At least theoretically, proposals requiring a few hyperscale app providers to pay fees to internet service providers might lead to lower consumer prices for broadband access. Such payments, some believe, could also lead to higher levels of network investment by ISPs.
A report prepared by Oxera for the Dutch Ministry of Economic Affairs and Climate concludes that advantages likely would be small, and also have a negative impact on content provider business models, which would lead to higher prices for consumers of those products.
Broadband consumers might benefit if some of the payments were used to lower home broadband or mobile broadband costs. Others might argue that the improved cash flow would not necessarily result in price reductions for consumers, but only higher profits margins for ISPs.
Also, consumer gains in the form of potential lower internet access prices would be balanced by higher costs for consumers of hyperscale app and content services, as the new costs necessarily would have to be passed on to users of those apps.
Two items are worth noting. First, the relationship between end users of the internet and app providers is a somewhat classic two-sided market, with ISPs and internet backbone providers arguably acting as the “platform.”. On the other hand, the direct business relationship is between an ISP and its own access customers, or between an ISP and a peering fabric or internet exchange point.
Since the internet is a “permissionless” environment, no app provider requires a direct business relationship with any ISP to be reached by any internet user.
“Overall, our analysis of the proposals for a levy shows that such a policy cannot robustly be shown to increase economic efficiency, and would potentially bring substantial transaction and set-up costs,” Oxera analysts say. “From an economic perspective, once welfare losses in the market for content are accounted for, the net welfare gain from the policy is relatively small.”
“Without a consumer price reduction, the effect of a charging scheme is simply to transfer money from CAPs (content application providers) to telcos,” the report states.
Oxera also questions the assumption that app providers “cause” network demand. Instead, traffic is typically caused by a consumer of an ISP. “For example, the streaming of music or a film occurs because the consumer sent a request to the CAP to send them the film,” the report says. “The CAP then obliges.”
Traffic is caused by the ISP customer’s initial request, not the fulfillment of that request. As in the case of natural gas, electricity or water consumption; use of toll roads, airports, seaports, public parking or other “utility or infrastructure” assets, it is customers who directly or indirectly pay for usage.
The point is that, overall, any subsidies extracted from app providers boosts the business case for telcos, while harming the app provider business case.
But this battle is likely not about consumer welfare. Rather, it is about ecosystem participant business models. The effort to tax a few hyperscalers is designed to help ISPs and slow down the hyperscalers; help domestic industries at the expense of foreign. So far, few ISPs have
argued against the hyperscale tax.
In principle, why would they? Hyperscaler taxes shift cash towards ISPs, bolstering ISP business cases.
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