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A Literature Review of OTT- related Policy and Regulatory Issues

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A Literature Review of OTT- related
Policy and Regulatory Issues
Industrial Organization

Hochschule Rhein- Waal

Faculty of Society and Economics

Md. Motaleb Hossain

 A Literature Review of OTT- related
Policy and Regulatory Issues
Applied Research Project, M-EF_03

Faculty of Society and Economics

Economics and Finance, MSc
Hochschule Rhein- Waal

Supervisor
Prof. Dr. Jörn Sickmann 5

Faculty of Society and Economics

Assignee
Md. Motaleb Hossain
I
10639

Due date: 15.08.2016

.
Table of Contents

Introduction ................................................................................................................................. 1
What is OTTs ................................................................................................................................ 2
Voice (Skype, Viber etc.): ........................................................................................................ 2
Messaging (WhatsApp, i- Message, Webchat, Line): ............................................................... 2
Application eco-systems (mainly non-real time): .................................................................... 3
Cloud Services and other virtual storages: ............................................................................... 3
Problem statement ...................................................................................................................... 5
Conceptual framework ................................................................................................................ 7
Methodology................................................................................................................................ 8
Literature Review ......................................................................................................................... 9
Interaction among the players ................................................................................................... 13
Key elements at the core of policy and regulatory debates ....................................................... 15
Net neutrality ......................................................................................................................... 15
Market reviews ...................................................................................................................... 16
Feasibility ............................................................................................................................... 17
Incentives for the Telcos ........................................................................................................ 18
Economic outcome .................................................................................................................... 19
Regulatory remedies and market conditions: ............................................................................ 21
Future research opportunities ................................................................................................... 23
References ................................................................................................................................. 24
Introduction

The telecommunication market along with its supplementary services is changing rapidly
and a good number of new players is being successful in presenting new and innovative
services. The quick development of Over The Top Services (OTTs), which generally
requires wide use of existing infrastructure of traditional telecommunications service
providers but do not own an extensive infrastructure. This imbalanced situation has led
to disruptions in the traditional internet ecosystem. Hence, we can agree that at least some
of the OTTs growth is responsible for the recent distress situation of traditional carriers.
The impact of lost revenues may be further enhanced by smartphones dramatic growth.
We will explain it later part of the paper.

We are going to explain the facts behind the necessity of regulation of

Telecommunications and OTT service market. Neil Brown (2013) has identified two
main incentives of regulation, effecting market liberalisation, and protecting the interest
of consumers where market forces alone would be insufficient.

During our research we have seen so many arguments both for and against regulation for
the protection of consumers’ interest. As a substitute of traditional services over the top
services present the possibility of much the same harms as traditional services. In order
to protect the consumer interests Regulator should take adequate measures to regulate
OTT sector. But we have to keep it in mind that the traditional policy and regulation will
not be appropriate for OTTs. Because the respective market does not belong to a single
country or the consumers are not from a particular country. So in case of any strictness
from any individual country towards OTTs will certainly suffer from potential loss
without any significant change in the consumers’ protection. Because even though a
country can force the providers of OTTs but the consumers can still use them.

On the other hand, OTTs are causing major damage to the inflows of Telcos. Due its free
riding nature the Telcos are feeling deprived of justified revenue. But the situation is
getting more complicated, as the consumers are very demanding for the high speed
internet to use OTTs services, which in result pushes the Telcos to provide extra finance
(investment) in network upgrading and spectrum. So there are so many arguments
whether Regulators should treat OTTs in a similar fashion as Telcos or is it a possibility
that regulator might considering the deregulation of Telcos.
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What is OTTs

Over The Top services providers facilitate consumers’ internet connection. Therefore, the
user’s internet service providers or Telcos are not involved in the supply of an OTT
services as well as do not get a share of the revenues earnings in this process. This is one
of biggest financial incentives for the regulatory authority to get a grip on the situation to
set a level playing field between OTTs and the Telcos. However, OTT services take many
forms, voice and messaging services, video and music services and most of them are
acting as popular substitute services among the consumers in the telecommunication
markets. This is not only bad for traditional service providers but also hurting their
traditional services revenues.

Voice (Skype, Viber etc.): Traditional Voice call services are not replaced by the voice
services provided by the OTTs, especially in the international calling. VOIP services have
made a major impact in International calling: Globally, in last 5 years or so Skype has
achieved more than 44 percent increase, which is more than twice the volume growth
achieved by all the phone companies in the world combined. This drastical shrinkage
could result in to the growth of free calling services such as Skype or Viber. According
to OVUM (a London- based research firm), due to the current deterioration the
telecommunication industry might lose a total of $386 billion between 2012- 2018.

