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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