Response to TRAI consultation paper on OTT 200415

Response to TRAI consultation paper on regulatory framework for OTT services

20 April 2015

Premier advisors in TMT

CAPITEL PARTNERS

2 RESPONSE TO TRAI CONSULTATION PAPER ON REGULATORY FRAMEWORK FOR OTT SERVICES

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RESPONSE TO TRAI CONSULTATION PAPER ON REGULATORY FRAMEWORK FOR OTT SERVICES 3

1 Introduction

Capitel Partners is pleased to share its views on the TRAI consultation paper on “Regulatory Framework for Over-the-top (OTT) services”.

The questions raised by the TRAI are complex with significant implications for businesses, policy formulation and consumer welfare. The global National Regulatory Authorities (NRAs), legislative authorities, ISPs, and OTT service providers have been discussing these issues for years, with no clear resolution that is satisfactory to all stakeholders.

2 Response to questions in consultation paper

Question 1: Is it too early to establish a regulatory framework for OTT services, since Internet penetration is still evolving, access speeds are generally low and there is limited coverage of high-speed broadband in the country? Or, should some beginning be made now with a regulatory framework that could be adapted to changes in the future? Please comment with justifications.

2.1 It is amply clear that OTT communication services such as messaging, calling and video are a clear substitute to operator services. Operator SMS revenues have been eroded after the introduction of OTT messaging services. Similar erosion of revenues from voice will cripple the operator financials.

2.2 There has been a view that OTT voice will not be a perfect substitute for operator voice due to the lack of QoS and a closed ecosystem. However, a) OTT voice call usage is very convenient and intuitive given the integration of calling feature within the application itself, b) consumers will be ok with a reduced QoS on voice given its much cheaper than a voice call (2p per minute rather than 60p per minute), and c) OTT providers are advertising their services above-the-line to drive adoption with “free calling” as the primary proposition.

2.3 The ecosystem is primed for OTT operators to start replacing operator voice revenues, maybe beginning from a low base of 100mn+ data users and then increasing the base over time.

2.4 In such a situation, it is fair to conclude that the OTT communications service providers form part of the relevant market and should be subject to similar regulatory requirements as the ISP providers.

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2.5 The more important question is whether the solution to this issue is regulation of OTT providers, esp. given the complexity involved in regulating these entities? Issues such as the reported declining by Skype to register as a telecom service provider in France, after a push by the NRA ARCEP, is a clear indicator of the complexity of regulatory framework required, and hurdles in its implementation.

2.6 There are market led solutions that allow for commercial arrangements among operators and OTT providers that are practical and likely to be more efficient. A licensing driven solution will need a separate, detailed deliberation to address the various complexities involved in establishing such a framework.

Q.2: Should the OTT players offering communication services (voice, messaging and video call services) through applications (resident either in the country or outside) be brought under the licensing regime? Please comment with justifications.

2.7 As the OTT communications service providers offer substitute services, they form part of the relevant market for communications services, and should be governed by the licensing and regulatory framework for communications services. FCC decided to include linear VoD OTT providers within the ambit of MVPD (Multi Channel Video Programming Distributor) licensing, as the services offered were perfect substitutes.

2.8 Global experience suggests that the regulatory framework required for licensing multi-country OTT providers is complex and difficult to implement. The details of such a regulation led solution will require further deliberation, and needs to be weighed against a market led solution.

Q.3: Is the growth of OTT impacting the traditional revenue stream of TSPs? If so, is the increase in data revenues of the TSPs sufficient to compensate for this impact? Please comment with reasons.

2.9 In emerging markets such as India, the absence of a use case for data severely hurts the adoption of data services. OTT applications such as WhatsApp and Facebook provide a strong use case for service adoption and usage by data customers.

2.10 A high-level calculation will suggest that the incremental revenue from OTT-led data adoption and data usage has more than compensated for the erosion in SMS revenues due to OTT messaging.

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2.11 This same logic will not hold true for OTT voice, as voice forms a majority of operator revenues (75-80% of overall revenues), unlike SMS (3-5% of overall revenues).

2.12 For a voice-coding rate of 12.2Kbps for voice, per minute consumption of data capacity is 0.1MB. Assuming price of 24p/MB, the customer pays 2p/minute for a voice call as opposed to the current outgoing call rate of approximately 60p/minute, resulting in the operator losing close to 58p/minute for each voice call diverted from operator network to the OTT network.

