A look at the pros and cons of the ‘fair contribution’ debateA look at the pros and cons of the ‘fair contribution’ debate
European ISPs have been requesting regulators impose what has been coined as a ‘fair contribution’ payment on bandwidth-hungry Big Tech firms such as Google, Netflix, and Amazon.
January 11, 2023
European ISPs have been requesting regulators impose what has been coined as a ‘fair contribution’ payment on Big Tech firms such as Google, Netflix, and Amazon for operating their bandwidth-hungry services over their networks.
The argument for a fair usage type of fee was first debated a decade ago as telco voice revenues began to dwindle following the uptake of OTT voice services such as WhatsApp and Skype, when telcos accused OTT players of piggybacking on their networks. Regulators didn’t act then and now, a decade later, the European Commission (EC) has already rejected the matter on a fair contribution fee once already in its preliminary assessment, stating lack of viable evidence to support the demand for such fees.
However, since growing online content consumption put networks under increasing pressure during the peaks of the Coronavirus lockdowns, some political support in Europe seems to have been garnered (e.g. France, Italy, and Spain).
These fresh calls have convinced the EC to agree and review the matter once more. Against this backdrop, we present this deep-dive into the pros and cons of such payments that ISPs feel so strongly entitled to. Here is what we found based on publicly available documents and articles on the matter.
Arguments for a fair contribution payment
1. Flat telco shareholder returns and network costs
In a 2022 report by the GSMA, the MNO collective argued that one of the key aspects of the internet value chain is the interdependence of many internet services, and that currently operators are limited in making sufficient returns. This is supported by data on telecom operators’ return on investments which have remained low over the past six years, despite continued investment into capacity and coverage. Meanwhile, the data shows Big Tech has generated the much larger shareholder returns over the same period.
The report also argues that varying competition and regulatory frameworks as well as underlying economics, including market concentration, scale factors, and capital intensity add to the above-mentioned imbalance on returns.
None of this claims that operator profit margins aren’t healthy, indeed it describes those as “more respectable”, but it appears that the expected returns on capital are not as desirable as the operators would have them.
While it is true that operators have held the lowest shareholder returns for many years and revenues have predominantly remained flat, it is also true that telecom unlimited tariffs have had a part to play. In the fixed-line market, ‘unmetered’ tariffs have long been the dominant pricing model and in the mobile segment, ahead of the rollout of 5G, many operators initiated unlimited 4G bundling, then rolling it over to their 5G pricing, leaving little room for ARPU growth.
Granted the GSMA report doesn’t make a direct demand for a ‘fair contribution’ payment by tech giants, yet remains supportive of a regulatory change and stresses the imbalance of shareholder returns between the two sectors. Previous claims by ETNO (the Euro telecoms trade association), however, have made direct demands for Big Tech to contribute towards telco network costs.
Indeed, ISPs develop and maintain the infrastructures that underpin connectivity, and the payment demands from those ISPs is supposed to assist with the buildout and maintenance of the same. However, data from the above GSMA report shows Big Tech is already contributing more capex as a proportion of their revenue to the internet value chain than ISPs.
The highest capex-to-revenue ratio originates from User Device type of firms (e.g. Apple) with more than 25%. Meanwhile, the second largest share is held by the Search category (e.g. Google) along with Social (e.g. Facebook) at 20-25%. The Internet Access and Connectivity subsegment (e.g. ISPs) has the same capex-to-revenue ratio as E-commerce (e.g. Amazon) and Video and Audio Streaming (e.g. Netflix) at 10-15%. The only subsegment smaller than ISPs is Cloud-Based Software Services (e.g. AWS) coming up at around 5-10% capex-to-revenue ratio.
2. Traffic surge and network pressures
The Covid-19 pandemic-induced lockdowns led to increased online content consumption – often offered by content application providers (CAPs) such as Netflix, Amazon Prime, and Microsoft – whether it be for entertainment, work, or education at home. This increased consumption indeed put pressure on networks, though it’s worth flagging that in Europe this was predominantly fixed networks as fixed broadband penetration in the region is high.
Internet traffic data from six Big Tech firms (Alphabet, Meta, Netflix, Apple, Amazon, Microsoft) accounted for more than 56% of all global internet traffic services in 2021. However, there is a strong variation between those companies. While Apple is reportedly responsible for 3% of the total global internet traffic Alphabet carries 21%, the largest share. It is not clear which firms cover the remaining 44% and their respective shares are. It is also not clear what would constitute a fair contribution if one firm drives 3% of the global data traffic while another seven times more.
