The European telecoms industry is forcing Big Tech to pay to build the internet

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

Telecoms groups are pushing European regulators to consider introducing a framework in which companies sending traffic across their networks are charged to help finance mammoth upgrades to their infrastructure, something known as the “sender pays” principle.

Their logic is that like certain platforms Amazon Prime and Netflix chew through huge amounts of data, so they have to foot some of the bill to add new capabilities to cope with the growing strain.

“The simple argument is that telcos want to be properly compensated for providing this access and growth in traffic,” Paolo Pescatore, media and telecoms analyst at PP Foresight, told CNBC.

The idea is gathering political support, with France, Italy and Spain among the countries in favor. The European Commission is preparing a consultation looking into the issue, which is expected to start early next year.

‘Free Ride’

The controversy is hardly new. For at least a decade, telecom firms have sought to acquire digital juggernauts to support network infrastructure upgrades. Operators have long worried about the loss of revenue from online voice calling apps like WhatsApp and Skype, accusing such services of “free riding,” for example.

In 2012, the lobby group of the Association of European Telecommunications Network Operators counted BT, Vodafone, Deutsche Telekom, Orange and Telephony members have called for a solution that would see telecom firms negotiate individual network compensation with Big Tech companies.

But it never led to anything. Regulators ruled against the proposal, saying it could cause “significant harm” to the internet ecosystem.

After the spread of the coronavirus in 2020, the conversation changed. EU officials were genuinely concerned that networks would collapse under the strain of apps that help people work from home and watch movies and TV shows. In response, the likes of Netflix and Disney Plus has taken steps to optimize network usage by reducing video quality.

This revived the debate in Europe.

In May 2022, EU competition chief Margrethe Vestager said she would try to require Big Tech firms to cover network costs. “There are players who generate a lot of traffic, which enables their business, but they don’t actually contribute to enable that traffic,” he said at a press conference.

Metaalphabet, apple, Amazon, according to a May report commissioned by ETNO, Microsoft and Netflix accounted for more than 56% of all global data traffic in 2021. The report added that the tech giants’ 20 billion euro ($19.50 billion) annual contribution to network costs could increase the EU’s economic productivity by 72 billion euros.

Broadband operators are pouring seismic cash into their infrastructure to support the next generation of 5G and fiber networks — by one estimate 50 billion euros ($48.5 billion) a year.

US tech giants “must 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 prices for fiber optic cables and power have also pushed up network access fees, impacting operators’ costs, they said.

The debate is not limited to Europe. In South Korea, companies have similarly lobbied politicians to force “excessive” players like YouTube and Netflix to pay for network access. One firm, SK Broadband, even sued Netflix over network charges related to its hit show Squid Game.

The bigger picture

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

According to the market research company, while the total revenue from mobile and fixed services is expected to grow by 14% in the next five years to 1.2 trillion euros, the average monthly revenue per user of telecommunications services is forecast to decrease by 4% during the same period. Omdia.

The Stoxx Europe 600 Telecoms Index has fallen more than 30% over the past five years, according to Eikon data, while the Nasdaq 100 is up more than 70% — even after a sharp contraction in tech stocks this year.

Telcos today serve more as everyday utilities than household brands selling the hottest gadgets and services – like Nokia with its iconic mobile phone brand. Faced with profit squeezes and declining stock prices, ISPs are looking for ways to generate additional revenue.

According to Pescatore, video services have led to “exponential growth in data traffic,” and better picture formats like 4K and 8K — along with the rise of short video apps like TikTok — mean growth will “multiply” over time.

“Telcos don’t make any additional revenue other than connecting to provide access, whether it’s fiber or 4G/5G,” Pescatore said.

Meanwhile, the push toward the “metaverse,” a hypothetical network of giant 3D virtual environments, has telcos both excited about the business potential and excited about the mammoth data required to power such worlds.

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

Dexter Thillien, lead technology and telecommunications analyst at The Economist Intelligence Unit, told CNBC that while the “mass market” metaverse has yet to materialize, once it does, “its traffic will dwarf anything we see now.”

Do traffic senders have to pay?

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

Google, Netflix and others argue that ISP customers already pay them in call, text and data fees to invest in their infrastructure, and that forcing broadcasters or other platforms to pay for transmission traffic violates the principle of net neutrality, which prevents broadband providers from using the network. can to block, slow down or load more traffic for certain uses.

Meanwhile, tech giants say they’ve already invested a ton in internet infrastructure in Europe — 183 billion euros between 2011 and 2021, according to a report by consulting firm Analysys Mason — including submarine cables, content delivery networks and data centers. Netflix offers telcos free of charge thousands of cache servers that store internet content locally to speed up data access and reduce bandwidth strain.

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

There’s also the question of why Internet users pay their ISPs in the first place. Users do not depend on which operator keeps them connected; they want to access the latest episode of “Rings of Power” on Amazon Prime or play video games online — so telcos are increasingly bundling media and gaming services like Netflix and Microsoft’s Xbox Game Pass into their deals.

A lobby group of the Computer and Communications Industry Association, whose members include Amazon, apple and Google — Calls for “sender pays” fees “are based on the flawed understanding that the lack of investment is caused by services that drive demand for better network quality and higher speeds.”

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

There is no clear solution

The main problem with the proposal is that it is not clear how the payments to the telcos will work in practice. This can take the form of taxes levied directly by governments. Or, it can be private-sector driven, with tech firms giving telcos a portion of their sales based on how much traffic they demand.

“That’s the biggest question mark,” Thillien said. “Are we looking at volume, percentage of traffic coming from certain websites, what’s going to be the break-even point, what if you go up or down?”

“The softer the rules, the more companies can be held responsible for the payment, but the stricter it is, it will only target a few (which would be America, which has its own geopolitical implications),” he added.

There is no easy solution. And that has sparked concerns from tech firms and other critics who say it may be impossible. “There’s not a single bullet,” Pescatore said.

Not all regulators are on board. A preliminary assessment by the European Regulatory Authority for Electronic Communications found no basis for the network compensation payments. In the UK, Ofcom, the communications watchdog, has also expressed 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 network usage, they could pass the cost on to consumers, fueling already high inflation. Google’s Brittin said this “could have a negative impact on consumers, especially during price increases”.

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