2.13 For an operator carrying150 billion outgoing minutes per month, even a 10% shift in outgoing voice calls from operator network to OTT applications will result in a loss of INR 9,000 crores per annum. Such a loss can never be compensated by an increase in data revenues, irrespective of an increase in data penetration and usage.

Q.4: Should the OTT players pay for use of the TSPs network over and above data charges paid by consumers? If yes, what pricing options can be adopted? Could such options include prices based on bandwidth consumption? Can prices be used as a means of product/service differentiation? Please comment with justifications.

2.14 Consumers expect free and unrestricted access to the Internet, including all content and applications. As the customer has already subscribed to a data pack, attempt to charge additional fee for access to OTT content and applications results in pushback from customers and violates the key principles of Open Internet.

2.15 It is critical to understand that the “product” being monetized by an OTT service provider is a data subscriber of the operator. The OTT provider is able to offer free calls, messaging and other services because it makes B2B revenues from advertisers and brands by sharing profiling data, consumer behaviour and purchase preferences. A wireless/wireline consumer without a data connection is not a valid “product”/”customer” for OTT providers - the fact that the subscriber has a mobile data connection makes the subscriber worth monetizing.

2.16 In such a situation where a) OTT providers are able to develop a product riding on operator data services and monetize these products using B2B revenues, and b) end consumers are not willing to incur incremental B2C charges for OTT applications, the only avenue available for operators is to

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establish a B2B commercial relationship with OTT providers at least for communication services such as OTT voice.

2.17 In the absence of such a B2B commercial relationship between OTT provider and operator, the scenario of all major operators taking a common stance to block OTT voice communications services appears very realistic. The legal validity of such a stance will be known only in due course. Given the experience of net neutrality policy development in the U.S., it is clear that in the absence of a market driven collaboration model between OTT providers and operators, a prolonged legal process appears to be the only outcome.

2.18 As the operator market is sufficiently competitive, such a commercial relationship should be driven by market forces similar to the current arrangements like roaming, and expected upcoming arrangements on spectrum sharing, trading and MVNO bandwidth purchase arrangements.

2.19 The varying cost structures, spectrum holdings, technology plans and commercial focus of operators makes it very difficult to establish a reference framework or specify prices, as long as such arrangements are open to interested buyers at same prices for same services.

Q.5: Do you agree that imbalances exist in the regulatory environment in the operation of OTT players? If so, what should be the framework to address these issues? How can the prevailing laws and regulations be applied to OTT players (who operate in the virtual world) and compliance enforced? What could be the impact on the economy? Please comment with justifications.

2.20 As mentioned earlier, given that the OTT communication services are now maturing to become the perfect substitute for operator services, the OTT providers are part of the relevant markets and associated regulatory and licensing obligations.

2.21 A major assumption in such a framework is to prove that the services are “perfect” substitutes. Such an argument does not have easy answers – some global NRAs (such as Ofcom) believe that OTT services are not a perfect substitute, while others have a different perspective. Without establishing such an offering parity, bringing OTT providers under the umbrella of regulation is legally untenable.

2.22 On the other hand, enforcing “compliance” using a regulatory mechanism does not appear practical given the lack of global policy support, and the high engagement level of these services for end customers. A social media

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backlash along with other activist mechanisms will most likely result in a withdrawal of such regulations.

2.23 As the key issue is the provision of OTT communications services, esp. OTT voice service, a better approach will be a market driven solution with some commercial agreement between operators and OTT providers.

Q.6: How should the security concerns be addressed with regard to OTT players providing communication services? What security conditions such as maintaining data records, logs etc. need to be mandated for such OTT players? And, how can compliance with these conditions be ensured if the applications of such OTT players reside outside the country? Please comment with justifications.

2.24 A majority of consumers using OTT messaging services on smartphones have an understanding the OTT provider will use their profile data and consumption behaviour for targeted advertising and other promotions.

2.25 For OTT communication services such as OTT voice, the proposed commercial arrangement between OTT provider and operator should allow access to legal intercepts and other policy requirements for OTT voice conversations similar to an operator voice call. Ultimately, the OTT provider becomes a user of the operator bandwidth, and the operator is responsible for ensuring that all the required legal and policy requirements are met.

Q.7: How should the OTT players offering app services ensure security, safety and privacy of the consumer? How should they ensure protection of consumer interest? Please comment with justifications.

2.26 As mentioned above, a majority of consumers using OTT application services have an understanding the OTT provider will use their profile data and consumption behaviour for targeted advertising and other promotions.