Meanwhile, opponents of the argument debate operators would still face the same capacity issues if the volume of data were more evenly split between many more CAPs, instead of a few tech giants. Basically, charging a few won’t make the load go away. This presents a good segue to looking at the opposing side of the coin.
Arguments against a fair contribution payment
1. The Open Internet Access & Net Neutrality Principles
The internet is considered the building block for the digitisation of enterprises and public services. As such, the open internet access or otherwise also known as net neutrality, is a protective measure the EU has fought to uphold for many years.
The principle directly addresses the way ISPs treat the network traffic they carry, namely, equally and non-discriminatory. To this end, it aims to enable end-users’ right to be “free to access and distribute information and content, use and provide applications and services of their choice”.
This principle, it has been argued, would be at risk of harm if Big Tech were to strike some form of payment deal with network operators. Such payments would enable any CAP to also strike a deal for preferential treatment on network traffic, thus directly violating the principle of net neutrality and an open internet access.
2. Identifying a non-discriminatory model to enforce payments
Concerns remain about how such payments would even be collected without impacting existing regulations and harming the wider ecosystem. Selecting a randomised collection of firms could be viewed as discriminatory. Using a measure such as network traffic (as discussed earlier in this piece) does not necessarily validate a random cut-off point, raising questions around a payment model. Presumably the body to choose a model could be the EC but it is unclear what would be considered an objective model or value for the deployment of a fair contribution.
3. Big Tech R&D and subsea cable investments
Firms such as Facebook and Google are among the top contributors to subsea cables underpinning the world’s information pipes. With around 80% of investments into new cables stemming from these two US-based Big Techs alone. As such, why should there be a need for additional contribution when there is already an existing share of the infrastructure that Big Tech is supporting financially?
Comparative analysis of telco R&D spend versus the tech giants also puts the latter group miles ahead, while both are part of the same internet value chain. These investments cast further doubt on the validity of any additional contribution by Big Tech to ISPs.
4. Potential consequences for consumers
Considering the aim of such payments is to support and increase the uptake of 5G and fibre services, requiring high bandwidth use cases to drive demand for telco infrastructure, it has been argued that it would be counter-intuitive and counterproductive to charge the same CAPs for delivering those exact use cases that act as the source for telco network demand.
Similarly, telecom operators have long engaged in offering media and entertainment services (e.g. Netflix and Amazon Prime Video) together with their own services offering so-called multi-play bundles to make their own services more attractive to consumers. Once again, a sense of counter-intuitive thinking arises from charging those same CAPs for delivering a service that telcos are already benefiting from.
It has also been argued that fair contribution payments will lower incentives for further investment in the network infrastructure and create a weakened competition between ISPs, subsequently impacting consumer experience. In parallel, this raises the concern that tech giants would pass on the additional costs back to end-users, which in the current European economic and cost of living crisis could have profound consequences.
Arguments against a fair contribution payment further point to challenges observed in South Korea, the only country in the world currently imposing any type of mandatory termination charges both between ISPs and more recently including local and international CAPs. A study undertaken by WIK on behalf of the German regulator Bundesnetzagentur using South Korea as an example, states that measures such as those imposed in South Korea can have “a negative impact on the quality of the content delivered and thus on consumers”. Considering existing infrastructure investments, CAPs, including tech giants, are expected to “resist a change in the current balance” if it were so imposed on them.
Our view: two wrongs don’t make a right
Ultimately, impacts on consumers should supersede any arguments for or against such regulatory intervention. But even leaving aside what might be the ultimate moral compass for us, the arguments against a fair contribution still outweigh those in favour.
Nonetheless, many in the industry agree that Big Tech business growth has undergone little regulatory restrictions for far too long enabling them to build oligopolies, avoid tax payments, violate worker rights, and much more. However, a lack of wider Big Tech regulation alone doesn’t justify a demand for payments which would directly and only benefit telcos alone.
Equally, there is no doubt that imposing asymmetric regulations and telecom-sector specific taxes, restrictive consolidation policies, and enabling spectrum auction wars resulting in lofty spectrum costs have also impacted the telco business model at least to some extent negatively. But risking impacting consumer experience and the principle of open internet doesn’t sit well as the right avenue for making two wrongs right.
The regulations and policies concerning both telecom operators and Big Tech are rightly an issue the EC should review but this should be done with considerations of the wider regulatory environment each sector is operating in and the resulting consequences on consumer experiences.
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