Network Neutrality and Why India Should Pay Attention

Note: This article was originally written for the Journal of the Economics Society, Ramjas College. Since the subject has somewhat captured the public domain, TRAI has invited responses to their 118 page long (ridiculous) consultation paper. Go to savetheinternet.in and send your response by 24th April. 

During December 2014, Bharti Airtel received strong opposition from consumers when it announced a new tariff plan under which the use of Voice over Internet Protocol (VoIP) services like Viber and Skype would be chargeable even if an internet scheme had already been purchased by a consumer. In the face of public outcry over this proposed plan, the company soon withdrew the idea.

The main objection made against the proposal was that the plan violated the concept of Net Neutrality. The concept of net neutrality propounds that Internet Service Providers (ISPs) and other network operators cannot deliver certain data packets faster than others based on the criteria such as type of application, source and nature of content etc.

Since the inception of the Internet, information packets have been transported in accordance with this concept. The NGO Common Cause defines net neutrality as “the principle that Internet users should be able to access any web content they choose and use any applications they choose, without restrictions or limitations imposed by their Internet service provider.” Under this system, there is no distinguishing between units of data depending on the services for which they are used or the identities of the uploader or downloader of the data. In other words, when a customer pays her ISP a subscription fee to use the Internet, she is given access to the whole Internet at once. Her ISP cannot charge her separately for the use of Buzzfeed, for example. Or simply deny her access to Twitter.

The idea of a ‘perfectly neutral’ network is a dangerous one, however. A perfectly neutral network will not prioritize any data packet over another. This may be problematic as certain types of data packets, like error messages and router-to-router traffic, need to move faster than others. Without this discrimination, the network will not be able to function. Offering a solution to this predicament, Tim Berners Lee –the inventor of the World Wide Web –explains that net neutrality must mean that there is no discrimination between data packets of similar applications and not a purely neutral transmission regardless of the application in question. He argues that some applications are more sensitive to jitter (signal distortion) and latency (delay). Latency-sensitive applications like video streaming services cannot tolerate miniscule delays in data packet delivery. However, e-mail services can do so. Treating both applications in the same way is discriminatory against latency-sensitive applications.

There are certain trends, whose existence ensures a favourable environment for the violation of net neutrality by ISPs. These trends include an increase in the use of applications that have low latency features or use high bandwidth, such as streaming video or audio, VoIP applications and online games. Another trend is the increasing use of wireless home networks which allow multiple people (sometimes even multiple families) to share an internet connection, thereby reducing revenues for ISPs. Even improvements in network technology which make providing broadband service less expensive encourage ISPs to violate Network Neutrality.

From an economic point of view, the departure from network neutrality regulation will have two primary consequences:

  1. It will introduce the potential of two-sided pricing on the Internet such that the ISP that controls internet-access of the end consumers will charge a fee to content or application firms ‘‘on the other side’’ of the network which did not have a contractual relationship with it before. This means that content and application providers such as Google, Yahoo, MSN, or Disney will be forced to pay its consumers’ ISPs to ensure that their consumers can access their services. The ISPs would also be able to apply different prices to different content providers, even for the same type of information transmitted to consumers. This could result in situations where residential ISPs will charge Google more for making the Google search service available to consumers than what it will charge Microsoft for making its search service available.
  2. It will introduce the possibility for prioritization, which may enhance the arrival time of data packets originating from paying content and application firms and may degrade the arrival time of data packets that originate from non-paying firms. This has the possibility of increasing efficiency of packet transfers over the Internet, such that more time-sensitive packets are given prioritized access. But it can also effectively exclude access to non-paying firms’ content and applications. A possible consequence would be that start-ups will be virtually unable to build a consumer base. The average consumer will frequent services and apps that are more accessible i.e. faster to use for her. For example, let’s assume that a new video streaming service known as VidShare is founded in the absence of network neutrality. A consumer will experience slow download speeds on VidShare whereas her access to YouTube will be fast an unaffected as YouTube pays her ISP a fee. She will not feel that “the internet doesn’t work”, she will think that VidShare is a sub-par service and not worth using. Thus, new entrants in the market and small businesses will not be able to establish and scale themselves respectively.