2.27 As of now there is no basis for regulatory intervention in this area. An annual regulatory review of such services will help identify if any such intervention is required at a later stage.

Q.8: In what manner can the proposals for a regulatory framework for OTTs in India draw from those of ETNO, referred to in para 4.23 or the best practices summarised in para 4.29? And, what practices should be proscribed by regulatory fiat? Please comment with justifications.

2.28 We believe that the ETNO approach, with the following components is one of the most practical approaches to deal with the current concerns of operators

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as well as OTT providers, and will also ensure consumer interests are not compromised:

• “Sending networks, such as content providers, OTT services and other application providers, must be required to pay “fair compensation for carried traffic” to interconnect with network operators (the “sending party network pays,” or SPNP principle);

• New interconnection models should be allowed providing for end-to- end Quality of Service (QoS) delivery for sending parties willing to pay a premium; and

• Governments should allow these interconnection and carriage arrangements to be negotiated between network operators and information services without regulatory interference (Article 19, 2012).“

2.29 We believe that a market led solution on the above lines will be more effective than a regulatory “fiat”.

Q.9: What are your views on net-neutrality in the Indian context? How should the various principles discussed in para 5.47 be dealt with? Please comment with justifications.

2.30 We believe that operators should be allowed zero rating, paid prioritization, and traffic management subject to the presence of following factors in the market place:

• Transparency: Consumers should have reasonable information on the zero rating, paid prioritization and traffic management practices followed by operators

• Choice: Consumers should have the choice of offerings from multiple operators, and the market place should not be dominated by providers with dis-proportionate market power to be able to block open internet access to users

• Low switching costs: Consumers should be able to switch among various service providers at a very low cost

2.31 An understanding of the operator business model, and the current market scenario is useful to understand the rationale for these recommendations. Such an operator and OTT business model is as illustrated in Figure 1 below

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2.32 An operator invests capital in acquiring spectrum and deploying a network. The next step is to develop a go-to-market proposition to acquire subscribers, and has a facilities based ownership of consumers.

2.33 OTT services are an important part of the overall proposition (device, content, apps, data pricing) used to acquire subscribers in the market place. Operators have a B2C monetization model with their consumers and get paid for the operator voice, data and video usage by their mobile subscribers. The mobile subscribers also use OTT services in addition to operator services, generally for free, as part of their B2C payment relationship with the operator.

Figure 1: illustrative business model of a wireless operator

Source: Capitel

2.34 The network usage is a mix of operator service usage as well as OTT service usage, and may result in the purchase of additional spectrum and/or deployment of additional capacity base stations, or other offload mechanisms to support the increase in data usage. As mentioned in the beginning of this section, the operator makes these investments.

2.35 Zero rating of applications drives mass-market service adoption: Utility of Internet services is one of the barriers for adoption of mobile broadband, in addition to affordability of device and services – with consumers consciously buying non-Internet enabled handsets, and the attach rates even on enabled devices limited to single digits.

Spectrum investment

Network investment

Network Go-to-market model

Subscribers

OTT providers

Add network capacity

Affiliate fees

Ad based monetization

Profiling revenues

Carrier services

OTT services

B2C ARPU B2B ARPU: X

•  Device bundling •  App bundling •  Content bundling

•  Xp/MB •  X p/min Free

Carrier Usage OTT Usage

B2B monetization

Service substitution

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This is very unlike developed markets such as the U.S. where broadband services have become a near utility, with significant dependence of consumers on such services. India may reach that stage in the coming five years, but as of now establishing the utility of broadband itself is a big challenge.

Operators work on utility as well as affordability to develop a proposition for acquiring data consumers, working with device OEMs, content providers, application developers as well as OTT service providers. These include subsidizing or bundling handsets, bundling of free content such as music, and free applications, commonly known as zero rating.

Given the importance of social networking as a key utility application among consumers for adopting mobile internet services, zero rating is increasingly becoming prevalent, with support from initiatives such as Internet.org. Operators have been collaborating with OTT service providers in emerging markets such as Africa, Asia and Latin America to increase the utility of Internet services through such price based differentiation.

Consumers always have a choice of service, products, bundles as well as providers and are not required to opt for specific bundles, but the flexibility of providing such propositions is imperative. Unlike in fixed line networks in developed markets, consumers have a clear option of choosing plans and providers, which limits the power of any single firm in influencing the terms for Internet access.

