Update: updated below with a note on Netflix-Comcast, which possibly shouldn’t be causing net-neutrality concerns. Mostly about peering, it appears.

March 4th: A friend recently pointed out to me that the acquisition price of WhatsApp (around $19 billion, though mostly in stock) is very close to the market cap of India’s largest telecom operator. Sure enough, at the time that this post is being written, Bharti Airtel’s full market cap, with the share trading on the BSE at Rs 286, is Rs 1,14,125 crore, which, in dollar terms, amounts to around $18.45 billion. That must hurt.

Telecom operators are afraid, and have every right to be. The discussion at the Mobile World Congress, every year, has sprinkings of commentary on telecoms and what they refer rather disparagingly to as OTT (Over The Top) services, which are essentially Internet services delivered over telecom networks. This year, Facebook’s acquisition of WhatsApp and the announcement that WhatsApp will introduce voice services, has led to an increased focus on the Telco vs Internet situation. Here’s an overview of what is happening:

1. The breaking down of telecom operator walled gardens and VAS: Until a couple of years ago, telecom operators in India preferred to focus on their walled gardens, instead of providing pervasive access to the Internet: they had their own WAP portals through which – along with voice and SMS based marketing services – they provided “Value Added Services” (ringback tones, mobile radio, voice SMS, job alerts). The only problem is that much of the revenue earned by these services was not based of consumer demand, but was fraudulent: falsely billing customers ran into crores of rupees every month. Ever since Indian telecom regulator clamped down on “false billing”, and involuntary subscription, this ecosystem has been collapsing. Telecom operators are now focusing on Internet subscription for driving non-voice revenues.

2. The growth of the Mobile Internet in India: Following the expensive 3G auctions, where competitive pressure forced up prices of the spectrum land-grab, telecom operators were forced to push Internet subscriptions, initially even at a loss. This is becoming a consistent source of revenue, and partnership deals with services like Facebook, WhatsApp and Twitter have helped drive usage. Non voice services accounted for 17.41% of Airtel’s India revenues in the last quarter, of which data services alone accounted for 10.25%. 27.4% of its total customer base were active data users, and “Data usage per customer saw a 54.4% increase to 249 MB during the quarter, up from 161 MB in the corresponding quarter last year, which lead to higher data ARPU of Rs 75 for the quarter, up 58.7% year-on-year.” Airtel is also now considering shifting to content-based data plans from the earlier data-oriented approach.

3. Retaining Control & Creating New Open “Walled Gardens”: The Internet has more to offer to customers than a telecom operators can ever provide through its controlled portfolio of services. The growth of the Mobile Internet is always going to lead to a move away from VAS service, but old habits die hard. Telecom operators do not want to become ISP’s. They hate being called pipes, even though, as access service providers, that is what they should be focusing on. Look at what Airtel has done on broadband: they’ve limited speed of access and data consumption through their “Fair Usage Policy” on wireline broadband, but in case you subscribe to services from a partner, data consumption, it appears, is no longer an issue, and for BigFlix powered Airtel Movies, a user has access to unlimited movies, once subscribed. Similarly, Vodafone offers a music streaming service which offers unlimited music downloads, once subscribed.

They want control over the pipes, and while at one point it time, it was about controlling access to which services were being provided within its walled garden, the focus is now on defining the speeds at which their customers can access the open web. For broadband, they created “Broadband VAS”, and we wouldn’t be surprised if the current approach would be to try and carve out a “data VAS” niche for “optimized OTT services”, for which Internet companies would be required to pay telecom operators for an optimal service. It’s already happening overseas with Netflix paying Comcast for improved service over its Broadband lines earlier in the month. Update: Vinayak Hegde points out that Netflix-Comcast is more about peering, the way Content Deliver Networks like Akamai do, than actually paying for better speeds of access. More here.

Last year, at the Mobile World Congress, Airtel’s then CEO International and Joint MD Manoj Kohli spoke about the relationship between telecom operators and Internet companies, saying that they “need to work together, and learn to live together. I believe we (telecom operators) can lift the level of usage of all these services, and customers propensity to use more and more, rather than continue this unnecessary tension. Of course, there are commercial negotiations that are important, and we do commercial negotiations all the time.”

Implicit here, in our opinion, is that quality of service will suffer if Internet companies don’t pay up.

Airtel is a company that has consistently held its line on trying to make Internet companies pay. Airtel’s former President (B2C services), K. Srinivas, (read the interview here) had told MediaNama that telecom operators have no choice but to charge Internet companies: “Show me one company in India or anywhere in the world that is thriving on data. You need to have the right kind of model. There is no free lunch”…”The point you were making (in your post) was that I need Google and Google needs me. Very true. The issue is that the amount of investment that goes behind. Tell me one product or commodity in the country which has not changed its price upwards in the last 10 years, or even the last one year.”

You’ll hear a lot more of net neutrality issues in the coming months.

4. Voice Changes Everything: As long as Internet services were adding to the bottomline through subscription services, and essentially replacing SMS revenue with (higher) data revenue, they weren’t seen as much of a threat: SMS was, at it’s best, less than 10% of revenues. WhatsApp’s plan to launch Voice services hits telecom operators where it hurts most, and to protect this, they will use every trick in the book to create roadblocks and prevent these services from becoming operational and scaling. We’re expecting the following tactics:

– Call for regulation of services: P2P voice services are kosher under law in India. Airtel CEO Gopal Vittal’s call for regulating services like WhatsApp is not unexpected. Services like Nimbuzz, Skype and Viber have allowed p2p voice services for years, and this issue hasn’t been raised before. Under law, they aren’t allowed to terminate VoIP calls on PSTN networks, but Internet to Internet is allowed. What Airtel is trying to do here is change regulation in order to address potential competition.

– Raise the national security and interception bogey: Over the next year, we will see telecom  operators and other entities raise issues related to interception of Internet based services, in terms of access provided to national security agencies. The telecom operators are licensed and if reports about the Centralized Monitoring System are to be believed, will provide unconditional access conversations and data to the Indian government. Encrypted services will typically not be easy to intercept, and telco’s could use this situation to try and change policy to include online services, and bring them under regulation as a consequence.

– Increase latency to impact performance: Internet services in India typically suffer from high latency, and telecom operators could try and reduce the performance of voice services in particular by increasing latency. This is less of an issue in case of messaging, which can be asynchronous, as compared to voice, where a response is expected immediately.

MediaNama’s Take: What’s best for the consumer? What’s best for the ecosystem?

In our opinion, what should define policy and regulation is consumer interest. The consumer is paying for a neutral network, and the ability to get access to services over the Internet. A telecom operator is an access service provider, and any manipulation of quality of services for commercial gain by providing preferential access performance to customers of certain services should be opposed by policy makers. Else, this impacts competition online: what the telco is saying is that if you don’t pay us, your visitors or customers will get sub-optimal access to your site.

If the telecom operators feel that their revenues are under threat, then they should raise prices. Any method that involves sites paying for preferential access is a form of blackmail.