India Shoots Self in Foot; US Prepares to Follow

Lou Dobbs should love it.  India is building its own wall against winning further outsourced business.  According to an article in IndiaTimes the government is banning the use of “unlicensed” (eg. cheap) VoIP providers like “Net2Phone, Vonage, Dialpad, Impetus, Novanet, Euros, Skype and Yahoo” by call centers and other commercial providers of IP services.  Although the legal status of these operations in India has always been in limbo, the measures include what may be effective steps to force these Indian businesses away from these providers. 

The government cites security concerns and lack of tax revenue as reasons.  Om Malik, on whose blog I first saw this story, says: “These moves to ban low cost voice providers must have come at the behest of large phone companies - Bharti Telecom and Reliance Telecom - which are major long distance minute providers and of course, some of the biggest political donors.”

When the outsourced call center business got started in India, the retail cost of calls to and from that country was about $1.00/minute.  International calls were the monopoly of then-government-owned VSNL and domestic calls of government-owned BSNL.  The call center business would never have gotten off the ground at those rates – nor did call center operators pay those rates.  They built private VoIP networks over the broadband connections they already had.  This was one of the very early large uses of VoIP and it and the call centers flourished despite sometimes successful attempts by VSNL, which also owned the broadband facilities and leased them to the call centers, to block the traffic.

India demonopolized telecom in 2002 for economic development reasons and following the then good example of the US FCC.  The low capital cost of VoIP was crucial to the development of true competition in phone calls.  Retail phone rates fell by half in six months and half again in another six months.  Teledensity increased rapidly from a pitiful 3%.  And, not coincidentally, the India economy grew even more quickly.

India progressed from call centers to full IT outsourcing including all facets of systems development.  Although low paid by US standards, Indian call center operators immediately leave poverty and become middleclass; programmers are rich.  The streets of Bangalore are literally choked with big cars.  There is significant (although not enough) trickledown of this wealth.  Cheap communication has been an essential ingredient of this success.  There is real hope in India even among continuing terrible poverty.

China also deregulated.  Officially this was more gingerly and controlled than the India deregulation but, in fact, the central authorities in China lost control of phone rates which fell from over $.50 minute to just a few cents now to the major cities (unless you call a mobile phone or insist on over-paying at&t or someone like that for your calls). Again VoIP had a major role. China’s economic miracle has been aided and accompanied by this drastic drop in phone rates and communications costs.  You can’t outsource to a factory you can’t afford to talk to or whose manager has no home (or mobile) phone.

Now, for some reason, India wants to revert.  Calls won’t go back up to $1.00/minute.  A grey market may well reestablish itself to provide cheap calls.  But this is a dumb economic development decision.

So that should be good for the competitiveness of the US, right?  If it cost more to communicate with India, then it is easier to compete with India, right?

Well, it could be except that we are busy reestablishing at&t as the monopoly that AT&T used to be.  There was until now a constructive deadlock in the FCC which prevented early and easy approval of the proposed acquisition of BellSouth by at&t.  Recent news is that the deadlock may be broken because the FCC general council has ruled that Commissioner Robert McDowell does not have to recuse himself from the vote because of a prior conflict.  Although one would think that McDowell’s conflict (he worked for an organization which represented competitors of at&t and BellSouth) would predispose him against the merger, the fact that merger proponent Chairman Kevin Martin has pushed to have McDowell un-recused makes it likely that he will be a pro-merger anti-conditions vote. Story here in NYTimes.

The cost to the total economy of advantaging former telecom monopolies and politically influential companies is too high to pay – whether in India or the US.  Too bad we both seem to be doing just that.

Notes and disclosure: my vantage point for the role of  VoIP and deregulation in the Indian and Chinese economies was as CEO of international VoIP wholesaler ITXC. When the Chinese government gave the first trial license to China Telecom for VoIP in 1999, we were China Telecom’s international partner.  Similarly, we and our competitors helped the newly-licensed providers in India get up and running quickly.  I’m proud of having helped to bring rates down quickly to and from those countries.

Perhaps ironically, via two acquisitions, ITXC and its VoIP capability now belong to VSNL which is has been privatized and is majority owned by Indian industrial giant Tata Group.  I have no remaining financial interest but do care about the success of “our” technology and the role of affordable communication in economic development.

Comments

[Tom Evslin]

LookMa:

Your point is well-taken. However, it gives the chairman great power if he can choose to ask counsel to un-recuse someone depending on which way he is going to vote. I can't really figure out the ethics of this one.

But my point here wasn't ethical: in my view the FCC is about to damage America's competitiveness by approving the acquistion without substantial conditions.

[Tom Evslin]

Aswath:

Assuming the story is correct (you ARE correct that I am relying on a single source) it does seem to say that an enforcement mechanism for PC-to-PC calls is being put in place by forcing the call centers to divulge that they use Skype and other providers of such calls. Strict enough penalties for not reporting will probably get pretty good compliance - especially from the bigger players.

[LookMaNoHands]

I don't want to seem like I'm trying to bait you without stating my own opinion, so here's the way I see it:

In any number of fields over the past few years, the "appearance of impropriety" has been over-interpreted -- that's why we've had McCain-Feingold, for one thing.

I don't think it should be a conflict if McDowell was to approve the merger, but for supporters of new net neutrality restrictions (which I am not one) it is advantageous to claim there is one -- I am sure this is why McDowell recused in the first place, when I don't think he really had to.

[LookMaNoHands]

Hi Tom, I work with Hands Off, for what it's worth, but I have a partially unrelated question, about the merger.

I see you've noted McDowell's former employer is Comptel -- which does not support the merger. Yet of course everyone seems to believe McDowell will vote for the merger, if he does vote at all.

How, then, would this be a conflict of interest? It would seem to conflict if he voted against the merger, but if he voted for it, he would actually be voting against his own interests, correct?

[Aswath]

Tom:

I am afraid you are making the same mistake that I think Om is making: reading too much into a news item that appears in one website. Instead of repeating my points, let me link to my comments in Gigaom: http://gigaom.com/2006/12/08/google-clicks-to-call-in-india/#comment-420324

Let us assume that for the sake of argument that the story is correct as reported. Still, I do not see how call centers and outsourced companies will be affected. The story does not suggest that end-to-end VoIP calls are regulated; we know that it is not technically feasible. So, if VoIP call originating in US (say) and terminates in a data network in Chennai (say) and flows to an ATA will not be regulated.

As I indicated in my comment to Om, only calls entering Indian PSTN is and CAN be regulated. If India wants to milk tax revenue through PSTN toll gates, I wish them luck especially because PSTN is dying anyway. :-)