Competition Commission of India Doi: 10.54425/ccijoclp.v4.

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Journal on Competition Law and Policy Vol. 4, No. 2, December 2023, pp. 159-185

Should Over-The-Top (OTT) Providers

Pay the Telecom Industry?
Abhinav Chattaraj1

Abstract
The objective of this study is to investigate the prevailing conflict between
the telecommunications and Over-The-Top (OTT) sectors in India. Telecom
Service Providers (TSPs) have been urging OTTs to compensate them for
network usage and revenue deficits. This study leverages an exhaustive
literature review to scrutinize the various assertions and recommendations
forwarded by diverse telecommunications bodies across the globe. The
findings reveal that while the OTTs have favourably influenced the Internet
Service Provider (ISP) segment of the telecom industry by functioning as a
complementary good, it has negatively impacted the growth and revenues
of traditional communication platforms like SMS and calling. The paper
also identifies the competition issues attributed to the OTT market, as
claimed by the TRAI and ITU. Through a dedicated model, an argument
is substantiated that the disadvantages inflicted by OTTs on the TSPs
surpass the benefits. We then propose our policy recommendation which
necessitates that OTTs bear or share some of the costs of the TSPs. Two
distinct models are introduced to calculate these compensations. The models
factor in the different sizes of OTT and telecom firms to yield a balanced
costing model. Subsequently, an in-depth analysis of the recommended
policy implications is conducted. It is deduced that although our policy
may instigate a debate about potential negative impacts on net neutrality,
a similar approach adopted by the US government did not result in any
adverse effects on the growth of their internet sector. On the contrary,
it demonstrated notable expansion. The exploration undertaken in this
paper illuminates various fallacies and misconceptions prevalent within
the relationship between the telecommunication and OTT industries.

1Department
of Economics, Rutgers University, New Jersey, United States; abhinav.
[email protected]
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Keywords: Competition, net-neutrality vertical restraints, over-the-top,

telecommunications

1. Introduction
Consider the dynamics between the owner of a house and an uninvited
occupant as an analogy to illuminate the core of our investigation.
Envision the owner owning a house, investing in its transformation into a
successful shop, navigating bureaucratic processes, and adhering to local
regulations. Suddenly, an outsider sets up shop within the same premises,
bypassing all regulatory procedures, and offering similar goods at lower
prices, thereby attracting the owner’s customer base, and significantly
impacting their revenue. Despite the downturn, the owner remains liable
for the house’s utility expenses such as electricity and water, while the
newcomer contributes nothing. The scenario leaves the original owner
with a legitimate demand that the outsider should bear a share of the
operational costs. This situation mirrors the dilemma faced by the telecom
industry (house owner) with the advent of the Over-the-Top (OTT)
industry (the outsider), laying the groundwork for our research into
whether OTT providers should compensate telecom companies.
This research paper investigates the complex dynamics between Over-
The-Top (OTT) service providers and Internet Service Providers (ISPs),
with a focus on evaluating whether OTTs ought to compensate ISPs for
the costs they incur. OTTs, which deliver media content over the Internet,
have experienced significant growth, largely facilitated by ISPs, especially
telecommunication companies providing high-speed Internet access
(International Telecommunications Union, 2017). However, this expansion
of OTTs has, as will be discussed in subsequent sections, exerted pressure
on ISPs, culminating in stagnation within the telecom sector due to a shift
in revenue towards OTTs (ITU, 2017 and 2019).
The study delves into the intricate interplay between OTTs and the
telecom industry, aiming to develop models that effectively address the
financial challenges faced by ISPs.
The paper begins with an exhaustive review of the existing literature
focusing on the relationship between the telecom industry and OTTs in the
Indian context (Telecom Regulatory Authority of India 2018, and 2020). It
identifies two key effects: a complementary effect, which encapsulates the

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benefits accrued by telecom firms following the advent of OTTs, and a

substitution effect, which highlights the adverse impacts (TRAI 2018, and
2020).
After this literature review, a theoretical framework is presented,
pinpointing the problems identified from the literature. This framework
examines various dimensions of the issue, including competition and
regulatory discrepancies, investment considerations, and the overall net
effects (Goldlovitch, Kotterink, Marcus, Nooren, et al., 2015) (TRAI, 2020).
The discourse then progresses to the introduction of two cost models.
These models offer intuitive methods for determining the appropriate
financial contributions OTTs should make to telecom providers,
considering factors such as the disparity in scale between the two entities,
and the nuances of ad revenue versus premium subscription revenue,
among others.
The paper also explores the policy implications of this relationship,
particularly scrutinizing the various arguments surrounding net neutrality
as presented by different stakeholders.
In conclusion, the study asserts that OTTs should indeed compensate
telecom companies. This compensation, however, must be equitable
and subject to regulation. The paper emphasizes the importance of
governmental mindfulness regarding factors such as the varying sizes of
different firms within this sector.
This paper centres on the vertically integrated market shared by
telecommunication firms and OTT service providers, where telecom firms
serve as distribution channels for OTT entities. The core objective of this
research is to develop a comprehensive framework tailored to address the
unique challenges inherent in vertically integrated markets like this one.
This framework is not only specific to the telecom-OTT nexus but also
has the potential to initiate an expansive research discourse. The insights
and methodologies derived from this study could, with appropriate
modifications and advancements, be extrapolated and applied to other
similar markets. Thus, this paper is positioned not just as an analysis of
the current telecom-OTT interplay but also as a foundational piece that
could influence future research in analogous market structures.

