DoT report on net neutrality spells tough times for OTT players

A recent Department of Telecommunications (DoT) panel report on net neutrality has opened a Pandora's box. The 110-page report was supposed to define the rules of net neutrality in the Indian context and clear the air around the simmering feud between telecom operators and OTT (over-the-top) service players, primarily led by WhatsApp, Skype and Viber.

But it seems the report has not gone all the way to settle the issue. In fact, the report has made a series of recommendations that raise more questions than answers. Several recommendations are open-ended, confusing and subject to various interpretations.

Take, for instance, zero-rating plans. While the panel has recognised zero-rating services as "walled gardens", it has recommended that such schemes, before their launch, need to be vetted by the Telecom Regulatory Authority of India (TRAI) to determine whether they conform to the principles of net neutrality. If TRAI approval doesn't come within a reasonable time, the scheme would be deemed approved.

Zero-rating packages are offered by telecom operators by tying up with content providers (OTTs and e-retailers) to provide free Internet access to end consumers. In zero-rating plans, content providers pay for data charges on behalf of users. For example, Bharti Airtel launched Airtel Zero in April that offered free access to mobile apps. Companies like Flipkart became part of Airtel Zero initially but opted out after a huge social media backlash.

On the other hand, the panel has proposed a blanket ban on loosely-similar services like Internet.org, which is a partnership between Facebook and companies such as Samsung, Ericsson, Reliance Communications and Qualcomm to give Internet access to users in developing countries (like India) without any payment towards data charges. "Collaborations between TSPs [telecom service providers] and content providers that enable such gatekeeping role to be played by any entity should be actively discouraged," says the report.

Industry veteran TV Ramachandran, former director general of the Cellular Operators Association of India, says it's a job only half-done. "The report nicely says that telecom operators have to abide by the core principles of net neutrality. If implemented, the recommendations would create disputes," he adds.

At the core of the net neutrality debate is revenue cannibalization of telecom operators due to the rise of communication services provided by OTTs. The report has made some recommendations to tackle the issue.

The Internet ecosystem is broadly divided in two areas - infrastructure layer and application layer. The infrastructure layer belongs to telecom operators such as Bharti Airtel, Vodafone India and others who have spent a huge amount of money - estimated to be over Rs 7.5 trillion - to build infrastructure over the years. The application layer includes websites and apps that are scaring off operators. While about 95 per cent of these apps, including e-commerce, taxi and ticketing apps, don't pose a threat to telecom operators, their biggest worry comes from communication apps such as WhatsApp, Viber and Skype.

The report suggests that domestic calls made through voice over Internet protocol (VoIP) services of Skype and others should be regulated while international calls made through the same channel should be kept out of the regulatory purview. "The committee feels that existence of a price arbitrage between TSPs' services and OTT communications services resulting from a non-level playing field needs to be taken note of. TSPs may become reluctant to invest in expansion of broadband infrastructure if the possibility exists of competitive OTT communication services cannibalising expected increase in revenues from such investments," the report highlights.

But why regulate only domestic VoIP calls, and not international calls and messaging services? The DoT panel says that while both international VoIP calls and messaging has affected revenues of telcos, neither had the effect of completely disrupting their revenue models. As per TRAI data, international voice calls contribute just 3.45 per cent to the gross revenues of telcos. Also, the international voice calling segment has shown stabilisation even during the rise of VoIP services.

The average revenue realization for telcos on a VoIP call is around Rs 0.06 per minute, which is far lower than revenue realisation from conventional calls - Rs 0.36. A one per cent shift in voice traffic from conventional voice calls to VoIP calls results in Rs 1,200 crore revenue loss for telcos. The loss then limits telcos' ability to build more telecom infrastructure that would require an investment of Rs 5 trillion over the next five to six years. Since a large chunk of revenues is generated from domestic calls, the DoT panel has proposed to regulate them to ensure "a level playing field".

Telcos complain that OTT players use their infrastructure for free and eat into their revenues. For several years, the telcos didn't mind the presence of OTTs because these apps led to a rise in data consumption thereby opening a new revenue stream for telcos. The threat of OTTs was recognised recently, leading to telcos asking regulator to bring OTTs under regulatory purview.

Another contentious issue is blocking and throttling of competing apps or websites by telcos. The report explicitly says telcos should not engage in blocking, throttling or paid prioritization of any lawful content.

How practical are these recommendations? If OTT players offering communication services are required to obtain unified licences, they will be subjected to security obligations, will have to declare their financials and will be taxed in India. At the moment, most OTTs are not required to meet these statutory requirements.

In all likelihood, OTTs will continue to operate in the country but they could also look for exiting India or start charging for their services. WhatsApp, for instance, might start charging users after one year of free service expires. The entry fee for the unified licence is Rs 15 crore. Subsequently, an annual license fee is levied at six, eight and 10 per cent - depending upon the service areas - of the adjusted gross revenue of the licence holder.

However, there could be some relief for OTTs. Under the National Telecom Policy 2012, the acquisition of licence is delinked from the spectrum. This means OTTs don't have to necessarily acquire the expensive airwaves if they were to obtain telecom licences.

Subho Ray, President of Internet & Mobile Association of India (IAMAI), a body that represents online and mobile value-added services industry, says it's a wrong approach to solve the problem. "There is no regulatory arbitrage; there is only cost arbitrage. I cannot figure out how removal of regulatory arbitrage will remove cost arbitrage. This part has not been shown by this [DoT] paper," he says, adding that the DoT panel has tried to strike a balance.

"It is a complicated issue. The way I look at this report is that the DoT panel thought they have been favourable to Internet companies by putting out the principles of net neutrality. So, in order to balance that, they wanted to give something to the operators as well," says Ray.

What's next? The report says the views expressed in the report are not of the government. It has asked for comments on the report from all stakeholders. Meanwhile, TRAI is already working on its recommendations, which will be sent to the DoT for examination. Experts say that with the TRAI chairman's post lying vacant, work has stalled at the regulator's end. "In TRAI, nothing moves without the chairman. The chairman's thinking directs the entire organisation," says a telecom analyst.

The recommendations of TRAI and the DoT panel will be put up before the Telecom Commission and the telecom minister will take the final view. But there's a catch. Ramachandran says telcos and the government have a running agreement. "Before the government brings about any changes in the policy, the telcos have to agree to it, otherwise it could be disputed," he says.

It seems there's a long road ahead before a final policy is drafted.