Federal Communications Commission chairman Julius Genachowski in late September outlined principles of net neutrality to promote more open use of the Internet. What will these developments mean for business in the U.S. and other parts of the world? In a new interview format called Five Questions, Rajesh Jain, CEO of India-based Netcore, asks Wharton legal studies and business ethics professor Kevin Werbach about net neutrality. In the second part of the interview, roles are reversed and Werbach poses five questions to Jain about opportunities in the Indian mobile market, which is going through explosive growth.

An edited transcript of both interviews appears below:

Rajesh Jain: I would love to hear about your experiences as part of the Obama transition team, and there has been a lot of discussion around net neutrality, which is now coming up in the U.S. What principles should govern telecom in the U.S.? The FCC is supposed to announce net neutrality guidelines. What do you think should be the principles, especially given that mobile operators make huge investments and they would like to keep them as secure as possible. How can you have the right balance in this space?

Kevin Werbach: Part of the way you have the right balance is to have the right kind of process. I have been very fortunate to have a chance to work with the Obama administration’s technology team going back more than two years, to the early days of the campaign when I got a call from a friend of mine named Julius Genachowski, whom I had known from my earlier days of my career working at the FCC, saying that he was now working with a law school colleague named Barack Obama who was running for president. He was assembling a team of technology experts as part of the campaign.

This was a fairly novel and extraordinary idea just in a presidential campaign. Ultimately, the Obama campaign had several dozen of these policy committees where they brought in experts. These weren’t necessarily contributors or people who agreed with everything that the candidate agrees with. They were smart experts in lots of different areas – transportation, education and so on. But there was one on technology. And our task was to help develop the agenda for the campaign.

One of the key points of that agenda – we ultimately came out with a document that the president announced during the campaign when he was doing a visit at Google – was the idea of an open Internet. It was the idea that the reason, or a big reason, that the Internet promotes so much innovation and so much tremendous business investment and development is that it is structurally open. Its technology and the norms that it was built with allow anyone to get online, anyone to reach any other point on the Internet, and competition to flower. And that’s important to promote and preserve. While it’s very important that government not excessively intervene in the workings of the private sector on the Internet, it’s important that government take a stand in favor of that kind of openness and competition.

So that was something that candidate Obama committed himself to, and then when he was elected president of the United States he made a really extraordinary commitment to not just changing the policies of government but changing the way government works. So the Obama administration has brought in lots of very innovative people and has in just a short period of time introduced some really novel ways of making government work.

To take one example, to get to the one that you mentioned, the issue comes up about how the government should address this issue of the open Internet. Julius Genachowski is now the chairman of the Federal Communications Commission, which is the agency that oversees communications networks. So he announced an initiative to promote the openness of the Internet and to have the FCC consider a set of policies and rules to ensure that. The way he did it was not just going and giving a speech and not just starting a proceeding, but announcing a website – which is now at openinternet.gov – with a video blog, with Facebook and Twitter feeds, with an open discussion forum, and lots of resources for people to come together, comment, try to discuss the issues, find out information, and engage in that process. So wherever that goes, that’s the kind of thing the Obama administration has done across the board. I was part of the transition team, which is the small group that works after the election to basically set up the structures for the new administration. So I got to see firsthand just the extraordinary vitality that was there. And there’s a unique commitment in this administration to finding all possible ways. Technology is a big piece of it. It’s not the only part of it. A lot of it is about social mobilization and reaching out to people and communities. But using tools like the Web and like social networks and like mobile to make the government process something much more open and participatory.

Jain: How does the open Internet play out in the mobile space? Obviously their operators would like to keep it as controlled. We’ve seen these things happen – the Google voice controversy, the app store is one example of it. How does the concept of the open Internet play out in the mobile space?

