both the set-top box and the programme card are issued by the multi-service operator, this large player now knows exactly how many subscribers there are and what proportion of them is watching what bouquet of channels. Broadcasters and advertisers can now plan their budgets and targeting strategies with that much more assurance.

However, as I had argued in an earlier column (July 7, 2003), the pricing of the set-top boxes violated every principle of regulation, which is supposed to promote consumer welfare by neutralising monopoly power.

In the USA, a set-top box is issued to every subscriber by cable operators. There is no explicit pricing for the box; its rental cost is implicitly built into the monthly subscription.

When a subscriber wants to terminate, he simply returns the box, which has always been the property of the operator. To ask subscribers to buy their own boxes, which themselves were non-transferable across locations was to trap them in a web of local monopoly power.

On the other hand, as was pointed out above, the fragmentation of ownership of the last mile carries potential problems. One cannot expect the average local operator to make the full investment in the boxes.

On the other hand, while multi-service operators can probably make the investment, the fact that they do not control the last mile means that they are still not in direct touch with subscribers and the information asymmetry persists to some degree.

From an economic perspective, the solution is obvious; the two have to become fully integrated in order for the logic of conditional access to work. If this is not possible, for various historical reasons, a pricing formula, which covers the costs of both multi-service operators and local operators needs to be developed.

The starting point for this would be to visualise the delivery system as though it were fully integrated, along US lines. What is the total cost of linking the broadcaster to the subscriber? That is what subscriber charges have to cover, and this would include the implicit rental on the set-top box.

After that comes the question of how this is to be shared between the multi-service operator and the local operator. This is essentially a question of network inter-connection. The same principles that were used by Trai in determining inter-connection charges between fixed-line, WLL and cellular networks recently can presumably be brought into play here.

The difficulty is more in terms of information than of principle. Is there enough credible information available on the costs of providing the last mile of this service? Can parameters from the telecom sector be used as benchmarks? Will it be necessary to generate some primary data on last mile costs? These are the basic operating questions that Trai needs to answer as it initiates its pricing exercise.

The writer is Chief Economist, CRISIL. The views expressed are personal