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2. Literature Review
2.1 Fair Cost Sharing
A few studies have delved into the optimal level and targets for cost-
sharing, particularly in the context of ad-financed services. Economides
et al., (2012) in their research, tackled the issue from a two-sided market
perspective, yet they did not consider any forms of transfers, be they
monetary or non-monetary, between content providers and consumers.
In a similar vein, Peitz and Schuett (2016), in their work, highlighted that
cost-sharing could help mitigate traffic inflation by content providers and
lessen network congestion. Building upon this concept, the current study
expands the scope by permitting content providers to influence demand
through the dual strategies of content quality selection and advertising
intensity. This approach underscores the diversity in content, particularly
in terms of its size and the revenue generated from advertising.
In their study, Jullien and Bouvard (2023) provide a detailed analysis
of a fair cost-sharing mechanism between content providers and network
operators. This model not only motivates content providers to regulate
traffic but also affects consumer pricing for access and content. The
study highlights that consumer welfare hinges on the content provider’s
ability to monetize its user base. With a strong monetization capacity,
cost-sharing can lead to lower prices and enhanced consumer welfare.
Additionally, the study assesses the longevity of these effects in relation
to the operator’s investments in cost reduction and varying consumer
content preferences. It also notes the emergence of contractual externalities
in scenarios with multiple providers and operators, suggesting a need for
regulatory oversight. This framework offers a basis for the models that
will appear in later sections.
In the subsequent section, we aim to discuss the growth trajectories of
the telecom industry and OTTs, their synergy, and the different contrasting
effects that the latter has had on the former.

2.2 Growth of ISPs and OTTs

Over the past decade, the growth of OTT has been remarkable, exerting a
profound impact on both macro and microeconomic levels, encompassing
businesses and individuals alike. Economic impact of OTTs: Technical report,
an article published by the International Telecommunications Union

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(2017) made several predictions regarding the expansion of OTT globally.

However, for a more localized perspective, consider including data from
TRAI’s annual reports or market analysis specific to India, highlighting the
rapid adoption and impact of OTT services in the Indian telecom sector
(ITU, 2017). According to the report, approximately 5 trillion messages,
out of a total of 10 trillion, were exchanged through OTT platforms,
thereby accounting for roughly 50% of the overall messaging volume
accredited to OTT services (ITU, 2017). Notably, in 2017, an astounding
45 trillion messages were exchanged via OTT platforms out of a total
of approximately 56.5 trillion messages, representing an approximate
share of 79.64% for OTT messaging. A comprehensive analysis reveals
that the share of OTT messages exchanged relative to the total volume of
messages exchanged has increased by approximately 59.28% (ITU, 2017).
This substantial change can be attributed to the increased accessibility of
mobile phones and networks over the past decade, facilitating widespread
internet access and seamless utilization of these services.
Services such as communication and streaming platforms have
witnessed a significant upsurge in popularity. WhatsApp, for instance,
has become a significant player in the Indian market with a user base
surpassing 487.5 million in 2022, reflecting a broader trend of OTT
adoption in India’s digital landscape.
Telecommunication has conventionally played an integral role in the
Internet ecosystem, and ISPs serve as the network providers that enable
OTTs to deliver their services, establishing a vertical relationship between
the two. In lieu of this, there has been notable growth in the availability
and affordability of mobile broadband services.
According to the ITU report, the coverage of 3G mobile data was
accessible to approximately 45% of the global population, amounting to
7 billion individuals, in 2010. By 2015, the same report indicated that 69%
of the global population, which had increased to 7.4 billion, had access
to 3G mobile data. This expansion can be attributed to the growth in
Gross Domestic Product, as increased per capita income has augmented
individuals’ ability to own mobile phones and utilize internet services
(ITU, 2017).

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2.3 Similarities and Disparities

Having familiarized yourself with the growth trajectories of the telecom
and OTT industries, the following sections delve into examining their
disparities and similarities. It is necessary to identify the global reach of
OTTs as compared to Telecom Service Providers (TSPs).

2.3.1 Similarities Between Telecom and OTT Industries

1. Core Function and Market Expansion: Both the telecom industry and
the OTT industry originated with a primary focus on communication.
The telecom industry’s market, while predominantly associated with
communication services, has expanded its scope. Similarly, in the OTT
industry, especially in the Indian context, there has been a diversification
beyond traditional media consumption and communication, venturing
into sectors like e-learning, telemedicine, and digital payments,
reshaping the market landscape (ITU, 2019).
2. Global Impact and Consumer Reach: Both industries have significantly
influenced global communication and media consumption. The
telecom industry operates primarily within national boundaries,
adhering to country-specific policies. In contrast, OTT services, with
their widespread availability and universal accessibility, have achieved
a global reach (ITU, 2019).
3. Interplay and Dynamic Relationship: The relationship between ISPs and OTT
services illustrates their roles as both complements and substitutes in the
market. This dynamic underscores the intricate interplay and mutual influence
they exert on each other’s market positions and strategies.

