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Why Licensing of Internet Services is a Terrible Idea

If telecom operators want a level playing field, they should focus on themselves; not internet services that are actually driving innovation.

Of all the ways to describe how telecom companies are responding to the net neutrality debate, ‘crabs in a bucket’ might be the most accurate.

With telcos demanding ‘same service, same rules’, and the Telecom Regulatory Authority of India (TRAI) seriously considering a licensing framework for internet services, we are now forced to come up with (twenty) good reasons for why that is a terrible way to level the field.

One important reason is that the perceived imbalances can be reconciled using existing legal and regulatory powers. Moreover, telcos actually stand to benefit from policies that, in the long run, would promote innovation, efficiency and profitability for the entire ecosystem. Unfortunately, licensing of internet services is not one of them.

Level playing field

To say that internet services are currently ‘unregulated’ is disingenuous, and only serves to obfuscate the actual imbalances that exist. A closer look at the existing legal and regulatory framework reveals what the consultation paper does not — telecom operators and internet platforms endure similar obligations with respect to privacy and data protection, content regulation, cybersecurity, and law enforcement —key issues from a regulatory and policy perspective. In such circumstances, it is hard to imagine how licensing of internet services could be an optimal solution. (A comparative analysis, along with links to the regulations, is available here.)


(Pulling down competition is not an optimal method to level the playing field)

At the same time, it is important to address the legal and regulatory imbalances that do exist, as proponents of licensing will readily point out.

Financial Conditions

While telcos are required to satisfy eligibility conditions and pay various fees, charges and taxes to the government, online platforms are not subject to such conditions. This apparent ‘imbalance’ is actually integral to Indian telecom law, which empowers the government to issue licenses to private companies for monetary consideration.

Needless to say, these financial conditions impose high barriers to entry, resulting in a small band of operators cornering a lion’s share of the market (see official figures). On the other hand, internet services continue to thrive in an open ecosystem that encourages frictionless entry and intense competition.

At a time when the government is keen to promote entrepreneurship and ‘ease of doing business’ (by introducing a simpler incorporation process, for example), the licensing of internet services will be a definite move in the opposite direction.

Quality of Service

Telcos are required to observe service quality standards with respect to call drops, telemarketing, billing and other parameters. However, such benchmarks are absent from regulations governing internet services.

QoS standards are designed to enhance the customer experience, so it is important to understand how users might respond to poor service. Hypothetically, if a messaging platform like Hike were to start spamming its users, they will likely shift to WhatsApp. If call drops become frequent on Skype, Viber will fill the vacuum.

On the other hand, complaints about telcos are endless, with few solutions in sight, even as the rules on Mobile Number Portability take effect. This difference in ‘switching costs’ is an important reason why QoS standards for internet services by means of licensing is unnecessary at present.

Instead, the government could introduce rules on billing and refunds for ‘App Stores’ and other platforms that market or sell internet services. Amendments to the Consumer Protection Act (to cover e-commerce transactions, for example) would also help improve the online experience.

Internet Telephony

Perhaps the most contentious issue is VoIP. TRAI has even acknowledged the regulatory ambiguity in a previous consultation paper, so it is understandable why telcos have hesitated to roll out VoIP services. But with the introduction of the unified license, now is certainly a good time to start.

Mandatory Registration

Another popular suggestion is for internet services to be registered with the government. While this might be reasonable for certain types of applications (for example, VoIP services), mandatory registration for all internet services will have an adverse impact on innovation.

The best evidence for this comes from existing regulations — obtaining an OSP registration, which is required for the provision of ‘application services’, can be a cumbersome process. Registered OSP’s are subject to strict terms and conditions, including filing of returns, notification procedures, and other tedious compliance obligations. It is not difficult to see why mandatory registration for internet services could end up hurting innovation in the long run.

Looking Forward and Inward

Instead of fighting internet services, telcos could exploit their popularity to earn additional revenue, by offering carrier billing services and mobile payment methods, or by introducing new value added services. Even as we speak, telcos could partner with the government to provide rural internet connectivity and use it to test next generation technologies and business models. In the future, telcos might even be allowed to resell bandwidth, subject to certain conditions.

Users will happily support reforms that actually improve the quality of services — for example, improvements in 3G speeds as a result of spectrum sharing guidelines; or revised merger and acquisition guidelines to help consolidate the market and bring down tariffs; or the liberalisation of internet telephony regulations to encourage new communication services.

All of this is only to say that telcos should think twice before supporting licensing of internet services, for their own sake, as it could stifle innovation and hurt their own growth and profitability in the long run.

Innovating to Survive

If the government is serious about promoting innovation, it should take note of the difficulties that entrepreneurs will face under a licensing regime, and the negative impact it will have on users. The time and energy spent in developing a new regulatory framework for internet services could be better spent in formulating policies that actually benefit the IT and telecom ecosystem in India.

One way to address a whole range of policy issues is to revive the Communication Convergence Bill, streamline the licensing and registration process for telcos, and introduce clear liability provisions for internet services.

In the meanwhile, telcos would do well to reflect on their failings, and brainstorm ways to leverage their technical and operational experience to bring innovative services to the market. If not, wouldn’t it simply prove that licensing of services is a terrible idea?

Disclosure: I advise start-ups and internet companies in a personal and professional capacity.

(Based on a presentation at the ‘Consultation on Net Neutrality’ held in Bangalore on 18 April 2015. Many thanks to the participants for their inputs, and to ALF for inviting me to speak)

About Amlan Mohanty

Amlan is a lawyer based in India. He engages in research, writing, speaking and teaching at the intersection of technology, law and policy.