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Net neutrality and innovation

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Shreyas Bharadwaj
Shreyas Bharadwaj
Shreyas Bharadwaj is a young conservative.

One of the many things in the public discourse over Net Neutrality that has puzzled me is the use of the word- Innovation. A motley group of start-up founders will come to a TV show and say free-basics and network management will harm innovation. Some give bytes to news websites saying – ‘An end to net neutrality will reduce the innovations and increase the barrier to entry for young innovative startups to do new things’ and ‘A compromise in that principle would spell the end of innovation from young people operating independently from their college hostel rooms and addas.’[1]. A few things amused me too -A man I respect very highly tweeted – ‘Oh my fellow Indians, either choose this & do a jihad for independent Internet later or pick #NetNeutrality today.’ ; a few others spoke as if the skies would fall if the Net Neutrality regulation is not brought in by the TRAI(Telecom Regulatory Authority of India).

The reason I was puzzled by the use of words like innovation by these Internet revolutionaries is that I understood the concept of innovation quite differently. To me, innovation is not only about a bunch of young people starting up with a cool new internet based product but also about process innovation by established companies. It was also about product innovation by established companies either to cater to an already present consumer need or to create such a need within the consumer. To verify, I checked with OED[2] for a better definition – the introduction of new things, ideas or ways of doing something or a new idea, way of doing something, etc. that has been introduced or discovered. What turned out wasn’t wrong.Yay!

Uber is an innovative form of internet enabled transport, Paytm is an innovative way to make internet-based payments, Jio Chat (Reliance Jio’s skype like app) if zero-rated by Reliance Jio would be an innovative way to video-conference, Facebook’s Free Basics (is)was an innovative and legitimate way to attract the next 100 million users to facebook and so on. One needs to face up to the fact that all of these players are acting in their legitimate self-interest and any attempt to paint content providers like Paytm, Snapdeal or even Foodpanda and the head revolutionary – Medianama as David fighting the Goliath of big telecom is quite disingenuous.

These startups led by Internet Revolutionaries while positioning themselves as Davids are demanding as Ravi puts it[3] the ‘gigantic rock called Government to crush goliath.

The revolutionaries regularly bring up the phrase ‘Permission-less Innovation’ and say that without Net Neutrality regulation being enforced, content providers will have to take the permission of telecom/internet service providers (TSPs/ISPs) to innovate. I concede that this is a valid concern. What the don’t tell you is that TSPs and ISPs would now need the permission of the regulators to innovate. In effect, the content providers are demanding the government to force ISPs and TSPs to either stop all forms of innovation and become dumb networks or innovate only with the government’s permission (Yay! for permissionless innovation) so that they can maintain a cozy status quo. In their shameless use of public respect for self-interest, they seem to have forgotten about the most important part of the market- the user.

Another important point our dear revolutionary friends forget to mention is that whatever they propose is ex-ante regulation(regulation based on forecasted harm) and intrusive regulation at that. They don’t mention that in highly competitive two-sided markets (Markets wherein there two or more groups of consumers are brought together by an intermediary ), this kind of ex-ante intrusive regulation is risky.It may benefit a few content-providers who hog large amounts of bandwidth but may harm the rest. One thing is for sure though, such regulation ends up subsidizing the Content Provider part of the data supply chain at the cost of the consumers and the TSPs/ISPs .

Sustainable and innovative two-sided markets are not as complex as they are made out to be. It has certain basic qualities- 2 or more distinct groups of consumers, a platform which interconnects them, externalities created through increased participation of the 2+ groups(mostly positive) and most important of all- non neutrality wherein an asymmetry between the two or more sides due to which the platform can capture value[4]. The ‘non-neutrality part is extremely important as the value captured due to this helps the platform invest in upgrading the quality of the market, the size of the market and smoothness of operation. Translation- If you force platforms(TSPs/ISPs) to be neutral, their incentive to invest for up gradation reduces.

On June 12, 2015 the FCC i.e.The Federal Communications Commission‘s rules on Net Neutrality took effect. The Indian revolutionaries rejoiced saying that the USA is leading the way in ensuring the maintenance of an ‘open internet’. Memes were churned out by their comrades in Mumbai, sarcastic tweets tweeted & retweeted at superfast speeds but did they tell you what happened next. For the first time since the post-recession fall in capex and the third time in internet history, there was a fall in capex of ISPs. By how much?- the net decrease in the first half of 2015 came to a grand total of  USD 3.3 Billion with the average decline in wireline ISPs being 12% and wireless ISPs at 8%. The damocles sword hanging over the heads of US Telecom was enough to cause such record-beating falls in capital expenditure. (I’m eagerly waiting for the entire year’s data to be released).[5]

I expect the rebuttal of the point above in lines similar to these- ‘It is a one time fall, too early to comment conclusively, the context isn’t completely apparent, it would be moronic to extrapolate the above data to say Net Neutrality Regulation would reduce incentive for investment, etc’. Here is my response in advance – When you have been using research using forecasts of game theory models to demand ex- ante regulations, why is it a worry if I use actual data (not forecasts) to point out the harm caused by such regulation elsewhere. I have more evidence (not forecasts) to back me up on this – Increased access regulation in Europe (20 nations over 1997-2006) resulted in a loss of 16.4 Billion Euros in investment[6]. What your revolutionary campaign is asking for is regulation many times more stringent than access regulation.

Another important point that has been ignored in this debate is that the part of the proposed Net Neutrality regulation which would prevent Zero-Rating and Special Packs (WhatsApp packs etc) would amount to trust-busting vertical agreements.It is interesting to note that economic literature is divided on this issue. The One monopoly rent hypothesis would mean that vertical anti-trust action isn’t of any use in increasing consumer welfare. Game theoretic models may churn out analysis that it does harm consumer welfare. Empirical evidence for harm to consumer welfare caused by vertical agreements is minimal. One has to wonder what is the pressing need for such ex-ante regulation which if implemented amounts to vertical antitrust action when there is a much more prudent option- WAIT !

Another silly argument put forward by our revolutionary friends is – Tim Berners Lee (They then stress that he is one of the founding fathers of the internet) says that the absence of Net Neutrality regulation will ‘threaten innovation’. Dave Farber- a person often called the grandfather of the internet has said that the Net Neutrality regulation would be more harmful than any ‘fragmentation’ of the internet. He has also called ‘Net Neutrality’ a slogan and stressed that such regulation will ensure that almost nothing interesting will happen in the internet.[7] If that was the reason you supported the Net Neutrality regulation, I sincerely hope you have found reason enough to stop supporting it.

Can a developing country like India afford to make such mistakes due to a bunch of activists in search of the un holy grail of neutrality in a 2 sided market? Can our unconnected be ignored due to a bunch of activists acting like trade unionists? After my initial angry blog on this issue[8], I tried to be more respectful in my conversations with these revolutionaries – even after being called a moron shilling for facebook and big telecom, but the increasing shamelessness of this campaign for Net Neutrality made me realize that they were nothing more than a bunch of Trade Unionists in the garb of activists who have no use for reason and evidence while they make their arguments. On this issue, they share their views with original trade unionists – CPIM .


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Shreyas Bharadwaj
Shreyas Bharadwaj
Shreyas Bharadwaj is a young conservative.
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