2.3.2 Disparities Between Telecom and OTT Industries

1. Regulatory Environment and Market Flexibility: The telecom industry,
particularly ISPs, faces a complex regulatory environment in India, with
requirements such as licensing, spectrum usage charges, and adherence
to Quality-of-Service regulations (ITU, 2017). This influences their
operational strategies significantly. Conversely, OTT firms encounter
relatively lower barriers to entry and are subject to fewer regulations,
which allows for more fluid investment allocation and operational
flexibility (ITU, 2019).

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2. Scope and Services Offered: The telecom industry provides

communication services and facilitates the means to communicate.
However, the OTT industry caters to a broader spectrum of sectors and
offers a wider range of services, making its market more complex to
define (ITU, 2019).
3. Cost-sharing and Investment Dynamics: A pertinent question arises
regarding whether OTT firms should partake in cost-sharing and
investments with ISPs. This issue stems from the observation that OTT
services have, to some extent, supplanted traditional telecom providers
in various domains while imposing additional costs upon them (ITU,
2019).
4. Pricing Strategies and User Base: OTT service providers, such as Jio,
often employ zero pricing strategies to reach a significantly larger user
base compared to TSPs. This contrasts with the telecom industry, where
TSPs are subject to more stringent regulatory oversight, particularly in
privacy and data management (ITU, 2019).
Using the observations hitherto, one can divide the Indian telecom
industry into two parts: Internet Service Providers (ISPs) and Traditional
Service Providers (TSPs). It can be seen in the next section that OTTs
have had a contrasting effect on the two branches, one where they have
bolstered a branch (complementary) and the other where they have
negatively affected the branch (substitution).

2.4 Complementary Argument

Drawing from neoclassical microeconomics, one understands the
concept of complementary goods as those that are utilized together. This
concept finds a clear illustration in the Indian telecom market, where
the complementary nature of OTT services and ISPs is particularly
pronounced. Platforms like Hotstar and JioTV, pivotal in the surge of OTT
usage, have directly contributed to an increased demand for high-quality
ISP services (TRAI, 2018 and 2020). This interdependence is underscored
in the ITU report, highlighting the critical synergy between network
providers and OTT providers. These two industries, coexisting within
the same ecosystem, not only offer consumers the means to communicate
but also provide a rich array of media content. It is now commonplace
for consumers with a mobile device to engage with both ISP services for
connectivity and OTT content for entertainment and information. This

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scenario where a network connection becomes indispensable for accessing

OTT content further emphasizes their mutual reliance.
This interdependence substantiates the notion that the
telecommunications industry and the OTT industry, while distinct, are
interconnected facets of the same overarching system. Recognizing the
importance of this relationship for the market’s well-being, it becomes
imperative for both industries to collaborate and operate in harmony (ITU,
2019). The ITU report recommends encouraging practical cooperation
between OTTs and network operators. Particularly, Section 7 of the report
focuses on fostering innovative, sustainable, and viable business models
through this cooperation, aiming to yield socio-economic benefits (ITU,
2019).
However, while this interplay underscores a generally positive
relationship, it is crucial to recognize that the substitution aspect, wherein
OTT services replace certain functions traditionally fulfilled by network
operators, carries substantial weight. In fact, the volume of substitution
might even overshadow the complementary aspect. Therefore, it becomes
necessary to duly consider this substitution, or competitive, relationship
between these two entities alongside their cooperative dynamics. Such a
balanced view helps in understanding the full spectrum of interactions
between ISPs and OTT services, shaping policies and business strategies
that cater to the evolving market landscape.

2.5 Substitution Argument

The ITU report acknowledges the dual nature of the relationship between
ISPs and OTTs. It illustrates how OTTs have not only complemented but
also replaced traditional telecom systems, like SMS provided by Telecom
Service Providers (TSPs). This phenomenon is mirrored in India, as
highlighted by the ‘Indian Telecommunications Market Analysis’, which
observes a significant decline in traditional SMS revenues. This decline is
attributed to the rise of OTT messaging platforms such as WhatsApp and
Telegram, evidencing a clear substitution effect.
Supporting this trend, TRAI reports a reduction in the Average Revenue
Per User (ARPU) for traditional telecom services, a pattern echoed in
other regions including the Americas and Europe. Specifically, TRAI
notes, “Average Revenue Per User (ARPU) from wireless services has also

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come down due to increased competition” (TRAI, 2011). This decline in

ARPU is a direct consequence of the competitive pressure exerted by OTT
platforms.
Further illustrating this shift, the ITU report details the increasing
use of OTT voice, video, and text communications across computers and
mobile devices. A striking example is Skype, an OTT service that saw
its international traffic surge by 35 billion minutes in 2014, reaching a
total of 248 billion minutes. Although international telephone traffic still
surpasses Skype’s volumes, the latter’s growth is significant. In 2013,
Skype’s international traffic was four times greater than that of the world’s
largest telecommunications company, and its growth in 2014 exceeded the
combined volume growth of all carriers worldwide by nearly 30 percent.
These statistics from the ITU report (ITU, 2017) highlight the profound
impact of OTT services, such as Skype, on the telecommunications
landscape, showcasing their immense growth in user engagement and
traffic volume. This trend is indicative of a broader shift where users
increasingly favour OTT services over traditional telecom services.
In response, telecom firms have been compelled to adapt, leading to the
development of new business models. A prevalent strategy among telecom
firms is to bundle OTT services with their own offerings. This arrangement
provides consumers with a comprehensive package that includes both the
telecom firm’s services and those offered by OTT companies, often at a
discounted rate. This strategy aligns with the concept of complementary
goods discussed earlier.
In the theoretical framework, it is observed that the substitution effect,
which represents the negative impact of OTTs on TSPs, outweighs the
complementary effect, the positive impact of OTTs on ISPs. This leads to
the conclusion that the net effect of OTTs on the Indian telecom industry
is predominantly negative.