Werbach: The FCC has a set of existing principles. They are not enforceable rules. They are just principles on Internet openness. They say things like you can’t block someone from going to a certain website. You can’t prevent someone from using certain devices. However, they don’t apply to wireless. And they also are very general and they are not enforceable. So what Chairman Genachowski proposed, among other things, was taking these principles and making them enforceable, adding on some additional principles about non-discrimination and transparency. And also making the principles, at least in general terms, apply to wireless as well. I should say just by way of caveat … As I said, I was on the transition team. I’m doing some consulting now for the FCC and also did some consulting for the Department of Commerce, which has a related set of issues. I’m not directly involved in making these decisions, but I should give the caveat that I have an affiliation with the agencies.

The issue with wireless is, the argument gets made that capacity constraints, the spectrum constraints, are so great that there is a need to either block or certainly to heavily discriminate against certain kinds of traffic. My personal view is that it can be taken to an extreme. There certainly are differences. There are differences within wireless. It depends on whether you are talking about, say, a Wi-Fi network or a WiMAX network or a 3G network. And it depends if you’re talking about in a rural area or an urban area. So even within wireless services there are lots of differences. It’s not the same as a wire-line environment, but across the board the idea that you absolutely need to block in all cases does not make sense. The need to manage the network appropriately to deal with congestion and to deal with illegal content and other sorts of situations, those are real needs. But I don’t think there’s a fundamental difference between those needs in wired and wireless.

And I think that’s basically the position that the chairman of the FCC has taken. But there’s going to be a proceeding. And they are going to look at all the details. But if one believes that there’s a need to have a principle of openness and the network operators should not be able to have free reign in doing whatever they want with content and applications on their network, the network operators should be able to have incentives to invest and they shouldn’t be limited in their own innovations in how they manage the network. But if there is going to be a principle of Internet openness, I don’t see why wireless should be off the table.

Jain: So assuming that these things go through, how does that change the landscape? This is going to be a fundamental shift. And when you talk to investors – venture capitalists – very few investors have made money in mobile even though a lot of investment has happened over the last 10 years. So every year it’s the next year that will be the year of either mobile advertising or location-based services or whatever. Do you think this is going to bring about a fundamental change? And, if so, does it have the potential to drive the creation of data services and mobile services companies?

Werbach: I think it has tremendous potential. What’s important to realize is that there are opportunities for innovation and opportunities for new businesses and new revenue streams at every layer of the stack. It gets to some of the things you were talking about. There’s nothing wrong with operators monetizing their investment. In fact, they should. If there is a lot of capital-intensive investment to build a mobile network, there’s certainly nothing wrong with an operator taking revenues and profits out of that, and taking revenues and profits out of what comes on the stream across their network. But that shouldn’t be the only opportunity. You read the speech that Chairman Genachowski gave, which is at openinternet.gov. It’s really all about innovation, and innovation not just in a sense of promoting social good, but innovation in a business sense. There need to be opportunities for content providers to innovate and generate revenue, application providers, some of the new kinds of intermediaries that you’re talking about, an independent apps provider – and all those paths needs to be open.

There needs to be competition and the marketplace needs to decide. So I think if the FCC does this right … And again, they’re just starting the proceeding. They’re doing a lot of creative things to make sure they get the right ideas in the process. If they do it right I think it will catalyze a tremendous amount of innovation and a tremendous amount of business opportunity.

I should give one other example. There was a really striking interview a few days ago with Ivan Seidenberg, the CEO of Verizon, where he basically said, “Look, we’re not a landline phone company any more. We are a wireless and video company. Landline telephone service is a declining business and we’re sort of obviously maintaining our customer base there, but freeing ourselves from that.” And basically what he said was, “I should have realized this a long time ago. For a long time culturally I thought, ‘Well, I’m running a telephone company.’” And a lot of the people, frankly even the people who were promoting things like the Internet and the value of applications and content on the network, not to put words in his mouth, but he and I think other people in some of those industries said, “Well, no, that’s not who I am. I’m not an Internet company.” And I think now they’re realizing that it is who they are because that’s the way the market is going. There’s a role for them to play. There’s an opportunity for them if they free themselves from the sense of they’re the infrastructure provider and therefore their business is in a certain place and not in certain other places.