Such bundling is especially critical for emerging markets with an open device ecosystem as the consumer buys devices from open market and not through an operator channel. The latter allows operators to embed and bundle services, content and applications as part of the device proposition as per operator specifications.

2.36 Traffic management to ensure QoS: Management of network traffic by the operators allows better quality of service experience by end consumers, and also ensures policy management to avoid abuse of network resources. This becomes especially important as consumer usage behavior becomes increasingly complex and is spread across multiple devices.

Traffic management is also a practical necessity due to limited spectrum, and the need to optimize user experience on mobile networks. Traffic management does not necessarily translate into operators blocking specific services and content, as market competition ensures that even if one operator blocks a particular service, there are other operators willing to use it

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as a competitive advantage to gain subscribers, especially in a prepaid market with low switching costs, and minimal bundling of services.

Also, given the limited opportunities and inclination of operators to vertically integrate the content business, preferential treatment to operator-led offerings at the expense of OTT offerings is a remote possibility.

2.37 Paid prioritization for service innovation

For emerging services such as Internet of Things, smart meters, and other m-enabled applications that form the backbone of smart cities and other initiative within the Digital India framework, a reliable end-to-end connectivity is necessary. Also, critical applications such as medical and health data should be delivered in an optimal and secure manner. This requires prioritization of application traffic to commit end-to-end QoS, low latency rates and increased service reliability.

Some countries in EU have suggested splitting the Internet into two layers – one that allows for such prioritized lanes for special services, and the other that treats all traffic on an equal footing, best effort basis. Having such a flexibility to prioritize traffic is necessary to enable service innovation and ecosystem development for data services, including initiatives within the Digital India program.

Even within OTT service providers, the business models allow them to prioritize specific search results, based on sponsorship and payments. The key issue is transparency – as long as the consumers understand that the results, or services are prioritized and they are in a position to select alternate products, services and providers at low switching costs, there is no threat to open Internet or net neutrality. Transparency on prioritized services will help consumer choice and allow them to select among services and providers based on their needs.

2.38 In summary, as of now, there is no perceived threat to the concept of open internet or net neutrality in India, as the firms are operating in a competitive market place with no single firm having disproportionate market power to be able to block open internet access to users, as is also clear from the recent consumer push back to plans launched by major operators. Operators need to ensure transparency in sharing relevant information with consumers, with mechanisms such as an industry code of conduct, or through regulatory oversight.

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Q.10: What forms of discrimination or traffic management practices are reasonable and consistent with a pragmatic approach? What should or can be permitted? Please comment with justifications.

2.39 In spectrum-constrained markets such as India, traffic management of mobile network is a practical necessity, and is also imperative to optimize user experience.

2.40 Prudent traffic management while ensuring security and consumer privacy and protecting network abuse due to asymmetric traffic from any of the retail or wholesale users of the network (Ref: Comcast and Level 3, Cognet and Orange France) is acceptable practice globally.

2.41 Traffic management by type of application to ensure QoS for end users is acceptable and should be allowed. Undue discrimination based on the type of service provider should not be allowed, although there should be a mechanism to ensure fairness in the process.

2.42 Such oversight can come through regulatory enforcement, or similar to the practice among operators in EU, industry can also adopt a code of conduct for self-regulation to define traffic management practices, and ensure there is no unreasonable discrimination among OTT service providers.

Q.11: Should the TSPs be mandated to publish various traffic management techniques used for different OTT applications? Is this a sufficient condition to ensure transparency and a fair regulatory regime?

2.43 Global policy making experience suggests that availability of information itself will not help prevent discrimination unless its at a level that can be understood by a mass-market consumer.

2.44 Publishing details on technical approaches to traffic management will not help consumer choice or welfare. A consumer transparency framework that helps highlight specific exceptions to established process of traffic management could help consumer choice and allow them to switch to a different provider if needed.

2.45 In summary, we believe that self-regulation with a light touch regulatory oversight on broad issues such as consumer transparency and choice would suffice at the current stage of market maturity with follow-up policy reviews to determine if any additional intervention is needed.

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Q.12: How should the conducive and balanced environment be created such that TSPs are able to invest in network infrastructure and CAPs are able to innovate and grow? Who should bear the network upgradation costs? Please comment with justifications.

2.46 As illustrated in Figure 1, the operator owns the network assets and should bear the upgrade costs as well. Operators already have a well-defined mechanism to monetize the network on a B2C model, and need to establish a B2B monetization mechanism with OTT providers to be compensated for OTT communications services such as OTT voice.

