Economic and Regulatory issues in the Era of Free Services

This post is based on my presentation at the International Telecommunications Union. The presentation can be viewed here.

Modern telecommunications, the internet and various Over the Top (OTT) applications and services greatly facilitate our lives today. By lowering costs, bringing us greater choice and innovative methods of service delivery, OTTs in particular, have become an indispensable part of modern life. In the near future, newer technologies such as Machine to Machine (M2M) /Internet of Things (IoT) communications and Artificial Intelligence (AI) will confer further benefits such that we will be living in progressively smart societies.

As can be expected, markets by themselves will not always deliver perfect outcomes and the transition to, and the management of smart societies will entail new regulatory challengers. Thus, even in the digital economy, with its multiplicity of players and where many services are delivered free at times rendering price irrelevant, both as an indicator of market power and as a regulatory tool, the role of regulation will continue to be vital.

From a regulatory viewpoint, it will be important to protect innovation and competition and to empower customers through good regulation and greater transparency so as to build trust in new applications and services. These are prerequisites for the continued growth of new technologies, without which the trend towards smart societies will not be sustainable in the long run.

In an increasingly converged environment where ICTs facilitate all types of services (not just communications), it would be impossible to regulate without collaboration between the ICTs regulator on the one hand, and the competition regulator, data protection authorities and a host of sector regulators on the other.

Smart societies will call for a review of the regulatory approach in the areas of competition, security, quality of service (QoS) and interoperability and also demand much greater attention to inclusiveness, privacy and data protection, transparency and trust.

In the era of OTTs, IoT and AI, some of the important areas engaging the attention of ICTs regulators across the world are the promotion of investment in new technologies and networks, appropriate methods of licensing and spectrum allocation, new competition issues, universal service, net neutrality, privacy and data protection and QoS. Many of these regulatory problems are interconnected.

The issue of Net Neutrality, for example, requires the regulator to express its stance on non-discriminatory treatment of internet traffic. While there may be no unique answer relevant to every regulatory context, the decision on Net Neutrality regulation will always involve examining questions of investment, competition, interoperability, transparency, trust, inclusivity etc. On due consideration of various aspects, India has taken a pro net neutrality position and forbidden zero rating of services.

When it comes to OTTs, the regulator while acknowledging the popularity and benefits of these applications and services must be wary of both the pressure from incumbent telecom service providers (TSPs) to regulate OTTs, and of ignoring the unique regulatory problems surrounding OTTs. The former arises in part from the asymmetric regulatory burden wherein TSPs are subject to requirements of licensing, taxation, law enforcement and security, emergency services, universal service, QoS etc., and OTTs players are not. The latter is less evident but significant. There are noteworthy competition and consumer protection issues surrounding OTTs, especially given the tendency towards the creation of global giants such as Uber, Google, Amazon and Facebook. The theoretical explanation for the evolution of large, global platform operators is the reduction in transaction costs, uninterrupted economies of scale in comparison to brick-and-mortar firms, and strong network effects.

Given the above, even though there are ostensibly a large number of players in digital markets and services appear to be free or relatively low priced, traditional competition problems of misuse of market power, barriers to entry, competition reducing mergers and acquisitions and unfair trade practices continue to exist, albeit in new forms in contemporary markets. This is evidenced by recent regulatory actions against global platforms in the areas of competition and data protection.

While there may well be a call to correct the imbalance of regulatory burdens on existing operators vis-à-vis OTTs, any attempt to license/regulate OTTs must first and foremost address issues of fair competition and consumer protection rather than focus per se on the protection of incumbents.  There may be in fact, a case to move towards light(er) touch licensing regimes for both types of operators wherein the focus is on innovation, investment, security and consumer protection. Any decision on licensing will have to take into account taxation issues too. The positive multiplier effects of telecom penetration and digital services tend to increase Gross Domestic Product (GDP), and hence, the tax base may justify less focus on direct levies and greater reliance on the general budget for funding universal service interventions.

When it comes to licensing M2M / IoT operators it must be noted that many of these are not necessarily communication service providers. Apart from the danger of overregulating too early in the life cycle of this new technology area and thereby hampering innovation, there is also the question of regulatory burden and cost entailed when the number of players is so large. Added to this is the complexity of regulating entities that serve so many different sectors, such as energy, transportation, health and agriculture etc. This challenge calls for cross-sectoral regulatory collaboration and newer, flexible regulatory approaches. India has recently decided on a policy approach that combines light-touch licensing and cross-sectoral regulatory oversight.

An unquestionable facet of our lives in smart societies would be the threat to the privacy and security of personal data emanating from the large-scale disclosure and collection of data daily thanks to our digitally connected personal devices, homes and cities etc. As technology becomes increasingly pervasive and intrusive, timely legal and regulatory interventions to protect privacy and personal data become critical. This is not just a political, strategic or ethical issue; it is also important from the business perspective of consumer demand. In the absence of adequate protection of their rights to privacy and control over their personal data, in the absence of consumer trust, consumers will cease to subscribe to even the most innovative or useful applications. This would not only adversely affect the profitability of the digital communications industry, it would also impede further innovation and the scaling up and sustained growth of new technologies and applications. Such a scenario would deprive the world of its benefits. This requires industry and governments to come together to ensure adequate regulatory safeguards, privacy by design and to promote consumer awareness.

In fact, it is widely acknowledged that data is the hidden cost of free services and the new source of market power of Apps and digital platforms.  Going forward, the regulation of data shall occupy the attention of not just data protection authorities but also ICT regulators, competition regulators, law enforcement authorities etc. From a competition viewpoint, data portability and anonymized data sets could remedy the monopolization of data.

Data as a source of market power is also closely linked to contemporary issues of competition regulation as in multi-sided markets, it is consumer time/attention/data that attracts advertisers, who are the major source of revenue for digital service providers. This, in turn, makes cross-platform operators who can accurately profile customers based on their consumption of email, messaging, banking services, transportation, social media and shopping services etc., very powerful. With market power comes the possibility of its abuse. While ICTs and competition regulators have recently started examining platform-to-business practices, there is in fact a need to review competition regulation of digital services on many fronts. The definition of markets and sources of market power are all changing and much more information about newer markets will need to be collected for a better understanding. This calls for partnership and cooperation among all stakeholders.

It is important for regulators to collaborate, learn, adapt and be flexible. It is also important for the industry to bridge information asymmetries, build consumer trust and work together with regulators to ensure the continued growth of digital services in a manner that benefits all stakeholders.