Net Neutrality NET NEUTRALITY Telcos’ Moment of Truth Telecom
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TECHWEISS Net Neutrality NET NEUTRALITY Telcos’ moment of truth Telecom The net neutrality debate in getting louder and could alter the course of the internet’s evolution. This is now already centre stage in the US, where dilution in net neutrality norms has opened up a pandora’s box and telcos are scrambling to build content portfolios. But what about India? We see parallels. TRAI’s recommended exemption of content delivery networks (CDNs) could significantly benefit telcos with large internet ecosystems given its potential to alter customer preferences. Reliance Jio (RJIO) has taken the lead and already built strong content platforms, but Bharati Airtel (Bharti) and other players are aggressively following suit. While this could still pan out in many different ways, we dig deep into net neutrality’s evolution and possible impact on telcos, and how it could play out in India. Regulations permitting, global telcos focused on content creation Globally, net neutrality rules are divergent and evolving, with lenient regulations in a few countries - some European countries permit differential pricing. In the US, the regulator has jettisoned stringent net neutrality regulations to replace them with flexible norms, albeit mandating disclosures to customers. Accordingly, companies are investing in beefing up their content ecosystem exemplified AT&T acquiring Time Warner and AppNexus (digital advertising platform) and Verizon taking over Yahoo and AOL. In India, CDN exemption to aid telcos with strong content strategy TRAI’s net neutrality recommendations bar discriminatory treatment of data traffic and differential pricing. However, these recommendations exclude CDN, which will enable the telecom service providers (TSPs) deliver content on their platform at favourable terms to their customers. Potentially, TSPs can offer free content in turn altering customers’ preference and luring them to their content. App ecosystem maturing - Advantage telcos Although we are witnessing surge in data consumption, monetisation of the mobile app ecosystem is hampered by poor infrastructure, challenges in payment channels and low spending habits. But, with improving digital payment channels and availability of services on the move, we expect the ecosystem to mature over medium term. We believe RJIO and Bharti are well placed to capitalise on a maturing content ecosystem: 1) as it will create stickier customer base; and 2) open up additional revenue streams, such as, advertising, among others. Pranav Kshatriya +91 22 4040 7495 Fig. 1: App market maturity model [email protected] Sandip Agarwal +91 22 6623 3474 [email protected] Nikunj Mandowara +91 22 4040 7431 [email protected] Source: AppAnnie, NASSCOM July 10, 2018 Edelweiss Research is also available on www.edelresearch.com, 1 EdelweissEdelweiss Securities Securities Limited Limited Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Telecom Net neutrality refresher Network neutrality or net neutrality mandates that all data traffic on the internet should be Net neutrality has implications for transmitted and charged the same regardless of content or origin. Net neutrality does not data pricing as well treatment only target differential pricing of data traffic carried on the network, but also its treatment. such as prioritisation, throttling Telecom networks are able to identify origin of the data traffic and can: 1) prioritise certain and blocking data over other, which means that customer experience for prioritised data will be better than for others; 2) throttle data traffic, which deteriorates customer experience; and 3) altogether block certain content. Net neutrality has the potential to make profound impact on the choice of services that consumers are likely to use due to availability, effective pricing and experience of service. Hence, it is one of the hotly debated topics currently. Why it matters? Internet ecosystem has vastly expanded as newer sites/apps reach customers across the world as there’s no interference of the service provider. Increasingly, concerns have been raised globally relating to discriminatory treatment of internet traffic by access providers. These concerns relating to non-discriminatory access have become the centre of a global policy debate, often referred to as the net neutrality debate. In a hypothetical situation, in the absence of net neutrality regulations, a telco could have slowed down traffic of a TV app, thus deteriorating customer experience, while it would promote its own app. This would lead to customers preferring the telco’s TV app versus any other app. There have been cases across the globe where various net neutrality principles have been flouted. We quote few examples here. Differential pricing In December 2014, Bharti had VoIPDifferential pricing for VoIP traffic: In December 2014, Bharti announced it would be introduced differential pricing for excluding VoIP incoming and outgoing calls in the bundled data usage pack and that they incoming and outgoing VoIP data would attract standard internet usage charges, which effectively made them expensive. Subsequently, the company also launched separate VoIP packs which provided 75MB data for INR75. However, Bharti had to roll back these plans post the public outrage. Fig. 2: Bharti’s terms and conditions for differential VOIP charges Source: bgr.in 2 Edelweiss Securities Limited Net Neutrality Free Basics: Free Basics is the free internet access platform promoted by Facebook’s internet.org. Free Basics was launched in India in 2015 in partnership with Reliance Facebook’s Free Basics offers free Communications (RCOM), but was subsequently banned by TRAI. Free Basics is available in internet access to limited sites many countries - Philippines, Nigeria, Bangladesh and other developing countries. only In this platform, internet.org ties up with a mobile operator to provide free internet service to its customers limited to the internet portals or apps with which internet.org has a tie up. The websites are available for free (no data charges), and includes content on news, employment, health, education, local information, etc. Typically, there are no monetary payments made by internet.org to the mobile operator or by internet portals/apps to internet.org. Mobile operators participate in this platform as it seeks to educate customers on the benefits and value of the internet. Once people understand the internet and are engaged, internet.org helps the mobile operators sustain these new users—over 50% of people who use internet.org pay for data and access the broader internet within 30 days. Net neutrality proponents have been critical of Free Basics as this service, although helpful in increasing internet penetration, limits the access to internet to only limited websites which are curated by internet.org. This benefits the apps which are present on internet.org, while competing apps are at a disadvantage. Traffic throttling In 2007, Comcast slowed down connections that used peer-to-peer file-sharing software, In 2007, Comcast slowed down BitTorrent, which was often used for digital piracy, but also had legitimate uses. Internet BitTorrent traffic, which was service providers were burdened with dense traffic generated by a small number of largely used for digital piracy subscribers who were avid users of file-sharing programs. Since the rules allowed network management and did not explicitly prohibit throttling of certain types of traffic, Comcast chose to do so. The company stated that network management choices were reasonable, consistent with industry practices and did not block access to websites or online applications, including peer-to-peer services. However, the Federal Communications Commission (FCC) found the company’s practices intrusive and concluded that Comcast monitored the content of its customers' internet connections and selectively throttled peer-to-peer connections. The selective blocking of file sharing traffic interfered with users' rights to access the internet and to use applications of their choice. Thereon, FCC ordered Comcast to stop throttling file sharing traffic. Traffic blocking In 2005, a US-based ISP blocked In 2005, Madison River Communications (Madison), a US-based regional broadband VoIP traffic of a competitor company, had blocked its customers from accessing Vonage (then a leading internet phone company). However, for customers who had disconnected their traditional phone lines and were relying solely on Vonage, such blocking meant they were unable to make calls. Subsequently, Vonage complained about the blockage to FCC. The FCC then found blocking of services anti-consumer and fined Madison USD15,000 and asked it to stop blocking consumers from using VoIP calling services. 3 Edelweiss Securities Limited Telecom Evolution of net neutrality regulations globally Net neutrality regulations have been oscillating in the US with initially no norms which prompted some net neutrality violations, such as, Madison blocking VoIP calls and Comcast throttling peer-to-peer traffic. FCC had then initiated action on case-by-case basis and subsequently tightened its regulations with the FCC Open Internet Order in 2010. In 2014, broadband was classified as Title II services, or Common Carrier, which are more rigorously regulated and marked to standards similar to telephone, gas and electric providers and expressly banned activities like throttling, blocking and paid prioritisation. However, since 2017, FCC began rolling back some