Why is EU Looking at App Provider Payments to Telcos?

Though the outcome remains unclear, European Commission policy makers will be looking at new regulations requiring a handful of big application providers to pay telcos for internet access investments, the stated rationale being that a few app providers represent 56 percent of capacity demand. 

At least in part, the proposed rules are intended to address lagging broadband capacity and the buildout of 5G. Why the access business appears relatively unprofitable is the issue. 

The answers include both the shift from monopoly to competition and the advent of the internet, both of which have arguably damaged telco revenue models. 

The global shift to competition as the framework for telecom services has had a dramatic effect on business models, severely challenging supplier profit margins and  cutting the share of market any competent supplier can expect. 

At the same time, the internet has led to a gradual diminishing of the “applications” role and its replacement by a “dumb pipe internet access” role that offers far-less opportunity for adding value and sustaining profit margins. Few--if any--popular apps now are created and owned by telcos or other competing connectivity providers. 

In other words, telcos once exclusively created and sold “voice services” and had a legal monopoly on the creation of any other services sold to customers. 

A smallish data transport business existed, and it produced high profits. But key to the business model was the sale of an application. Customers were not charged for use of the network, in a direct sense. 

Compare that to today’s model, where the revenue model is driven in precisely the opposite way: customers are charged for use of the network in a direct sense (internet access) but not for specific applications, which are supplied by third parties. 

Likewise, prices once were charged based on distance and volume: higher prices were charged for connections further away, and as well as by minutes connected. 

These days, distance does not matter. And “volume” is less directly related to pricing. Often, virtually unlimited usage is allowed in exchange for payment of a flat fee. 

All of that contributes to the business model stress connectivity providers now experience. 

source: ETNO 

Consider the impact of competition on potential market share. In the monopoly era a telco could theoretically capture nearly 100 percent of potential demand. All that changes with lawful competition. In mobile markets, three or four contestants are common. That reduces the potential market share of even a share leader to perhaps 33 to 40 percent. 

Much the same happens in fixed markets, where facilities-based competition or mandatory wholesale is the regime. The market share held by the leader will be a fraction  of what was possible in the monopoly era. 

All of that suggests that, in some markets, the number of competitors will decrease; wholesale mechanisms will become more important or perhaps even a return to monopoly in some form will be necessary.

Who Should Pay for Internet Access? EU Changes its Thinking

In a move that completely reverses the key notion of network neutrality--that all bits be treated the same on access networks, the EU is considering whether some big app providers should be making payments to connectivity service providers to support infrastructure investment. 

A study sponsored by the European Telecommunications Network Operators association claims that a few big app providers represent about 56 percent of the usage of EU access networks, so ETNO wants them to pay as much as that percentage of access infrastructure costs. 

source: ETNO 

ETNO estimates internet service providers in the EU spend about $28 billion on capacity that directly supports the operations of a few big app providers, according to the report published by the European Telecommunications Network Operators association. 

source: ETNO

The issue for ISPs is that revenue no longer is tied in some direct fashion to use of network resources. In the voice era, usage was basically related to revenue” use more, pay more. 

In the internet era, customer data consumption is not directly related to revenue. Customers generally pay for buckets of usage on mobile networks and by speed tiers on fixed networks. 

But mobile ISPs sometimes offer “unlimited usage” as well. A  flat fee for unlimited usage completely breaks the relationship between usage and revenue. 

On fixed networks the pricing is variable based on speed, with some overall usage limitations. 

According to ETNO figures, the mobile networks are where the biggest disparity lies. 

Traditionally, customers pay for usage of network capacity. ETNO proposes, and the EU is considering, altering that business model by adding third party users to the financial support picture.

Where traditionally “customers” paid for access, ETNO and the EU now also want third party users to contribute. In other words, a few big users would be required to subsidize the access networks. The irony is that this flips network neutrality on its head. 

All bits would not be treated equally. Payments would have to be made by some app providers but not all. The “threat” of such unequal treatment, which net neutrality laws were intended to address, now would be embraced by policymakers. 

Where financial payments for use of the access network were outlawed for consumer access, in order to “protect” freedom, now regulators propose precisely a remedy that authorizes unequal treatment of bits, albeit in the guise of infrastructure support. 