Messaging (WhatsApp, i- Message, Webchat, Line): In 2013, the global SMS traffic
was around 8.16 trillion messages annually, when compared to 18.3 trillion messages by
OTTs like WhatsApp, Messenger etc. To add more spices to the wounds in recent years
Online messaging traffic have been including a number of broadcast messages (live in
Facebook), in some other cases the messages are using geographical location information
(Ola, Uber etc.) photo sharing, as in Instagram, Snapchat etc. There is online message
which is Operating System specific like Apple iMessage. Apple said 40 billion iMessages
were sent each day during January 2014. WhatsApp's subscribers base is ever-growing
every day in the world as it has a free subscription model. The SMS traffic for the telecom
operators has shown declining trends in the recent past. The messaging traffic fell 18%
from 5.35 bill in June 2013 to 4.40 bill in June 2014. This decline in the volume of
traditional SMS service revenue has an implication of approximately $350- $400 billion
annually.

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Application eco-systems (mainly non-real time): Social media services like Facebook,
Linkedin, Twitter, Instagram, WeChat, or the E- commerce application, including m-
payments, m-wallets- Amazon, Flipcart, Snapdeal, Alibaba etc. are becoming quite a
phenomenon in modern day life. These lead to loss of voice and SMS revenues even the
revenues of traditional postal services like Deutsche post. In case of E-commerce
application, Amazon, eBay, Alibaba etc. are considered as major sources of loss of
revenue to existing brick and mortar establishments. But the process of regulatory
compliance in E- commerce industry is comparatively complicated compared to the
traditional brick and mortar establishments. First of all, these mobile commerce services
are provided globally with no specific geographical boundaries. Secondly they cannot be
brought under any taxation laws because there is a grey area about the domicile (no
national boundaries) of the service providers, as the businesses are operating through
internet.

Cloud Services and other virtual storages: The Cloud Services are actually virtual
storage system where the consumers can access the server from anywhere, any time
through the internet. The content in the server can be accessed from any device rather
leaving it on a hard drive or any hard paper copy at your home or office. iCloud (Apple),
Google Drive (Google), SkyDrive(Microsoft) and Dropbox offer various kinds of Cloud
services.

Cloud Services are allowing consumers to upload all their data on the Cloud server at a
central location which is then become accessible by using any device. Consumers are
using these services very frequently which in result also place huge demands (pressure)
on the network.

Emergence of wireless technology in internet services and the recent abundance of

smartphones are acting as catalysts, according to Cisco’s forecast, global IP traffic will
nearly triple by 2018, to reach 131.6 Exabyte’s/month. Consumer IP traffic will reach 108
Exabyte’s/month and business IP traffic will surpass 23.6 Exabyte’s per month mobile
data is estimated to grow at a CAGR of 61% in this time frame (Cisco Visual Networking
Index: Forecast and Methodology, 2013–2018). As a result, Telecom operators pushed to
finance the necessary additional investment in network upgrading and spectrum. But the
recent decline in revenue growth will certainly discourage the additional investment in
the infrastructure development.

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Video / Audio content: YouTube, Dailymotion, Vimeo, Netflix, Hot star, Spuul, BoxTV
are some of the popular Audio/ video applications which present unique opportunity for
the consumers to entertain themselves anywhere anytime with the help of much improved
internet services along with the easy accessibility of smartphones. These applications are
not in direct competition for a telecom operator. But they certainly caused a huge loss of
audience (hence advertising) for traditional TV services and cable TV services.

It is a very common knowledge that these media applications have been one of the major
OTT service sector that are earning huge revenues for the Internet companies. The prime
source of revenue of this sector is advertising.

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Problem statement

Earlier stages of internet services, networks used to be built around service applications,
like uvoice, internet or Pay TV. Voice, message or video content. But now a day these
internet services have been reduced to provided mainly by the independent service
providers. Among them Google, Yahoo, YouTube, Facebook, Wikipedia.org etc., are the
major players in this OTT industry. Because they are not owned by Telcos, they have no
significant control over the contents supplied through their networks. They are only
responsible for the data usage by the OTT.

Telcos have no control over the OTTs services, have no share in the revenues, has little
recognition for their traditional inter services and telephony services; so there are some
arguments that They should play their role as "network pipeline" instead of remaining
integrated companies that facilitate services and infrastructure. Due to the drastical
Internet growth, networks providers will have to be concerned about frequently built and
upgrade the network, the cost of which will have to be borne exclusively by telecom
operators. But are there enough incentives for this incremental invest in network? Telcos,
certainly do not feel that way. As we have already mentioned earlier, they have generated
cash flow through the provision of internet services, as the contents and carriage went
together. But now they are earning revenues only from wholesale data usage. Even though
volume of data usage has increased significantly in past couple of years, the Telcos
experienced a very little growth rate.in their data revenue. But question is how long they
are going to bleed and continue to operate like this situation.

In August 5, 2015, there was a seminar by TRAI, where the attendees have discussed this
issues from both players’ perspective, Telcos and Internet service providers.

