Even as Davos was worrying over the haemorrhage of international capital from emerging markets and Finance Minister Arun Jaitley was at pains to point out that India was different, a different narrative was unfolding in the Telecom Regulatory Authority of India (TRAI) in Delhi. It had to do with a consultation paper issued by TRAI on “Differential Pricing for Data Services” inviting responses from the public. The consultation process closed on January 7.
The breaking news a few days back was the quixotic outburst by a senior TRAI official in a letter addressed to the $260-billion social media giant, Facebook, harshly rebuking it for inundating TRAI with template responses from nearly 2 million users in support of the Facebook-promoted Free Basics. The senior official was apparently outraged at the manner in which Facebook used its brute “majoritarian” muscle to intimidate TRAI with overwhelming public opinion and asserted that if such tactics were accepted, “it would have dangerous ramifications for policy making in India”
Readers will remember that last year a TRAI consultation paper on Net Neutrality was similarly responded to by net neutrality fundamentalists to demonstrate the ground swell of opinion in favour of a strict version of neutrality. At the time TRAI was indulgent of this innovative way of crowd sourcing opinion. This time around it is Facebook, not indigent activists, on the front foot; the leadership in TRAI has changed and it seems to be open season for charges and counter charges.
Zenophobia or pique?
The “establishment” and a large swathe of Indians, bred on traditional distrust of the “Ugly American”, are quick to take offence at the in-your-face lobbying. To be fair, Facebook clearly went over the top in pushing its case. Americans play hardball and have to be restrained when dealing with other cultures, like ours, where soft, behind-the-scenes contact achieves far more.
In the instant case, Facebook’s evangelical assertion that Free Basics is all about giving free access to the “poor” lacks credibility. Free Basics is a process innovation to improve business for Facebook and the telecommunication service provider (TSP), which provides the access. But isn’t that what all successful businesses are supposed to do. Why else would you invest in them?
TRAI has developed a solid reputation for being a savvy, growth-oriented regulator. The recent outburst is quite out of sync with its image and one hopes that it remains an outlier.
The case against free access “walled gardens”
Now, on to the substance of the matter. The case against “walled gardens” like Free Basics is built around two reasons.
First, in a price-sensitive market like India, a freebie is habit forming – like reading a free newspaper which provides selective news. But it is insulting to readers to assume that they cannot see that they are getting only limited stuff. For getting a child married, they are unlikely to use the freebie and instead insert an advertisement in a popular daily, if they can afford to do so.
The second argument is that TSPs are likely to favour content providers who pay them in return for free access and shun or disadvantage others who do not. This discriminates against start-ups which do not have the financial muscle to reimburse the TSP for free access. Thereby innovation itself will be stifled, like great art which remains undiscovered because the big galleries will only stock established artists.
These are powerful concerns in an ecosystem which has grown around unhindered and near real time access to innovation via the internet.
Strict net neutrality imposes unnecessary costs on the final user of the net and sharply constrains assess in poor countries which walled gardens can help breach
There are three counter arguments why fears that innovation will be stifled by walled gardens.
First, internet-based content is a growing market-especially in India. Only 25 per cent of Wi-Fi subscribers in India access it via a mobile. Less than a 100 million people in India have a 3G or a 4G enabled handset (one of every twelve persons). This illustrates that the potential for new business via new and better content providers is virtually unlimited.
Second, creating content is a highly competitive business like tailoring. If your trousers don’t fit, you are unlikely to order repeats. Similarly, if the content on Free Basics fails to keep up with content in the same space available elsewhere, you will switch your TSP or opt out of Free Basics. If enough apps on Free Basics are duds, it will eventually negatively impact Facebook itself, as users will either migrate to another “free walled garden”. Even if walled gardens are habit forming, they will compete with each other, possibly even on the same TSP network.
Third, the IT ecosystem automatically filters out non performers. The TSP needs data traffic to make its returns. Content providers need eyeballs for successive rounds of funding or they are forced to shut shop, merge or sell out. This is not an ecosystem which is kind to those who are not on-top.
If the concern is to ensure voice for minorities, there is nothing to stop a walled garden from coming up specifically targeted at socially important, but fringe, groups – the lonely blogger writing on about the rights of the Rohingyas; social activists raging against growing inequality and other such laudable causes. There is nothing to stop a government-supported entity from launching a free wall where anyone can post and to which access is free. This has a parallel in public service broadcasting. Facebook’s social objectives may be doubtful. But surely non-state actors can fill that breach.
Light touch regulation requires nerves of steel and a deep resolve to not be influenced, either by public opinion or ideology. It also requires technical expertise and industry experience to drill down from motherhood concepts like “net neutrality” and contextualize its application to the market and the regulated entities. So long as the regulator remains neutral, the net is safe.
