Column: Why net neutrality?

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Published: April 30, 2015 2:27:19 AM

Economic analysis suggests that net neutrality may weigh against efficiency in the build-out of infrastructure

In a recent column (, I argued for the importance of a robust digital infrastructure for India’s development. Since then, the government has conducted a record-setting auction of wireless spectrum, and a controversy has erupted over net neutrality. There are two reasons for looking at this issue more closely. First, net neutrality so far is a bit of an elite issue, since only a relatively small percentage of Indians are internet users. Second, the net neutrality discussion has been rather emotional, rather than analytical, making it difficult to judge what will really lead to wider internet access for Indians.

Net neutrality has been a major policy issue in the United States for several years, and considerable analysis has been done. The US context focuses on residential internet access, whereas in India, because of the advent of smartphones, the issue has arisen in the context of cellular providers, but the economic issues are the same. In particular, the internet service provider, whether a cable company or a wireless provider, has some degree of monopoly power vis-à-vis consumers in all cases. Economists Nicholas Economides and Benjamin Hermalin provided a comprehensive analysis as long ago as 2012. They begin by pointing out that there are two types of deviation from net neutrality. The first is charging application and content providers, where the status quo is zero fees. The second possible departure is price discrimination. In the US, this has meant differential transmission speeds or prioritisation, whereas it can now include fees for participating in a consortium of providers (in particular, the Facebook-led initiative).

The analysis first shows that, with respect to prioritisation of different classes of content, the superiority of net neutrality for social welfare can depend on the specifics of consumer demand, but that holds under plausible conditions. Second, with respect to charging content providers, the results are similar: Under plausible conditions, such charges reduce welfare, where some content providers drop out of the market. The two economists also argue that the benefits of net neutrality are reinforced once the possibility of innovation by content providers is allowed for. Indeed, this has been a point made in the Indian context, where innovation in a fledgling market for internet content would seem to be extremely important.

A countervailing consideration is the impact on provision of infrastructure. The economic analysis suggests that net neutrality may weigh against efficiency in a build-out of infrastructure. In this context, it has to be recognised that the Indian government’s spectrum auction, while being designed to allocate spectrum to providers who can extract the most value from winning, is also intended to maximise government revenue, rather than social welfare. Net neutrality may help by forcing providers to expand usage, rather than extracting revenue from a smaller number of consumers, but this expansion may worsen congestion in the absence of an expansion of the infrastructure.

Parliamentarian Jay Panda has offered an important and innovative solution to the problem created by a need to build infrastructure and increase market size in a situation where many consumers may be shut out by simple affordability conditions. He suggests using the Universal Service Obligation Fund (which is a further source of government revenue extracted from the telecom companies), to allow the telecoms to reverse bid for building networks for rural and unreached areas. He also suggests providing electronic vouchers to poor consumers for purchasing internet access (wired or wireless)—through Aadhaar linkage. Both suggestions are desirable complements to net neutrality. Another possible policy intervention would be to directly incentivise innovation for expanding the range of content and applications available to Indian internet users, through tax policy, for example.

Aside from incentivising private providers, the government needs to support public investment in a fibre-optic network. This is already on the agenda through the National Optical Fibre Network (NOFN) project, which is several years old. The FY16 budget delegated this implementation to the states, with reimbursement from the Centre, and Andhra Pradesh was quick to take up this opportunity, but it is not clear whether the delegation to the states will speed things up in general. Clearly, there are opportunities for greater efficiency in government services and positive externalities for the private sector if the NOFN moves forward effectively. What is surprising is that the slow progress of NOFN has received hardly any attention compared to the furore over net neutrality. Or perhaps this reflects the difference between the perspectives and media clout of elite urban Indians versus rural Indians who do not have any kind of internet access.

The bottom line, therefore, is that net neutrality is almost certainly desirable from a social welfare perspective, but direct and indirect public investment in building out the digital infrastructure may be just as important, and deserves more attention from those who influence policy and implementation.

The author is Professor of Economics, University of California, Santa Cruz

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