Reponse - TRAI Consultation Paper on Differential Pricing for Data Services

The Telecom Regulatory Authority of India has recently issued a Consultation Paper on the Differential pricing for Data Services. This paper, and the final decision of TRAI on the same is likely to have a big impact on India, and on the world too, as the action taken by India would set the tone for similar action by developing countries world wide.
Much has been said about the issue of Net Neutrality. The FCC ruling on "Protecting and Promoting the Open Internet" of 12 March 2015 addresses the core issue in a comprehensive manner. The FCC identified the following Clear, Bright-Line Rules:
1. No Blocking: A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or non-harmful
devices, subject to reasonable network management.
2. No Throttling: A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device, subject to reasonable network
management.
3. No Paid Prioritization: A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization. “Paid prioritization” refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity.

These are sound principles that the TRAI must consider adopting.

However, the current raging issue of "Free-Basics" is not in direct violation of the FCC ruling. Free basics is a form of paid prioritization through zero-rating. FCC notes in para 153 of its report "Given the unresolved debate concerning the benefits and drawbacks of data allowances and usage-based pricing plans, we decline to make blanket findings about these"
The FCC has also stated on the issue of Paid prioritization that: "The Commission may waive the ban on paid prioritization only if the petitioner demonstrates that the practice would provide some significant public interest benefit and would not harm the open nature of the Internet"

The TRAI needs to go further than the FCC in favouring net neutrality.
A clear and firm no to free-basics would be a step in that direction.

Here's my response to the issues raised in the TRAI consultation paper:

Question 1: Should the TSPs be allowed to have differential pricing for data usage for accessing different websites, applications or platforms?

Response Q1: No. TSPs should not be allowed to have differential pricing for data usage for accessing different websites, applications or platforms.

Question 2: If differential pricing for data usage is permitted, what measures should be adopted to ensure that the principles of non-discrimination, transparency, affordable internet access, competition and market entry and innovation are addressed?

Response Q2: A firm stand should be taken to prohibit any form of differential pricing in data usage which directly impacts access to specific parts of Internet. The justification for this stance is the “thin edge of the wedge” argument - once differential pricing (including Zero-rating for some content) for data is permitted, the TSPs can exercise the power that they technically have to become active Gatekeepers of the Internet. They can hold both the consumers of Internet, and the content providers to ransom – and in the long run lead to the shrinkage of Internet access, and simultaneous increase in cost of access. The content providers will be willing partners to this “ransom”. In a networked age where Power law distribution with increasing concentration is becoming the norm, even a small advantage can make all the difference between success and failure. Thus content providers would be willing to pay a substantial amount to the TSPs to be given preferential treatment in access to their site by consumers, say by getting it Zero-rated. If this option of getting zero rated is kept open to all content providers without any discrimination- then the advantage to any individual content providers is lost,  but the cost of content distribution over the Internet would go up. This would adversely affect the dynamism and innovation potential of Internet.

Question 3. Are there alternative methods/technologies/business models, other than differentiated tariff plans, available to achieve the objective of providing free internet access to the consumers? If yes, please suggest/describe these methods/technologies/business models. Also, describe the potential benefits and disadvantages associated with such methods/technologies/business models?

Response Q3: Internet is all of the Web as we understand it. Any subset of the Internet – say a few websites, and apps cannot be called Internet. The zero-rated plans which allow access to a subset of Internet cannot be construed as a model for providing universal access to Internet. They are best viewed as sponsored content – and hence not at all meeting the “objective” of providing free Internet access.

Enabling a certain basic access of Internet to all is a laudable objective. Digital divide is understood to be a form of social and economic inequality which needs to be tackled by society. However, since provisioning of Internet access consumes economic resources, we need to accept that somebody has to pay for it even if it is not the end consumer. The key decision lies in identifying the party which would pay for Internet access to meet the societal goal of bridging the digital divide.