In a paper written by Nicholas Economides and Joacim Tåg titled “Network neutrality on the Internet: A two-sided market analysis”, in which the issue of one-sided pricing vs. two-sided pricing is discussed, some interesting conclusions are presented.

In this study, the Internet broadband market is modelled as a two-sided network consisting of broadband users on one side and content and applications providers on the other, with an ISP connecting the two. Prices imposed on both sides by the ISP have direct implications on the number of broadband consumers as well as on the number of active providers of content and applications. Within this constructed framework, network neutrality is defined as the restriction that the price charged to the content providers by the ISPs is constrained to zero.

It is found that in a monopoly setting, network effects between consumers and content providers can provide a rationale for enforcing network neutrality regulation. For some parameter values, preventing residential ISPs from charging content providers for making their services available to residential consumers increases the total social surplus. However, there also exist parameter values for which this result is overturned. However in a duopoly setting, imposing network neutrality weakly increases total surplus. Furthermore, it is found that when everyone has internet access, network neutrality will always increase total surplus if content providers value consumers more than consumers value content providers.

There exist many arguments that reason that net neutrality is detrimental to networks, economies and people. The opponents of net neutrality claim that unless innovative services receive priority over other kinds of Internet traffic, their quality will remain poor, which will prevent them from fully developing. However, this reasoning is flawed in its very core. The innovation and creativity that characterized the rapid growth of the Internet is at risk of imposition of economic control by a few large private interests in the absence of neutrality. One of the main consequences of violated net neutrality will be the emergence of a two sided market where content creators will be paying ISPs in order to ensure that consumers can access their services. In this environment, it is obvious that new entrants will be at a systemic disadvantage. This set-up rewards collusion in the market, not innovation.

In the view of many, a political intervention in the net neutrality dilemma will actually support the free market, as it will prohibit unfair practices imposed by non-transparent monopolies. They warn that unless net neutrality is ensured through governmental regulation, unseen distortions tantamount to subliminal manipulations through imposed availability and slowdowns will alter customer practices, not through choice, but through artificial norms dictated by ruling commercial entities.

Moreover, advocates of network neutrality argue that in its absence, content providers that can pay will be able to get a commercial advantage over those that cannot. Thus, institutions like universities and charities would suffer. These policies will eventually result in the creation of a “two-tiered Internet,” in which those having “VIP” access will enjoy privileges in terms of speed and access to certain contents. For many content providers like charities, universities and services that target young people or those on a budget, this could mean not being able to reach their audience.

Pricing schemes rest on the assumption that traffic usage by each of the end-users is roughly equal and is within some reasonable limits. However, traffic consumption by the end-user tends to be much higher than average when users engage in practices such as peer-to-peer file sharing and installing wireless connections (which allows multiple consumers to use one connection). Faced with this situation, providers claim that they have no other option to avoid losses, short of raising the fee for all subscribers, but to fight such practices.

Critics of net neutrality also say that prioritization of certain traffic should not be prohibited if both content providers and ISPs agree on the terms of their cooperation. Depriving Internet providers of these sources of revenue will limit the amount of funds available for investment in further development of network infrastructure. However, it must be understood that there is no guarantee that the returns from the investment in infrastructure, if any, will be distributed in an equitable way. According to supporters of net neutrality, if everything is left to market forces, “islands of enhanced service” will develop. This would lead to increased investments in such islands and less investment in the general development of the network.

Many also regard net neutrality regulations as an infringement on the private property rights of network owners. They feel that although no single entity owns the internet in its entirety, many individual sections of the internet are privately owned and operated. On the other hand, many believe that the internet is a public good. And thus requires regulation to maintain its neutrality in order to ensure fair and equal access for all consumers. Without legislation, they believe that commercial interests will override consumers’ rights and pricing distortions, rather than improvements in service, will direct market share.