2.6 Intuition
The relationship between OTT services and the telecom sector,
encompassing both ISPs and TSPs, is characterized by an intricate balance
of complementary and substitution effects. This interplay, as evidenced
in various studies and reports, including those by ITU and TRAI, reveals

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how OTTs have revolutionized communication by offering alternatives to

traditional telecom services, while concurrently relying on the underlying
telecom infrastructure for service delivery. This duality is evident in the
way OTTs, like WhatsApp, Telegram, and Skype, have driven consumer
demand for robust internet services, benefiting ISPs, as highlighted in the
ITU report.
However, this complementarity is counterbalanced by a significant
substitution effect, where OTT platforms replace traditional services
like SMS and voice calls, affecting the revenue streams of TSPs. This
trend of OTTs encroaching on the traditional telecom market is a global
phenomenon, leading to a decline in ARPU, as reported by TRAI. The
substantial increase in user engagement and traffic volume on OTT
platforms, such as the notable rise in Skype’s international traffic (ITU,
2017), exemplifies this shift. Consequently, while OTTs foster greater
internet usage, aiding ISPs, they also pose challenges to the revenue
models of TSPs.
The ensuing section of this paper builds on these insights, presenting a
model that quantifies the net effect of these contrasting dynamics between
OTTs and the telecom sector. The model leverages the empirical data and
trends discussed earlier, including the insights from the ITU and TRAI
reports. It aims to provide a comprehensive understanding of how the
complementary and substitution effects of OTTs influence the overall
telecom industry. This analysis is crucial for determining the extent to
which OTTs impact telecom operators, guiding strategic decisions and
policy considerations.
Considering this model, the discourse on the financial relationship
between OTTs and telecoms becomes particularly relevant. Given the
nuanced interplay between these sectors, the model’s findings will inform
the debate on whether OTTs should bear financial responsibilities towards
telecoms. This discussion is not just an economic consideration but also
a reflection of the evolving telecommunications landscape, highlighting
the need for policies that support sustainable growth and collaboration
between OTTs and telecoms (ITU, 2019).

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3. Theoretical Framework
3.1 The Problem
International bodies and national authorities, including in India, are
concerned about the impact of OTT services on network operators’
investments, affecting the adoption of new technologies like 4G and 5G.
Traditional TDM networks are still prevalent, despite VoIP’s growth,
due to investment concerns and a focus on maximizing current revenue
(TRAI, 2018).
OTT services have caused a significant increase in internet traffic,
raising the costs for ISPs. However, the rate of internet traffic growth
is slowing, contradicting the notion that OTT services are leading to
increased demand for ISP services. TSPs face risks such as loss of customer
relationships, increased competition, potential commoditization, and the
necessity for digital engagement.

3.2 Competition and Regulatory Discrepancies

• OTT providers face lower barriers to entry compared to ISPs, who are
subject to numerous licensing provisions and regulatory fees (BEREC,
2016). This discrepancy gives OTT players a competitive advantage,
allowing them to offer services at lower tariffs while leveraging TSPs’
networks (Goldlovitch, Kotterink, Marcus, Nooren, et al., 2015).
• The rapid growth in video consumption and the expectation that
video will account for a significant portion of mobile data traffic raise
concerns about the telecom industry’s ability to support this influx
(Bijl, Renda, Motta, et al., 2015). TRAI mandates telecom providers to
expand infrastructure while maintaining fair pricing, a challenge given
the growing costs and traffic (TRAI, 2020).
• Critics argue that OTT players bypass regulatory obligations, exploiting
alternative revenue streams, leading to an imbalance in competition.
Allegedly, large OTT players are leveraging their scale to dominate the
market, leading to reduced turnover and industry dynamism.

3.3 Investments
Another critical aspect to consider is the advent of 5G, which is one of
the most highly anticipated developments in the telecommunications
industry and is expected to benefit OTT services as well. However, the

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deployment of 5G requires substantial capital investment from telecom

providers. The existing situation, where ISPs bear significant costs while
OTT providers enjoy competitive advantages, has limited the telecom
firms’ ability to invest extensively in technical advancements without
incurring deficits and overwhelming costs. Consequently, this may lead
to either significantly increased prices for telecom consumers, thereby
resulting in a decline in consumer welfare - a crucial goal outlined in the
Competition Act in India (Ministry of Corporate Affairs, 2002) (TRAI,
2020).