One possible model of funding universal Internet access to meet the challenge of Digital Divide is through the CSR spending which has been made mandatory by the Companies Act 2013.  The Act which applies to large companies meeting certain financial criteria[1]  mandates such companies to spend a minimum of 2 per cent of the average net profit made during the three immediately preceding financial years. Government may make funding universal internet access as one of the permissible activities for CSR spending, and include it in Schedule VII of the Companies Act 2013.

All TSPs may then voluntarily contribute their CSR spend towards providing this universal Internet Access.

The universal Internet access may be based on a bare bones data plan to be specified by TRAI, comprising a fixed amount of data access (say 200 MB per month to begin with – this can be periodically revised upwards). This plan can then be made available by all TSPs to their subscribers for free – to the extent of availability of funds. The plan may come with the rider that any person who would like to consume Internet access more than the minimum provided in the plan has to pay for additional access at a rate which also covers the cost of the “free” component.

While it is understood that CSR contribution by the TSPs by themselves would not be able to provide the basic Internet access to all their subscribers, this can be supplemented by the CSR contributions from other corporates. A suitable message can be displayed to the Internet consumer informing him/her that the Internet access has been sponsored by the particular corporate entity/TSP. TSPs may be encouraged to report on the number of subscribers being provided free Internet access through such CSR funding.

Question-4: Is there any other issue that should be considered in the present consultation on differential pricing for data services?

Response Q4: TRAI may consider porting of Broadband internet access service provider over mobile networks in the same way as porting of mobile numbers ie unbundle Internet access from voice communication service.

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[1] Net profit of Rs. 5 crore or more or net worth of Rs. 500 crore or more or a turnover of Rs. 1000 crore or more in any financial year [Section 135(1)]

TRAI picks up the call – but why did the market drop the message?

In a very consumer friendly move which far exceeded expectation, the TRAI issued a notification on 16th October 2015 - Telecom Consumers Protection (Ninth Amendment) Regulations, 2015 - by which relief was provided to the consumers facing call drops. From 1st January 2016, every consumer who faces a call drop will be credited by one rupee by the originating cellular mobile telephony service provider.
I was one of the many individuals who had provided feedback on the Consultation paper on "Compensation to the Consumers in the Event of Dropped Calls" floated by TRAI. (You can read it here).
I had then observed - "The consumer derives value from the call only when the sum and substance of the intended conversation stands completed" and that "--compensation, while correcting the wrong of the inconvenience to the consumer, would also serve as a financial disincentive to the service provider"
I am gratified that TRAI, in its Explanatory memorandum to its 16th October 2015 order has invoked both these arguments(Verbatim, actually).
But the compensation of Rs 1 for every dropped call exceeded my wildest imagination. My best case scenario was a compensation of about 30 seconds for consumers on a per second billing rate, and that too for calls dropped within the first 30 seconds. The present TRAI order provides for Rs 1 compensation as credit, or roughly 100 seconds of talk time at the current billing rate, for EVERY call dropped, irrespective of the duration.
If this order is implemented, the estimated loss of revenue in the form of compensation to subscribers would be in the region of 2 % of the billed amount. This is substantial - and may account for over 10 % of their profit before Tax.
So should not the market have responded to this news by hammering the stock prices of these mobile telephony service providers?
Here is how the stock prices (of three TSPs - Bharti Airtel, IDEA, and RCOM) looked in the period 16-21 October 2015 - notice the sharp dip in prices on the date of the TRAI order (16th October), and the almost immediate recovery. So what does the market know that this order does not convey? Is it optimism or a frank assessment that the big money Telecom guys will be able to ensure that the order in its current shape would not get implemented.
My money, sadly, is on the order getting diluted substantially. The current order appears to have become too consumer friendly to go uncontested. Did the consumer lose in the process?