There are other ironies. The “threat” to internet freedom was said to be the ISPs who could act as “gatekeepers.” Recent evidence has shown that the actual gatekeepers of content expression and freedom are the major app providers. 

Though in principle none of the network neutrality or proposed network unequal treatment rules directly address freedom of expression directly, they do so indirectly, by creating unequal costs to reach consumer end users. 

In the end, as EU policymakers now have been on both sides of the issue, it is clear that winners and losers within the internet value chain, and the costs of doing business for participants in different segments of the business, is the real issue. 

Earlier net neutrality rules were supposed to prevent ISPs as “gatekeepers” from distorting freedom and access. Now the EU considers policies that see a few big app providers as the true gatekeepers, and hence propose the reverse set of measures to prevent distortion. 

The other issue is that trade policy and perceived support for domestic industries also is involved. European policymakers long have noted that internet innovation happens in China and the United States, not Europe. 

The latest set of rules would have the effect of placing hurdles on U.S. firms that could indirectly aid EU domestic app and content providers as well as domestic telcos. 

It always is true that for every valid public policy purpose, there are corresponding interests. It is never more obvious than in considerations of how access infrastructure is supported. 

"Techco" Dream is Mostly That: a Dream

Even before the internet era, telcos and connectivity providers have been torn between “being who they are” and “becoming something else.” Some with long memories may recall efforts to diversify into computing (before edge, before cloud, in fact, before client-server) or systems integration or information technology consulting. 

In the internet era, many more will recall efforts to create leading app stores, become cloud computing or data center leaders. Though controversial, efforts to become content owners have been more successful. 

Now many connectivity providers explore private networks, internet of things or edge computing as new fields to lead. The phrase techco is the latest version of connectivity provider efforts to become something other than what they are. 

In some iterations, a “techco” is a connectivity provider that curates other digital services to add value and drive higher revenue. In a word, telcos need to become platforms. That is much harder than it often appears. In fact, few companies in any industry actually are able to become platforms, which earn their revenues in a specific way.

A platform earns its money by enabling transactions. It is a marketplace that matches supply with demand; products and services with the organizations that wish to buy such products. 

source: Simon Torrence 

 

It is a compelling vision, since it promises the flow of money and revenue from lots of different places to the telco. 

The problem is that other participants in the value chain either do not see the value or positively reject such arrangements. Who “needs” the telco business relationship when the “layers” architecture allows app providers to reach their users and customers directly, without any such business relationships?

source: STL Partners 

It is far harder than it sounds. Not everyone agrees that even successful curation or bundling of features means a connectivity provider has become a platform. A true platform implies that the actual revenue model for a firm is functioning as a marketplace where other buyers and sellers conduct transactions. 

Adding features, content or value does not, by definition, mean a firm is a “platform.” It just means the supplier provides different and expanded value. 

The Connectivity-Plus model might bundle cloud, edge and IoT providers’ services. 

The Innovation Platform model most closely approaches a “true” platform model as it has the connectivity provider exposing its services using application program interfaces. 

The End-to-end Solution model has connectivity providers assembling end-to-end solutions for business-to-customer products that might have complex value chains. 

The Adjacent Acquisitions model has connectivity providers acquiring specialist companies such as IoT or security firms, and operating them as independent or partnered efforts.

Perhaps most seasoned observers would expect most connectivity providers to try either the “Connectivity-Plus” or “expose our services using API” approaches, as neither of these forces firms to radically change their business models.

Those approaches also limit execution risk. 

Though most such efforts will focus on business customers and use cases, the fundamental approach has been tried often in the consumer space. The irony is that such efforts--whatever the outcomes--eventually are criticized as a distraction from “doing what you do best.” 

And what telcos “do best” is provide connectivity. 

source: Kearney

It is hard to argue with the vision of a connectivity provider network that is self-configuring, self-healing, and self-optimizing, enabling zero-touch operations and zero-wait for new services, as TMForum says is among the goals of applied artificial intelligence in the network. 

Likewise, it makes sense to many to explore more-complicated business models that add features and services “beyond connectivity.” 

But bundling new value does not change a telco into a techco. Using AI, creating a more-open network and automating are good things, to be sure. They help a telco run its business more efficiently, with less friction. 

