Whatever positions one takes on whether a few hyperscale app providers ought to pay fees to internet service providers, there is no question that the emergence of the internet as the next-generation “telco” platform raises tricky issues about business models, competitive dynamics and available supplier responses.
Differences in regulation of “public telephone networks,” radio and TV broadcast, cable TV and data networks always have existed. Those differences are exacerbated now that the internet has effectively become a universal distribution system for all content, communications and media.
“Sending party pays” is a new concept that would make a few hyperscalers pay ISPs for usage by ISP customers. Ignore for the moment whether that is just, fair or reasonable. The concept highlights new business model strains in the internet ecosystem between content owners and distributors.
Sending party pays also illustrates changes in the ways regulators might--or could--change their thinking about how to regulate various communication networks. There also are major issues around how much value chain participants can, or should, work out business agreements between themselves.
That also necessarily raises questions about where value lies in the ecosystem, and what policies best promote the growth and health of the ecosystem. Industrial policy also is inextricably interwoven in those choices.
Value chains are different for the internet, compared to traditional “telecommunications.” Traditional voice is a vertically-integrated app created, controlled and sold by telcos over their own networks. Enterprise wide area data networks provide another example.
The internet is different: it consists of loosely-coupled ecosystem partners operating on “open” rather than “closed” networks. No app or content or commerce provider needs an internet service provider’s permission to be used by any internet-connected user (government permission is another matter).
In other words, an ISP’s customer buys internet access service. The ISP does not control access to any internet-available app, service or site, and does not participate in a direct way in monetization of those apps, services and sites.
Like it or not, an ISP’s role in the ecosystem lies in supplying internet access to its own customers. Some ISPs might also participate in other roles, but in their role as access provider, their revenues are based on access customer payments, supplemented in some cases by universal service payments, government subsidies or, in a few cases, advertising.
That does not mean ISPs are barred from other roles and revenue streams. It does mean that in their role as access providers, their customers are the revenue drivers.
That has been the general pattern for home broadband and mobile internet access: customers pay based on consumption, or potential consumption, with mobile services having the clearest consumption-based pricing.
Mobile buckets of usage differentiated by potential consumption limits have been the norm, where for fixed networks “speed” has been the mechanism for pricing differential.
The big principle is that the usage is paid for by the access customer. The proposed new taxes on content providers move beyond that framework, making a few content providers liable for usage, not just the access customers.
At a high level, this is a somewhat normal sparring between buyers and sellers in a value chain, where one partner’s costs are another partner’s revenue. But there are issues. If an electrical utility requires more generation capacity, it has to build new power plants, encourage conservation or take other steps to match generation with consumption.
If a water utility has to support more customers, homes and businesses, it has to increase supply, by building dams, acquiring new rights to tap aquifers or other bodies of water, or discourage consumption restraint, or both.
There is an obvious remedy that ISPs have not taken, possibly because they feel they cannot do so: raise prices on customers (subscribers) that recover the costs of network capacity. Nor do ISPs generally take any measures to encourage conservation. They could do so; they simply do not.
With the caveat that there are revenue or business reasons for such inaction, it nevertheless remains the case that ISPs could act themselves to better match capacity supply with customer demand.
Assuming network neutrality rules are not a fundamental issue, ISPs also could institute policies for trading partners that likewise discourage “wasteful” bandwidth consumption practices, such as enabling autoplay video.
ISPs need the right to do so, if such practices benefit their customers by reducing the need to invest in new capacity at high rates without any compensation for doing so.
To be sure, the problem results from the economics of delivery networks. Content delivery networks are most efficient when they can operate in multicasting mode (broadcasting). Those networks are least efficient when they must operate in unicast mode (traditional voice sessions or any form of on-demand access).
In principle, edge-based content delivery networks help reduce wide area network capacity demand. It is never so clear even content delivery networks alleviate access network congestion, though.
That leaves a few levers yet not pulled: raise subscriber prices to approach the full costs of actual usage, and create incentives for conservation. Subscribers could be rewarded for downloading content overnight (when networks have spare capacity), stored locally and then consumed later.
Stripped to its essentials, channel conflict is what the telco-hyperscaler “sending party pays” proposals are about.
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