Net Neutrality can be breached if it is in national interest; does not result in dominant monopoly and is the outcome of technical or business innovation. Let’s not hang our hat by outdated ideological shibboleths. Sometimes majoritarian opinion is worth considering even if it comes via an industry biggie.
Adapted from the authors’ article in Swarajyamag http://swarajyamag.com/biz/trais-misplaced-rage-against-facebook/
(Photo credit: http://www.intelligent-eneregy.com)
Now that the Spectrum Big Bazaar auctions are over, it’s time to sift through the smoke and dust of the financial battle and figure out who lost and who won. But before the juicy part, here are the bare facts for those who don’t spend their lives following spectrum auctions.
First, the bulk of the spectrum sold in the 800, 900 and 1800 MHz frequency bands relates to licenses issued in 1995 and 1996 which are now expiring after 20 years. Very little new spectrum has been added by either the government releasing spectrum, currently reserved for the army (TRAI opines at least three times more than required) or from the cache given free to BSNL and MTNL, two government-owned telecom companies which grossly underuse their spectrum allocations because they just can’t compete with private service providers despite the public gift of free spectrum. So much for the “public Kohinoors” the government loves to hoard in public interest.
Second, the government secured firm bids worth Rs 110,000 crore (US$ 17.8 billion) as revenue from auction—25 or 33% paid upfront and the rest to be paid in 10 annual instalments after a moratorium of three years.
Spectrum in the 900 band garnered an incredible 120% more than the reserved price. TRAI had predicted and service providers moan, that they have paid through their nose just to hang onto spectrum they had till now.
The 1800 band secured an auction value only 14% above the reserved price. TRAI had predicted that the small amount and non-contiguous spectrum on offer would negatively impact valuation despite the 1800 band being a fallback option for supporting service in the preferred and scarce 900 band. The 800 band secured a respectable 64% above the reserve price value.
Third, the 900 band was the star of the auction. Despite comprising only 46% of the spectrum auctioned, it secured the lion’s share of revenue—71% of the total auction value. The 1800 band, comprising 27% of the spectrum auctioned, did the worst with a revenue share of only 9% of the auction value. The 800 band, used mainly for data transfer, balanced its share in spectrum auctioned of 27% with a share of 21% of revenue in auction value.
Fourth, let’s look at the institutional arrangements within which the auctions happened. Telecom Regulatory Authority of India (TRAI) has an overwhelmingly “advisory” role. The real decision making power on spectrum pricing; quantum of spectrum to be sold and the constraints to be imposed on the buyers of spectrum—right to swap, share or leverage spectrum financially, all vest with the Minister in the Department of Telecommunications (DOT).
In this sense, TRAI is very similar to the low profile Central Electricity Authority which is an adjunct of the Ministry of Power and advises it on techno-economic matters. Note that the similarity extends even to the nature of the entity. Both are “authorities” not “commissions” like latter-day utility regulators, including the electricity regulators, are titled.
This institutional arrangement has advantages. It reduces the risk for TRAI in offering innovative advice. After all, should the CAG or the CBI come calling with their inevitable investigations, usually once the government has changed, TRAI can turn around and coolly assert they decided nothing, being mere advisors to DOT. Also, this arrangement liberates TRAI from considerations of political economy- all of which weigh-in for government.
The arrangement also encourages TRAI to be transparent and participatory in its functioning which is a boon for ”Telecom watchers” who are not industry “insiders”.
TRAI’s consultation papers are drafted painstakingly. They provide a wealth of information and outline options for decision making. Most importantly, TRAI encourages open participation. None of this happens in the DOT.
Once an issue reaches the “in box” in DOT, the iron curtain crashes down; information put out is terse; formatted to confuse the “outsider” and as minimalist as Swedish furniture. The cumbersome “Right To Information” route becomes the only way to get access. But even then, the rationale for the many commercial decisions the DOT takes, is never disclosed. TRAI itself has, courageously, voiced its frustration on this “zipped lips” policy of DOT.
Undeniably, DOT could be much more.
transparent and “un-babu like”. Equally, TRAI has to learn to play ball. Adopting a strictly “technically correct” approach is not what an “advisor” is paid to do. In fact, by “islanding” itself, TRAI has cut its significant technical expertise off, from the deliberations in government around the “second best” option, which is the kernel of public decision making. The correspondence between TRAI and the DOT around its recommendations for the 2015-16 spectrum auctions bears out this institutional short circuit.
The bottom line is that, whilst the existing institutional arrangement could work better, what exists is far better than deciding everything in the cozy confines of the DOT. TRAI Chairs and its members have been outstandingly progressive in safeguarding public interest.
Fifth, is the question how successful has this particular auction been? Undeniably, from the purely fiscal point of view, no one—hopefully, least of all the CAG—can quibble. But the issues TRAI raised, and which remain unanswered, are pertinent.