Ed Whitacre, former CEO of AT&T, was quoted in BusinessWeek referring to his company’s Internet infrastructure: ‘‘Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it.’’  However, no one is using the Internet for free. In a transmission of a data packet, the ISPs on both sides pay the Internet backbone and each ISP is paid by its customer.

Besides economic effects (unfair practices by monopolies and lack of competition in the Internet access market), the creation of a two-tiered Internet and, essentially, a limitation of end-user choices can have strong political consequences. By slowing or hiding access to certain contents, ISPs can, in the long-run, shape the users’ information environments and indirectly influence their opinions and choices. Even though this scenario may be unrealistic for the near future, the possible long-term effects of decisions made today should not be overlooked.

The Net Neutrality Debate is taking place in various parts of the world right now. However, this debate is of special importance to developing nations. Developing countries are especially vulnerable to the negative effects of Internet segmentation because they lack the tools and experience to tackle them. They are often characterised by weak institutions which make them sensitive to net neutrality violations. Those who live in these countries already pay more for goods and services due to factors such as lower levels of competition. For example, Venezuelans pay three times the amount that Americans do for internet access. Violations of net neutrality exacerbate the lack of competition in these economies and ultimately harm the people.

In 2010, Chile was the first country to make net neutrality provisions to its General Telecommunications Law. But Chile’s blanket application of the principle has invited criticism. On June 1, 2014, Chile put an end to giving big companies “zero-rating” access to their services—a widespread practice in developing countries. Zero-rating refers to large companies, like Facebook, being able to make deals with mobile operators to offer the most basic version of their service without charging customers for data use. The details of these deals are unclear, but big companies may pay mobile operators for the privilege.

In fact, zero-rating has also entered the Indian market in the form of Facebook’s internet.org initiative for which it has partnered with Reliance Communication in order to give millions of Indians free access to Facebook and several other applications such as Wikipedia, BBC etc.  Google has also started discussions regarding a zero-rating plan with other application developers like RedBus, Flipkart and Ola Cabs. In the past Google had collaborated with Airtel and rolled out a scheme known as ‘Freezone’ wherein 1 GB worth of free access to Google applications every month was given to consumers.

On paper, these initiatives seem very noble. Internet access could be beneficial to India’s population in a multitude of ways. Farmers could have access to hourly weather reports, high school graduates in small towns could apply for college programs in major cities without having to travel long distances and new mothers in villages could easily obtain information about the healthcare programs for children around them. For people who don’t have access to the internet in the first place, an inexpensive entry to the information superhighway does not seem to have any down sides.

However, reality might not be so favourable. While being a blatant violation of net neutrality, this initiative will also control the content people will experience.  Moreover, it will effectively kill a large number of online enterprises that will be unable to collude with large corporations like Google and Facebook. Violating Net Neutrality will make it harder for low-cost innovation to succeed. This is especially disadvantageous for developing countries as they are often the places that need such innovation the most. Would there have been a Flipkart or a Zomato if ISPs were able to discriminate against them?

According to Susan Crawford, visiting professor of law at Harvard University and a co-director of Harvard’s Berkman Center for Internet & Society, it is “a big concern” that Google and Facebook are the ones becoming the portal to Web content for many newcomers. “For poorer people, Internet access will equal Facebook. That’s not the Internet—that’s being fodder for someone else’s ad-targeting business,” she says. “That’s entrenching and amplifying existing inequalities and contributing to poverty of imagination—a crucial limitation on human life.”

India still has a long way to go when it comes to Network Neutrality. In an interview with Indian Express, the Chairman of the Telecom Regulatory Authority of India (TRAI), Rahul Khullar asserted that Airtel’s proposed tariff plan was not in violation of any laws. “What the company plans to do is certainly not in conformity with net neutrality. But one cannot say the move is illegal today as there is no policy either by the government that net neutrality is our principle or a regulatory framework put in place by the regulator”, he said.  So while India doesn’t have any laws concerning net neutrality for TRAI to enforce, whether any steps will be taken to achieve this goal before the people of this nation fall to the mercy of corporates remains to be seen.

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