First we will have a look from Telcos point of view. No specific geographical boundaries
make the internet service providers free from any kind of government regulation. Most
of the time internet service providers provided services or applications which are not
properly licensed. On the other hand, Telcos have to follow a very strict set of rules and
regulations and pay a large sum of money to acquire the right to provide telephony service
along with the network services. The situation is getting more unfavourable for the Telcos
as the OTTs are unfairly taking a way a big chunk of the traditional services (voice, Text
and other services) and earning at a cost of Telcos. but still the Telcos has to maintain the
quality of service and invest recurrently to upgrade the network service so that the
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consumers can use more sophisticated OTT services and results are more revenue for the
OTTs. But question is how long they are going to bleed and continue to operate like this
situation (free riding problem)

Now what about the OTTs point of view. Let us find out what are the prime driving force
behind the recent success of OTTs. OTT service companies are using the high speed
networks and provide the services to the consumers, most of the cases they are free or
very low fee. But still they are getting richer and richer and one of the major earning
sources is advertisement. However, OTTs have also some explanation against the
concurrent complain situation. OTTs are buying internet access from Telcos. and at the
same time the consumers are also paying for the same service to both the Telcos and the
government. They may not be bound by regulations to maintain a quality level of their
services, but due a very harshly competitive market of virtual services they have to look
over their shoulders to check and keep a standard quality of their services. Telcos are may
be complaining about huge data use but at the same time this is resulting into an increase
in the Telcos’ revenue. So however we are going to look through these subject matters
while, exploring different scholars’ ideas and their works.

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Conceptual framework

Before we go through out conceptual frame work I would like to recap the whole scenario,
trying to identify and summarize the important key factors:

1. OTTs do not have significant investment in the network infrastructure but

utilize them to generate revenue.

2. Telcos have invested heavily in the infrastructure development, but still

losing revenue due to the OTT services are substituting the traditional
services.

3. Two-million-dollar question:

i. Should OTTs be brought under the regime of regulation or not,

does the costs justify the outcome?

ii. If OTT should be regulated, how should the regulators approach

on articulating a policy to regulate this sector, which has unique
business model and market mechanism and which is by the way
changing very rapidly.

There are no geographical barriers for this OTTs, so the policy makers should think it
through before presenting any regulatory measures against OTT. To ensure level playing
field some of the countries (UK, France; India etc.) are showing significant interest in
regulating the OTT sector. but due to its’ mobile nature and the vast usage of smartphone
make it quite impossible to regulate OTT services within a specific country. Even if a
country is able to launch a regulatory action against the OTTs, the result will be more
deteriorating for the economy. The country will lose the revenue (from OTTs) but the
services will be still available for the consumers. On the other hand, no traditional
regulation will be appropriate for this particular telecommunication service sector. OTT
has unique business model. So it is really hard to define the market which is changing
every now and then quite rapidly. Therefore, the regulators should consider Ex Post
situation rather than Ex Ante.

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Methodology

The whole research works and the scientific paper is written as a literature review, as I
have instructed to do so. In this paper I have followed a specific literature review method,
which is called Thematic Literature review. In order to do so I have put my focus solely
on the specific topic and compiles the scientific works previously done by the scholars
and experts.

At the same time, I have presented a background of my work and try to put the problem
into a historical perspective. Over the course of the research work I have put my best
effort also to find out the current concepts and state of the research on the topics, policy
and regulation of OTT market. Which allows me to discuss the sources in terms of themes.
I have tried to grouped and discussed the ideas in terms of arguments and theories.

Thematic reviews of literature are organized around a topic or issue, rather than the
progression of time. As the method asks I follow the sequence of the concept of OTTs
regulation from a broader telecommunication services to a specific OTT services market.
The organization method is often called a funnel, where the discrete pieces of information
are funnelled from broader-level concepts to the specific studies, in our case it is OTTs
market regulation.

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Literature Review

According to EU telecommunications framework the definition of “electronic

communications services,” “which consists wholly or mainly in the conveyance of signals
on electronic communications networks.” As a result of this relatively physical definition,
it is not clear whether over the top services can be regulated by the current rule or not.
But from our understanding the ultimate question is whether over the top services should
be under any regulation. The most convincing argument for regulating OTTs is that these
services are substituting conventional services, and so there is a solid possibility of
consumer harm if the key interests are not protected. At first over the top services may
have been considered as a fresh addition to conventional telecommunication services, but
over the time OTTs services are now showing proficiencies of substituting traditional
services, which poses us with new threat. For example, Apple’s iMessage service, once a
user is signed in, messages are sent via Apple’s own messaging service. In this way a
consumer is not only using OTT services, but might not even have any clues that this is
the case. While a consumer can rely on the existing policy and regulations to protect them
from unlawful interference by their providers of traditional services, no such protections
exist in over the top services, but the damage is more severe as users unknowingly route
their communications via over the top services, and, as such, are not making informed
decisions about risk. as Neil Brown (2013) has said that this damage is not only related
to the issues of privacy. For example, it is a general scenario in the Traditional services
that the users are enable to terminate calls on other providers’ networks (liberalisation),
where new entrants would not have the same capabilities as incumbent providers, but also
to avoid a user being tied to a particular provider. But while interconnection obligations
apply to traditional services, over the top service providers do not share such obligation
to each other, a Skype user cannot terminate a call with a FaceTime user. So regulators
can put OTTs under more general competition law, operate as discrete services.

