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Why OTT and cloud services in India should not be subjected to licensing regimes

Security concerns and use of licensed resources such as spectrum had motivated TRAI to consider regulating internet-based services.

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The Telecommunications Regulatory Authority of India released on 14 September its recommendations on regulating OTT communication services and cloud services — the latest among its deliberations on regulating the internet’s ‘applications layer’. This segment includes a variety of internet-based services: machine-to-machine communications, cloud services, over-the-top communications such as video calling and instant messaging, and other service providers, like IT-enabled Services and Business Processes Outsourcing service providers.

These applications use the internet as their primary infrastructure to provide various functionalities to customers: ranging from video calls and games to cloud storage services. After considering stakeholders’ views on all pertinent matters, the Telecommunications Regulatory Authority of India (TRAI) has recommended light-touch regulation for these services. A light-touch regulatory framework provides broad principles that must underlie regulation, and gives industry the flexibility to evolve mechanisms for their implementation.

Security concerns and the applications’ use of licensed resources (spectrum) motivated TRAI to consider regulating the applications layer. In terms of security issues, TRAI has said that intervention is not necessary in the market for over-the-top (OTT) communications, and has suggested self-regulation, or government-led certification mechanisms for other services in the application layer. On the use of licensed resources by applications, TRAI has recommended that the activities of Other Service Providers be regulated to prevent misuse, but has dismissed any such concerns for OTT communications.

In its deliberations, TRAI also considered imposing licensing frameworks to ensure orderly growth of the applications layer and prevent any misuse. But it has prudently decided that doing so would be inappropriate for any of the services included in the applications layer. Instead, it has supported the institution of a registration mechanism for machine-to-machine service providers, and other service providers. TRAI has recommended that cloud service providers regulate themselves, and that OTT services should not be subjected to any licensing or registration mechanisms.

Also read: Netflix, Hotstar opt for self-regulation in India to ward off criticism

No rationale for licensing applications

The aim of licensing mechanisms in the applications layer is to ensure the socially responsible use of natural resources, such as spectrum, for two main reasons. First, to ensure fair allocation of scarce resources; and second, to prevent any social harm that may arise from their misuse for private benefit. For example, unsystematic and rapid mineral mining is known to cause long-term damage to the environment. Hence, the government licenses mining operations to mitigate degradation and redistribute gains like license fees, for social welfare. The same rationale applies to the use of the electromagnetic spectrum, which telecom service providers (TSPs) use to provide voice and data services.

Section 4(1) of the Indian Telegraph Act, 1885 gives the central government the exclusive authority to grant licenses for the use of spectrum, which makes it a public resource. The Supreme Court has reiterated this in various landmark judgments over the years, such as Ministry of Information and Broadcasting v Cricket Association of Bengal and Ors (1995), Centre for Public Interest Litigation and Ors. v Union of India (2012) and Bharti Airtel v Union of India (2015). In these judgments, it also observed that spectrum is capable of degradation if it is used inadequately or inefficiently. Since it is a scarce resource, it is important to allocate it in a fair and equitable manner that is consistent with public interest. A licensing mechanism enables the central government to meet this objective by controlling access to spectrum frequencies.

However, no similar reason exists for subjecting internet-based applications to a licensing regime. These services are offered over the internet, and service providers do not directly exercise control over the underlying spectrum. Unlike spectrum, the internet is not a public resource because telecom and internet service providers control access to it. Further, the internet is not scarce and is non-rivalrous. In other words, its consumption by one person does not reduce the amount available for another, except if constrained by network capacity. Potential social harms that are a consequence of internet-based services are addressed by the Information Technology Act, 2000; the Consumer Protection (E-commerce) Rules, 2020; and the proposed Personal Data Protection Bill, 2019. Therefore, TRAI’s decision to not regulate internet-based applications via a licensing framework is a welcome step.

In the absence of an underlying legal or economic rationale, licensing applications can also violate the intent of net neutrality regulations and adversely impact freedom of speech and expression. According to the principle of net neutrality, the internet must treat all applications, content and services, equally. At present, Indian users can access internet-based services and applications for free, or at a very low price. If a licensing regime is imposed, only larger entities may be able to absorb compliance costs for internet-based services, while smaller ones may become inaccessible. Consequently, consumers may have to pay for any increase in tariffs, and only those with deep pockets may be able to exercise their freedom of expression.

Also read: How the Covid downturn is accelerating the global shift to a subscription economy

Challenges to licensing and international best practices

There are also many practical challenges to enforce a licensing regime for the applications layer. This segment includes a multitude of applications, websites, and services that offer diverse functionalities, which are subject to different social, legal and economic concerns. Some of these, such as digital payments services, may already be governed by specialised regulators. It is also difficult to classify them due to their multifunctional nature. In fact, a major point of debate in TRAI’s consultation on regulating OTT communication services was the definition of these services. Many platforms offer messaging services, over and above their primary function. Additionally, internet-based applications may be owned, developed and hosted in different countries. As a result, it is difficult to reconcile jurisdictional claims over them.

Many countries are still debating the regulation of the applications layer. Several nations that have evolved a regulatory framework have refrained from imposing a licensing regime upon them.

In 2016, the Australian government released a report reviewing the functioning of the Australian Communications and Media Authority (ACMA). The report acknowledged that the ACMA’s remit must also cover the applications layer. However, Australia has not evolved a comprehensive licensing regime in this regard. The European Union came up with the European Electronic Communications Code (EECC) in December 2018, which will come into effect by 21 December 2020. The Code aims to consolidate and reform the regulatory framework for electronic communications networks and services in the European Economic Area (EEA). Machine-to-machine (M2M) services at the applications layer have been left out of the scope of the Code, and OTT service providers only need to register with the regulatory authority in each member state to provide services.

Singapore’s licensing regime for OTT television service providers grants automatic permission to applicants if they take an undertaking to comply with Singapore’s Code of Conduct for Over-the-Top, Video-on-Demand and Niche Services. In practice, this is closer to a registration regime, which also applies to cloud services in Singapore.

Thus, if India were to consider a stringent licensing regime for the applications layer, it would mark a significant departure from international best practices.

Also read: Why TRPs are important for broadcasters, and are also prone to ‘manipulation’

An open and free internet is crucial for India’s future, because it can enable knowledge sharing, catalyse entrepreneurial energy, and support livelihoods. By recommending a light-touch regulatory framework for internet-based applications, TRAI has committed to supporting the innovation and competition that it enables in the Indian economy. As the ecosystem for internet-based applications evolves, future legal and regulatory interventions must imbibe the principles that TRAI’s recommendations are based on.

The authors work at Koan Advisory Group, a technology policy consulting firm. Views are personal.

This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector.

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