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Manu Rekhi
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How Telecoms And The Indian Government Stop Net Neutrality In Its Tracks

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Editor’s note: Manu Rekhi has been active with Inventus since 2008, co-investing in, advising and mentoring Inventus entrepreneurs particularly at Vivu, Dhingana, Genwi and Credit Sesame. 

Hidden under the guise of enabling the Indian population with faster and more reliable services, the major players in telecoms, such as Airtel and Reliance, have adopted new policies that could undermine the basic building blocks of Internet access in India.

In addition, the government’s heavy hand and tendencies toward corruption lead to a dangerous road where monopolies run wild in India and smaller startup technology companies are faced with bowing out or being subjected to high costs to even be able to compete.

While there is no doubt that India is on the rise as a global economic power, regulations have the potential to stop the country’s innovation in its tracks. Most recently, Mark Zuckerberg’s Internet.org partnership with Reliance and the introduction of Airtel Zero — a platform by telecom operator Airtel that will enable content providers to give free apps to consumers — have put the topic of net neutrality and its impact on innovation and entrepreneurship at the center of a heated debate in India.

Real net neutrality is good for the consumer and good for India’s competitiveness but not the contrived one, which is being proposed by some big players who want to establish an oligopoly under the guise of net neutrality.

What appear to be great initiatives to get India’s growing population online, like Internet.org, are actually wolves in sheeps’ clothing. Large companies with deep pockets, like Facebook, have the resources to be placed at the top of the “deck” for consumers, but startups and small developers do not have the money to gain access through negotiations with Reliance Communications or Airtel, two of India’s largest telecommunications companies.

There should be no Internet fast lanes for large corporations: Net neutrality needs to be truly free and not falsely bundled like a social venture. The current trajectory of these regulations is creating a walled garden that blocks innovation and will ultimately cause more harm than good for the Indian entrepreneurial landscape.

As the director at RAND Center for Asia-Pacific Policy, Rafiq Dossani, says, “There are two ways to undermine net neutrality. One is to segregate the premium market from the rest by allowing telcos to charge premium prices for high quality bandwidth. Another is to segregate the low end from the rest through initiatives such as Internet.org.  The result will be identical – a segregated market that goes against the concept of the Internet as a utility where users pay fees that match long-term average costs.”

To understand how the current state came to be, let’s first examine the role of the Indian government.

The telecom revolution in India took off when the Indian government led by BJP moved away from auctioning spectrum and to a revenue share model in 2001. The new model allowed players like Airtel and Reliance among many others, to get a foothold, invest in infrastructure and create the most dynamic telecom sector in the world.

In 2008, India’s government abandoned the successful revenue share model for an opaque first-come, first-serve model. This shift led to deep corruption and the bribing of government officials by telecom companies. Telecom companies have spent billions on bribe money that they no longer have money to invest in infrastructure.

This corruption is most evident from a series of events that have challenged the face of the Indian Internet landscape, such as the 2G scandal uncovered in 2012 and, most recently, one occurring in December 2014. In December, major telecom provider Airtel announced it would begin charging additional fees for making calls on its network using popular apps like WhatsApp and Skype. This sets a dangerous precedent, and there is no doubt that we will soon see far more egregious anti-competitive behavior.

The Reliance and Airtel playbook is simple:

  1. Restrict access under the guise of a public good.
  2. Charge companies like Facebook, WhatsApp and Skype for access or start charging users additional fees on top of data plans.
  3. Anti-competitive: Preferential treatment to in-house content. For example, if startup X creates a disruptive new product, the telco conglomerate can copy it and use the guise of Internet.org or Airtel zero to gain distribution.

The root of this problem is not the telecom providers themselves; it’s the Indian government.

From 1947 to 1990, an entrepreneur had to jump through a complicated series of hoops to obtain a license, which would permit them to set up and run a business in India. The rules, regulations and red tape were in place because the government was operating under a “planned economy” at the time and had complete control over private companies and their operations.

