To hear some connectivity service providers, the industry is in dire straits because of a “free riding” problem. Free riding is a situation where an entity or person benefits from something without paying for it. And that is essentially what some telcos allege happens when a few hyperscale app providers use internet access networks.
The argument always is that a few hyperscalers represent a disproportionate amount of internet access demand, “forcing” internet service providers to invest in their networks without compensation.
Among the key arguments:
ISP profit margins are far below those of the hyperscale app providers
This is somehow “unfair”
A few hyperscalers represent a majority of traffic load
ISPs will not be able to afford continued investment without compensation
Some might point to low research and development spending on the part of telcos, with such work as does occur having been essentially outsourced to third parties, principally the industry infrastructure supplier base.
Other arguments against such “fair share” arguments include:
Current infra investments by hyperscalers
Violation of network neutrality principles
Negative impact on app and content innovation, quality and prices
Source of demand is ISP customer behavior, to which hyperscalers respond.
On any number of financial metrics, though, it can be argued that ISPs and telcos are in the broad middle of all industries where it comes to financial performance. Profit margins and other measures of financial performance vary across industries, and telcos do not seem particularly disadvantaged on most of those metrics.
Consider the price/sales ratio, which compares a company's market capitalization to its annual revenue. It is calculated by dividing the company's stock price by its sales per share.
A high P/S ratio means that the market is willing to pay a high price for each dollar of the company's sales, typically because the company is expected to grow rapidly in the future, or because it has a strong competitive advantage.
A low P/S ratio typically means a company or industry is not expected to grow rapidly, or because it has a weaker competitive advantage. Telco executives might emphasize the latter; others the former.
But telecom has never been a high-growth industry. It is akin to other industries with a “utility” or “natural monopoly” character. And such industries tend to have lower P/S ratios. In other words, “unfair” share of ecosystem or value chain revenue or profits is not the issue.
Access networks are utilities, with utility-type valuations. “Unfairness” is not the issue.
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