OTT Regulation: The myth of ‘same-service-same-rules’

Over The Top (OTT) services refer to internet based applications that run over mobile devices. Given that OTT services like Viber, WhatsApp and Google Hangouts are often used as substitutes for PSTN voice/sms services, incumbent telecom operators have started building the narrative that regulations applicable to Telecom Service Providers (TSPs) should also be applicable to such OTT applications since they are “substitutes”. In other words, TSPs demand that regulations requiring licensing, lawful interception, do-not-disturb facilities, data localisation, portability etc should also be extended to these internet based applications. This is referred to as “OTT Regulation”.

Same service same rules?

Arguments by TSPs calling for ‘same service same rules’ are misconceived given the inherent structural differences between telecommunications service providers and OTT players  – such as  access to spectrum, ability to interconnect with PSTN, use of numbering resources etc.[1] Most fundamentally, telecom operators control the underlying broadband access infrastructure, and are the gatekeepers to broadband internet access. A consumer cannot even get to OTT services without first purchasing internet access service from a network operator. In contrast, OTT services do not control the underlying broadband internet access points.

However, it is worrisome to note that the Government has started buying into the TSP narrative and the possibility of “OTT Regulation” is indeed real. If such restrictions are imposed then Indian startups developing such OTT applications will be required to take a “license” from the government and not allowed to host data on the cloud because of data localisation requirements. This may also generate bad demand from foreign jurisdictions that may impose reciprocal licensing conditions on Indian startups, creating additional barriers for them to compete in foreign markets.

A recent report by ICRIER (2017) reveals that OTTs contributed a minimum of USD 20.4 billion (Rs. 1357.6 billion) to India’s GDP in the year 2015-16, which will increase to USD 270.9 billion (Rs.18275.9 billion) by the year 2020. In another report, WIK (2017), through a consumer surplus survey and analysis, finds that OTT usage in India saves on average 803.9 minutes per week in comparison to traditional alternatives (e.g. sending letters, physically meeting etc). Based on the average annual income in India (INR94,130), this translates into an annual consumer surplus of US$98 billion in 2017. Thus, each user of OTTs in India receives on average US$249 of consumer surplus annually. Applied to the entire population—not just OTT users—this results in US$74 per capita.

Given this trend, any overburdening regulations should be avoided that would create a compliance burden and form barriers to entry, affecting market efficiency and competition.

Loss of revenue?

Another narrative pushed by TSPs is that such OTT applications are causing a loss of revenue to TSPs due to substitution of SMS and voice services by OTT applications. Think – don’t you prefer sending a Whatsapp message rather than sending a SMS?; or don’t you prefer to Skype instead of using international voice calling? TSPs argue that they are investing in networks but their revenues are dipping due to substitution by OTT applications. In contrast, OTTs are “free-riding” on their networks but not paying their fair share in taxes to the government.

TRAI has deliberated on the recent past. In its recommendations on VoIP, it has very correctly recognised that OTTs and TSPs share a “symbiotic relationship” and that OTTs are driving traffic for TSPs; rejecting the misconceived loss-of-revenue narrative. The following quote from TRAI is important in this regard:

The Authority is of the view that the increasing revenue realizations from data services due to increasing Internet traffic will not only compensate for the loss of conventional voice traffic but will also increase the revenue potential of the last mile access networks. This symbiotic relationship will increase broadband proliferation and will also contribute to the overall health of the telecom sector along with increase in consumer choice. The separation of network and service layers of telecom service offerings is the natural progression of the technological changes in this domain. It is now possible to separate provision of service contents, configuration and modification of service attributes regardless of the network catering to such service.

TRAI (2017, VoIP – para 3.24)

Can we create rules just for “Communication OTTs”?

Proposals for creating any arbitrary distinction between “OTT Communication services” and “other OTT services” are flawed as most OTT services tend to develop platform characteristics that incorporate communication as only one aspect of the wider service provided. For example, most gaming and e-commerce OTTs also include options to exchange text and voice messages between community members.

Conversely, the Telecom Regulatory Authority of India (TRAI) should recognise that OTTs provides rich interactions beyond text and voice communication on the application layer – and that’s the innovation which should not be curbed. OTTs services should not be seen as like-for-like with traditional telecommunications, but instead as innovative rich interactions that are qualitatively and significantly different in terms of objectives and the richness of it, from conventional voice or text communications. This is a distinction that arises not from service providers but from consumers themselves. As a result, asking for regulatory parity on the basis of the “same service, same rules” argument is incorrect and does not justify a higher regulatory burden on OTT players.

Are market forces the answer? Are switching costs a barrier?  

The Competition Commission of India (CCI) recently explored whether switching costs in the OTT market are high, and whether they are any barriers for competition to address consumer requirements. This is what the CCI concluded:

The Commission also observes that there are no significant costs preventing the users to switch from one consumer communication apps to another. It may be due to the following reasons:

(i) all consumer communication apps are offered for free of cost or at a very low price (mostly free),

(ii) all consumer communication apps are easily downloadable on smartphones and can co-exist on the same handset (also called ‘multi homing’) without taking much capacity along with other apps,

(iii) once consumer communication apps are installed on a device, users can pass on from one app to its competitor apps in no-time,

(iv) consumer communication apps are normally characterised by simple user interfaces so that costs of switching to a new app are minimal for consumers, and

(v) information about new apps is easily accessible given the ever increasing number of reviews of consumer communication apps on apps store like google play store etc. Furthermore, the expansion of Hike Messenger to nearly 100 million user base within three years of launching their services into the aforesaid market reflects that in this market, there are no significant barriers to entry and consumers appear to be price sensitive.

Vinod Kumar Gupta Vs. Whatsapp Inc
[Competition Commission of India, 01-06-2017]

The above excerpt clearly indicates that the OTT market is evolving in a manner where competition is high and costs of switching from one OTT app to another OTT app are very low. The market automatically punishes bad OTT application providers. Then is there a need for the regulator to intervene in the absence of any market failure?



[1] See Report on Deconstructing the “level playing field” argument – an application to online communications – by Brian Williamson of Communication Chambers, May 2017 in which he deconstructs the “level playing field” and “same service same rules” arguments in relation to online communications and rich interaction apps. The paper concludes that these arguments do not stand up to scrutiny – technology and market differences matter.

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