Since OTT services are gradually becoming feasible substitutes for traditional ones, the
authority is regulated this latter class of services will result in an unfair playing field.
unless the difference between them makes the regulatory burden equivalent; where
services are substitutable, it is doubtful that there is an enough difference.

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In practice, the providers of traditional services are facing a higher regulatory burden, and
at a greater cost; due to the regulatory limitations, they are more limited in their innovative
activities.

The revenues generated only from data carriage is unlikely to enable traditional providers
to withstand the revenues of previous years — with the value of services moving up into
the OTT application stage, so the facilitating original network connectivity become too
much highly-regulated commodity, bringing in much reduced revenue compared to that
of the OTT. Even though Regulations should be introduced in this sector to ensure a
justified competition, there are some arguments about the way OTT should be regulated.
The degree of regulation should be limited to the extent where it does more good to the
market and the society.

First of all, there is no exact definition of OTT services, it includes software as well as
other services which are within a closed platform environment like Facebook chat. They
really cannot be defined as an equivalent substitute of traditional services. Then regulation
is a costly process, so it would be wise to regulate any sector if and only if it can produce
better outcome. It should not restrict the innovation opportunities and revenue growth of
potential OTT sector. Due the confusion about the geographical location of the OTT
service providers, there is a big question about the potential absence of jurisdiction, only
the consumption of the services within the country is a valid enough reason to impose
regulatory action on the service. Even if a country finds it justifiable to regulate this
sector, it will be a very little help for the market. For example, if EU wants to put more
regulation on OTT sectors, it might be possible that the providers will migrate to less
restricted overseas country, as a result EU will lose the tax revenue from this potential
sector, where the consumption will be still going on at the same rate, which is apparently
a counterproductive outcome.

There are some other arguments regarding this specific market regulation. Allowing
telecom operators to charge fees from content producers can result in such a chaotic
situation where certain content would only be available on certain telecom operators. And
there is also a big question about the right and freedom of expression. Where the core
idea is to ensure all the internet resources are easily accessible to the consumers. But
eventually regulation will hamper the accessibility. Many of the OTT service providers
are small and start up business venture, who will face a lot of difficulties to ensure
reasonable network access if Telcos have exclusive arrangements with the help of

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regulation. On the other hand, some of the OTT services are really need to be patronised.
Like health related applications or some social awareness applications. According to
Robert and Ravi (2015) Traffic Management would not be allowed under Net Neutrality.
There is a fine line between correctly applying traffic management to ensure a high
quality of service and wrongly interfering with internet traffic to limit applications that
threaten the telecom operators own lines of business. They have seen a warning sign at
the end of the road to regulation where the internet access will become costlier. Due to
rise in data traffic, Telcos will be forced to increase the cost of access for consumers and
consumers would be worse off. Instead, Apps that earn by advertising and other business
models should be charged by the Telecom Operators. They have seen some opportunities
where regulation might allow the Telcos to discriminate. There are lots of ways they can
do that like blocking certain apps or services, so that they can maximize their profit form
their own services, or they can slow the internet or asking for more payment for fast lane
access. However, Robert and Ravi (2015) has depicted some arguments in favour of the
Telcos. Attributable to the increasing demand of the users of Data- intensive applications
Telcos are always under pressure to invest in network infrastructure in regular basis. So
to some extent it is justifiable if the Telcos can generate some extra revenue by charging
contents, which they can utilize to bear the expenditure to upgrade the network. Even
though there is a possibility of violation of net neutrality but there should be some level,
after what Telcos can charge additional fee from a OTT service Providers. The pricing
structure before that level should be viewed as a means of subsidizing and promoting
innovation. Actually Net Neutrality cannot be either strictly followed or totally ignored.
So the regulators should find a solution in between where there will be a somewhat
balanced level of control over the OTTs.

