Wednesday, August 03, 2022

Why an 'internet traffic tax' doesn't stand a chance - updates

A number of large European telecom companies want the large internet platforms to contribute to the costs of the growing data traffic. They translate this into a contribution to infrastructure investments. The market offers no solution because they claim to have no bargaining power to force lower traffic costs. Imposing higher subscription rates on end users is not an option for the telecom companies either, and so they end up with politicians. They want a contribution to the costs from the large platforms, which would take the form of an 'internet traffic tax'. Armed with a number of reports, a lobby has been launched in Brussels and BEREC and the EC are working on regulations. However, on closer inspection, the basis for introducing such a tax is lacking. The chances of an internet traffic tax therefore seem minimal.

Reports

In May, consultancy firm AXON published a report for ETNO, the association of European incumbents, in which it made the case for an 'internet traffic tax'. The GSMA added a report written from the mobile operator's perspective and Analysys Mason also contributed.

Communication Chambers tore down the case for an internet traffic tax. We recommend reading the report. Nevertheless, BEREC saw reason to open a consultation, until July 22, and the EC announced a regulation before the fall, the Connectivity Infrastructure Act, which addresses the subject. In the meantime, there is a lot of lobbying for an internet traffic tax, in which the parties know that they are supported by the aforementioned reports. What is striking is that the operators generally make a very different sound towards the financial world (something Communications Chambers also delicately points out), as recently again with the quarterly figures. In a large number of cases, these provided room for raising expectations for 2022.

Argument 1: cloud

The telecom sector has a love-hate relationship with the internet platforms. The platforms have greatly undermined the role of traditional telephony and television, but in return, the telecom companies have been able to develop internet access as a business, which has certainly benefited them. Some telecom companies (not coincidentally, for example, Google Fiber) have even completely stopped with traditional services in order to significantly reduce the cost base. They simply refer their customers to OTT services as an alternative to their 'managed services' of yesteryear. Also in the field of virtualization and cloud-native the ties with the majors are close (including BT with both Google Cloud and AWS).

The decentralization of content and applications has major consequences for costs. The internet platforms, notably Google, Microsoft and Amazon, have built global cloud networks (incl. CDNs and submarine cables) to bring their servers physically closer to the end customer. They have done so without asking the telecom companies to share in the lucrative revenues of the Internet access market.

Governments have embraced the internet and broadband to make many services, including government services, more efficient - with all the associated benefits. The fact that the internet platforms earn a lot of money with this is independent of that. Similarly, Philips has become rich by selling electrical appliances with the advent of the electricity network - without the utility companies sharing in the revenues.

It is irrelevant that much of that money ends up with a handful of internet majors. It is a result of the 'winner takes all' effect. According to Sandvine, Google, Meta, Netflix, Apple, Amazon and Microsoft account for 57 percent of internet traffic. In other words: social networking, video and gaming even represent 70 percent. However, without that concentration among the internet majors, the situation for the telecom companies would be the same, but they would not be able to target those ‘darned majors’.

Argument 2: impact

In addition, the question is what the impact of such a tax would be. An additional source of income increases the free cash flow and thus the scope for paying dividends. It is by no means guaranteed that the telecom companies would increase their capex budget. At the same time, internet platforms would see their costs rise, which could curb investments and, moreover, would increase their prices (advertising and subscription rates, CPE prices). Ultimately, the consumer pays for the costs and the shareholder has the last laugh.

One concern is how the tax would relate to other laws and regulations. Net neutrality would be jeopardized if such a tax were imposed only on large platforms (or certain types of traffic, such as video). Rising costs for consumers can also have a negative effect on digitization, which is something that Europe is strongly aiming for. The great success of the Internet companies is to some extent applauded by the EC, although it would have been preferred if the proceeds were divided among more than just a handful of majors.

Politicians would rather let the market do its job than intervene again, after the DSA (where platforms are defined as 'gatekeepers') and the DMA (where special rules apply to the VLOPs, the 'very large online platforms') a long period of negotiation through the Brussels trilogue.

Argument 3: costs

The arguments for an internet traffic tax are largely based on the costs of the rapidly growing data traffic. The substantiation is weak: these costs (per unit) have been falling sharply for years, while the results of the telecom companies only show growing margins. Unsurprisingly, it is not specified which part of the opex consists of traffic costs and how this cost item develops.

Somehow, the telco majors make a leap from the cost of data traffic to the cost of upgrading their networks – which is strictly a different matter. The first point where their arguments fail.

In addition, mobile operators earn directly from increasing traffic: more use forces consumers to take out a larger and more expensive subscription. In the fixed-line segment, of course, the situation is different. We are used to unlimited use with pricing based solely on speed. Heavier usage doesn't necessarily lead to a need for a higher-speed subscription. If cost were a real problem, then competition would not be an argument for not implementing a price increase. After all, all ISPs suffer from higher costs.

We can further ask the question: what is logical, what is justified? Telecom companies have the right to investigate whether they can develop a two-sided business model, in which not only the end user (the consumer) pays, but also the supplier (the internet platforms). This will not work without politics, because if telecom company X threatens to let the services of, for example, Meta Platforms go 'dark' because of the rising costs, telecom companies Y and Z immediately jump into the hole because there is no question of rising costs at all.

Modernizing networks is business-as-usual for telecom companies. It ensures a capex-to-sales ratio of at least 15 percent, with peaks above 20 percent in times of technological change. If they find their returns insufficient, then they should try to raise their rates. After all, it is their customers, the end users, who are using the content and applications of the platforms and cause the data traffic. The platforms merely provide these and do not cause any traffic by themselves. Or the telcos could stop offering 'managed services' to drastically reduce their costs; they can easily refer to Meta, Microsoft, Google, Netflix and NLziet for equivalent services.

As Ad Scheepbouwer said when he left KPN as CEO in 2011, "The solution is not to have Google pay. (Then) we should have invented Google ourselves".

UPDATES
  • The internet majors could demand reciprocal funduing for content, applications and infrastructure, possible even an equity stake in the networks that they would subsidise.
  • Talk of any 'level playing field' makes no sense. There isn't one. Telcos provide infrastructure and get handsomely rewarded for that. It is up to everybody else to benefit from this - not least enterprises and governments  that aim for digital transformation.
  • Plume Consulting report (2011): "Rather than worrying, the increasing demand for Internet content is good as it supports revenue growth and broadband investment; Telecom providers' costs are not ballooning because of data growth; Content and application providers do not cause traffic; Content and application providers invest considerably in distribution infrastructure and technologies and do not 'free ride' on networks; Investment in next generation broadband would not necessarily increase, and may even decrease, if content and application providers were required to pay for users to enjoy their apps and services".
  • Netflix response (2014): "Netflix isn't 'dumping' data; it's satisfying requests made by ISP customers who pay a lot of money for high speed Internet; Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful ISPs to protect our consumer experience; ISPs sometimes point to data showing that Netflix members account for about 30% of peak residential Internet traffic, so the ISPs want us to share in their costs. But they don't also offer for Netflix or similar services to share in the ISPs revenue, so cost-sharing makes no sense; Interestingly, there is one special case where no-fee interconnection is embraced by the big ISPs -- when they are connecting among themselves. They argue this is because roughly the same amount of data comes and goes between their networks. But when we ask them if we too would qualify for no-fee interconnect if we changed our service to upload as much data as we download -- thus filling their upstream networks and nearly doubling our total traffic -- there is an uncomfortable silence. That's because the ISP argument isn't sensible. Big ISPs aren't paying money to services like online backup that generate more upstream than downstream traffic. Data direction, in other words, has nothing to do with costs".

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