US tech giants face pressure from European telecom operators to pay to build the internet

US tech giants face pressure from European telecom operators to pay to build the internet

European telecoms want big US tech to pay for the internet – but tech giants are fighting back

In Europe, the battle between American Big Tech companies and telecommunications companies has reached a fever pitch.

Telecoms groups are pushing European regulators to consider setting up a framework where companies that send traffic over their networks are charged fees to help fund massive upgrades to their infrastructure, which we calls the “shipper-pays” principle.

Their logic is that some platforms, like Amazon Prime and Netflix, chew up gargantuan amounts of data and therefore would have to foot part of the bill to add new capacity to cope with the increased pressure.

“The simple argument is that telecom operators want to be properly compensated for providing that access and traffic growth,” media and telecom analyst Paolo Pescatore of PP Foresight told CNBC.

The idea is garnering political support, with France, Italy and Spain among the countries that have come out in favor of it. The European Commission is preparing a consultation on the issue, which should be launched early next year.

“Free Driving”

The debate is not new. For at least a decade, telcos have tried to shell out digital behemoths to support network infrastructure upgrades. Operators have long been wary of the loss of revenue from online voice calling apps such as WhatsApp and Skype, for example, accusing these services of “free riding”.

In 2012, the pressure group of the European Association of Telecommunications Network Operators, which counts BT, Vodafone, Deutsche Telekom, Orange and Telefonica as members called for a solution that would see telcos enter into individual network compensation agreements with Big Tech companies.

But it never really came to anything. Regulators have spoken out against the proposal, saying it could cause “significant harm” to the internet ecosystem.

After the coronavirus outbreak in 2020, the conversation changed. EU officials were genuinely worried that the networks would crumble under the strain of apps helping people work from home and binge on movies and TV shows. In response, the likes of Netflix and disney Plus has taken steps to optimize the use of its network by reducing the video quality.

This has revived the debate in Europe.

In May 2022, EU competition chief Margrethe Vestager said she would consider requiring Big Tech companies to pay network costs. “There are players who generate a lot of traffic which then enables their business but who have not really contributed to enabling this traffic,” she said during a press conference at the time.

MetaAlphabet, Apple, Amazon, Microsoft and Netflix accounted for more than 56% of all global data traffic in 2021, according to a May report commissioned by ETNO. An annual contribution to network costs of 20 billion euros ($19.50 billion) from tech giants could boost EU economic output by 72 billion euros, the report adds.

Broadband operators are investing huge sums in their infrastructure to support next-generation 5G and fiber networks – 50 billion euros ($48.5 billion) a year, according to one estimate.

US tech giants should “make a fair contribution to the huge costs they are currently imposing on European networks”, the bosses of 16 telecoms operators said in a joint statement last month. Higher fiber optic cable and energy prices have impacted operator costs, they said, adding greater impetus for a network access fee.

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

The bigger picture

But there’s a deeper story behind the telcos’ push for Big Tech payments.

While overall revenues from mobile and fixed services are expected to grow by 14% to €1.2 trillion over the next five years, the average monthly revenue per user of telecommunications services is expected to decline by 4% over the same period, according to market research firm Omdia.

The Stoxx Europe 600 telecommunications index, meanwhile, has fallen more than 30% in the past five years, according to Eikon data, while the Nasdaq 100 has risen more than 70%, even after a sharp contraction in tech stocks this year.

Telecom operators today serve as everyday utilities rather than household brands that sold the hottest gadgets and services, like Nokia with its iconic brand of mobile phones. Faced with a squeeze on profits and falling stock prices, internet service providers are looking for ways to generate additional revenue.

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

“Telecom operators generate no additional revenue beyond the connection to provide access, whether fiber or 4G/5G,” Pescatore said.

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

What is the metaverse and why are billions of dollars spent on it?

While a “mass market” metaverse has yet to be realized, once it is, “its traffic will eclipse anything we see now,” senior technology analyst Dexter Thillien told CNBC. and telecommunications at The Economist Intelligence Unit.

Do traffic senders have to pay?

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

Google, Netflix and others say ISP customers are already paying them call, text and data charges to invest in their infrastructure, and force streamers or other platforms to pay for passing traffic could undermine the principle of net neutrality, which prohibits broadband providers from blocking, slowing down or charging more for certain uses of traffic.

Meanwhile, the tech giants say they are already investing a ton in internet infrastructure in Europe – 183 billion euros between 2011 and 2021, according to a report by consultancy Analysys Mason – including cables under -marines, content delivery networks and data centers. Netflix offers telcos thousands of cache servers, which store internet content locally to speed up data access and reduce bandwidth pressure, for free.

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

There is also the question of why internet users pay their providers in the first place. Users are not motivated by the carrier that keeps them connected; they want to access the latest “Rings of Power” episode on Amazon Prime or play video games online.

The Computer and Communications Industry Association lobby group – whose members include Amazon, Apple and Google – said calls for “shipper pays” charges were “based on the misguided notion that lack of investment is caused by services that drive demand for better network quality and higher speeds”.

At a September event hosted by ETNO, Matt Brittin, Google’s president for Europe, said the proposal was “not a new idea and would upend many principles of the open internet”.

No clear solution

A fundamental problem with the proposal is that it is not clear how payments to telecommunications companies would work in practice. It could take the form of a tax levied directly by governments. Or, it could be led by the private sector, with tech companies giving telcos a share of their sales proportional to the amount of traffic they need.

“That’s the biggest question mark,” Thillien said. “Are we focusing on volume, percentage of traffic from certain websites, what will be the cutoff point, what happens if you go over or under?”

“The looser the rules, the more companies can become liable for payment, but the stricter they are, and it will only target a few (which will be American with its own geopolitical implications),” he said. -he adds.

There is no easy solution. And it has raised concern from tech companies and other critics who say it might be unworkable. “There’s not a single bullet,” Pescatore said.

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

The current cost of living crisis also raises concerns: if tech platforms are charged more for their network use, they could end up passing the costs on to consumers, fueling already high inflation. This, Google’s Brittin said, could “negatively impact consumers, especially in times of rising prices.”

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