The telecom sector was essentially monopolized by the state, which in its infinite wisdom, had declared a telephone as a luxury item and did not allow any private investments in the sector.

This continues even after the economic liberalization of 1991. In 2000, after 53 years of state monopoly, there were only 17 million landline phones and about 1 million mobile phones.

At the end of 2000, NDA government under Prime Minister Vajpayee announced a big bang liberalization of the telecom sector, inviting private investments in the sector by opening up the licenses to one and all on a revenue share basis with only a nominal upfront charge. This freed up the capital to be invested in actual infrastructure, rather than in license fees to the government as had happened in some of the countries in Europe.

In one stroke, a golden age of telecom was ushered in; a new vibrant, corruption-free industry was born that was competitive and innovative in its approach, that delivered ever improving service at world’s lowest prices to hundreds of millions of consumers. By 2008 the number of cell phones in India had increased to over 300 million. India had one of the best telecom infrastructures in the world, which attracted private investments in newer technologies and was at once very profitable and low cost.

With the new method, the government took 7 percent revenue share on every cell phone bill and tax revenues soared. It was a win-win-win scenario: Companies like Airtel, Reliance and others were able to compete with the state-run BSNL and create immense shareholder value.

Consumers had more choices and better product at very competitive prices, and the government collected “more” tax revenue and saw the utility spread through the population without any subsidies.

Though the revenue sharing policy set India on the right track, when the government reverted back to its corrupt ways in 2008 and adopted the whimsical policies of selling licenses to cronies. These winners essentially immediately flipped those in the marketplace at huge profits. Investments dried up and the industry has struggled to keep up the advancing technologies. In less than five years, industry went from being one of the best to one of the worst.

The only reason to revert to an auction-based system is control and ability for politicians to collect bribes. This system allows incumbents to play the system better than upstarts, who don’t have the capital and connections to pour into licensing and bribes. The 2G spectrum scam that surfaced in 2012 is an example of the corruption within the government and the inefficiencies of a state run process.

Currently, India has less than 9 percent of the population online. The government wants to provide Internet access to everyone but charging so much for auctioning is resulting in the opposite effect. The current model, auctioning off spectrums, must change for this to happen. Otherwise, big companies will continue to monopolize the space, and once again leave the small businesses and startups with potentially groundbreaking ideas behind.

The positive effect of healthy competition and Indian innovativeness had a far-reaching impact, much more than Internet.org could ever accomplish. This was made evident from a particular incident that I encountered in 2007 while living in India, working for Google as a product manager. I was on a rickshaw in a small village outside of Bangalore and on a call with an engineer when my phone battery died.

The rickshaw driver generously handed me his phone. I was quite shocked that someone scraping by with two meals a day had a mobile phone and allowed me to use his minutes at no charge. The revenue-sharing model welcomed competition among telephone companies, which drove the cost down so even the poor in India could take advantage and reap the many benefits of owning a cell phone.

These poorly thought through regulations create unnecessary friction that will stop India from producing powerhouses like Facebook, Google and Tencent. As for the telecommunications companies, they spend billions of dollars on the auctions that they no longer have money for infrastructure, and they must find other ways to make money – which means charging content creators that can afford it access.

However, things may be looking up. In an ongoing case, the Supreme Court of India is examining Reliance Telecom’s claim that spectrum auction based on tender condition does not meet the overall goal of public policy despite the fact that the Indian government is able to make a lot of money.

I want to see that Rickshaw driver check his smartphone for rides on Autowale to increase his daily yield; watch his favorite Bollywood music video and find the best prices for groceries on his way home on an app written by a local entrepreneur. Net neutrality is good for the rickshaw driver, and it is good for entrepreneurs and definitely good for an emerging India.

It’s time to get back to an open competitive environment where competition is based on innovativeness and quality of service rather than the depth of one’s checkbook.

Featured Image: Cranach/Shutterstock (IMAGE HAS BEEN MODIFIED)