How OTT Competition is Challenging Traditional Regulatory Models

Wednesday 16 January 2019

Transnational giants offering OTT services are transforming telecommunications. What should regulators be doing about it?

Hennessy.png Michael Hennessy
At the start of 2017, 7 out of the top 10 corporations in the world were tech/internet-based giants from the US and China. These giants, which have transnational reach, compete using application-based services and massive global user networks over the top (OTT) on the Internet. They are truly transforming telecommunications.

A common regulatory proposition has been that "greater reliance on market forces is the most efficient way to achieve policy objectives such as lower prices, increased choice and innovation." OTT services seem to deliver on these objectives. However, many regulators and network operators are increasingly expressing concern with these transnational networks, leading to calls to block, tax and/or regulate digital competition.

Are OTT Pricing Models Efficient?

A principle argument to regulate OTT is that OTT services, often free, are not contributing to paying for infrastructure and at the same time, are eroding core operator revenues (voice, messaging) that are needed to reinvest in critical broadband/ICT infrastructure.
The first argument of revenue erosion may have some legitimacy in emerging markets where core revenues are critical to support increased investment in deploying/extending advanced networks such as LTE. However, in more advanced markets, the question is:
Why are increased data revenues from greater use of digital services are not more than sufficient to offset losses in voice and messaging?
In these cases, issues such as the abuse of significant market power (SMP) by dominant operators or inefficient pricing of broadband access may be a more immediate threat to sustainable growth and competition than the threat raised by OTT.

Related stories: Regulation and Digital Transformation – 10 Key Points for Regulators

Justifying OTT Regulations

A second argument that has been made in support of OTT regulation is that current regulation is asymmetric – while network operators are often heavily regulated, these large digital competitors have virtually none or at least very limited regulatory obligations. This second argument of asymmetric regulatory obligations may be more legitimate. For example, OTT providers are not subject to the same obligations as local operators within sovereign states. This lack of accountability is not limited to telecommunications, but stretches to numerous global players ranging from Uber, to Airbnb and Netflix.

Certain jurisdictions have resorted to blocking some OTT services, but this practice can undermine key regulatory objectives such as consumer choice and innovation. At the same time, it is legitimate for individual countries to intervene either directly or through regulators where national sovereignty, (economic, social or cultural), is considered to be at risk. In this area, some governments are considering or have imposed taxes on revenues earned within the local economy. This assertion of local jurisdiction in matters of taxation, if successful, could in turn create precedents for national telecom regulators to then justify regulation of OTTs.
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