OTT vs. TSP: Should OTTs pay for network usage?

There is an ongoing debate on whether over-the-top service (OTT) providers should financially compensate telecommunication service providers (TSPs). The core economic question is whether OTTs or content providers contribute to the costs incurred by a telecom network operator when delivering content to consumers. It is argued that imposing a fee on OTT would violate the net neutrality principle. The most basic definition of net neutrality includes the prohibition of payments from content providers to network service providers/TSPs. Arguably, once a payment component is introduced, the network provider can pick winners, eroding the very democratic nature on which the internet is premised. The cost-sharing proponents will surely hit this particular aspect of the net neutrality holy cow. However, I argue that when this question is seen from the lens of multisided markets, there is little support for the simplistic claims made by net neutrality evangelists as they overlook the tradeoffs involved and the welfare implications of the same.

The most important reason to revisit a blanket net neutrality principle is to recognise the evolution of the telecom industry, the digital economy and the positioning of the two with respect to each other. A very expansive version (that includes the payment aspect) of net neutrality principles was devised at a time when market failure being addressed through rules was the market power of the bottleneck facility, the network service provider, due to its monopoly position for an entrenched subscriber. In the absence of strict net neutrality, the competition in the application layer (the layer in which OTTs reside) would have been impacted to the detriment of users. Thus, the underlying premise for strict net neutrality was the unequal bargaining position between the application layer and the infrastructure layer.

However, the last few years have seen unprecedented innovation in digital services creating an explosion in the demand for data. Cloud services, artificial intelligence and the Internet of Things are going to further fuel this demand. If we look at some numbers for India, between 2015 and 2023, mobile data subscribers have increased from 282.81 million to 846.21 million. In the same period, the average wireless data usage per user per month has increased from 0.09 GB to 17.36 GB. However, network expansion has not kept pace. If the number of mobile towers is used as a proxy, the network has expanded at a slower pace. This development calls for a new appraisal of how to govern the commercial relationship between the two layers.

TSPs facilitate OTTs’ operations by providing crucial network infrastructure. This relationship is not horizontal, but vertical, creating unique market dynamics. There may be some element of complementarity too. TSPs facilitate OTTs’ operations by providing the crucial network infrastructure and the OTTs create value for the network providers. So let us view them as complementary. The question then is the following: In a situation where the TSPs and the OTTs are in a complementary economic relationship, how should they share the costs and benefits such that users benefit from improved products and investment? When the question is posed in this framework, the answer has to weigh all the tradeoffs and should have consumer welfare as the end goal with both the price and quality dimensions of the complementors. The net neutrality principle is too simplistic to answer this question as it may benefit both the complementors to partake in the costs of the network to avoid the pitfalls of underinvestment as the investment generates benefits for the firm producing the complementary product. By sharing some of these costs, OTTs could help ensure a higher quality of service for their users. This, in turn, has the potential to enhance the overall user experience.

It is important to understand that the TSP mediating between two sides of the market — the content provider and the final consumer. Upgrades to the network have to be paid for either by consumers or by the content provider or both. Nobody knows what is the right pricing structure between these two sides. There should be no presumption that the right structure is to recover all the cost of consumer broadband networks from consumers alone and allow the content providers zero-priced network access. If one accepts the need for large investments to expand and upgrade capacity and that the cost should be shared with the content layer, we also need rules on which content providers should contribute and how much.

Bruno Jullien and Matthieu Bouvard in their research on fair cost sharing show that it can be efficient when it is restricted to large and efficient content providers, which depends on their ability to monetise demand through prices, advertising or other means. On the other hand, imposing a positive contribution to content providers with a low ability to monetise users is inefficient. But contractual issues may arise when it comes to deciding who pays and how much (as we are seeing in the competition litigations against app stores by app developers). Moreover, any contract between one network operator and an OTT may create contractual externalities impacting other network providers and content providers. Thus, a regulatory mechanism coordinating the contributions to cost may be required. The other aspects of net neutrality can still be maintained in this regulatory architecture. The TRAI’s interconnection regulation may be extended to OTTs to ensure net neutrality in terms of quality of service by setting rules and standards for how these services connect and exchange traffic. Indian Express