Junk the Bell curve – but in the right places and for the right reason

Maybe there were loud cheers in the Infosys flock with the announcement that the company is doing away with the bell curve based performance assessment. And if Economic Times which ran this story is to be believed, the “decision is already showing results” with a substantial reduction in attrition. Looks like one of those Efficient Market Hypothesis scenario, where the employee attrition rate at Infosys has already factored in this “junk the bell curve” decision of the management to be implemented from this quarter. Or maybe it’s a post hoc fallacy, but that is not the issue for discussion here.

I am all for the end of Bell Curve way of thinking, but only for its universal applicability to domains where it is simply not valid leading to errors in judgment.

The normal distribution, popularly known as the bell curve, has a strong hold on our way of thinking. We almost believe it to be a law of nature (It is not). But fundamentally, it is a distribution of errors. You can see how the bell curve equation can be derived in this 5 minute YouTube video.

Frankly, Bell curve leads to a fairly benign performance appraisal system.A Bell curve is symmetric, it’s mean and median are the same - the average is truly sitting at the centre, with 50% of the values above and below it.

Where else in the world of human interactions to do you see such an egalitarian (Yes – egalitarian) distribution?

Whenever people interact, minor advantages conferred by our fickle preferences or chance snowballs to huge differences over time. This is the classic Matthew effect

Daniel Kahneman succinctly put this as his “favourite equation” –

success = talent + luck

great success = a little more talent + a lot of luck

Any appraisal system that replaces a bell curve based system, and which also wants to rank the employees for rewarding/penalising the top/bottom performers is likely to be far more discriminatory than the poor, much maligned and misapplied Bell. Employee performance, if measured by pure output, is going to show a Power Law distribution. Thomas Piketty, in his book Capital in the 21^st Century, has shown the prevalence of such skewed distribution in income and wealth of individuals.

Are organisations and performance appraisal systems willing to accept the role of luck in success, and the perception of success which leads to further opportunities for the winner in turn leading to the creation of superstars?

The graphic below shows the relative share of various segments of population for Income and Wealth in USA (for 2010, based on data from Piketty’s book), and the share under normal distribution (say of Income, with mean of USD 45,000 and standard deviation of USD 15,000).

The bell curve leads to a far lower level of inequality. 

Now if the idea behind junking the bell curve is to do away with the forced identification of the “non-performers” – then I am all for it. 

I would live in a bell curve world any day - and wish the same for the world – but fear that the Power Law is here to stay.

Call Drops in India - Does the TRAI Consultation Paper address the core issues?

Dropped calls have become a part of the telecom scene in India. We don't even get angry any more when we face a call drop- we simply accept it and call again, or if we are indoors, try calling again using the land line.
Recently, when the issue of call drops started hitting the front page with the Prime Minister of India also commenting upon the issue, the Telecom Regulatory Authority of India came out with a consultation paper on 4th September 2015 titled - "Compensation to the Consumers in the Event of Dropped Calls" . The paper sought comments from all stakeholders by 21st September 2015.
Like a good citizen and a willing stake holder (sic)  I reviewed the consultation paper, and dutifully forwarded my comments to TRAI.
Let me say upfront, I was not very satisfied with the drift of the questions - it appeared to suffer from the logical fallacy of "petitio principii"- begging the question. When you are given a finite set of options to choose from, not only is your choice constrained, but even the overall scope of options that you can imagine gets constrained. The TRAI paper is riddled with such assumptions.
Here are my responses to the questions raised by TRAI in its consultation paper.

Response to TRAI Consultation Paper No. 4/2015

Compensation to the Consumers in the Event of Dropped Calls

Q1: Do you agree that calling consumers should not be charged for a call that got dropped within five seconds? In addition, if the call gets dropped any time after five seconds, the last pulse of the call (minute/second) which got dropped, should not be charged. Please support your viewpoint with reasons along with the methodologies for implementation.