But it is really agonising to admit that no national regulation will be enough to put any
significant impact on the international dynamics of the internet service industry. The
emergence of Internet Protocol based telecommunication networks has enabled the
decoupling of application and network layers and which subsequently enables OTTs to
distribute their services and applications directly to the consumers. In line with the ideas
some researchers claim that OTTs might exploit Free riding opportunities, even though
Telcos are receiving for the facilitation of network at a flat rate. But the problems derive
primarily from the inequality of treatment of the regulatory authority towards the related
parties. Unparalleled regulatory obligation and gradual decline in revenue level due to
potential growth of substitute OTT services, make Telcos highly motivated to peruse the
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proclamation of regulation. On the other hand, the regulators are bound to oblige any
opportunities if it is given, in order to maximize the welfare of the society, in this case
benefit of the customers. In order to do so It may bring some change in the market
structure which eventually will pose as a barrier to the innovation process in internet
service market. However, regulation may be justified to the extent only if, it is there to
motivate Telcos to invest in the infrastructure, and certainly in an economically
reasonable way. Besides regulation there can be some other alternatives like, state aid
business, subsidies in the infrastructure etc. (Baldry, Dr. Steingröver and Hessler, 2013).

But what is the main driving force behind the government attempt to regulate the OTTs
industry to such an extent. But the reasons of this market failure should be diagnosed and
quantified. Baldry, Dr. Steingröver and Hessler (2013) have envisage a process of
assessing the current Broadband market. According to the researchers there is a very
popular hypothesis that the unfairly competitive behaviour of OTTs is causing the market
malfunction. The process should be started with the assessment of the economic demand
for the broadband service, the feasibility of the network should be calculated than. There
may be several outcomes, based on the outcomes the regulatory authority will make
policy decisions. But there might be a substantial possibility of negative public relations
effects of any regulation actions. Because the consumer will have to pay for their services
in a regulated market at a higher rate. Probably that is why most of the scholars are agreed
on that there should not be any injunction on the market, otherwise it will destroy the
competition by giving the Telcos upper hand and also restrict the innovation process by
regulating OTTs.

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Interaction among the players

Regulators must have a clear understanding of the market scenario and the related players
like Telcos, OTTs and the customers, how they operate and they interact with each other
in different market situation. Telcos are the primary source of Network facilities who
allow OTTs to use their network access. On the other hand, OTTs have to pay for hosting
and connectivity. OTTs use the network facility to deliver their services and application
to the end users and most of the cases they earn their revenue either with third party
advertisement or with little charge. Now these are the current market scenario. Now what
might happen if regulators are going to impose regulation on OTTs. According to Robert
and Ravi (2015), that might allow Telcos to manipulate the situation. Telcos can prioritize
the network access for higher prices (favouring any native services), put categorize
charges for different priority of network access (sensitive services). The prioritization of
network access will result in a transgression of the quality of service techniques, which
eventually will lead to a disintegration of internet services.

Now in order to ensure the quality of services delivered by the internet service market,
Robert and Ravi (2015) think the following principles have to be followed.

1. Effective competition in the IP service market: accurate information should be

adequately available to the consumers so that they can make right purchasing
decisions, if it seems necessary they also can switch their service providers.

2. Transparency: The service providers should reveal all their practices on traffic
management and service management. Ofcom, the telecommunication regulator,
has suggested about six principles about revealing consumers’ information in the
process of delivering services and applications.

a. All necessary information should be revealed and only those information,

that a consumers require to make an informed decision.
b. Elementary information should be easily accessible at the point of
purchase, and more elaborate technical information should be voluntarily
presented online or on request.

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 c. Consumers should be able to comprehend the practical impact of policies
and regulations on the way they may use the internet service, so the
presented information should be simple enough.
d. The information provided by the OTTs should be verifiable by consumers,
regulators or any other independent third party.
e. Customers should be able to compare information provided by different
providers, if they wish to before they are making any purchasing decisions.
f. Timing and precision are two most important things about the
effectiveness of information. So the information available have to be up-
to date, both at the time of sale and afterward.

As we all know the ultimate goal of the regulation should be to promote innovation and
technology and maximize the welfare of the end users. In order to do that the regulator
should consider the importance of consumers’ choice, unrestricted innovation and some
other factors of internet innovation. free speech and decentralized economic, social,
cultural and political interaction regarding this subject matter are also important.

If the regulators are really want competition to affect the OTTs service management
practices, consumers should be able to act on their knowledges and information by
switching providers. In a competitive market, consumers will be able to switch the
providers without extra costs or other barriers, when their providers have different service
management practices in operation. The possibility of the practice of prioritization in the
network provided by the Telcos, is becoming a matter of greater regulatory concern to
the respective authority. Somehow if the prioritization by Telcos become widespread, the
users who are not so prioritized will suffer competitively due to degradation of network
services. So there should be some policy measures to ensure the minimum level of service
quality from both sides. And finally the regulators should concern about one problem,
which is related with very recent discovery of the OTTs service risk. Most of the
advertisement funded application like Google, has shown foremost intention to present
bias search results to the customers, mainly in favour of their paying advertisers or related
companies. Sometimes they also follow and personalize the users through their browsing
history, personal information and social connexion (via social network application), and
most of the cases they are doing it with the proper knowledge and consent of the users.

