"Fair Share" Costs Will be Borne by Businesses and Consumers

So-called “fair share” payments by a few hyperscale app providers to internet access providers in Europe means a formal end to network neutrality; higher revenues for connectivity providers but higher costs for the affected few hyperscale app providers.

As always, business partners of the affected hyperscale firms will wind up paying for the higher app provider costs. Such new fees are simply a cost of doing business, and will be incorporated into the costs the affected hyperscalers must cover to sustain their businesses.

It remains possible that other ramifications will be seen, even if unexpected. The app providers may have new incentives to reshape their apps to reduce the amount of bandwidth they consume on the local access networks.

They might have new incentives to create their own networks, especially if some connectivity partners are able to forego charging the fees, thus offering a lower-cost access alternative.

To be sure, such actions would be complicated and run counter to the business interests of having apps available to as many people as possible. But higher fees for business partners would be relatively simple as a remedy.

If profitability becomes more challenging in EU countries, compared to others, the affected hyperscalers might decide to focus growth and investment priorities elsewhere, to some extent.

And that might be among the benefits legislators see. Since governments are obviously interested in promoting domestic competition to the hyperscalers, and since such smaller potential domestic competitors would not have to pay the fees, domestic broadband networks should get a boost at the same time that domestic competitors to the hyperscalers get a small cost advantage.

But some of us might also note that the additional costs are likely to resemble other regulatory costs faced by hyperscalers and other leaders in any industry who face regulatory costs. The additional costs might be unwelcome, but rarely, if ever, are life threatening.

The costs will be recovered from business partners or customers and users, in some way. A decade from now, nobody will pay much attention, as the marginal increased costs are simply built into routine cost structures.

Such payments by a few hyperscalers also effectively end network neutrality. Recall that the fundamental net neutrality principle is “non-discrimination.” 

At its core, net neutrality means ISPs must treat all internet traffic equally, regardless of the source, destination, content, platform, or application. That has, in practice, meant no blocking, throttling, or prioritizing specific content.

By definition, taxing traffic from a few hyperscale app providers--delivered at the request of the ISP’s own customers--is unequal treatment by source, content, platform and application. 

Granted, the flow of revenue within a value chain can take many forms. But the core principle in the communications business has been that customers pay for their own consumption. The possible new European Union rules on “fair share” shift the revenue flow, allowing ISPs to charge both their own customers as well as a few firms whose products their customers use extensively. 

At a high level, digital infrastructure value flows toward end users and retail customers, while revenue flows from end users back to infra suppliers. 

Content value is more complicated, as are revenue mechanisms. Some professional content creators create value that flows to distributors, and then to consumers. Revenue can flow from end users, advertisers and other business partners towards content creators and distributors. 

E-commerce providers create value that flows up from product creators and suppliers towards consumers. Revenue flows from buyers to sellers and distributors. 

Providers of social media and search functions create value that flows to end users. Revenue flows from advertisers and business partners towards the social media and search providers. 

source: Kearney 

The change in connectivity value might remain relatively unchanged if the EU imposes “fair share” requirements. End users might still be able to access their favored “fair share” apps. But changes always are possible. In the EU, surcharges or fees for some features could develop, as the affected app providers move to maintain their profit margins. 

The affected firms might optimize their platforms to minimize data consumption, which could affect user experience. They could shift resources and investments away from the EU, focusing on markets with less stringent regulations.

The affected companies might raise advertising costs for their partners. 

The affected firms might explore new data monetization methods. Subscription models for specific features or content could develop.

Overall, the affected firms would likely accelerate an exploration of alternative and additional new revenue streams to compensate for the new costs of doing business in the EU. 

Advertising on EU-consumed content might increase. For-fee elements of service could increase. 

The point is that no value chain participant, facing higher costs from one of its suppliers, is going to sit still. At the very least, new efforts will be made to offset the higher costs. 

In principle, the proposed new payments are a tax on doing business in the EU. And, like all taxes, they are simply a cost of business whose costs must be recovered. They will be recovered. And the payment burden will ultimately fall on consumers and business partners.