Response Q1: The calling consumer should not be charged for a call that gets dropped within a finite duration of the beginning of the call. However, the cut-off duration of 5 seconds for deciding when not to charge for the call, as suggested in the Consultation paper, is too low, and appears biased in favour of the telecom service provider. The consumer derives value from the call only when the sum and substance of the intended conversation stands completed.  What is the most appropriate cut-off duration value can be debated, but in my assessment, it should be the median call duration. An analysis of the calls made by me over last 8 months shows that less than 3 % of the calls are of less than 5 seconds duration, with the median call duration being 30 seconds. It is proposed that calls that get dropped within 30 seconds of the call initiation should not be charged.

The distribution of call duration (over last 8 months) is shown below. The X-Axis shows the call duration binned in intervals of 5 seconds, the Y-Axis shows the % of calls in each bin (as bar), and the cumulative count of calls (as line)

Q2: Do you agree that calling consumer should also be compensated for call drops by the access service providers? If yes, which of the following methods would be appropriate for compensating the consumers upon call drop:

(i) Credit of talk-time in minutes/ seconds

(ii) Credit of talk-time in monetary terms

(iii) Any other method you may like to suggest Please support your viewpoint with reasons along with the methodologies for implementation.

Response Q2: Yes, I agree with the TRAI Consultation paper that calling consumers should be compensated for the call drops by the access service provider.

While the response to Q1 addressed the issue of the dropped calls which should not be billed by the service provider, this by itself does not compensate the consumer for the poor quality of service. An additional compensation, while correcting the wrong of the inconvenience to the consumer, would also serve as a financial disincentive to the service provider. This compensation may be in the form of Credit of talk-time in minutes/ seconds. For consumers who are on a per-minute pulse, the credit could be of 1 minute, while those with per-second pulse, the credit could be of 30 seconds (being the assessed median call duration).

Q3: If the answer to the Q2 is in the affirmative, suggest conditions/limits, if any, which should be imposed upon the provision of crediting talk-time upon call drop and usage thereof.

Response Q3: As mentioned in the response to Q2, the compensation may be in the form of Credit of talk-time in minutes/ seconds. For consumers who are on a per-minute pulse, the credit could be of 1 minute, while those with per-second pulse, the credit could be of 30 seconds (being the assessed median call duration).

The only condition/limit on the talk-time credited on account of call-drop could be that the credit be consumed on the same day that it is credited.

Q4: Is there any other relevant issue which should be considered in the present consultation on the issue of call drops?

Response Q4: The following additional relevant issues should be considered in the consultation paper:

1) Quantum of penalty / financial disincentive on the TSP: Presently, a penalty of “Not exceeding Rs 50,000” can be imposed on the TSP by TRAI for not meeting the Quality of Service parameters, including call drop. This is too low to serve as a disincentive. This may be suitably increased to the point where it actually starts functioning as a disincentive.

2) Mode of computation of the Quality of Service(QoS) parameter of Call Drop: Presently, call drop is measured at an aggregate level by averaging all the call drops over the period of 1 month. The consultation paper recognises the inherent limitation of this aspect and states: “sometimes averages may not give the full picture”.  The current target of average call-drop of less than 2 % thus does not adequately ensure this quality of service for the individual subscriber, but only for subscribers on average. This parameter may be reinterpreted as quality of service for individual subscriber. TSPs may be asked to provide data on the percentage of subscribers who faced call drops in excess of 2 %, in addition to the average call drop rate. TRAI may set the Quality of service target of this parameter as: “Ensure that not more than 5 % of the subscribers face call drops in excess of 2%”. A basic statistical computation leads to a translation of this parameter as a requirement that the average call drop rate should be less than 0.9%, which in turn would lead to not more than 5 % of subscribers having call drop rate in excess of 2% (Based on an average of 200 calls per subscriber per month). This is illustrated in the normal curve shown below:

Human Development Index (HDI) - Time for an overhaul?

The Human Development Index is composite index prepared annually by UNDP, which tries to give a single numerical score (from 0 to 1) to measure the extent of human development in various nations. Whenever the HDI report is released, the Indian media normally focuses on two aspects – what is India’s rank (135 out of 187 nations), and how does it compare to Pakistan (146 – India is ahead) and a few other nations. But its time to question the validity of the Index itself.

