1.1 Vishal Misra, a professor of computer science at Columbia University, conducted a seminar titled ‘Routing Money, not Packets’ at The National Institute of Public Finance and Policy on 06 August 2019. Misra presented a condensed version of his research that constructs a detailed model of the internet and studies its incentive structures, eventually redefining the concept of net neutrality. Vihang Jumle and Tuhina Joshi, associates at Ikigai Law, attended this event. This blog post summarises the discussions that took place during the seminar. A version of Misra’s presentation can be found here.
2. Key points from Misra’s presentation
2. 1 The internet as a conceptual platform, net neutrality and co-operative game theory
Misra explained that the internet provides a platform to connect users with content providers and routes data packets between them. Per Misra, initially the traffic on the internet was symmetric, meaning data packets flowed in equal numbers in both directions between two or more internet service providers (“ISP”). For example, a packet originating at ISP “A” and handed off to ISP “B” for delivery would be balanced by a packet moving in the opposite direction from “B” to “A”. ISPs often entered into no-cost agreements to carry one another’s traffic, each believing that the amount of traffic they carried for another ISP would be matched by the other ISP carrying its own traffic. Net neutrality hence naturally prevailed as ISPs did not differentiate between different data packets since each ISP compensated for the other’s bandwidth use. The emergence of large content providers caused the internet to become asymmetric with more packets flowing from content providers (such as YouTube) to consumers compared to data packets flowing from consumers to content providers. These content providers also established a revenue stream outside the internet by advertising, online merchandizing, etc. ISPs became more specialised and separated into two different groups. ‘Eyeball ISPs’ provided last-mile connectivity, whereas ‘transit ISPs’ owned the global internet infrastructure and catered to specific content providers. The asymmetric flow of data packets led to an imbalance of power between eyeball ISPs and transit ISPs such that transit ISPs started peering with eyeball ISPs to ensure delivery of their content. Misra explained this scenario using co-operative game theory where each ISP tries to maximise its revenue by peering, introducing pricing policies such as premium internet services, charging differently for different data packets, etc. Per Misra, these interventions disturbed net neutrality. Misra also used the ‘Shapley value’ to demonstrate the optimal arrangement under which each ISP would have the incentive to contribute to the overall good of the system, maintaining net neutrality.
2.2 Competition amongst ISPs in the US
Per Misra, ISPs should ideally compete based on the quality of services they provide. However, ISPs in the US compete based on the facilities they provide to their users. The prevailing competition model in the US requires all ISPs to set up their own infrastructure to provide last-mile connectivity, such as independent cables etc. Since most users in a particular region avail internet services from only one ISP, the ISP that is the first to lay cables in a particular region and provide last-mile connectivity enjoys an immense first-mover advantage over other ISPs who move into the region later, since users rarely change their ISPs. As a result, most ISPs in the US operate as monopolies in the regions where they provide last-mile connectivity, leading to unfair competition. In contrast, Misra presented the United Kingdom and Nordic countries’ competition model as a comparatively fairer one, since last-mile connectivity infrastructure in these regions is publicly owned. As a result, all ISPs in these countries have to enter into lease agreements to access last-mile connectivity infrastructure, avoiding the distortion of competition that takes place in the US. This model allows ISPs to compete based on their performance and the quality of services they provide to their users.
2.3 Zero-rating, consumer surplus, and FCC’s definition of net neutrality
Misra also discussed zero-rating, an agreement between ISPs and content providers, that allows internet users to access certain content providers’ content for free (think Facebook’s Free Basics). In this agreement, the content providers themselves pay the ISPs to cover the cost of data that their users consume. Approximately 80 countries offer zero-rating services. Per Misra, zero-rating services distort competition between ISPs by affecting something known as ‘consumer surplus’. Consumer surplus is defined as the difference between what a consumer is willing to pay and what the consumer has to pay. This can also be defined as the difference between the consumer’s utility from a commodity and the price of the commodity. Typically, consumers choose commodities that maximise their surplus. For instance, Netflix has relatively fewer users than YouTube in India because YouTube allows users to access content for free, maximising their consumer surplus. According to Misra, the problem with the FCC’s definition of net neutrality is that it does not restrict ISPs from providing free services, which distorts the market. The FCC’s rules only disallow ISPs to block, throttle or create “fast lanes” by paid prioritisations of any content on the internet. These rules can be found here.
2.4 T-Mobile’s survey on zero-rating and consumer surplus
To illustrate how zero-rating distorts markets, Misra talked about a survey conducted by T-Mobile, a German telecommunications company, that studied the impact of zero-rating on the consumption of online content by users. At the time of this study, T-Mobile had introduced a programme named ‘Binge On’ which allowed T-Mobile’s partner sites (such as Netflix, Hulu, HBO, etc.) to offer content for free while non-partner sites (such as YouTube, etc.) could not. All videos on T-Mobile’s network were throttled at 1.5 Mbps. It was observed that this scheme led to an increase in the consumption of videos of both, partner and non-partner content providers. However, partner content providers enjoyed a 79 per cent rise in viewing time while the viewing time for non-partners only rose by 33 per cent. Thus, this study concluded that zero-rating led to market distortion, since partner content providers enjoyed far greater benefits than non-partners.
2.5 Conclusions of Misra’s study:
A. If zero-rating options are allowed in the market, low-value content providers usually suffer a utility loss, whereas high-value content providers usually enjoy utility gains.
B. With zero-rating options allowed in the market, the Herfindahl index will never increase which implies the competition of the system will decrease. Herfindahl index is a commonly used indicator to determine market competitiveness.
C. Differential pricing is inconsistent with net neutrality.
D. Zero-rating puts low-value content providers at a disadvantage and may hamper innovation.
E. Net neutrality should be redefined such that the internet provides a level playing platform for all content/app/services, either through ‘pricing’ or ‘quality of service’.
2.6 Developments in India after the Prohibition of Discriminatory Tariffs for Data Services Regulations, 2016 was passed
A. Internet penetration accelerated.
B. Broadband speeds improved.
C. India currently provides the cheapest data prices compared to other markets. This was because Reliance Jio provided free data for all of the internet and not only its content like Jio Movies, Jio TV, etc. This also led over-the-top service providers like Netflix, Amazon Prime, Hotstar to exponentially grow in usage and content.
D. Misra also spoke about how the current definition of net neutrality in India allows for relatively fair competition – please include this bit.
(Authored by Vihang Jumle, Associate, Ikigai Law with inputs from Tuhina Joshi, Associate, Ikigai Law.)