European telecom industry forces Big Tech to pay to install internet

In Europe, the war between US Big Tech companies and telecommunications firms has reached a fever pitch.

Telecom groups are forcing European regulators to consider implementing a framework in which companies sending traffic over their networks charge a fee known as a “sender pays” principle to help fund massive upgrades to their infrastructure.

Their logic is that certain platforms, for example Amazon Prime and Netflix are chewing up huge amounts of data, and so adding new capacity to deal with the growing pressure must pay some of the bill.

“The simple argument is that telecommunications companies want to be duly compensated for providing this reach and growth in traffic,” media and telecoms analyst Paolo Pescatore of PP Foresight told CNBC.

The idea is garnering political support, with France, Italy and Spain among the favored countries. The European Commission is preparing a consultation examining the issue, which is expected to begin early next year.

‘Free ride’

The debate is hardly new. For at least a decade, telecom firms have sought to get digital giants to support upgrades in their network infrastructure. Carriers have long been wary of the loss of revenue from online voice calling apps like WhatsApp and Skype, for example, accusing such services of “free rides”.

In 2012, the European Telecommunication Network Operators Association lobby group, IT, Vodafone, German Telecom, Orange and telephone As members, they called for a solution that would allow telecom firms to sign individual network compensation agreements with Big Tech companies.

But it never really led to anything. Regulators have decided against the proposal, saying it could cause “significant damage” to the internet ecosystem.

After the coronavirus outbreak in 2020, the conversation changed. Officials in the EU were genuinely worried that networks could collapse under the load of apps that help people work from home and keep up with movies and TV shows. In contrast, the likes of Netflix and Disney Plus has taken steps to optimize their network usage by reducing video quality.

This rekindled the debate in Europe.

In May 2022, EU competition chief Margrethe Vestager said it would require Big Tech companies to pay for network costs. “There are players that generate a lot of traffic that then activate their business but don’t actually contribute to providing that traffic,” he said at a press conference at the time.

MetaAlphabet, Apple, AmazonAccording to a May report commissioned by ETNO, Microsoft and Netflix accounted for more than 56% of all global data traffic in 2021. The report said tech giants’ annual contribution of 20 billion euros ($19.50 billion) to network costs could increase EU economic output by 72 billion euros.

Broadband operators are investing seismic amounts of cash in their infrastructure to support next-generation 5G and fiber networks – 50 billion euros ($48.5 billion) per year by one estimate.

The bosses of 16 telecom operators said in a joint statement last month that the US tech giants “must make a fair contribution to the huge costs they are currently inflicting on European networks”. They said higher fiber optic cable and energy prices are affecting operators’ costs and adding more momentum to the network access fee.

The debate is not limited to Europe either. In South Korea, companies have similarly lobbied politicians to force “top” players like YouTube and Netflix to pay for network access. One company, SK Broadband, has even sued Netflix over network costs associated with the launch of its hit show “Squid Game.”

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But there is a deeper story behind the push by telecommunications companies for Big Tech payments.

According to the market research firm, total revenues from mobile and fixed line services are expected to increase by 14% to 1.2 trillion euros over the next five years, while the average monthly revenue per user of telecom services is expected to decrease by 4% over the same period. Omdia.

Meanwhile, the Stoxx Europe 600 Telecommunications Index has dropped more than 30% over the past five years, according to Eikon data, while the Nasdaq 100 has risen more than 70% even after a sharp contraction in technology stocks this year.

Today, Telcos serve as casual services rather than home brands selling the most popular gadgets and services, such as Nokia with its iconic mobile phone brand. Faced with shrinking profits and declining share prices, internet service providers are looking for ways to generate additional income.

Video services have seen “exponential growth in data traffic”, according to Pescatore, and better image formats like 4K and 8K – coupled with the rise of short video apps like TikTok – mean the growth will “boost” over time.

“Telcos, whether fiber or 4G/5G, do not generate any additional revenue beyond the connection to provide access,” Pescatore said.

Meanwhile, the push towards the “metaverse”, a hypothetical network of massive 3D virtual environments, has both excited telecom operators about the business potential and caused concern over the massive data needed to power such worlds.

While a “mass market” metaverse has yet to be realized, once it does, “traffic will dwarf everything we’re seeing right now,” Dexter Thillien, lead technology and telecoms analyst at The Economist Intelligence Unit, told CNBC.

Should traffic senders pay?

Tech companies naturally don’t think they should pay for the privilege of sending their traffic to consumers.

Google, Netflix and others argue that internet providers already pay call, message and data fees for their customers to invest in their infrastructure, and forcing broadcasters or other platforms to pay for traffic that crosses them could undermine the net neutrality principle that thwarts broadband providers internet access. further blocking, slowing or charging for certain traffic usages.

Meanwhile, tech giants have already invested a ton – 183 billion euros between 2011 and 2021 – in internet infrastructure in Europe, according to a report from consulting firm Analysys Mason, including undersea cables, content delivery networks and data centers. they say. Netflix offers telecommunications companies thousands of caching servers that store internet content locally to speed up data access and reduce the load on bandwidth.

“We operate over 700 caching locations in Europe, so content doesn’t travel long distances when consumers use their internet connection to watch Netflix,” a Netflix spokesperson told CNBC. “This reduces traffic on broadband networks, saves costs, and helps deliver a high-quality experience to consumers.”

There is also the issue of why internet users pay their providers in the first place. Users are not guided by which operator is keeping them connected; They want to access the latest “Rings of Power” episode on Amazon Prime or play video games online – hence why telecom companies are increasingly incorporating media and gaming services like Netflix and Microsoft’s Xbox Game Pass into their deals.

Computer and Communications Industry Association lobby group whose members include: Amazon, Apple and Google — said the “sender pays” fee calls were “based on the erroneous notion that the investment gap is due to services driving demand for better network quality and higher speeds.”

Matt Brittin, Google’s Head of Europe, said at an event organized by ETNO in September that the proposal was “not a new idea and would upset many of the principles of the open internet”.

There is no clear solution

A main problem with the proposal is that it is not clear how payments to telecom companies will work in practice. It can take the form of a tax levied directly by governments. Or it could be private sector-led, with tech companies cutting their sales at the rate of traffic they need.

“This is the biggest question mark,” Thilien said. Are we focusing on volume, the percentage of traffic from certain websites, what will be the breakpoint, what happens if you go above or below it?

“The laxer the rules, the more companies can be liable for payment, but the stricter and target only a few (which would be American with its own geopolitical implications),” he added.

There is no easy solution. And that has caused tech firms and other critics, who say it might be useless, to worry. “There isn’t a single bullet,” said Pescatore.

Not all regulators are on board. A preliminary assessment by the European Electronic Communications Regulators Authority found no justification for network compensation payments. In the UK, communications watchdog Ofcom also cast doubts, saying it “has not yet seen enough evidence that this is necessary”.

There are also concerns about the current cost-of-living crisis: If tech platforms are charged more for their network use, they could pass the costs on to consumers, further fueling already high inflation. Google’s Brittin said this “could have a negative impact on consumers, especially during price increases.”

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