Human Development is multi-dimensional, and no single numerical measure can truly capture the essence of development. This is one of the drawbacks of any such Index. At the same time, a single number does allow people to focus on the issue – simplicity has its advantages. But as Einstein is said to have stated – “Everything should be made as simple as possible, but not simpler”
Lets see if HDI appears a valid score of development.

How is HDI Computed?

HDI looks into three aspects, Long and healthy life, Knowledge, and standard of living (Illustrated below- Technical note to HDI Report). For each of these dimensions, a proxy is used to compute a score between 0 and 1. A geometric mean of the three scores is then taken to arrive at the HDI Score.

An arbitrary cutoff of 0.550. 0.700 and 0.800 is then used to categorise the nations as Very High Human Development (>=0.800), High Human Development (0.700-0.799), Medium Human Development (0.550-0.699) and Low Human Development (<0 .550="" p="">Based on the 2013 report, this neatly categorises the 187 nations into four almost equal sized groups.

The variation of the three individual components of Health, Education and Income which leads to the HDI Score can be seen in the scatter plot below:

The Balancing Act of Income Index

The striking feature in the above scatter plot is the variation in the Index score for Income. Every other proxy for development, the number of years of schooling (average and expected), and the life expectancy at birth contributes linearly to its related Index. However, the Income index based on the Gross National Income GNI per capita on PPP (Purchasing Power Parity) grows on a logarithmic scale, ie it rises very fast initially, even for small increases in GNI. The index score for GNI is designed to scale logarithmically from a baseline income of $100 upto a maximum per capita GNI of $ 75,000. The logarithmic scaling between $100 and $75,000 implies that an individual gets 40% of the benefit that money can buy with an annual GNI of $1500 , which is just 2 % of the maximum upper GNI of $75,000. Does this appear reasonable?

The rationale for these two numbers as given in the HDI report is:

“The low minimum value for gross national income (GNI) per capita, $100, is justified by the considerable amount of unmeasured subsistence and nonmarket production in economies close to the minimum, which is not captured in the official data. The maximum is set at $75,000 per capita. Kahneman and Deaton (2010) have shown that there is a virtually no gain in human development and well-being from annual income beyond $75,000”

The World Bank itself uses a poverty line of PPP adjusted  $1.25 per day. This translates to an annual threshold of $ 456.25.

Then why would UNDP use a minimum of GNI of $ 100 a day to start scoring on the Income Index? Is it to arrive at "acceptable" HDI scores?

The study of Kahneman and Deaton provides valid grounds for two aspects relating to the Income Index as used in HDI computation. One, the subjective well-being is best measured against the logarithm of Income, and not absolute income (in keeping with the basic fact of perception known as Weber’s Law), and two,  the effects of income on the emotional dimension of well-being would satiate fully at some level - ∼$75,000.

However, Kahneman had Deaton had based it on a survey of Household income, and not per capita income as is used here. Further, the survey was based on US respondents. More importantly, as their paper states: "Some observations were deleted to eliminate likely errors in the reports of income. The GHWBI (survey) asks individuals to report their monthly family income in 11 categories. The three lowest categories—0, <$60, and $60–$499—cannot be treated as serious estimates of household income."

The above statement is damning - data relating to people below a monthly stated income of $499 was simply ignored. So how can one  assume that this logarithmic scaling is valid even for incomes below $499? So even if we accept that income satiation level is reached at a per capita GNI of $75,000, what grounds do we have to support the lower level of $ 100? Why not start at $10, or $1,000, or $5,000? Note that the lower limit used for HDI Income index is GNI of $100 per year.

By varying the lower baseline number,large changes can be effected on the Income index score without materially altering the well-being of the individuals in different nations.

If we use the PPP adjusted poverty line of $ 1.25 per day or $456.25 (rounded to $ 460 per year), the number of countries in the lowest HDI Category increases from the current number of 43 to 56, a 30% increase in the number of low HDI countries. 