3.4 Net Effect of OTTs on Telecom

In the literature review above, it was claimed that although the telecom
industry has derived certain benefits from OTTs, the losses incurred by the
sector outweigh these gains. To test this assertion, a model that analyzes
the long-term steady-state growth patterns of the telecom industry will be
introduced. The analysis and assumptions are grounded in the existing
literature reviewed thus far.

3.5 Rationale
In constructing the theoretical model to analyze the impact of OTT
services on the telecom sector, observed market trends and empirical
data have been drawn upon, as highlighted in reports by ITU and TRAI.
The choice of variables and the underlying assumptions in our model are
deeply influenced by these insights. The model primarily revolves around
two sets of variables: those representing the complementary effect (ISP
revenues from OTT services and network costs) and those signifying the
substitution effect (lost revenues from traditional telecom services and
OTT advertising revenues).
The rationale for focusing on these variables emerges from the notable
trends in the telecommunications industry. As indicated by TRAI, there
has been a discernible decline in traditional telecom revenues, especially
in sectors like SMS and voice services, attributable to the rise of OTT
platforms like WhatsApp and Telegram (TRAI, 2011). This decline in
revenue signifies the substitution effect, where OTT services are replacing
traditional telecom functions. Additionally, the ITU report (ITU, 2017)
underscores the substantial growth in user engagement and traffic volume
on OTT platforms, such as Skype’s significant increase in international

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traffic. This growth in OTT platforms, particularly in advertising revenue,

further validates our focus on these variables to represent the substitution
effect.
Concurrently, the complementary effect, characterized by the
interaction between ISP revenues and network costs, is grounded in the
understanding that OTTs, while enhancing internet usage, necessitate
significant investments in network infrastructure. This is reflected in
the ITU’s observation of the critical interdependence between network
providers and OTT providers (ITU, 2019). While OTTs drive demand for
high-quality ISP services, they also impose substantial costs for network
maintenance and upgrades, leading to a scenario where network costs
potentially grow faster than ISP revenues.
Given these market dynamics, our model assumes that the substitution
effect is larger than the complementary effect. This assumption is based
on the evident trend where the rapid growth and economic benefits of
OTTs, particularly in advertising revenues, are not sufficient to offset
the losses incurred in traditional telecom service revenues. The model,
therefore, posits that in the long run, the net effect of OTTs on the telecom
industry is negative. This theoretical stance is not only aligned with the
empirical observations documented in the ITU and TRAI reports but also
reflects the broader shifts in consumer behaviour and the evolving digital
economy.

3.6 The Model

For this model, one can introduce a group of time series equations with
variables that serve as parameters to estimate the effect of OTTs on the
telecom industry. The equations can then be brought to a steady state form
and calculate the net effect. The net effect will be calculated theoretically
using the data and trajectories observed so far.
The following are assumed:
• The rate of change of each state variable depends linearly on the current
states and exogenous shocks.
• The coefficients are constant over time.
• The exogenous variables follow a fixed deterministic pattern, and their
effects on πt, ct, λt, αt respectively are known.

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• The network costs (ct) grow faster than ISP revenues (πt), i.e., β2 > β1
and/or ρ2 >ρ1.
• The OTT ad revenues (αt) grow faster than the lost revenues from
traditional services (λt), i.e., β4 > β3 and/or ρ4 > ρ3.
Consider the following system:
π t β 1 (π t − ρ1ct ) + ε tπ
π t + 1 =+
ct + β 2 (π t − ρ 2α t ) + ε tc
ct + 1 =
λt + β 3 ( λt − ρ 3α t ) + ε tλ
λt + 1 =
α t β 4 (α t − ρ 4π t ) + ε tα
α t + 1 =+

For time t ∈ Τ, πt represents ISP revenues from OTT services, ct

represents network costs. The difference between these two variables
gives us the complementary effect of OTTs on ISPs. λt represents lost
revenues and αt represents OTT ad revenues. n TSPs. M
The difference between these two variables represents the substitution
α
effect of OTTs on TSPs. Meanwhile ε t represents exogenous shocks
affecting ISP revenues from OTT services, ε t for network costs, ε tλ for
c

lost revenues and ε tα for OTT ad revenues.

The net effect can be computed as:

ηt = (π t − ct ) − ( λt − α t )

This basically tells us that if the complementary effect is higher, the net
effect will be positive and if the substitution effect is higher, the net effect
will be negative.
It is assumed that the system quickly reaches a steady state (in one
period), where:
π t +=
1 π=
t π*
ct + 1= ct= c *
λt +=
1 λ=
t λ*
α t +=
1 α=
t α*

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If steady state net effect is less than 0, it would suggest that in the long
run, the net effect of OTT on telecom is negative, as per this model.

Given the assumptions, it can be determined that in the steady state,

c * > π * and α * > λ * .
Therefore, the net effect in the steady state (η * ) is negative:

( ) ( )
ç * = ð * − c* − ë* − á * < 0

Our theoretical model, under certain assumptions, demonstrates

that the net effect of the introduction and growth of OTT services on the
telecom industry is negative. This is embodied in our solution η * < 0,
which indicates that the additional costs and losses brought about by OTT
services surpass the benefits that accrue from increased data demand. Our
model’s assumptions, crucially, are that the network costs grow at a faster
rate than ISP revenues, and the ad revenues of OTT services expand faster
than the losses in traditional communication service revenues.

