Amid rising traffic levels and investment requirements, telcos want tech firms to contribute to network costs. While tech firms claim telcos have failed to monetise their customers, the ‘fair contribution’ concept has grabbed the attention of policymakers
European policymakers and industry have been brought together to discuss the functioning of the internet ecosystem and how it should be funded in the future. At the heart of this matter is the ‘fair share’ debate, in other words whether big tech should contribute to the cost of the telecoms networks on which their online services depend.
ETNO produced a report on the IP traffic market in Europe, which concludes that a new telecoms network funding model could have positive implications for the region’s GDP, employment and carbon emissions. The question of whether big tech is paying its way resulted in dissenting views, with some seeing fair share as telcos’ failure to charge their own customers enough for data consumption.
The GSMA argues that returns on capital are unevenly distributed across the internet value chain, with the telecoms business still viable but hardly lucrative. Despite agreement on the need for telcos to drive network efficiencies and on the potential positives of in-market consolidation, not all participants at its event saw fair contribution as an appropriate solution to help the sector.
Orange has claimed that fair contribution should not be seen as telcos wanting money from big tech firms, but rather it is about ensuring the delivery of networks that can serve a shared interest. Netflix urged caution and wants to see the EU continue their evidence gathering, particularly from consumers, before considering whether there is a problem that needs remedying.
As a decade-old question reemerges, should telcos expect a different answer this time around?
Former European Commissioner Neelie Kroes looked to draw a line under the ‘fair contribution’ debate in her so-called adapt or die speech from 2014, in which she urged telcos to be dynamic, forward-looking and open to change, and to work with the “digital demand” that tech firms generate. However, amid a challenging commercial environment and heightened network demands due to the pandemic, the debate has resurfaced. The proposed European Declaration on Digital Rights and Principles has been the trigger for this, and some operators are once again calling for tech firms to directly fund the rollout and upkeep of telecoms infrastructure.
The issue was brought to the fore in recent weeks, with ETNO, the GSMA and Orange all arranging events (some as part of a ‘Telecom Insights Week’), that convened (virtually and in person) policymakers and industry to exchange views and ideas. Across all three events, the tech industry echoed many of the sentiments of Commissioner Kroes eight years ago. Meanwhile, operators considered that times, and indeed the digital economy, have changed and that it is an auspicious moment to revisit how the deployment and maintenance of telecoms infrastructure is financed, particularly as Europe strives to bounce back from the impacts of the pandemic and set out on a path towards sustainable economic growth.
ETNO’s event showcased the predictable difference of opinion between both sides
First up was ETNO on 16 May, with an event exploring whether those participating in, and indeed deriving value from, Europe’s digital economy are making a fair and proportionate contribution to its foundational pillars. In anticipation, ETNO produced a report on the socioeconomic balance between telcos and big tech in Europe. It argues that surging data traffic has pushed infrastructure investment up to record levels, while at the same time telecoms revenues have declined. It concludes that the time is now right for a new network funding model, which could have positive implications for GDP, employment and carbon emissions in the region. Deutsche Telekom welcomed the report, stating that today there is one side that benefits and another that pays the bill. It called for repairs to the current system, not least to constrain the excessive market power of large digital platforms.
Unsurprisingly, the Computer & Communications Industry Association (CCIA), representing tech companies, disagreed. It argued that internet-based services drive traffic to telecoms networks and that the real problem is that telcos are struggling to charge their own customers enough for data consumption. The CCIA said the fair share argument has been made and rejected before, even suggesting that telcos could be the ones free riding on content. Both BEREC and DG Connect highlighted the importance of the right regulatory frameworks and EU funding programmes to encourage investment. Interestingly, BEREC also suggested that consolidation may help operators gain scale, become stronger and deploy next-generation networks faster. This would have been well-received by Deutsche Telekom, which believes that higher ARPU markets make for better networks, although DG Connect appeared unconvinced.
Telcos urge overhaul of consolidation rules to capture value from expanding internet ecosystem
The second event was the GSMA’s discussion on the value of, and trends in, the evolving internet ecosystem. The organisation updated its 2016 internet value chain report, which shows how large digital players have moved into new markets (e.g. Amazon from retail to devices and entertainment), and delivered far superior financial performance compared to the telecoms industry (15-20% ROCE for social media companies versus 5-10% for telcos). With phenomenal growth in data traffic, investment in network capacity and capabilities (e.g. automation) is needed; however, telcos are experiencing a two-sided squeeze, leaving them to seek returns from a decreasing revenue pool. In light of this, asset utilisation is vital, which Vodafone said it is looking to achieve through tower and network sharing arrangements, as well as consolidation.
Telefónica and Credit Suisse echoed Vodafone’s call for regulators to adopt a more permissive approach to M&A in order to walk prices up from marginal cost level and to unlock investment. Credit Suisse also recognised that the Europe’s telecoms sector has long underperformed due to revenue, capex and leverage pressures; however, they did not share Vodafone’s view that having more parties funding network investment would lead to better outcomes for the region and its consumers. Here, the bank appeared to side more with the arguments put forward by Microsoft, viewing internet access as an enabler rather than a destination for end users. BEREC agreed, seeing connectivity (underpinned by digital skills) as the spark for a virtuous cycle of investment and innovation. As market conditions change, regulators should be conscious of the emergence of new bottlenecks, ensuring policy frameworks remain up to date.
Not all telcos see fair contribution as a silver bullet, but some believe change is required
The final event was co-hosted by Orange and positioned the fair share debate front and centre. DG Connect again provided the policymaker’s perspective, highlighting the fundamental role connectivity will play in achieving the EU’s Digital Decade targets, including the digital transformation of the region’s businesses and public bodies. On the general principle of fair contribution, DG Connect stated that it was in listening mode, as negotiations continue between the EU Council and Parliament. Taking the organisation at its word, Orange noted the €60bn investment it has made over the last 10 years, as well the exponential growth in data traffic. For Orange, the stark difference in the level of data traffic today and a decade ago demonstrates why those driving incremental capex should contribute more to telecoms network costs.
Netflix stated that it already contributes to making the internet work and that despite traffic being 40 times greater than 10 years ago, telecoms margins and networks have held up. It therefore did not accept that the telco business model is unsustainable, nor that direct usage fees are required, outlining a symbiotic relationship between connectivity and content. HSBC was slightly more pessimistic, with flat revenues and higher capex delivering poor financial returns for investors. It also saw a strong case for consolidation, which could be a constructive step-change that would not necessarily harm the consumer. Orange agreed that consolidation is needed to support the telecoms industry, which has been forced to sell core assets to maintain network and spectrum investments. Though fair contribution is not a silver bullet, it is part of a wider solution to ensuring that telcos can finance the digital infrastructure to deliver on shared purposes.