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Key elements at the core of policy and regulatory debates

The advancement of internet has enabled the growth of firms like Google, Facebook and
Amazon, who have taken advantage of its ubiquity and reach to develop into global
enterprises and often have disruptive impact that has on traditional industries. Due to its
diverse nature we need regulations which are continuously evolve rather than being
designed as static documents. But at first we have to consider some economic perspective
of internet such as a strong contributor to GDP, improved job opportunities, increased
living standards etc. At the same time internet can be seen as a tool of creative destruction
or a dismantling force for many industries (printed newspaper). But as it is happening
throughout the world, no single nation or country can control its dynamic effects. So
policy makers should be ready to adapt new technologies, trends and above all new
business models. There are several arguments against and in favour of the regulation of
OTTs service industry. so we are now going through some key aspects of the core of the
policy and regulatory debates.

Net neutrality
Although international trends show that net neutrality is becoming less stringent, but It
has been suggested that to ensure a thriving and neutral Internet, basic neutrality
guidelines should be maintained or introduced.

This is predominantly relevant as the tendency towards discriminated service offers

could, without a framework, cause some internet services being neglected completely.
We can have a simple understanding of the principle from the net neutrality guidelines
issued in Singapore:

1. Telcos are not permitted to block any legitimate service content;

2. Telecommunication operators must always comply with competition and
interconnection regulations;
3. They must reveal information to the consumers about their network management
practices,

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 4. There should be a minimum QoS standards, well-defined in the licenses; and
should be strictly followed by the Telcos,
5. They are allowed to provide niche or differentiated network services and favour
any specific internet services.

Market reviews

World is becoming smaller and the countries are becoming borderless, especially the
market barriers are now a days breaking down what brings new players in the market who
are much more innovative in their business model. With the help of innovation and
dramatic advancement of internet enabled those players to achieve economies of scale in
such a scale which is far beyond the reach of their physical counterparts. So the regulators
are not facing any ordinary market scenario, rather they have to consider such a market
which is ever changing and evolving due to harsh competition and so the regulators
should have a future proof framework to cope up with any kind of sudden market
development. The main focus should be on the innovation phase of the market. Most of
the researchers are agreed that the regulation should be technology neutral and ex- post
rather than ex ante in nature.

If we look through the eyes of Telcos, who have invested millions of dollars in the
network infrastructure development, licensing and other regulatory stuff, are currently
bleeding due to the sudden emergence of OTT services, who are eventually proved to be
substitute services in the IP service market. So they are utterly demanding a quick and
comprehend regulatory solution of their revenue difficulties. Otherwise there will be bad
consequence, one of them is showing already (lack of motivation to investment in
broadband).

But it is not an ordinary market, so it is need to be well defined before imposing any
policy. As OTTs services are both telephony services as well as media content. So such
a congregated service market should have to face a well congregated regulatory
framework. And there is also a big problem with the Sovereignty questions. For example,
Cloud service in general located in a specific country (abroad). So no single country or
regulatory authority will be enough to regulate them, or otherwise if the countries did
agree to work together, there is also a bigger question that how to co- ordinate the
regulators from different countries.

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Beside the concern about Telcos’ revenue there is also a matter of consumer protection.
For example, today we are living in a web of social networking application like Facebook,
twitter etc., where people voluntarily disclosing their personal information, photos, videos
etc. but the things they are not aware of that, this information are frequently used for
targeted advertisement. There is no specified declaration about the privacy concern, data
ownership or the longevity of those information.

In their recent quest for regulatory remedies of this situation the BSA (2013) recognised
seven requirements for internet services and applications to develop optimally in a
society. These fundamental principles are: privacy protection, information security,
cybercrime measures, protection of intellectual property, ensuring data portability,
liberalized trade rules, and the availability of the necessary IT infrastructure.

Feasibility

OTTs compelled Telcos to invest massively in the network infrastructure in order to

facilitate the higher demand of the customers. But the uncertainty of the revenue
generated from the additional investment. On the other hand, due its mobile nature of
business, there are no employment benefits in the host country and also no knock on
effects. We can have a lesson from the history, when Skype first introduced in UK, most
of the Telcos had seen the potential danger and blocked its use but Ofcom and EU have
chosen to follow the net neutrality principle and allow skype to be operational. But in
recent time both of the regulatory bodies are realized and agreed on the term that there is
an utmost necessity for capacity management through either or both price differentiation
and traffic management. Because they understand that due to the unfair competition
Telcos are losing money but no one else is gaining them. This is turn out to be a
destructive competition which led to Dead weight loss.

The flat rate business model does not prove to be fruitful any longer for the Telcos, so
they should restructure their prices to match the volume usage. On the other hand,
regulators should reconsider their regulatory actions like tariff regulation for the
wholesale rates of Telcos.

The Media content producers are also one of the parties in the market who are badly
suffered from OTTs media contents. Most of the OTTs media content providers are
Advertisement based business, who provide these content with no fees from the

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consumers. After a lot difficult legal battles, both parties are evolving and working
together to lessen the outcome of destructive competition in the industry.