But none of that--exposing APIs, automating, using AI, open interfaces and processes, enabling zero-touch provisioning--makes a telco a techco. They make a telco a better telco.

In principle, a true telco operating as a platform would not “sell connectivity.” It would be a marketplace that allows others to buy and sell connectivity. 

Few--if any--legacy telcos will ever become true platforms. To do so, they would have to become Amazon or eBay--marketplaces and exchanges--making their money from transactions. Such a “telco” would not own the actual networks and services that are bought and sold. It would simply make the transactions possible. 

Few even entertain the notion, let alone are actively moving to realize such ambitions.

How Much Mobile Substitution for Fixed Network Home Broadband, and How Fast?

Observers continue to debate the importance of 5G fixed wireless as a driver of increased home broadband market share for Verizon and T-Mobile, as well as a cause of slower cable TV home broadband net additions.

Cable operators predictably deny that fixed wireless will prove a threat, arguing that hybrid fiber coax speeds are fast enough to stay ahead. But financial results posted by Verizon and T-Mobile suggest that fixed wireless already has proven to be a key driver of home broadband market share gains.

The issue now is the fixed wireless rate of growth, compared to new fiber-to-home additions. Despite cable executive denials, more observers believe FTTH and fixed wireless are going to eat into cable's market share over time. How fast that happens is an issue.

But there have been signs of mobile ability to substitute for fixed network service over the past five years or so.

Some studies show that users in 2018 often found 4G mobile internet access was faster than their home broadband using Wi-Fi. 

A key caveat here is that Wi-Fi device speed inside the home is not the same thing as the speed delivered to the home by the internet service provider.

source: Deloitte 

Another possible caveat is that it is not clear how many of the speed comparisons used home Wi-Fi compared to public hotspot Wi-Fi. It is almost certainly the case that home Wi-Fi runs faster than public Wi-Fi. 

Wi-Fi is slower than line speed for a number of reasons, so to note that 4G data access is faster than home Wi-Fi is not to say that 4G mobile networks perform better than ISP fixed networks. 

It is to say that a smartphone or other device able to use a 4G network might often experience faster speeds than delivered to that same device by the in-home Wi-Fi. 

This might be even more relevant for comparisons of home Wi-Fi experience compared to 5G mobile network experience, as 5G is going to be faster than 4G, once the networks are substantially or fully populated. Even as early as 2020, early 5G was faster than Wi-Fi, according to Opensignal.  

That also goes for 5G fixed wireless, as it is rolled out on a variety of frequencies globally. Generally speaking, if 4G was faster than Wi-Fi, there is a very good chance that 5G will be even faster, in comparison to Wi-Fi. 

source: Opensignal 

In countries that launched 5G early, 5G has proven to be faster than 4G and Wi-Fi, according to Opensignal. The sole exception was the U.S. market, where early 5G used low-band spectrum that does not support mid-band or millimeter wave speeds. 

source: Opensignal 

All of this is important for the development of 5G fixed wireless as an alternative to fixed line networks. In some markets, 5G fixed wireless is expected to be a key challenger to fixed network service. 

Fixed wireless has become a major driver of Verizon home broadband net new account additions. That also is true of T-Mobile home broadband net account additions in the U.S. market. 

In its first quarter of 2022, for example, fixed wireless supplied 85 percent of Verizon net home broadband account additions. 

For its part, T-Mobile got fully a third of total net home broadband additions in the U.S. market in 2021, and all of those accounts gained used fixed wireless. 

So 5G mobile and fixed wireless speeds will be a huge material factor in driving Verizon and T-Mobile home broadband market share gains, as well as a limitation on cable TV operator net additions as well.

How Fast is "Fast Enough?"

Determining what an acceptable internet access speed “ought to be” requires knowing how many users are sharing a connection, what they do when connected, how often they are connected simultaneously, the days of week and times of day when that happens. 

And it is hard to avoid the conclusion that most of the discussion we hear about “how fast is fast enough, ” when it comes to internet access and home broadband,  is a political or lifestyle or values statement, not a technology statement. 

The minimum amount of bandwidth to support one user is not the same as that to support four users, each connected simultaneously to a few devices. Even assuming every user requires streaming video support, most of the time, minimum bandwidth requirements are not that stringent. 

source: Minim

In fact, the single best rule might be the number of concurrent users and concurrent video streams that must be supported. Not many households will find they really require speeds above 500 Mbps, assuming latency performance and upstream bandwidth requirements are tolerable. 