The result provides a theoretical backing to our initial hypothesis that the
OTT phenomenon negatively impacts the telecom industry. Importantly,
while this model provides a theoretical perspective, it is designed to mirror
real-world scenarios and trends observed in the telecom sector globally.
The rapid proliferation of OTT services has undeniably reshaped the
telecommunications landscape, impacted traditional revenue streams and
increased demand for data services. By encapsulating these dynamics, our
model serves as a valuable tool for gauging the net impact of OTT services
on the telecom industry.

Considering these considerations, it becomes logical to propose that

OTTs should bear some form of contributory costs towards the telecom
industry for the competitive advantages they have been enjoying. The
subsequent section will delve further into this topic, exploring potential
mechanisms for addressing this issue.

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0 t 0 0 t

Figure 1. Long run net effect of OTT on telecom.

3.7 The Solution

One can now introduce the subsequent models employed in this study, each
targeting distinct aspects of the issue at hand. The first model concentrates
on fair cost sharing, investigating the equitable distribution of costs.
The second model centres around fair revenue sharing, examining the
equitable allocation of revenues. These two models collectively contribute
to our comprehensive understanding of the multifaceted nature of the
problem.

4. Modelling

4.1 Model 1: Fair Cost Sharing

One needs to employ a model to calculate the proportion of total costs
incurred by the telecom industry attributed to supporting OTT services.
We will be deploying a model like that of Frontier Economics which was
used to compute the same for the European Union.
The following assumptions have been made in this model:
i. γ: The assumed value in the model requires validation through
thorough surveys conducted by regulatory authorities like the Telecom
Regulatory Authority of India (TRAI). Accurate determination of this
value necessitates empirical research and data collection to correctly
portray the actual situation.
ii. Global revenues: The model operates on the assumption that revenues
considered are global rather than specific to a region. This approach
aligns with the 2023 amendment to the Competition Act, particularly
Section 27(b). By taking global revenues into consideration, the model

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strives to offer a more comprehensive view of revenue distribution and

fairness within the telecommunications sector.
The limited number of assumptions in this model contributes to its
usability and practical implementation. The existing assumptions are
unambiguous and can be effectively utilized to determine fair costs within
the given context.
Consider the following expression for total costs of a TSP:
δ + K h Wh + Oh
Th =
In the above expression, for telecom provider h = 1,2,3…..H,
Th = Total costs incurred by telecom provider h
δ = Sum of annual depreciation
K h = Capital employed by h
Wh = Weighted Average Cost of Capital (WACC)
Oh = Operating Cost of h
Now that we have an expression to compute the total costs, we can go
on to the expression to compute the proportion of costs attributed to OTT
providers,
π h = Thγ h

In the above equation,

Th = Total costs incurred by telecom provider h
γ h = Proportion of busy hour traffic of telecom provider h attributed
to OTT
π h = Costs incurred by h attributed to OTT
Now, move on to the OTT’s side. A key aspect of this model is that one
must account for the disparity in the turnovers of different OTTs. Here is
the first expression:
 α 
βi = π i  I i 
 ∑ αi 
 i =1 
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In the above equation, for OTT provider i = 1,2, 3…. I,

α i = Market size of OTT provider i, given by global revenue
π i = Share of TSP’s total costs attributed to supporting OTT services
β i = Fair share of T that i should contribute
This equation gives the fair share of the total compensation thatαeach
i
firm in the OTT industry would provide. One can say that I

represents the market share of firm i. Now, we need to account fori =1the
αi ∑
differing scales of the OTT and telecom firms. Introduce a “scale factor”
over here that would fairly adjust the final amount paid by OTT providers
according to the above-mentioned difference in scales. Look at the
following expression:
 I
∑ α I

 Y
i =1 i
, if ∑α i <Y
θ = i =1
I

1,

if ∑αi =1
i >Y

In the above equation,

Y = Global revenue of the telecom industry
I

∑α
i =1
i = Global revenue of the OTT industry

θ = Scale factor

Note that if ∑α
i =1
i < Y , i.e., if the OTT firm has a smaller global revenue
than that of the telecom provider, the amount paid by firm i will be scaled
I

∑
‘down’, whereas if α i > Y , i.e., if the OTT provider has a larger global
revenue compared to i = 1 that of the telecom provider, the amount paid by

firm i won’t be scaled.

The above-mentioned equation introduces a mechanism to find the
relative revenue of the OTT industry with respect to the telecom industry.
Using this, one can find the final amount that the OTT provider must pay
to the telecom providers.