Jain: So essentially what we are in for now is a lot of disruption. Some models have been working for many years and now technology is a force driving a certain set of change. And then you have the regulatory environment, which is hopefully opening up things. How do you see the next three or four years evolving in terms of the fact that the last many years the U.S. has been a little behind on the broadband side with some of the East Asian companies.

There’s been a lot of criticism of that in the U.S. But that is changing with Verizon’s rollout of FiOS, for example. In mobile, with SMS, the same thing used to be said. But now, from what numbers I have seen, the U.S. is the second-largest sender of SMS’s in the world after China. So there is amazing resilience and the ability to capture new strands of innovation. If you were speaking to, say, entrepreneurs in the U.S. or possibly entrepreneurs outside looking for opportunities from a changing dynamic in the U.S. market, what would your advice be?

Werbach: You are absolutely right that disruption is coming. And I should say it’s nice as an analyst and a professor to say it is disruption. It is good. There are lots of challenges there, and there are challenges again with real businesses that have invested real capital in their networks and need to recuperate their investments. And there are challenges with public policy issues. Who gets left behind? Is there a need for government action to ensure something along the lines of what we call universal service here? Are there other consumer protection issues? So there’s a whole set of things that need to be done to dampen some of the negative aspects of disruption. That being said, it is happening. I ask people sometimes, “Who is the largest phone company in the world?” And I don’t know the answer to that. One answer would be Skype. One answer would be Google. And one answer would be China Mobile. I don’t know if I’ve left anyone out. It is certainly not a company that if I asked most people on the street in the U.S. that they would think of. And that’s already today. So the disruption is going to happen. I think the opportunities for innovation and the opportunities for value creation for companies are looking into situations where you can align all of the interests involved.

If your business model is, “I’m going to kill the mobile operators,” you are going to be in trouble, because they are still very powerful. They are very strong. And if you are dependent on them it is a challenge. If your model, though, is “I’m going to do a value proposition that makes sense for my customers, I have something that makes sense for the mobile operators to the extent that they’re willing to see the opportunity, I have something that makes sense for my partners whether they are content or application providers, then I think there’s value.

The other thing is you have to be nimble. You can’t assume that you’re in a certain place. Because it’s all up for grabs. Apple is a great example. Are they a hardware company? Are they a network services company? Are they an operator? What are they? Today they are incredibly successful. There’s no guarantee, though, that they are going to stay in that place. And I think they know that. So I think everyone needs to be very nimble. And for investors and new companies coming into the market it is looking for those cracks that open up where there’s something that is missing and you have a chance to get in there and get to scale. That’s the other piece of this. If you’re someone new coming in you really have a choice. You can go for a niche. Find something that’s defensible but small. Or you can try and go broad, and those are obviously the home run opportunities, but they are very few and far between. So you can’t just assume that anything will grow to that scale.

Jain: I want to ask you about Supernova. Supernova comes out in December. The theme is “Changing Networks.” Can you tell us a little more about that? I’d also like to ask that question from the point of view of markets outside of the U.S. What are the opportunities there for entrepreneurs in, say, India or China who could think of coming in for something like Supernova?

Werbach: So Supernova is the annual technology conference that I organize in partnership with the Wharton School. It’s in San Francisco. This year it’s December 1-3. As you said, the theme is “Changing Networks.” And there really are two sides to that. One is how networks are changing. And that’s a lot of the things that we’ve talked about at the physical level. At the infrastructure layer we’re seeing this great shift from wired to wireless. We’re seeing all these great shifts in terms of what it means to be an operator and how the network operates. But above that, for example, when you look at the application level of the network, we’re seeing the rise of cloud computing and this massive transformation as things migrate toward data centers and all the disruption and opportunity that creates. And we’re seeing similar kinds of disruptions in the networks of content in social networks. We’ve got massive numbers of users on things like Facebook and other similar ones in other parts of the world. But the next question is, “Where does that go?” When we look back 10 years from now, is that just a fad that a lot of people used or is that the foundation for a new dimension of the whole Internet and communications ecosystem? I think a lot more of the latter, but we don’t know exactly how. So that’s one piece: how networks are changing.