Should “public silver” be sold only for short-term gains or should there be a wider strategic objective? Telecom adds 3% to the GDP, so a 30% growth in telecom adds a significant 1% point to national growth and could meet one-eighth of the target of 8% increase in GDP. The bulk of the incremental, “good-jobs” are in the information technology space and depend on robust growth. Identifying needs and monitoring the delivery of social services are strongly dependent on a pan-India telecom network being available. Consider also that in a vast, poor country like India, where 25% of the citizens are domestic migrants who remain culturally, strongly linked to their home village or town and it becomes easy to view telecom access as a necessity for improving the quality of life.
Clearly, no one wants a situation where funds from spectrum sale in the hands of the government, come at a huge cost hurting the growth of private telecom services or adversely affecting their affordability.
The problem is that both government and TRAI are prone to fall back on the “cost-of-service”—heavy handed model of regulation, which entails examining the pockets of the private service providers, either to ferret out if they are making too much profit (DOT) or too little profit (TRAI) and somehow adjust the profit by either squeezing service providers (DOT) or conversely compensating (TRAI) through spectrum pricing.
The Spectrum Usage Charge (SUC) is one such additional levy, over and above the spectrum cost. It is levied as a proportion of the Adjusted Gross Revenue of a service provider. Actually, there should be no usage charge at all, since spectrum is now auctioned and bidders reflect a part of their expected surplus in the bid. The user charge is a revenue generating instrument, left over from the days when spectrum was “allocated” administratively. TRAI has repeatedly suggested that it be brought down transparently from 5% to 3% before an auction, to induce bidders to reflect the reduced cost into a higher bid. But DOT has resisted this move without ascribing a reason for its obduracy.
More importantly, now that the auction is over, reducing the user charge retrospectively is not an option. Any reduction in license cost will now go directly into the pockets of the service providers. Worse, those bidders who may have “inside” knowledge of a probable post-auction reduction, would have been enabled to bid lower on the basis of this “privileged information”. A classic case attracting the allegation of potential “crony capitalism”.
The current Minister of Telecom is too savvy a person to fall into this trap. But political office is transient with too little institutional memory. In comparison, service providers bid their time better than a leopard and the institutional memory of an elephant. It is an unequal match which can only go against the public interest.
But even on the issue of technical efficiency to achieve a narrow fiscal objective, TRAI had raised “red flags” which merit more serious consideration. TRAI had warned of a price war if additional spectrum was not made available for new comers in 900 or 1800 bands. If newcomers have to fight it out with incumbents, clearly, bidders will scrape their revenue models to the bone. This is what has happened.
In the 900 MHz band, the bids are more than 2.2 times the reserve price. Was there really that much undiscovered fat in the revenue models of the service providers? Clearly, if there were such huge margins then the auction has achieved what markets are supposed to do– cut the producer surplus to optimum levels and pass the benefits to customers.
But there could also be a fine print to this bidding madness. DOT has still to take decisions on the property rights of the new spectrum owners. We know that they can share spectrum in the same band (900 and 1800 MHz being considered as one band) with other service providers, but on what terms? When and how will they be able to trade it with spectrum in other bands within and outside their License Areas? When does government intend to implement it’s “in-principle approval” to create a post-auction market for spectrum trading? If not, why not?
All these are “untapped value pools” for enhancing producer surplus post the auctions. Are we sure that this discretion will be used well?
More importantly, recent history in natural resource management in India shows that the use of administrative discretion immediately raises “red flags” and can invite an adverse comment from the CAG or CBI investigations on the charge of “crony capitalism”.
The spectrum auction is for 20 long years. Does this mean that if the Minister or his officers err on the side of complete probity and safety, it effectively seals our economic future at a sub-optimal equilibrium level till the next auction two decades hence? And only because they failed to take these crucial decisions upfront prior to the February auction?
Of course, the Indian bureaucracy has a delightful habit of springing welcome surprises. It is entirely likely that they will find a way out of this conundrum. But TRAI’s observation remains relevant—why go to Nagpur via Kanpur?
And finally the juicy part—who won? The Finance Minister won big time. He got around Rs 9,000 crore in FY 2015 to plug part of our fiscal deficit, courtesy the generosity of the winning bidders, who paid up part of the upfront payment before time to meet the March 31st fiscal deadline.
The DOT lost the opportunity to burnish their image and came out instead looking like bumbling, inefficient, indecisive babus.
TRAI covered itself in short-term glory by being outspoken—almost pugilistic and technically sound.
The handful of six private service providers, being canny business people, frankly don’t care how the government wants to play the game, so long as they win out in the end—which some of them are likely to.
Customers are on a roll with the fizz of tailored talk and data plans and an ascending escalator of bundled services to care too much one way or the other.
And the nation—well, any outcome which helps reach the tight fiscal deficit target helps India get good risk ratings; cheaper credit and most importantly international recognition that PM Modi means business. All’s well that ends well.