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C i = β iθ
In the above equation,
β i = Fair share of that I should contribute
θ = Scale factor
C i = Final amount paid by firm i

The value C i will then be divided according to the respective market

shares of each telecom provider. For instance, if a telecom provider firm
H has a market share of 30%, the compensation H will receive from i will
be [(0.30) C i ].
The model presented is characterized by its intuitive nature and
straightforward interpretability. The initial equation delineates the total
costs associated with a TSP, drawing upon a conventional formulation
frequently utilized in accounting literature. This equation comprehensively
incorporates various cost components: depreciation, an indirect cost
element; weighted cost of capital, encompassing expenses related to
capital assets such as machinery; and operating costs, representing the
routine expenditures of the TSP.
Subsequently, the analysis progresses to an equation delineating the
costs incurred by a TSP attributable to OTT services. Prior observations
have linked a rise in total costs to augmented OTT activities. This equation
allocates the total costs in relation to the heightened traffic during peak
hours, which is a direct consequence of OTT services.
Further, the paper introduces an equation to ascertain the portion of the
TSP’s total cost attributable to a specific OTT entity. Here, the gross costs
incurred by the TSP due to OTT services, as determined in the preceding
equation, are refined to net costs by considering the market share of the
OTT firm. For instance, should the TSP’s total costs attributable to OTT
services amount to Rs. 500 crores, and an OTT firm holds a 5% market
share, the cost apportioned to this firm would be Rs. 25 crores, equating
to 5% of Rs. 500 crores.
The final segment of the model addresses two scenarios: one where
the OTT firm’s size surpasses that of the TSP and another where the

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reverse holds. The comparative analysis of their revenues serves as the

basis for this distinction. In instances where the OTT firm’s revenue
exceeds that of the TSP, the firm is liable for the full cost computed in
the equation. Conversely, if the TSP’s size is greater, the calculated cost
is proportionately reduced according to the relatively smaller scale of the
OTT firm. This adjustment ensures the financial feasibility for smaller
OTT firms to shoulder these costs.

4.2 Model 2: Ad Revenue Model

This model proposes a unique methodology to estimate how OTT
companies can equitably contribute fees to telecom providers. It factors in
ad revenue and differentiates between basic and premium subscriptions
available through the OTT platform. The OTT service offers two types
of subscriptions: basic and premium. The basic service is free, with the
provider earning revenue through advertisements shown to these users.
In contrast, premium subscribers pay a set fee at regular intervals for an
ad-free experience.
Assumptions:
i. Greater number of regular subscribers: This assumption is because OTT
providers often have a larger customer base for their regular services,
as they are lower priced and therefore more accessible to more people.
ii. Pre-determined values: The model assumes that parameters ϕ and σ,
which define ad and premium revenue shares, are predetermined,
ensuring transparency in revenue sharing.
iii. Subscribers as primary revenue source: The model assumes that the
main revenue for the OTT provider comes from regular and premium
subscriptions.
iv. Two versions of service: The model is specific to OTT providers offering
only two service versions - regular and premium. It does not consider
other service versions or payment plans.
The revenue for the OTT firm can therefore be delineated as follows:

π=i ρi ( N i − ni ) + ρˆ i ni + ε i
In the above expression,
N i = Total subscribers of provider i

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ni = Premium subscribers of provider

ρi = Ad revenue per subscriber
ρ̂i = Unit price of premium subscription
ε i = Exogenous revenue
The final cost paid by the firm to ISP provider k would be:

 ρ ( N − ni ) ρˆ i ni 
=Ci β k  i i +  + εk
 σ φ 

In the above expression,

β k = Market share of k
σ = Pre-decided ad revenue share of k
φ = Pre-decided premium users’ revenue share of k
ε k = Fixed usage fee paid to k. Note that 1 < φ < σ .
The model assigns a higher value to ad revenue share compared to
premium revenue share. This decision acknowledges that streaming
numerous advertisements to a wider audience generates increased
network traffic, thus imposing a higher cost burden on ISPs.
The initial equation in the analysis methodically calculates the revenue
of an OTT firm. This calculation incorporates a bifurcated revenue
structure: one segment emanates from advertising revenues generated by
non-premium service customers, while the other stems from subscription
revenues accrued from premium service clients. Additionally, the equation
judiciously integrates a variable specifically designated to encapsulate
any exogenous revenue streams that the OTT firm may benefit from.
Following this, the model adopts a nuanced approach to distribute
the calculated revenues. It applies a weighting mechanism to the
revenue streams, effectively moderating them to reflect a more realistic
financial scenario. Subsequently, the resultant adjusted revenue figures
are apportioned among various TSPs. This distribution is meticulously
aligned with the market shares of each TSP, ensuring that the allocation

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of final costs is proportional and reflective of their respective market

standings. This methodology not only captures the diverse revenue
sources of OTT firms but also ensures an equitable distribution of costs
among TSPs based on their market influence.

5. Policy Implications
The Indian Government introduced the Telecommunications Bill in 2023.
This analysis will delve into the bill’s critical elements and elucidate the
implications of both the Act and our theoretical models on policy and
regulation.
Section 3 of the bill accentuates the theme of exclusive privilege,
delineating the government’s comprehensive authority to regulate
telecom entities, grant licenses, and assign spectrum. In contrast, Section
4 underscores the multifaceted licensing and payment obligations of
the telecom industry (Department of Telecommunications, 2022). These
sections collectively depict a future of stringent governmental control,
thereby amplifying existing entry barriers in the sector.
Section 5(7) advocates for technological innovation, allowing providers
to deploy novel technologies, contingent on licensing fees. While fostering
innovation, it does not mitigate the prevalent financial constraints. In
contrast, Section 6 proposes efficient spectrum utilization, allowing
sharing, trading, leasing, and surrendering of assigned spectrum. This
section seems to be a transition towards fostering agreements between
telecom and OTT sectors, and our models could shed light on the potential
terms and conditions.
However, the proposed collaboration does not address the vertical
relationship between OTTs and telecom providers or the potential
violation of net neutrality principles, which advocate for equal treatment
of all internet traffic. The history of regulatory shifts in net neutrality,
particularly in the United States, underlines the potential complexities in
interpreting the forthcoming Indian Telecommunications Bill.
Ajit Pai’s tenure as the United States Federal Communications
Commission (FCC) Chairman marked significant changes, arguing
for fostering competition, reinstating United States Federal Trade
Commission’s (FTC) oversight, eliminating redundant regulations, and
advocating transparency requirements. Contrary to the speculated ‘Death

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of the Internet’, data reveals significant growth in broadband speeds,

internet user proportion, and ISP financial performance, refuting the
contention that a decline in net neutrality would adversely affect the
Internet (FCC, 2017).

