It is evident that the success of Internet firms and telcos goes hand in hand. However, the ownership of approximately 18% of Jio by Facebook and Google provides a hint that new dynamics are on the horizon — with the evolution of 5G technologies, we are seeing the growth of an integrated sphere of cooperation as well as competition between telcos and Internet companies on account of substitute services, and competition in complementary value networks.
Asymmetric regulatory stance
The growth in over-the-top (OTT) messaging services provided by Internet firms has been accompanied by significant reductions in the revenues of text messaging services provided by telcos. For instance, the quarterly SMS volume in the U.K. has declined by half to 10 billion by 2021 in the past five years. Similarly, the growth of Voice over Internet Protocol (VoIP) services offered by OTT service providers is also a threat to telcos.
Complementary value networks or ‘Walled Gardens’ comprise a bouquet of services provided by network operators, handset manufacturers, platform vendors, and content providers. An example is the one created by Apple with exclusive wholesale agreements with AT&T Wireless in the early 2000s for its iPhones. By subsidising the iPhone with long tenure contractual agreements, and creating a proprietary app store, Apple created a walled garden. Recently in India, RJio has forged arrangements with Google for JioPhone Next to create an ecosystem of handsets, connectivity and applications. These walled gardens often have a “platform captain” (i.e. Apple, RJio) which provides coordinating mechanisms, rules, key products, intellectual property and financial capital. Platform captains generally derive business benefit from their pole position. Hence, members of a walled garden may aspire for the position of captain. This brings a new element of competition into the telcos-Internet companies’ relationship.
Despite the fact that services can be substituted and despite increasing competitive pressures within walled gardens, there is an asymmetric regulatory stance with respect to telcos and Internet companies. Some of this stems from fundamental differences in the nature of business such as the jurisdictional nature of operation and technology used. However, the asymmetry partly reflects a certain world view with regard to the regulation of competition across telcos and Internet firms.
Net neutrality regulation
An example is net neutrality regulation. When net neutrality was conceptualised in the early 2000s, it was meant to stem the significant market power of telcos, which provide an essential service. A dominant telco can hinder competition in a downstream market by a vertical merger with content and application providers. Net neutrality regulation that prohibits discriminatory treatment of Internet companies — either with respect to pricing or traffic management — in a sense eliminates any incentive for vertical integration. Net neutrality regulation can also be explained as a way of preventing telcos from extracting all their revenues from Internet companies. This possibility arises because such firms have no choice but to make themselves available via all telecom service providers. On the other hand, subscribers restrict themselves to one service provider.
Also read | Telcos ask government to defer net neutrality rules
However, over the past decade, the Internet has evolved to a point where many Internet companies also provide an essential service and enjoy significant market power. For instance, web search, a market dominated by Google, is often the starting point for navigating the World Wide Web. Without search neutrality, search results may be manipulated to favour certain firms. This concern becomes heightened in the presence of vertical integration between the search engine company and downstream companies. Hence, net neutrality principles need to be applied to Internet companies as well.
Beyond net neutrality, just as it is mandatory for telcos to provide “equal access” for interconnecting with other telcos’ networks, social media networks, instant messengers, and indeed any Internet service that exhibits critical mass dynamics needs to be governed by interconnection regulation.
In sum, there is an element of competition between telcos and Internet companies in the context of overlapping services and walled gardens. Hence, there is a need for a measure of regulatory parity between the two. In the U.S. and in India, while the sector regulator makes rules for telcos, the competition regulator oversees the behaviour of the Internet firms. It is time for a unified regulatory framework. A semblance of this convergence is visible in the European Union. India too needs an integrated perspective.
Rohit Prasad and V. Sridhar are Professors at MDI Gurgaon and IIIT Bangalore, respectively
