Net Neutrality is an Ongoing Global Debate
The true “openness” of the internet and its ability to scale, both in terms of number of consumers it caters to and the value it provides to the users, and by extension, the amount of innovation and the number of businesses it gives birth to creates the need for it to be a level-playing field for all the stakeholders.
The fundamental bone of contention for the ongoing Net Neutrality debate is the difference in rates and phases of growth, scale, revenue realization and the valuations of the internet-based companies, and the companies that provide and maintain the necessary network infrastructure for internet (primarily, telecom service providers).
Net Neutrality is an ongoing global debate with no proven solution in place. While the regulatory bodies of some countries such as USA, European Union have opted in favor of the neutral net (no prioritization or throttling of legal internet traffic basis its source by the service provider), in some other countries the debate is fierce between the regulatory bodies and the telecom carriers. Even among the countries that have mandated neutral net policies, the carriers are filing lawsuits against the government and regulatory bodies (seven lawsuits in US so far). So, this debate is far from over.
While Net Neutrality is a Structural Issue, Airtel Zero is a Business Model
While the debate is going on globally, India’s TRAI (Telecom Regulatory Authority of India) has sought recommendations (for the first time from the general public, and not just the industry) by floating a consultation paper presenting their understanding of the business impact of Over-The-Top (OTT) players and need for Net Neutrality. This was soon after the government ended the wireless spectrum auctions, in which the telecom carriers spent over USD 17 billion, most of it to retain their existing spectrum.
Around the same time, Airtel, India’s leading telecom carrier launched “Airtel Zero”, a platform designed for partnering with various internet-based companies in order to generate revenues. There has been significant furore in the public domain and a campaign against Airtel Zero, leading to the company’s withdrawal of the program.
The underlying assumption of the public campaign was that Airtel will optimize their network to prioritize the internet traffic of its Airtel Zero partner companies, and throttle the traffic of the non-partner companies. Technically, and in principle, this was not the case.
With some basic checks and balances and transparencies in place, it could have been ensured that Airtel and other telecom carriers maintained the sanctity of neutral net – treating all traffic on their networks equally – while establishing an additional revenue channel (apart from direct consumer revenue) in the form of zero-rating programs.
India’s Current Internet and Broadband Infrastructure is Not Scalable
China, world’s leading country in terms of internet subscribers (>700 million), has over 250 million fixed line broadband connections. Compared to that, according to Convergence Catalyst estimates, the current fixed line infrastructure in India can provide broadband connectivity to only 19 to 21 million connections.
Of over 625K mobile base stations deployed in India currently, only ~100K are 3G enabled base stations. As per Convergence Catalyst estimates, the maximum number of subscribers that can be serviced with existing 3G spectrum (4 blocks of 5 MHz spectrum in 2100 MHz band, among all carriers), with a dedicated 1 Mbps throughput, is 8% to 9% of the current subscriber base in India. In the top 50 cities alone, an additional 25% of 3G base stations are required to match the current 2G network coverage. Apart from spectrum, one of the key parameters adversely affecting the mobile broadband capacity and user experience is insufficient back haul.
There exist multiple regulatory, business, strategic, financial, operational, resource and technology specific issues for Indian carriers to grow the mobile broadband ecosystem and market… And, most of the issues are interwoven in a complex structure, and untangling them is a delicate and time-consuming process.
Of over 267 million internet subscribers in India, over 240 million access internet through mobile, and over 200 million through mobile-only… and, >60% of them are exposed to sub-standard mobile internet experience.
How Does This Relate to the Ongoing Public Debate and Campaign? The standard formula for ‘Addressable Market Size’ found in most of young Indian internet companies’ business plans and investor pitches is:
1.3 billion population –> 940 million mobile subscribers –> 150 million installed base of smartphones –> expected to grow to 500 million in the next few years –> >250 million active internet subscribers –> 200 million mobile-only internet users –> expected to grow to 500 million by 2017 –> target X% of that base –> justifies USD Y million valuation.
