Why does one regulate a business?

The recent discussions and debates on net neutrality in the media and among people got me thinking about one thing. What’s a regulator? Why do we need a regulator for any industry? 

Well, any industry that is governed by a body that is formed by a law of parliament to regulate the functioning of an industry would be categorized as a regulator. In the Indian context, the Reserve Bank of India (RBI), Telecom Regulatory Authority of India (TRAI) and the Security Exchange Board of India (SEBI) are examples of regulators. 

RBI regulates banks and non banking financial institutions. TRAI regulates the telecom and broadcast industry. Recently it has taken up the role of even regulating Internet in India. SEBI regulates the stock markets and the forward markets.

But why do we need a regulator for an industry you say? Governments try to figure out how to regulate businesses. By the time they try to figure it out, there are calls to regulate the industry. When the regulation is demanded then the natural corollary is setting up a regulator. This satisfies the industry members because they have to go and whine about their problems to one organization rather than the government.

That was the reason why (new) regulators are setup in India. The real reason that we should setup regulators for industries is simple. Let businesses be given a set of rules to conduct their businesses. These rules are to be implemented by people who understand how the industry functions. So if we have a stock market regulator then obviously there must be people who know a little bit about the stock market working there. It would be silly to have someone, who doesn’t get the stock market like a bureaucrat who didn’t work or study to understand securities laws and stock markets most of his life, wouldn't it?

Well, that’s not what happens in India. Every law that requires a regulator would eventually have a bureaucrat manning the regulator after a while. I am not railing against bureaucrats here. I am just highlighting a simple fact that at some point we need to have a set qualification for regulators. We can’t carve out a bureaucracy from a ministry and recreate it in another white elephant of a regulator. This can’t be happening again and again.

I say this because when you watch Raghuram Rajan’s work with the RBI and his constant regulatory movements, you know the guy knows what he’s doing. Why shouldn’t all regulators be like that? They should be nimble and react to the business environment that prevails. They shouldn’t be caught napping. And neither should they come out with papers that are patently favoring the companies that they are trying to regulate, like TRAI did with Net Neutrality the first time.

TRAI should have foreseen the Net Neutrality debate coming. There was a huge hue and cry about the same subject in the U.S. last year. We are the next big market where people would try to control the future content delivery mechanism – the Internet. You can’t be caught napping.

We should move to a more professional approach to regulating industries. We can’t keep giving posts that require technical qualifications to people who might not have any. We can’t have a regulatory system that only responds to the companies they regulate but not to the consumers.

Why the consumers you say? Well, look at it this way. Laws are passed in parliament for the greater good of people right? Then the law that creates a regulator should also be interpreted and applied for the greater good of the people. That would mean the regulator should work for the greater good of the people too.

Why shouldn’t our regulators not take the consumers views and make it their only reason to exist? Businesses are important for an economy no doubt, but regulators are not meant to promote monopolies and super profits. The businesses are supposed to figure out how to make profits. That’s why when you have the largest telecom operator in India complaining about loss of revenue because of lower revenue from calls and uses that as a reason for justifying differential pricing for data, we should stop and think. Who were these regulators set up for again?

It’s the people stupid.

Net Neutrality: Why should a network be neutral?

Why is everyone debating so passionately about network neutrality in India? Why does it even matter to anyone whether a network is neutral or not? This question has popped into all our heads when the media coverage of this debate reached a crescendo before December 30th 2015 and it will again do so before January 7th 2016.

The debate here is essentially whether the network that is the internet should be controlled by a few or should it be democratic. Democracy would mean that the people who populate the would would control the content that is created on the internet.

Television and Internet

Alright, so let's go back in the past for a bit. The television revolution in this country began in the early 90s. It allowed us to watch new age programming (for those of us who remember Doordarshan) and allowed content creators to experiment with different formats. It popularized sports broadcast and also led to the eventual explosion of the television news business. There was one problem. The broadcaster had to pay our local cable operators(CO)/multi-system operator(MSO) to be available on your television screen. This payment is called the carriage fees. If I couldn't pay the carriage fees, my channel wouldn't feature on the cable network.

Long story short, those who owned the network owned the broadcasting business. This is still the case. The cable digitization drive will move the cable business from an analog signal to a digital signal. This will allow the broadcasters to measure their subscribers accurately. It will also help in sharing of the subscription revenues between . It will help in better tracking of the television rating points (TRP), the lifeblood of the cable /direct-to-home (DTH) TV industry. TRPs allow marketers to measure the audience of a particular TV show or channel. TRPs help the marketers decide where they should place their ads to maximize the reach of a marketing campaign.

So in all every medium of communication should allow monetization for it to be able to sustain itself. Take newspapers, magazines, television news channels, entertainment channels etc. The fact that television media was owned by the messenger (cable TV companies) and not the content creator (broadcast companies) is what led to the broadcasting business being a very expensive business. The listed media companies in India like NDTV, Network 18 (before Reliance acquired it) and India Today group were all in debt. This is because the television business entails huge fixed costs to get the business rolling.

