Is the connectivity service provider market broken? If so, what is the reason and what are the solutions? Those questions are inevitable as the European Telecommunications Network Operators’ Association continues to argue before EU regulatory bodies that some form of revenue sharing (taxes, essentially) need to be levied on hyperscale app providers to make the service provider business model work.
The basic argument is that hyperscalers impose most of the costs of building and operating an access network, but that internet service providers cannot “recover their costs” because of asymmetric bargaining power with the hyperscalers.
Not to be flippant, but that is akin to electricity providers arguing that they do not have the power to levy fees on the manufacturers of air conditioning or heating systems, light bulbs or lamps to support the electricity delivery business model.
Electrical utilities recover such fees--and support their business models--by charging customers for consumption of electricity. Historically, so did telcos, though the role of government subsidies and price regulation also was key.
As always, the problem is complex and not simple to resolve. Large ISPs argue that their business models are unworkable without direct revenue contributions from third parties. That is the gist of the argument.
Some of us might put the emphasis elsewhere. ISPs are admitting their business model is structurally flawed and essentially broken. So the issue is how to remedy the problem. And ISPs might not like the eventual answers.
One potential answer is to nationalize the former incumbent telcos, making them government-owned entities again. Another answer is to allow the markets to return to monopoly structures by allowing most of the competing firms to fail.
Nor can big ISPs avoid questions about the soundness of their own cost structures; marketing practices and efficiency. Ignoring for the moment differences in market scale, U.S. ISPs between 2014 and 2020 reduced the amount of capital investment; European telcos saw capex burdens grow.
To be sure, some of the change might be transitory. Japan’s costs climbed while South Korea’s capex first climbed, then dropped, presumably because of the spike caused by early 5G deployment.
Still, one “easy” solution is for ISPs to charge their own customers based on volume consumed, as remains the case for electricity, fresh water, natural gas. In fact, nearly every commodity purchased by consumers is based on volume of consumption, whether that is groceries, gasoline or clothing.
Eventually, that basic line of reasoning might eventually lead back to price controls and rate regulation, which ISPs almost always oppose. But inability to charge based on volume of consumption is among the root causes of business model instability.
ETNO and others always point out the valuation differences between hyperscalers and access providers as though that necessarily shows a problem exists. It is a false analogy.
Different industries often have different valuations. And those expectations are based on revenue growth. Hyperscalers grow fast, telcos do not. That is why the valuation differential exists.
That difference in growth rates arguably explains most of the valuation difference between firms, and between industries. One might as well say that ISPs have lower valuations because they grow more slowly.
If one dislikes slow growth, and that is a structural matter for any industry, then leaders need to ask how, and if, they wish to continue. With private assets, there always is something else to do. Assets can be bought, sold, recombined or swapped. Assets then can be deployed elsewhere. It happens all the time.
To be sure, capital investment is driven by usage.
Heavy usage is an issue for ISPs. Traditional methods of conquering heavy-usage problems rarely work: profiling and capping heavy users; capping applications; quota tiering; unlimited plans; and throwing more money into capacity. On the other hand, ISPs do not, strictly speaking, use metering mechanisms to allow their customers to regulate their own usage.
Speed tiers or usage tiers help to some extent by creating proxies for usage rating. That is a choice ISPs make. They could make other choices (though the choices might not be easy or simple).
But that is a business problem for an ISP to settle, not others. ISPs might have “blamed the government” for imposing costs in the monopoly era. They might blame third party hyperscalers in the modern era. Those are excuses.
ISPs control their own operating costs to a substantial extent, though of course some would say legacy costs remain embedded uncontrollably in their cost structures (pension costs imposed under monopoly schemes, the “residue” of monopoly era expectations, for example). Though true, those also are excuses.
Large ISPs might rightly argue they cannot control their costs as much as they would like because there are labor unions to contend with, environmental regulations and so forth, and that is correct. Most large industries could say the same, though. And none of that relieves executives in any other industry from taking action to protect the soundness of business models.
The proposed ETNO solution likely is unworkable. In some instances, it might be unlawful under current regulatory regimes. In countries where “network neutrality” is law, it would have be undone.
By definition, charging the owers of some apps and services, while not charging others, violates the core of net neutrality rules.
And, to be sure, ISPs never really have wanted network neutrality in any case. But many unexpected developments could occur, if the ETNO position carries the day.
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