All that said, would I willingly downgrade from my gigabit connection, which I know I really do not need, even back to 500 Mbps or 600 Mbps? No. But that is not based on any real performance advantage I can perceive. All of my requirements are, in principle, met by a connection operating at 25 Mbps. 

I haven’t had a connection running that slow in a few decades. My consumption keeps growing, but as a technology matter I cannot really argue that I generally “need” speeds as high as I pay for. 

 

source: Minim

In a sense, the behavior is many decades old, sort of done for the same reasons as I always have purchased mobile data usage buckets that exceeded my expected usage.

The logic is similar to the reasons people often buy “unlimited usage” consumption plans that typically exceed their anticipated usage. 

The value is predictability of payment amounts, not a fine-tuned analysis of price versus usage relationships. In fact, people tend to pay more than they need to, to assure predictability of the recurring payments. 

In a similar manner, having a speed “up to Xbps” means that when the network gets congested, I still can expect to have .6Xbps as a realistic experience. Obviously, what matters is the speed one actually experiences at the most-congested part of the day, when running the most demanding applications, with the most concurrent devices or users.

EU Looks at Allowing ISPs to Treat"Some" App Providers Unequally

Network neutrality has always been a slippery, impossible to define concept, notable more for its help or hindrance to business models of various participants in the internet ecosystem. Under the rubric of “treating all bits the same,” policymakers and advocates have prevented quality of service mechanisms for consumer internet access; blocked the access equivalent of “toll free” calls and generally imposed effective price regulation on internet access providers. 

All that despite the fact that application providers routinely pay money to ensure that their own bits are “not treated the same,” using content delivery networks to circumvent public internet routing delays and uncertainty. 

Now, in an ironic twist, European Union regulators are looking at imposing just such “unequal treatment of bits” on a handful of large application providers. 

Allowing ISPs to extract fees from some app providers for the privilege of allowing bits to be delivered over ISP access networks. 

One if almost forced to conclude that the network neutrality debate was never about equal treatment; equal access or anything else related to the delivery of bits over ISP access networks. 

It seemingly always was about the perceived revenue and cost advantages and disadvantages faced by various ecosystem participants. It is hard to reach any other conclusion given the extreme range of regulator opinions.

First, “equal treatment” to benefit app providers. Now, “unequal treatment” to benefit ISPs. In addition to all that, there are other political concerns, principally the impact of policies on domestic suppliers of apps, content or access. 

If we are honest we will stop pretending “network neutrality” had much to do with “protecting bits from discrimination,” and recognize it was a political move designed to help or hinder some parts of the internet ecosystem, just as it now--in reverse--is similarly designed to help or hinder ecosystem participants. 

In the latest incarnation, it is ISPs who need “revenue help.” The business simply is not growing in Europe, and ISPs seemingly have won the argument that it is they who need help, not app providers. 

source: ETNO

As often is noted, app providers have enjoyed revenue growth, while ISPs have seen their revenue shrink since the early 2000s. 

 

source: ETNO

The point is that network neutrality is shown to be a sham. The new proposals will impose unequal treatment of bits. It is the exact opposite of “net neutrality,” whatever that was supposed to be, and to some of us the concept never had integrity. 

The same people who argued for “equal treatment of all bits” also agreed that sometimes ISPs would have to treat bits unequally to preserve network performance. 

Maybe the better advice would be to stop picking winners and losers under the charade of some sort of “fairness” or “equal treatment.” It appears to be nothing of the kind. Instead, we have governments picking winners and losers for political reasons.

If You Hate Meeings, Do Not be a CEO

Frustrating though it might be, CEOs of larger organizations spend very little time with customers: about three percent, according to a survey conducted by Harvard Business School professors Michael Porter and Nitin Nohria in 2006. 

About 72 percent of CEO time was spent in meetings.

Broadly speaking, no more than 21 percent of CEO time was spent on anything connected with business strategy. About a quarter of time was spent on function or business unit reviews and another 25 percent on “people and relationships.”

About 16 percent of time dealt with “organization and culture issues.”

source: Harvard Business Review