How Indian Telcos Are Planning To Hijack The Open Internet & Cripple The Startup Ecosystem

Every web startup depends on a free and open internet that provides a level playing field and enables “innovation without permission.” This requires telecom operators to adhere to a set of principles known as net neutrality. These principles, followed voluntarily since the earliest days of the Internet, were recently made legally enforceable by the US telecom regulator, the FCC:

1. No Blocking: Internet providers may not block access to legal content, applications, services, or non-harmful devices.
2. No Throttling: Internet providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.
3. No Paid Prioritization: Internet providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind.

In India, however, net neutrality is under grave danger. Telecom operators like Airtel and Vodafone want to block apps unless they get paid by app developers, and our regulator, TRAI, looks likely to capitulate to their demands. This would be an extreme violation of network neutrality.

However it’s not just the extreme violations that will destroy net neutrality in India. Even the practice of zero-rating — where operators have a separate, free plan where only apps that pay them are accessible — would kill the web startup ecosystem in a few years. An example of such a plan is Airtel Zero, announcing yesterday to garner public support as TRAI prepares anti-neutrality regulations. You can see that zero-rating violates principle 3 above, but it might not be obvious why this is harmful.

The current form of zero-rating, with a handful of apps, is just the thin edge of the wedge that will split the Internet in two. In two or three years, the 100 or so top sites and apps will all become available on the “zero” plans of all operators. As these 100 websites cover 95% of most consumers’ usage, a majority will choose the zero plan rather than the open internet. The operators may also dramatically increase the prices for the real internet access in order to to accelerate this switch.

These users will all be lost to startups that cannot afford to be on the “zero” plans.

Why would operators want people to switch to a free plan? That looks like a terrible business strategy!

No, it’s pretty sound. The reason lies in two surprising facts.

First, operators will make far more money per MB on “zero” plans than on the open internet, simply because large monetized apps can afford to pay more than consumers. If you want to get pedantic, many apps, especially in e-commerce, get many times more economic value per MB than the average home user. The operators know this, so they will charge more.

Second, consumers purchasing data plans have far more negotiating power than small or even medium sized app developers will have. Consumers only have to purchase one internet plan from one operator, so operators must compete with each other; app developers on the other hand must sign up with all the operators or lose a large chunk of their user base, so the operators are not in competition and can work like a cartel. Except for the largest apps, whose absence might cause users to take the drastic step of switching operators (e.g. Facebook), app developers won’t have any negotiating power vis-a-vis operators.

If it’s so terrible for app developers, then why did Flipkart sign up? Also, what about Airtel claiming Zero is an “open platform” where startups can also pay to “market themselves”?

The cost for a large company like Flipkart, who signed up early, has large traffic and probably has a long-term contract, will be a tiny fraction of that for a startup. Zero will be an inherently unequal playing field.

This is why segment leaders like Flipkart have signed up so readily. It helps them keep out competition from scrappy startups. “Zero” plans will freeze the current market structure in each segment, which is in the interests of the segment leaders whose fear of decline is greater than their aspiration for growth.

Nevertheless, it is potentially a very dangerous game for Flipkart. When the open internet shrinks in India, so will their negotiating power vis-a-vis operators.

Related: Flipkart May Shell Out INR 8.8 Cr. Every Month On Airtel Zero?

The whole thing sounds like a terrible deal for startups, but wouldn’t consumers still benefit from the free data?

Whatever Flipkart pays Airtel will be recovered from us through higher prices. In fact, with just one or two competitors rather than dozens, the pressure on Flipkart to keep prices low, deliver stuff on time and provide good customer support will all reduce.

The same holds for free apps — they will use their newly increased market share to charge advertisers more, a cost that those companies will pass on to us.

In the longer term, customers will lose as future Indian startups all die before they even raise an angel round.

What can we do to help preserve net neutrality?

TRAI has released a consultation paper on this, and we can send comments until April 24. While we certainly recommend that you do, the wording of the consultation paper looks like it was drafted by the COAI (Cellular Operators’ Association of India) and are filled with their claims and arguments passed off as fact. This means that writing to the TRAI is probably not enough, and we need to mobilize public opinion and make our voices heard.

Most importantly, acting together will be far more effective than acting individually. The author is part of a group of concerned citizens fighting for net neutrality, and we welcome you to join here.

Related: How Airtel, Voda & TRAI Are Trying To Screw Indian Internet Users