The other side is networks as an instrument of change. Some of that is social change and policy change. What I talked about in terms of what the Obama administration is doing is all about using networks to promote change. And one of the things that I value highly about this administration in the United States … It’s very open to learning from the rest of the world. It’s willing to recognize that there are areas where other countries have done things better or faster or more creatively than the U.S. and it is trying to incorporate those good ideas. And it’s also, I think, doing a lot of very innovative things that other governments and other companies in the private sector should look at around the world.

If you looked at Barack Obama as the CEO of a company and look at how he is rolling out his strategy and how he is empowering people inside and outside his organization, that’s a great lesson for lots of other companies. So there’s that kind of change. And there’s also business change. How do you actually achieve some of these transformations that we have both talked about? Leveraging the networks that are there to allow for change. So there’s a whole set of different specific questions and discussions that leads to … I think for people outside the U.S. it would be very valuable. And one thing about Supernova – and you attended it a couple years ago and I think you saw – even though it is based in the United States, it is a much more global conference than most American technology conferences. And obviously with travel issues and so forth it can’t be as much as I would like it to be, but the mingling is really what promotes the value. People from lots of different perspectives. And even within the United States it’s not just Silicon Valley. It’s people from other parts of the country, people from government, people from academia, and other sorts of fields as well. So there’s a lot to learn. For me, one of the irreducible factors of the digital world is as everything becomes virtual and digital, lots of things we had to do in person and through physical mechanisms no longer need to be. But the few things that have to be, it’s that much more important. So getting smart, diverse, interesting people who you don’t normally talk to in a room together is extraordinary. And I think that’s especially important if you’re in another country or in a company or not in a situation where you are interacting with these people on a day-to-day basis and vice versa. The people from Silicon Valley, they come out of Supernova saying: “Well, it’s great where we live, but I never had a chance to talk with someone who is running a company in India or in China or in Brazil, and that has enlightened me as well.” So I think that’s really the opportunity.

Now I’m very interested in learning from you more about the market in India, where you have been active. Could you talk about how the Internet market and the communications market in India are different from the United States or other countries in the West?

Jain: The market in India is dominated by mobile. For mobile we have 400 million-plus users. Internet has been more stagnant in the last year or year and a half at about 45 million to 50 million. So what’s happening is that, unlike many other markets, mobile is becoming the dominant device for voice, for value-added services, and increasingly for mobile Internet also. It’s somewhat similar to what we saw in Japan in 1999 where, because of the limitation of broadband and computing, basically i-mode, the service which DoCoMo launched, became the center of people’s lives. Mobile is already becoming that. There’s a whole host of services being created around mobile, but there are two challenges with both.

The challenge with Internet is that there is not enough usage, and that has limited the growth in Internet advertising. The Internet-ad spend in India is about $140 million, which is about 3% of the overall media spend in India, but it’s still quite small. Mobile on the other hand, the value-added-services part, where if you look at non-voice and non-P2P SMS, that’s about a billion dollars. So you have a situation where the consumer spending is roughly seven times that of what businesses are spending. From an entrepreneurial perspective, you see these are two separate opportunities.

So while you create services you will be limited by Internet advertising, which is not growing. Google is getting a larger share of the pie and so on. In the mobile space, the problem becomes the mobile operator. Operators want a larger cut of end-user pays. You’ve got to give billing to the operator. There has to be some innovation, which needs to happen in one or both of these segments. That’s the lay of the land when it comes to India.