Incentives for the Telcos

Investments in future networks are always highly risky undertaking. Earlier The network
generates cash inflows. Because with the help of additional investment they normally
expect to utilize this excess capacity. But now it is not happening so sweetly for the
Telcos, they are now become nothing but a wholesaler. At the same time their wholesale
prices are regulated at a cost-oriented and rather restrictive level. On the other hand, OTTs
services are gradually replacing the traditional Telcos’ services, which is the final nail in
the coffin. So the Telcos are forced to increase their capacity with no potential income
growth, it is not being considered as a sustainable business model for the providers, there
should be somewhat level playing field in the market. There are couple of options that the
regulatory authority can follow like the structural separation of the market to network
segment and service segment, like they did it in Australia and Singapore. Another option
can be the introduction of universal service obligation to cover broadband access, which
obligated to provide funding for the provision of broadband to be undertaken by all related
parties in the market.

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Economic outcome

Telcos follow a one-sided model, where they provide traditional services to the customers
directly, but OTT are operating in a two-sided market model where they are acting like
both buyer and seller at the same time or sometimes just facilitating the meeting place for
the potential buyers and sellers.

Dominant Telcos have access regulation to follow- where they are responsible for
providing access to essential facilities to the competitors. But there are some arguments
regarding the outcome of access regulation in the market scenario. Access regulation
primarily has shown positive effect on the dynamic efficiency (Nardotto (2015), Bacache
et al (2015)). But some of the researchers might not be so much agree with the idea,
according to Cave (2006) there is no sign of dynamic efficiency or in some cases there
are negative dynamic efficiency exist due to the Access regulation.

However, access regulation has certainly increased the static efficiency. There are some
OTTs who poses sufficient criteria for a dominant market position, especially those who
are operating in two-sided market and enjoying a large market shares. Due to their
services and the way they run their operation, they actually operate a private virtual
network (based on customer data). This network is growing even larger and make it really
hard to compete for the alternative providers. So like Access regulation in Essential
facilities at infrastructure level, access to consumers/ data in virtual network (essential
services) should be regulated at the software level. One of less rigorous regulatory action
can be done by allowing competitors access to customers’ data base (Ratings eBay), so
that the alternative providers can reassess their approach of providing services and
application to the potential customers.

Now question is whether the Access regulation of OTTs is necessary and reasonable, for
the sake of argument, Krämer and Wohlfarth (2015) has highlighted the key differences
between one-sided infrastructure markets of Telcos and two-sided content markets of
OTTs information services. A very first key concern is about Traditional infrastructure
bottlenecks situation (more demand than they can handle). Telcos are operating their
business based on physical infrastructure, which is by the way always needed continuous
development. Moreover, now Telcos have to provide network services for ever-growing
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OTT services. So once what was a dominant position of Telcos, now become a burden.
Another important topic for discussion is market delimitation. Telcos do not have
geographical relocation advantage, due to its huge network infrastructure. But OTTs are
international in nature, relocation is possible. Without any significant financial losses.
There are significant differences according to possibilities to respond on concrete
jurisdiction as leaving a delimited market seems a far more realistic scenario for OTTs
than for providers of a physical infrastructure, like Telcos. (Krämer and Wohlfarth
(2015))

Dominant OTTs like Google, Yahoo, Facebook, are operating a two-sided market model,
while the Telcos are operating in one-sided market model. Eventually the two-sided
market model creates stronger indirect network effects and the value of the network is
also increases due to the increase of number of consumers in the network.

Pricing strategies are quite distinctive in two market model. The profit maximizing price
set at ((𝑝 > 𝑀𝐶 ) in the one-sided market of Telcos, who follows monopolistic behaviour.
But in two-sided market pricing is little complex strategy, it is more like a Profit
maximizing balance between two side of the market (𝑝 ≥/≤ 𝑀𝐶 ). Krämer and
Wohlfarth (2015) has explained the pricing of OTTs by considering the internalization of
external effects to balance both market sides simultaneously, which is most likely to result
in a welfare based beneficial situation (cf. Hagiu, 2004). According to Hagiu (2004) the
resulting price could lead us to maximizing the social welfare (allocative or static
efficiency). On the other hand, the one-sided profit maximizing monopolistic price is
unable to achieve allocative efficiency due to its too high price in nature, eventually
results in a dead weight loss.

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Regulatory remedies and market conditions:

According to European Regulatory Framework (Peitz et al., 2014) OTT can be considered
as an Electronic Communication Service. (Directive 2002/21/EC Article 2c). But the
business strategies and the services that OTTs provide to the market are so diverse that
no single market can define them. Brown (2014) respectively said OTTs are a regulatory
hybrid fitting neither in the classification as electronic communications service nor an
information society service (Directive 98/34/EC Article 1(2)). So an investigation is
compulsory to analyse by case basis.

