The Telecom Regulatory Authority of India (TRAI) on Monday released a consultation paper on ‘Regulatory Framework for Over-The-Top (OTT) Communication Services’, thus bringing full-circle a process that began in March 2015 with the release of a similarly titled paper. The 2015 paper foreshadowed the major regulatory battles that have marked this space in the intervening three and a half years, including on issues such as net neutrality and zero rating which have received some measure of closure during this period.

One crucial issue though was parked for later exploration: that of possible regulatory arbitrage between voice, text, and other communications services offered by telcos on the one hand, versus similar OTT services offered by internet companies on the other. It is this precisely demarcated issue which the current paper seeks to explore.

Same, same, but different

Let’s try to remember what late 2014/ early 2015 was like for the Indian telecom and internet landscape. The dust had finally settled after the shock cancellation of 122 spectrum licences by the Supreme Court in 2012, and telcos could finally focus on the macro trend in their industry – namely, data eating the world. Airtel had announced and then quickly withdrawn VoIP-only recharge packs in December 2014. Multiple telcos had data packs offering access to only a limited set of OTT services. Facebook had just launched FreeBasics in February 2015. Airtel was planning the rollout of its Airtel Zero platform in April 2015. Reliance Jio was a name known only to telecom industry watchers.

This was the landscape in which TRAI released the 2015 OTT regulation paper. It was an expansive document and attempted to explore a number of complex topics including net neutrality, regulation of OTT services, and differential pricing. What ensued was mayhem, with acrimonious open-house meetings, highly adversarial responses reflecting a deep gulf between telcos and internet companies, and an inability to focus on specific regulatory outcomes because of the wide sweep of the consultation. As public opposition to zero-rating mounted, TRAI shifted focus to immediate and achievable regulatory goals. It issued the differential pricing regulations in February 2016 which outlawed zero-rating and similar forms of price-discrimination, and went on to issue detailed recommendations on net neutrality in November 2017.

The 2015 paper, however, saw no follow-up and no recommendations were issued.

Landscape shift

Between 2015 and 2018, India has seen massive changes in the telecom business and consumer behaviour. Reliance Jio’s launch in 2016 has caused data tariffs to plummet across all telcos, and accelerated the deployment of 4G networks. This, combined with the availability of powerful 4G smartphones in the sub-Rs 10,000 range capable of streaming video and supporting powerful communication apps, has radically increased data-consumption amongst users. SMS has been relegated to the status of a glorified spam-folder, having long been supplanted by WhatsApp and similar OTT services.

Consolidation in the telecom industry has left India with just three major private-sector players. Bruising tariff wars have meant that most telco plans now offer unlimited free voice calls, with only data being charged. And technical and regulatory changes have made it easier to use VoIP/voice calling through free OTT apps.

This period has also seen the sharpening of TRAI’s regulatory competence, with a marked increase in the quality and sophistication of its consultation papers and resulting recommendations. On issues such as net neutrality, it has displayed the ability to deftly weave economic, technical, market, and competition analyses into compelling narratives.

What matters in the current paper

Fast forward to 2018, and we see all of these changes and trends manifested in this new OTT consultation paper. To begin with, its scope has been narrowly defined to include only OTT communications services, or more specifically ‘OTT services as can be regarded the same or similar to the services provided by ’. This narrow focus is directly reflected in the fact that the 2018 paper, at 42 pages long, is thankfully just one-third the length of the 2015 paper. It zeroes in on a key question discussed in the 2015 consultation – is there regulatory arbitrage between traditional telco services (such as voice calls and text messaging) and similar OTT services, which works out to the disadvantage of telcos? But this time around, it keeps the focus tight by asking stakeholders to comment on a very specific criterion – whether ‘substitutability’ should be treated as the primary criterion when undertaking this analysis. Expect much debate around this key framing point, although the thrust of the paper makes it appear that TRAI believes the answer to this question is a clear “yes”.

There is no denying that telcos in India have a high regulatory and financial burden to bear in the form of obtaining licences and spectrum, paying taxes and revenue share, maintaining strict quality of service (QoS) norms, fulfilling rollout obligations, obtaining right-of-way for cables, and extensive and expensive lawful interception and monitoring (LIM) compliance. All this in an industry that is capital-intensive to begin with. Contrasted with OTT services which are more lightly regulated (and not licensed), and are easily scalable because they are pure internet-based applications, it is easy to see at a basic level why telcos would feel aggrieved about losing cash cows such as SMS and value-added-services (VAS) to OTT applications from which telcos realise no direct revenue.

But this elides the fact that telcos charging for specific services such as voice calls or SMS are an artifact of older technologies where dedicated networks, protocols, and equipment were required for each new type of service. In IP-based telecom networks, which are quickly becoming the norm, the same limitations do not apply. Therefore, framing a question around declining profitability of telcos ostensibly impacting their ability to invest in networks (as this paper does), runs the risk of overlaying old commercial structures on new technological frameworks.

Possibly the most provocative question that the paper asks though, is in the area of interoperability. Telecom networks are mandated to be interoperable the world over. We take it for granted that an Airtel subscriber can call or text a Vodafone subscriber, and that an AT&T customer in the US can seamlessly call a China Unicom customer in mainland China. This is the result of over a century of harmonised technical standards and hard regulation. On the other hand, we do not expect that a WhatsApp call can be placed to a Skype ID. Given that internet services are prone to network effects, which in turn could lead to monopolies and a decline in competition, does it make sense to extend regulations on interoperability to the OTT space? Given India’s regulatory approach in fintech and payments, where open platforms such as UPI and regulatory interventions such as mandating wallet interoperability have arguably resulted in innovation and reduced concentration, there will certainly be a section of policymakers who will look for similarities in the communications space.

Are telcos as ‘dumb pipes’ inevitable?

Muttering the phrase “dumb pipes” in a roomful of telco executives is a surefire recipe to both invite their righteous indignation and fuel their nightmares for a few weeks. That is because it is an existential threat to their business. If telcos are relegated to only providing data connectivity, their revenue streams will rapidly narrow to just one commodity – and a highly fungible one at that. This is a trend that has already taken hold, since many telco plans now offer unlimited (i.e. free) voice and SMS, and only charge for data usage.

Rhetoric during the 2015 OTT consultation certainly indicated that this was a core worry and not much has changed since. While telcos are moving to offer proprietary or bundled content services and OTT applications (such as Airtel Movies, JioTV, or loosely affiliated service such as Hike), it is highly debatable whether they are more compelling than OTT alternatives from companies whose core competence is in building internet services. With regulation likely to make exclusionary vertical integration tactics (such as outlawing competing OTT apps on a telco’s network in favour of its in-house option) difficult, the long-term trend seems hard to shake.

Given all of this, pushing to increase the regulatory burden on OTT services will be an obvious tactic to ‘level’ the playing field by increasing the regulatory bar for all. It will be interesting to see if TRAI can instead use this as an opportunity to lower the regulatory burden for telcos, promote innovation and competition, and benefit consumers.

(Disclosure: The author was an advisor to companies operating OTT services during the 2015 TRAI consultation.)

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