Werbach: How do you see that changing? Or do you see that changing? You talked about Japan, and in Japan certainly i-mode was fairly dominant, and still mobile Web services are big there. But also DSL and fiber became very significant.

Jain: In India there are two changes I see happening if I look at the Internet space and the mobile space. In India, on the Internet what we will see happening is the emergence of really mobile broadband. I was talking to one of the telecom providers recently and they have these USB modems, which are basically wireless modems on USB. Typically they’ve been used with laptops – people on the move, enterprise users. Interestingly, when I talked with them they said, “Look, the biggest demand we are getting for these USB modems – because they are high-speed, they are 3G speeds – is from consumers to connect their home PC, the fixed PCs, to the Internet.” Because in many places it is hard to get connectivity. The speeds are just not good. So even though people are willing to pay, the connectivity is pathetic for the most part. So that can drive the growth of the Internet. And devices, low-cost devices, which really are network computers. So we have to solve both the connectivity problem and the device problem for the Internet to grow in India. And then, of course, once that grows, more users start happening. Automatically the ad spends will increase. But that’s the change which needs to happen.

The mobile side is even more interesting. What’s required on the mobile side is to create an ordinate ecosystem for value-added services to the operator. So it’s not really happened, because companies tend to prefer to work with the operator, and once you start working with the operator it’s very difficult to break that relationship.

Two things have happened. The entity DoCoMo showed the potential for an open marketplace where they had tens of thousands of applications which got created, and that drove users. They went from zero to 30 million in about three years, in 1999 to 2002. Apple has shown what’s possible in the U.S. with a model which is basically independent – the App Store model – which is independent of the mobile operator. That is the opportunity which exists today to create what I call a digital-services operator, where there are four elements one needs to put together in the mobile space: alternate payments of collecting money independent of the operator, which Apple is doing in the U.S. through credit cards built up largely first through the iTunes music they sell. The second is having a large reach, so you can reach tens of millions of people cost-effectively so you can make them aware of the services. The third is an open publishing platform and marketplace, so third-party providers, content providers, service providers can comment. And finally, an initial set of compelling services, which get people to want to go create the account.

If these four elements can be put together there is a great opportunity to transform the mobile space and break the stranglehold that mobile operators have. What’s happening today is that, because of their focus primarily on voice and in India mainly launches in rural areas, the top of the pyramid – which is about 100 million people, 25% of the base – want new services but are not able to get to the operators.

So there’s an interesting opportunity which can be created in India and then made to work outside.

Werbach: But how does that happen given the level of control that the operators have, because presumably the operators will resist that change?

Jain: The key thing is to start with two better channels on the mobile, which are in a way almost open. So SMS and voice, because most phones are not using and don’t have data plans in India. But SMS and voice work on all phones. And now if you can create push SMS-based services, which make it almost agnostic. You can make it agnostic of your unit. Businesses are using it to send SMS’s and at very low price points compared to P2P pricing. These prices tend to be much lower because you are buying SMS capacity in bulk. And the incremental cost of sending an SMS through any network globally is close to zero. So there is an interesting thing now where you can create the equivalent of an SMS app store and a voice app store. This is the thing which Apple has basically not done today. They have focused on content so they are limited in a way to only the people who are buying their phones. But an SMS app store could fill what I call life’s free moments. You can create lots of services. Can we create a series of, say, 30 packs of SMS’s, where you can educate people on innovation? You send them an SMS at a fixed time every day and it comes with a link so you get a key idea, which you can read in 15 seconds. And then there’s a link where you can explore for maybe three of four paragraphs, 45 seconds to a minute.