Krämer and Wohlfarth (2015) have discussed about three distinctive scenarios where the
economic effects of competition should be analysed.

First question is about the existence of the contestable market. OTT market is
characterized with low sunk costs, high probability of potential new entrant and can
replace the incumbent firm (Google search engine). So there might be a possibility that
the OTT market is a contestable market. But the incumbent OTT firm can guard their
market from entry by offering a service bundle, what will certainly discourage consumers
from multi- homing. For example, Google and Android operating system to its Google
services to create barriers for new entrants.

Second question is about the access regulation, should it be applied to the two sided OTT
market. Schiff (2003) considers so called open two-sided market mechanism, because
there is always a possibility that one market side is accessible for other players. According
to Schiff (2003) an open duopoly is well acceptable over a monopoly, because the positive
network effects from a joint customer basis will result in an increase in consumers’
surplus. On the other hand, in some cases consumers may choose monopoly over a closed
duopoly, cause the internalization of externalities in monopoly is far better outcome than
the increase in price. But there is a chance of experiencing weakened completion in an
open platform, which might lead them to merge. Potential merger initiative should be
strictly observed because there is always a significant possibility of decrease in
consumers’ surplus as well as total welfare.

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So in summary ex ante regulation may result in a weakened competition or if the
regulation cannot be implemented, a two sided OTT monopolistic market is more
efficient than the competition of a closed platform.

Third concern is about the platform competition, where the Telcos can achieve both static
and dynamic efficiency with the help of platform competition (Krämer and Schnurr,
2014). But competition might be little harmful for the overall welfare. Moreover, the
overall effects of competition in two-sided market platforms are complex and highly
depend on the related market structure. Krämer and Wohlfarth (2015) have explained a
situation where two platforms provide the same service but the consumers use either of
them not both and the advertiser also choose to advertise one of the firm at a time. Like
Google search or Microsoft Bing. In this situation the incumbent must price very low to
secure its market power, but they do not make significant profit. This monopolistic firm
behaves like in a contestable market, even though they have 100% of market share but no
market power.

The potential entrant firm can enter the market and take over the incumbent service
market if and only if consumers are able to multi- home (Doganoglu & Wright, 2010).
But if the incumbent can ensure single homing through exclusive contract or any other
kind of high switching costs, the outcome will be inefficient for the new entrant.

However single homing, where there is competition between homogenous platforms are
efficient, multi- homing may also be a necessity to ensure that inefficient monopolies can
eventually be out-dated.

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Future research opportunities

In this paper we have discussed on whether dominant two sided OTTs should be ex- ante
regulated. We have also found out that content markets may be considered as a
contestable market. Where ex ante access regulation may yield positive static efficiency
effects on total surplus. But the efficiency is highly dependent on the market structure,
whether it is multi- home or single home.

However most of the researchers agree on that the ex- ante or access regulation of OTTs
should not be implemented quickly as the benefits and necessity of such intervention is
very questionable.

Furthermore, we wish to conclude that our discussion was purely based on insights on the
theoretical economic papers, so there is still a need for rigorous empirical analysis on
contestability of OTT market as well as thorough theoretical investigation on the effect
of access regulation as well as platform regulation. We are also concern about one sided
OTTs, who are responsible for replacing traditional telephony services like Skype,
WhatsApp etc. In order to ensure interconnection obligations, demotivate any abusive
conducts, they may be need to bring under the ex- post regulation. (Krämer and Wohlfarth
(2015))

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 References

Backache et al. (2015) Dynamic entry and investment in new infrastructure: Empirical
evidence from the fixed broadband industry.

Baldry, Dr. Steingröver and Hessler (2013), The rise of OTT players – what is the
appropriate regulatory response?

Cave, M. (2006), Encouraging infrastructure competition via the ladder of investment.

Cisco Visual Networking Index: Forecast and Methodology, 2013–2018

Doganoglu and Wright, (2010), Exclusive dealing with network effects.

Hagiu, A. (2004), Two-sided Platforms: Pricing and social efficiency.

Krämer and Wohlfarth (2015), Regulating Over- The- Top Service Providers in Two-
Sided Content Markets: Insights from the Economic Literature,

Krämer and Schnurr (2014), A unified framework for open access regulation of
telecommunications infrastructure.

Neil Brown (2013), Telecoms Policy: theme1 Report,

Nardotto (2015), Unbundling the Incumbent: Evidence from UK.

Pedro Seixas (2015) an ITU expert has presented in a presentation (Regulatory

initiatives regarding OTT services) Mauritania.,

Peitz, M. Vallettim T., & Schweitzer, H. (2014), Market Definition, Market Power and
Regulatory Interaction in Electronic Communication Markets.

Robert and Ravi (2015), Regulatory Framework for Over- the- top (OTT) services /
Internet services and Net Neutrality,

Schiff 2003, Open and closed systems of two-sided networks, Information Economics
and policy.

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