Now, for an Indian version of Meerkat or Periscope, that number of “500 million mobile internet users by 2017” will be capped off to 120 to 130 million (not to mention much lesser due to Fair Usage Policy data caps implemented by most mobile carriers), due to the current state and state of growth of broadband infrastructure in India. So, data-intensive internet services companies will always lag in terms of their growth potential, and by extension, their valuations as compared to their global peers
None of the Key Stakeholders Have So Far Invested in the Long-Term Vision
Government: Indian government has created a highly unstable and self-contradictory regulatory environment, which leads to difficult business and operating conditions and lack on investor confidence. Be it retrospective tax, awarding and then rolling back new telecom mobile carrier licences, rolling back subscriber-linked spectrum allocation policy, introducing auction as a form of license extension and spectrum retention, delaying decision and implementation on spectrum sharing and trading policies, etc., it is difficult to build and execute on a long-term business plan (in such a volatile regulatory environment) in India.
Up until a few years ago, Indian mobile carriers had to factor <USD 300 million for their pan-India license extension, but thanks to government’s decision to auction the spectrum that is already held by carriers, as a part of their license-extension scheme, mobile carriers had to spend more than 15 times that amount. Such moves adversely impact the business plans of mobile carriers operating in India.
Telecom Carriers: Indian mobile telecom carriers had the opportunity to grow the share of non-voice revenues through VAS (Value-Added Services), before the advent of smartphones and apps led data growth. But, not only did they fail to innovate on creating compelling products and services, they stifled the innovation by other ecosystem players by demanding ~70% share of VAS revenuees. Moreover, instead of educating the customer and encouraging and motivating them to adapt and use the VAS services, Indian carriers used myopic sales tactics such as pesky OBD (Out-Bound Dialing) marketing calls, URLs in SMSs, flash SMS, etc. They failed to create the stickiness for these services, which led to ~60% churn rate across VAS services in India in 2008-10, and VAS failing to grow more than 10% of overall revenues.
Had Indian mobile carriers succeeded in educating and motivating the consumers to appreciate the value of VAS, today their job of monetizing their data services and increasing data ARPUs in the smartphone and apps led data ecosystem would have been much easier.
Also, in 2015, Indian mobile carriers cannot cry foul about OTT players riding their networks and adversely impacting their revenues. It is not like these OTT players sprung up overnight, or there were no indications of this impending trend. Way back in 2007-08, even before the first iPhone or Android device was launched, mobile Internet Messengers (IM) such as ‘Fring’ (Israeli) and ‘Mundu IM’ (Indian) were popular on the then popular smartphone platform in India – Symbian S60. It was just a matter of time before these IMs scaled to impact the SMS behavior of the consumers. Mobile carriers in India cannot, through forceful regulation, curtail the growth of third-party apps when they themselves failed to innovate enough or create stickiness and value for their own captive customer base.
Currently, we are witnessing early trends and the impending (and eventual) growth of connected devices as a part of Internet of Things (IoT) ecosystem. And, if the carriers are not agile enough, they might have to cry foul in 2025 when IoT becomes prevalent and mainstream, and then the OTT players would be providing connectivity in remote corners, where the carriers would’ve failed (or not cared enough) to reach. With the current pace of innovation in the digital world, a billion dollar company is taking birth everyday by plugging a loophole in the incumbent players’ ecosystem and disrupting their way of doing things.
Consumers: Indian consumers have been conscious of only price, and seldom value (or demand) high quality of service. And, this led to carriers focusing on price wars as opposed to improving their quality of services and innovation.