Figure 2. Number of internet users (%) in the USA.

Considering the increases in the quality of internet service, the number

of internet users, and the improved sector performance, it is reasonable
to refute the contention that a decline in net neutrality would trigger the
alleged ‘death of the internet’ (FOCUS, 2018).

6. Conclusion
Our extensive research on the relationship and dynamics between OTTs
and ISPs suggests a need for a systematic re-evaluation of the financial
and competitive landscape of these industries. The study illuminates
significant challenges in maintaining a balanced level playing field due
to the difference in market entry barriers and the subsequent competitive
advantage enjoyed by OTT firms. Based on our findings, one can conclude
that OTTs should compensate ISPs to rectify the disparity created by their
rapid growth and inherent competitive advantage.
The remarkable expansion of the internet and OTT sectors has come
with a complicated blend of complementing and substituting effects.

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While the OTTs have been a catalyst for the internet boom, traditional
telecom services have taken a hit due to the substitution effect. This has
led to stagnant growth and reduced revenues among TSPs. The revenues
traditionally accrued from advertisements and subscriptions have instead
shifted to OTT providers. This discrepancy is exacerbated by the fact that
OTT companies face fewer regulations and scrutiny, a fact that confers
them an arguably unfair competitive advantage.
To maintain a competitive and fair marketplace, we advocate for
a restructuring of the financial relationship between OTT firms and
telecom providers. This could manifest as a compensatory arrangement
where OTT firms contribute towards the investment costs incurred by
telecom providers in managing increased internet traffic. The proposed
compensation would not only level the playing field but also bolster the
telecom industry’s ability to invest in technological advancements, which
is crucial for the overall development and sustainability of the digital
ecosystem.
Our proposed models offer a robust mechanism for determining
the right compensatory amount. The first model considers the cost side
of ISPs, estimating the expenditures directly related to OTT activities.
The second model incorporates the concept of ad revenue and different
payment tiers within an OTT service. By considering the disparity in firm
sizes and financial resources, these models ensure that the compensation
is equitable, proportionate, and non-discriminatory.
Finally, the policy implications of our hypothesis were tested and
compared to a similar approach adopted by the US. We find that the
policy, which would expectedly violate net neutrality, would not lead to
any harm to the telecommunication providers or consumers, therefore
ensuring market welfare.
In conclusion, the extraordinary growth and influence of OTT service
providers on the digital landscape, coupled with their competitive
advantage, necessitate a rebalancing of the financial equations governing
these sectors. OTT firms should indeed bear some responsibility for the
increased costs faced by ISPs, as a result of their own success.

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6.1 Balanced Responsibilities

As the recommendations for OTTs to share infrastructural costs with TSPs
are considered, it is equally important to highlight the responsibilities that
TSPs hold within this partnership. TSPs are not merely passive recipients
of compensation but active participants in fostering a sustainable and
innovative market environment. Their commitment to improving service
efficiency, investing in advanced technologies, and exploring new business
models is fundamental to maintaining a healthy digital ecosystem. The
onus is on TSPs as well to adapt to the evolving market needs and to seek
opportunities that benefit the consumer base and the market at large.
TSPs could adopt strategies such as diversifying their service offerings
beyond traditional telecommunication, like venturing into cloud services
or IoT solutions. This not only capitalizes on their existing infrastructure but
also aligns with the digital demands of a modern economy. Additionally,
TSPs should prioritize investment in 5G and fibre-optic technologies to
enhance connectivity and service quality, thereby complementing the
digital services provided by OTTs.
Moreover, regulatory frameworks should be designed to encourage
such collaborations while ensuring fair competition and consumer
protection. Policymakers might consider implementing regulatory
sandbox environments that allow TSPs and OTTs to experiment with new
business models and services under temporary regulatory relaxations.
This approach can foster innovation while allowing regulatory bodies to
adapt their policies based on real-world data and outcomes.
Concluding, this discourse acknowledges the symbiotic relationship
between OTTs and TSPs, emphasizing that the path forward requires
a confluence of efforts from both parties. As the industry strides into
the future, it is the shared responsibility and collaborative approach
of TSPs and OTTs that will ensure the resilience and growth of the
telecommunications infrastructure, ultimately serving the collective
interest of a connected world. The guiding principle here is one of mutual
advancement and adaptive innovation, where both OTTs and TSPs work
in tandem to not just share costs, but also drive the industry forward with
new technologies and business models, benefiting the broader digital
ecosystem and its myriad stakeholders.

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