SA must tackle net neutrality
South African regulators must develop net neutrality rules to ensure that when market consolidation happens, the result is not reduced innovation and less access to diverse and new voices and opinion. By Dirk de Vos.
The year has not started well for advocates of net neutrality, the idea that all data on the Internet should be treated equally, without discrimination. A US federal court struck down a key part of the Open Internet Order, a set of Federal Communications Commission (FCC) regulations meant to enforce neutrality.
Although the debate may appear tangential to South Africa, it has potentially huge consequences that go right to the core of our democracy. A new term has already been coined for the post-net neutral world — Internet 3.0. Yet, the concept of net neutrality is a rather fuzzy one and not understood by everyone in the same way. Indeed, the concept has evolved with the Internet itself.
Perhaps it is worth spending some time exploring what exactly net neutrality means. Also known as Internet freedom or Internet openness, net neutrality forbids telecommunications companies from blocking some websites or providing preferred priority to others. It prevents providers favouring one kind of traffic over another and guarantees that all traffic is treated equally.
Given that media in all its forms will be increasingly delivered “online”, we had better understand the issues. There will likely not be an announcement of Internet 3.0. Instead, we will know it is entrenched when the cellphone company to which we subscribe makes an offer on something like the following terms:
Sign up for our X gigabyte plan and with it you will get a free subscription to Y media group’s news service and Z media group’s video/music streaming service and, what’s more, accessing these won’t count towards your monthly data bundle limit.
The genesis of the recent US federal court decision was in 2008 when the FCC found that Comcast, a cable company, had violated net neutrality rules by slowing BitTorrent traffic. The argument in the US is that, without net neutrality, telecoms companies could pick their preferred content partners and subsidise the data costs for that content, thereby making it much harder for new entrants and stifling not only innovation but also free expression.
For example, in the absence of net neutrality, it would have been possible for MySpace to have special arrangements with phone companies to block Facebook or Google. The potential impact on freedom of expression should be obvious.
As one would expect, telecoms companies have not felt the same way as others about net neutrality. Essentially, they argue that over-the-top content providers have captured most of the economic value derived from the Internet while piggy-backing on the expensive infrastructure they’ve built. They face a tough counterargument, however: almost all innovation and new Internet based services in the past 20 years have come from outside the telecoms industry.
Indeed, it would be hard to name one innovation that has come from within the telecoms sector. The telecoms giants have missed just about every new game-changing trend and are perpetually playing catch-up. The result is that despite never-ending network upgrades, their businesses are being reduced to low-margin “dumb pipes”, or utility-type services. It would seem their size and hierarchical structures are fundamentally unsuited to the dynamics of innovation. This is particularly true as data pushes voice to the margins of the total revenue mix.
As is often the case in legal matters relating to technology and regulation, net neutrality is a complicated issue. At the risk of losing fidelity, the US court’s decision came down to this: the FCC has the power to regulate telecoms services but not websites and services such as Twitter, Google and Facebook.
But there was an anomaly — in the US, broadband Internet provided by cable companies was classified as an information service. As the mobile Internet grew, further exceptions and special exemptions emerged. The court took the view that broadband and Internet services are in the category information services and therefore cannot be regulated by the FCC and as such are not subject to its net neutrality rules.
There are good arguments that say that the Internet is nothing special and that it should be regulated, if at all, by competition law. Having net neutrality as a standalone set of rules prevents the development of a proper economic analysis of what type of rules best promote the development of, say, broadband access or new Internet-based services. This appears to be the way other advanced countries are dealing with the issue.
It is an indication of how far South Africa lags behind the rest of the world that the net neutrality debate scarcely features here. Instead, we have to watch as our biggest telecoms companies argue about termination rates and issue threats about withholding investment in next-generation data networks unless their own self-serving views are imposed on the market. It is quite bizarre and does not bode well for the future.
Termination rates only apply to traditional voice calls, not the future data-driven telecoms world. In South Africa, more than three-quarters of the incumbent mobile operators’ gross revenues – and more of their profits – come from traditional voice calls. Elsewhere, data services are far bigger contributors.
The clear message we are getting from these companies is this: “We have no clue how to make an adequate financial return from data, so allow us to continue to gorge our existing customer base to allow us to cross-subsidise our investments in broadband data services until we can figure out how to make money from that.”
Right now, the South African telecoms sector is dominated by talk of consolidation. Industry analysts spend much of their time speculating about who may merge with whom and which operator has the best fit with another. Merchant banks and a plethora of advisors and consultants are lining up to profit. Of course, each of these potential deals will need the approval of the regulators, Icasa and the Competition Commission, but also of government.
This is why we need to start the debate about net neutrality in South Africa. It could either be secured by specific rules developed by Icasa or by different rules developed by the Competition Commission.
Either way, we can be confident of one thing: two years hence, there will be fewer large operators, all with reduced profit margins. Internet 3.0 in South Africa, when it comes, will lead to winners and losers. It is up to us to ensure that the result is not reduced innovation and less access to diverse and new voices and opinion.
- Dirk de Vos runs a corporate finance consultancy specialising in the renewable energy and ICT sectors
- Read more columns by De Vos