Market failures associated with direct and indirect network effects

With the increase of members on the networks, the value of the networks rises. Since, the additional member offers more value for the current member by opening better opportunity for interaction, the network with more connection becomes very valuable and useful. This is related with internet access, as internet is a network of networks. There is probable market failures associated with direct network effects. The exciting member on a network is benefited when a new member joins the network. The benefits are not considered by the joining member, resulting in a sub-optimally low membership. There will be a significant gain if competing networks are joined together. To do this, incentives are offered to the network operators but certain factors needs to be balanced so that there is no interconnection. Price and quality is considered when customers choose networks. However, they do not consider the effects of that choice on other customers. This means, when a customer on a high-quality network makes call to someone on a low-quality network, excellent voice clarity is not achieved. At times, calls will be restricted and the value of the call of both parties will be reduced significantly.

Indirect network effects are much larger than the direct network effects. Situations where there are indirect network effects, intervention is not required as the participants have the incentive to consider these effects. ‘Best-efforts’ open internet with reasonable quality could provide required kick-start by offering a large addressable customer base. In case the service does not work with customers on low quality networks, then poor quality ‘best-efforts’ internet will hamper the development of the new service. Applications requiring higher bandwidth cannot be run by more participants on the poor quality networks. Online gaming, video streaming and video calling are few of the high bandwidth delay-sensitive applications. There is no provision to switch to upgrade networks as the service with a superior quality does not exist. If the market choose prioritisation over good quality ‘best-efforts’ service then the opportunities for innovation will be left untapped. In such cases, the regulator should intervene and impose a certain minimum quality of service.

If the market fails to cater to the preferences of the customers, then it will result in lack of effective connectivity. This kind of situation is undesirable and should not be encouraged.

Concerns of the stakeholders
Regarding the issues, stakeholders have their own concerns. They feel that
Content and application service could be excluded if the ISPs that offer similar services block them. Prejudiced application of traffic management practices could also result in the exclusion of content and application service. An example for this is mobile phone operators restricting services like VoIP. The market will change in such a way that ISP will start charging the service providers as well as the consumers. This may result in a situation where innovators would need to pay access fee to reach customers. In case the ISP provide paid-for priority services that obtains transmissions at the expense of services that use ‘best-efforts’ capacity, the ‘best-efforts’ internet could be hindered.

Blocking of services and traffic management limits on fixed broadband

Traffic management tools are used by the fixed broadband providers to control and manage the traffic congestion. Usage caps and throttling the traffic of heavy users are of the ways adopted by the providers. By means of prioritising certain types of service, they manage congestion. Delay-sensitive application is prioritized by certain providers. Information regarding such policies should be offered to the customers so that they could make a better choice. Since, there is no strong evidence that traffic management policies are harming the customers, intervention becomes unnecessary.

Blocking of services and traffic management policies on mobile broadband
Mobile network operators adopt similar measures like the fixed broadband providers to control traffic congestion. The traffic management policies could be blocking specific services or restricting access to certain service. Blocking services could restrict innovations largely. However, just a few operators block the services. Ofcom considers blocking of a service undesirable since it hampers innovation. They also calls for certain form of traffic management that could control traffic congestion. Customers should be offered with information about the services that are blocked or discriminated against. If blocking services continues, then regulator will consider intervening into the matter.