2.47 In the absence of such a B2B commercial relationship, operator incentive to invest in networks diminishes, and the ability to generate returns is hampered. The current business case for operators, and the rationale for multi-billion dollar investments into spectrum are based on generating voice revenues in addition to data revenues.

2.48 If the voice revenues get reduced to a fraction of the expected cash flows, then operator survival itself becomes a question mark. On the other hand, OTT providers are generating robust B2B revenues by monetizing mobile data subscribers, and are promoting their OTT voice offerings to compete with mainstream voice offerings by operators.

Q.13: Should TSPs be allowed to implement non-price based discrimination of services? If so, under what circumstances are such practices acceptable? What restrictions, if any, need to be placed so that such measures are not abused? What measures should be adopted to ensure transparency to consumers? Please comment with justifications.

2.49 As long as there is no degradation in quality of best effort internet services for mass market consumers, operators should be allowed to differentiate based on enhanced QoS for certain “specialized services” such as high definition video streaming services, or guaranteed bandwidth quality for healthcare applications, and specific m2m services

2.50 Self-regulation with a light touch regulatory oversight on broad issues such as consumer transparency and choice would suffice at the current stage of market maturity with follow-up policy reviews to determine if any additional intervention is needed.

Q.14: Is there a justification for allowing differential pricing for data access and OTT communication services? If so, what changes need to be brought about in the

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present tariff and regulatory framework for telecommunication services in the country? Please comment with justifications.

2.51 As illustrated in the discussion of economic model of an operator, revenue loss through cannibalization by OTT voice services appears to be a realistic threat.

2.52 One of the ways to address this loss is by charging end users additional fees to access OTT communication services such as OTT voice. However, in the current environment of hyper-connected socially active consumers with an opinion on Net Neutrality and Open Internet, it’s difficult for any one operator to have a differentiated pricing model for OTT communication services. Such an approach can only work if all operators migrate to such a model; however, given the level of competition such an operator collaboration scenario appears unrealistic.

2.53 As we have discussed earlier, the only other way to recover such expected loss is through a B2B commercial relationship between operators and OTT providers.

Q.15: Should OTT communication service players be treated as Bulk User of Telecom Services (BuTS)? How should the framework be structured to prevent any discrimination and protect stakeholder interest? Please comment with justification.

2.54 A B2B commercial model, structured on the lines of existing wholesale agreements should allow OTT providers to offer communication services as well.

2.55 To ensure non-discrimination, such an offer from operator should be available to all similarly placed OTT providers, and at similar prices.

Q.16: What framework should be adopted to encourage India- specific OTT apps? Please comment with justifications.

2.56 We believe this decision should be left to market forces and developer ecosystem informed by various factors including user consumption behavior, and potential areas to add value. We do not believe that there is potential for regulatory intervention in these areas, and market evolution, in addition to incentives from stakeholders and associations such as NASSCOM can assist in the development of India-specific OTT applications.

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Q.17: If the OTT communication service players are to be licensed, should they be categorised as ASP or CSP? If so, what should be the framework? Please comment with justifications.

2.57 We believe that regulation of OTT providers is a complex issue, and will need a separate detailed discussion on an appropriate regulatory framework given the issues of geographical presence, and limited global precedence.

2.58 A market-led commercial solution will be a practical and efficient solution as compared to licensing.

Q.18: Is there a need to regulate subscription charges for OTT communication services? Please comment with justifications.

2.59 We do not believe that operators have the option to separately charge for OTT communication services over and above data access charges. With the expected entry of new entrants in the mobile market, such an incremental charge will become even more difficult for operators to implement, without hurting their market share and brand.

2.60 With the current level of market competition, high level of consumer choice and low switching costs, even if operators were to charge additionally for subscription to OTT communication services, regulatory intervention will not be needed.

Q.19: What steps should be taken by the Government for regulation of non-communication OTT players? Please comment with justifications.

2.61 The need for regulation of non-communication OTT players is not apparent at the current stage. A follow-up regulatory review can assist in determining if such a regulatory intervention is needed to help balance the growth of the overall OTT ecosystem and operator interests.

Q.20: Are there any other issues that have a bearing on the subject discussed?

2.62 A comprehensive review of the “neutrality” of other participants in the ecosystem such as search engine providers would also help provide a well-informed picture of overall “net neutrality”, over and above the current focus on network access providers.

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Documents

Response to TRAI consultation paper on OTT 200415