Why is EU Looking at App Provider Payments to Telcos?

Though the outcome remains unclear, European Commission policy makers will be looking at new regulations requiring a handful of big application providers to pay telcos for internet access investments, the stated rationale being that a few app providers represent 56 percent of capacity demand. 

At least in part, the proposed rules are intended to address lagging broadband capacity and the buildout of 5G. Why the access business appears relatively unprofitable is the issue. 

The answers include both the shift from monopoly to competition and the advent of the internet, both of which have arguably damaged telco revenue models. 

The global shift to competition as the framework for telecom services has had a dramatic effect on business models, severely challenging supplier profit margins and  cutting the share of market any competent supplier can expect. 

At the same time, the internet has led to a gradual diminishing of the “applications” role and its replacement by a “dumb pipe internet access” role that offers far-less opportunity for adding value and sustaining profit margins. Few--if any--popular apps now are created and owned by telcos or other competing connectivity providers. 

In other words, telcos once exclusively created and sold “voice services” and had a legal monopoly on the creation of any other services sold to customers. 

A smallish data transport business existed, and it produced high profits. But key to the business model was the sale of an application. Customers were not charged for use of the network, in a direct sense. 

Compare that to today’s model, where the revenue model is driven in precisely the opposite way: customers are charged for use of the network in a direct sense (internet access) but not for specific applications, which are supplied by third parties. 

Likewise, prices once were charged based on distance and volume: higher prices were charged for connections further away, and as well as by minutes connected. 

These days, distance does not matter. And “volume” is less directly related to pricing. Often, virtually unlimited usage is allowed in exchange for payment of a flat fee. 

All of that contributes to the business model stress connectivity providers now experience. 

source: ETNO 

Consider the impact of competition on potential market share. In the monopoly era a telco could theoretically capture nearly 100 percent of potential demand. All that changes with lawful competition. In mobile markets, three or four contestants are common. That reduces the potential market share of even a share leader to perhaps 33 to 40 percent. 

Much the same happens in fixed markets, where facilities-based competition or mandatory wholesale is the regime. The market share held by the leader will be a fraction  of what was possible in the monopoly era. 

All of that suggests that, in some markets, the number of competitors will decrease; wholesale mechanisms will become more important or perhaps even a return to monopoly in some form will be necessary.