Because it is coming to people and it is permission-based, it opens up a whole new world. On the mobile, people are willing to pay for everything they get. So this starts creating an alternate channel. Now because it’s SMS and push-based, and because it’s voice where you’re dialing up and calling up a voice portal like an IVR system and then listening to stuff, there is no way operators can block any of these things, especially if you have your own payment-collection mechanism. You can make these services-priced. You get all the elements required to start offering services direct to the users without having to rely on all the operators. You need one or two friendly operators for you to push your SMS’s in the system and be able to offer you the voice capabilities. But you can do that in many markets – in most markets – because you always have someone who is willing to compete with the other operators in that market.

Werbach: But at some point, even if you can prove out that model on SMS and voice, presumably there is demand for the smartphone type of applications.

Jain: Absolutely.

Werbach: Especially as you get to 3G and 4G and higher capacity.

Jain: Absolutely. So start with what works today. Again, to go back to the Apple analogy, they started with music. Now they’ve gone into apps and videos and ringtones and all that stuff. Today, in India, SMS subscriptions and voice orders are $350 million to $400 million. That’s money being spent by consumers where the actual content providers and service providers are getting less than 20% of their money. Everyone is looking for a way to monetize mobile users because people have realized that you can’t build a business on the Internet relying only on advertising. It’s got to be consumer-based, and consumers are paying. The question is, “How do you get a fair share or a significant share of the pie to then let you promote the service, to be able to then reinvest back into creating new content?”

The rest of that ecosystem needs to fall into place. But what’s missing is the platform, which basically allows for service discovery, for money collection, for a cash balance to be created. So you make it prepaid – because in India we don’t have too many credit card users – to do exactly what the mobile operators have done. Get people to create a small cash balance so you’re paying $2, putting money into your account. And then as you use the services the money starts being credited. It’s a model they are very familiar with. So the payment model they’re familiar with, content they’re already using, and now because if we don’t have the operator’s share, which is in many cases predatory, you can offer services at very compelling price points, maybe a third of the price points at which today they are being offered in the market. If you can start putting this, I think you’ll see an explosion on the SMS voice site. You have the accounts being created, and then you grow with the market. So then as 3G comes in you can offer video, you can offer apps, and you can offer content downloads, all of that. But start with where things are today and which can work on every phone without the dependency on data plans and high-speed networks.

Werbach: How do you envision things going forward? Is there going to be a global market ultimately of app store providers? Or will this continue to be very much localized depending on the characteristics of the market?

Jain: Very interesting. What we are seeing now is two kinds of apps stores being created, by the handset makers – so like Nokia, Apple – and now already some operators are starting to think of their own app stores. The Vodafones, Verizons and others are probably all thinking of app stores.

I think in both cases what the app stores are doing is being offered to a limited set of users. So in the case of iPhone and Nokia, it is people who bought those phones. People tend to change their phones once in two years. What happens then to your apps and the services you subscribe to? What happens if you change operators? There’s an opportunity to create operator- and handset-agnostic app stores. So essentially take some of the good ideas of the Internet, the open access, etc., make it available on the mobile with one big difference. Have people create a payment or subscription relationship. In retrospect you see that’s something which was missing on the Internet. If operators basically do billing for, say, 10% or 15%, they could get a piece of the pie also. But if they insist on keeping 50% or so of what end users pay, it will create an opportunity for neutral, third-party marketplaces to get created who can create their own case balance and who can offer services which are independent of any of the handset guys or handset companies or the operators. That’s one.

Second, everyone’s focus has been on smartphones and the apps. But what everyone forgets is that in markets like India, 95% of the market doesn’t use such phones. Even in the U.S., 70% of the market does not use it. We’re only going to stay that way for some time. There’s a window of opportunity at least for the next two years. So if you can get in there today – in say the next few months – start building relationships with them, start getting them comfortable with the SMS, voice and, today, services app store, which is independent of your dependency on which service provider you’re using or which handset company you’re using.

That is going to be the real opportunity, which can start in a few countries. But it can actually be global. Theoretically there is nothing that we are doing in India which can’t be offered to any other mobile user anywhere in the world. So that is the big opportunity to monetize mobile users directly independent of the specific operators or the handset companies they have.