Case for Co-Existence of Net Neutrality and Airtel Zero… And, The Role Each Stakeholder Needs to Play for Sustained Evolution of Broadband in India
India is currently ranked 142nd in the world on the State of Broadband, way below countries such as Bhutan and Sri Lanka. In US, the government has recently classified broadband as a utility and modified the definition of broadband from 4 Mbps to 25 Mbps. This was possible due to the existing infrastructure in the country. In comparison, in India, the definition of broadband speed is 0.5 Mbps, and the existing infrastructure is insufficient to cater to even 1/10th of the country’s population by that definition… let alone increasing the speed limit for broadband. Indian government’s DEITY (Department of Electronics and Information Technology), as a part of “Digital India” initiative, aspires to classify broadband as a utility by 2018. That target looks extremely difficult to achieve with the current state of affairs.
The cumulative debt of Indian mobile carriers, before the recent wireless spectrum auctions was over USD 40 billion, which is more than the entire year’s telecom industry revenue in India. And, the recent spectrum auctions increased that debt by ~45%. So, Indian carriers are under tremendous pressure to grow their revenues.
Telecom carriers in India need to make money in order to build and maintain networks that can cater to the ever-growing consumers and data-intensive internet services. The current revenues are barely sufficient to structure their debts, let alone scale and maintain their networks.
Programs such as Airtel Zero, if planned and executed thoughtfully, enable carriers to monetize their network infrastructure and service offerings, partnering with other value chain players in a win-win business arrangement, while maintaining and upholding the sanctity of the neutral net. In the absence of such models, the onus of enabling an optimal user experience for all data-based services and educating the consumers on the virtues of digital technologies adoption, along with revenue generation, spectrum acquisition, network rollout and maintenance, competing with local and national players rests solely on the telecom carriers. And, this will surely lead to less than desired rate of growth of internet and broadband services in India.
With transparency and some checks and balances, there is a way to ensure Net Neutrality and innovative business and monetization models to co-exist. And, each stakeholder can play a key role in ensuring that:
Government – Provisioning stable and growth-driven policies and ensuring transparency
- Create a stable policy environment in line with long-term goals, targets and available resources
- Push for carriers to share the throughput data for both zero-rated and non zero-rated apps and services and publish it as a part of TRAI’s quarterly telecom industry Key Performance Indicators (KPI) reports
- Conduct regular audits on carriers networks to ensure Net Neutrality principles are adhered to
- Accept and implement TRAI’s Recommendations for ‘Delivering Broadband Quickly’ in India (released on 17th April, 2015)
Telecom Carriers – Create a level-playing field and adhere to Net Neutrality principles
- Create a uniform tariff structure and a level playing field for all partners of zero-rating programs on a fixed-cost basis instead of revenue share or customer acquisition cost share model, and publish it. This provides the freedom to the internet-based services company to factor in this cost in their business plans and they can choose to grow their active user base and engage them either through pull-based (through conventional marketing methods) or push-based models (through partnering with a carrier on zero-rating program)
- Adhere to Net Neutrality principles and stay away from prioritizing or throttling traffic, and make available requisite network and throughput data in the public domain for transparency
Consumers and Young Internet Startups – Push for transparency, better QoS and modify business plans
- Push government to establish stringent guidelines for Net Neutrality
- Push carriers for transparency, uniformity and improving their quality of services
- Young internet startups should consider factoring in the zero-rating program partnership costs as a part of customer acquisition/marketing costs, and weigh options basis their goals, targets, rate of growth and state of maturity
Conclusion
Various players across the value chain of technology-based industries in India are facing the same challenges and issues simultaneously as their peers in the developed markets. But, the Indian players are at a disadvantage in comparison with their global counterparts in terms of lack of adequate infrastructure, low revenues, immature market conditions, lack of adequate consumer education, high competition and unstable regulatory framework. And, this makes the evolution or sustained growth of any industry or ecosystem extremely difficult and time consuming.
There are no easy or short-term answers. And, it is extremely difficult for various stakeholders and value chain players at different stages of growth to align and strategically work towards realizing a long-term vision. There is no precedence of this in India. Having said that, it is not impossible… and, there is also no other way!