Internet is democratic

The Internet is democratic. It allows the content creator and the content distributor (internet service providers and companies like Facebook, YouTube and Netflix ) an equal footing on the medium. Initially, there were only a few content creators on the Internet.

As the adoption of the Internet grew, we saw companies like YouTube and Netflix come up. These guys put the creators and the consumers on a platform, so that the consumer could choose which content he/she could consume. Hence, there was more content out there to consume and the internet made it one click away.

Facebook the behemoth

Then came Facebook. Facebook's business model is predicated on the idea that as long as people are on Facebook, it will make money. That's the whole point of the medium. It's a good business though.

Imagine having all the knowledge about the likes and dislikes of almost 1 billion users of the Internet. If you actually go through Facebook's terms and conditions, it says that Facebook can do whatever it wants with any and every byte of date you share on Facebook. This data can be used to target ads at Facebook's users. Facebook needs more people on its network to justify its valuation.

The more people it has on Facebook the more data it has to sell to marketers and advertisers to tailor ads at Facebook's users. Every like and dislike that you share on Facebook can be used to target a certain product at you. This is why Facebook is free. It's users are the product to Facebook. The customers are the companies that pay money so that we see ads on Facebook on our news feed.

If Facebook owns the platform through which you access the Internet, then they have more than the data that the need. How? An Internet user accessing any website through Free Basics would be sharing all of his/her browsing information with Facebook. This is because Facebook would be the gateway to the Internet. More information means more money. It's a simple equation.

What's in it for the telco?

In telecom parlance, this is called Average Revenue Per Unit (ARPU). It means the average revenue a telco has earned from a user on its network. This would include the calls that we make and the internet usage that we indulge in on our devices.

Most telcos are obsessed with their ARPUs. A higher ARPU means that the average customer is earning the telco more money. In India, ARPUs have stagnated (put the number here). Data (i.e. Internet) is the next big play that is going to earn the telcos more money. Imagine the possibilities. There are tests that have happened in the U.S. which may provide over 250 GB per second Internet speed. Well, what does that mean Vivek? Why should that matter to me?

We are going to abandon television very soon. The sheer speed and the targeted marketing ability of the Internet is going to cannibalize the broadcasters. The broadcasters are already seeing this trend and want to turn into a multimedia players.

Don't believe me? Google your favorite television show and there might be a pay per view or even a free streaming service available for it. Do you think you're going to spend 600-700 bucks for a television package in ten years? And this is in terms of today's value of money. This amount might be higher in the future considering inflation. Internet pricing will only get cheaper over a period of time as more people would adopt the internet.

Imagine a day when you won't think twice before having 2 GB per second Internet bandwidth at a reasonable price. If the speed increases higher than that, it might just replace your DTH or cable TV. Apple TV and Amazon Fire are examples of this.

The point being telcos have realized that they would remain only a utility provider if they can't have differential pricing for data. They won't earn even a slice of the ad revenue that content providers would be earning through their content. This is because the current model means YouTube owns the platform and hence gets to collect money from the ads. The argument of the telcos is that it's their infrastructure (and since the ARPU from voice calls has gone down) they need to protect their business and be allowed to have differential data pricing.

But why should the network be neutral?

Net neutrality activists say that the Internet was formed with an open architecture. It is supposed to be a connection of several networks across the world. If I enter the web address of a particular webpage in my browser, then I am essentially directed to that webpage as fast as my internet bandwidth would allow me to. Differential data pricing would on the other hand remove this parity. If Google paid my telco more money, then they get a leg up and load faster. And if say a small time media startup couldn't pay that money, then it would have to load slowly.

What's wrong with this you say? Shouldn't anybody who is ready to pay be allowed preferential access? Remember the cable TV industry story in the beginning and the carriage fees? It created a huge entry barrier for new players in the broadcasting space. Only those with deep pockets could feature on a cable or DTH network. There was no level playing field. 

The channels that were available on the network depended more on the abilities of the content distributor and content creator to hash out their business deals. In effect, the content creator (can be you and me) couldn't negotiate from a position of strength. This led to content being created by very few people. The Internet has changed all of that. It gave the power back to the content creator. Content over the Internet could mean any information -audio, visual or text.

Wouldn't' you want a cash cow that will allow you to make money just by having a regulator make a few changes in the regulations for you? The forces of the market are too difficult to handle you see. Profits are too precious not to protect. It would be better if telcos and Facebook own the whole space and make their own deals to share the piece of a huge pie. It's better if they get the deal done before anyone is looking.

P.S. I must admit that a lot here about the media landscape in the early 90s isn't my own thinking.. Most of my understanding is borrowed from the writings of Vanita Kohli-Khandekar. She has been covering the media industry in India since the early 90s. Reading her work would be really helpful.