The number of countries in each category by using a lower income level of $ 460 per year is given below:

And this is how the world looks based on the revised scaling of Income index:

Yes - India now moves to the lowest category of HDI, with a score of 0.474 against an earlier score of 0.586.

The march of HDI - Development over the  years

This is how the HDI score looks over the years for all nations for which data was made available with the HDI report for 2014. (Each line represents one country, showing its HDI score over the decades)

While there is an apparent onward march with increase in HDI score over the decades, I now wonder how much of it is due playing with the model leading to the Index computation?

What is however striking is how few countries are able to break into a different HDI category, delineated by the cutoff scores of 0.550, 0.700 and 0.800.

 (The colours used are based on the HDI category as of 2013 HDI report)

Why I am not ‘Appy about Myntra going the App Way

Online fashion retailer Myntra (a Flipkart acquired company) has shut down its desktop and browser version from 15^th of May 2015, and is now available only as an App. Probably the first online retailer to say no to omni-channel retail strategy. As their website now says – “Myntra is now App Only”.

As an implied justification of this decision, Mukesh Bansal, CEO, Myntra, and Head of Commerce, Flipkart says “Presently, we see 90 per cent traffic coming from the mobile app. Over 70 per cent of sales are via mobile devices.” Other reasons include – fast expected growth of smartphones in India, shift of consumers to smartphone over web for commerce and information consumption.

However, the “Appy” decision still means that Myntra is willing to risk losing a good 30% of its sales which was coming over the browser. Why would any retailer risk a potential drop in sales in the near term by shutting down one of the avenues of sale?  What does Myntra really expect to gain?

The answer probably lies in Myntra’s statement: “With mobile-based commerce emerging, we want to create a differentiated / personalised shopping experience for our consumers”

A retailer’s mobile app is like the best spying device available, and it takes your explicit consent for being spied upon.

I downloaded the app on my Android device from the Google Playstore. As you can see in the image below, the Myntra app wants to (automatically) access the following information about you available on your mobile: Your identity, Contacts, Location, Photos/Media/Files, Wifi connection information, Device ID and Call information.

After installing the app, you can browse the products on sale, admire what for now appears to be great deals, but you can buy only after you login to the app.

So here is the implication - Myntra, through its app, wants to sell products only to those customer’s whom it can know intimately, much more than on first name basis. With access to almost everything that your mobile phone is privy of, like where do you go, who are your friends, what have you bought in the past, it is ready to offer a “personalised” service.

It is willing to risk losing those 30% of sales coming through the browser which had inferior or limited personalised information. A browsers on a desktop would not allow location information, or even the identity of the person making the purchase as login was optional.

While Eco-101 taught us that markets were good for they allowed multitudes of nameless buyers and sellers to interact, and then transact at a discovered market clearing price generating economic surplus for both buyers and sellers, the App only model is preparing to create a million markets of 1 person each.  You will get an offer – a great deal on the surface, but the offer is only for you. Will it be good for you? I doubt it, unless you are one of the early investors in Myntra. Let me remind you of Adam Smith’s timeless statement – “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”

I strongly recommend Jaron Lanier’s excellent book – “Who owns the future” for a different and more alarming perspective on the digital revolution.

Visualising BSE-500 Market Capitalisation: Power Law all the way

In this Information age, it is the normal distribution which appears abnormal; it no longer deserves that name. It is power law that we see everywhere. While this has amassed fortunes for many entrepreneurs, it has also resulted in a highly skewed/unequal distribution.
A similar skewed distribution - a winner take all - Power Law kind of distribution is seen even in the market capitalisation of companies. Shown below in the interactive Tableau Dashboard is the market capitalisation of the 500 Companies constituting the BSE 500.
Click on any industry to see the same skewed pattern of market caps for companies forming a part of the Index.
I will be exploring the widespread prevalence of power law in the information age in subsequent blog posts.