Is EU "Fair Share" Dead?

European Union "fair share" proposals that would tax a few hyperscale application providers to help fund broadband upgrades by internet service providers remain uncertain. Some expect a finalized proposal by the summer of 2024, but aside from the ISPs themselves and some EU regulators, there seems little support. 

The European Commission held a public consultation on the "fair share" model in October 2023 and a majority of respondents, including academics, some regulators and most stakeholders except the large network operators who proposed the model, expressed opposition. 

In principle, the additional costs could be borne by the app firms (assuming they simply take a hit to their earnings); consumers (who will pay higher subscription fees) or business partners (advertisers, employees, other value chain partners). 

It seems doubtful the affected firms would simply take a financial hit and try and not attempt to recover the costs elsewhere. 

Some might point to South Korea, where the “sending party pays” approach was pioneered for large content suppliers. Withdrawal from the market also remains a possibility, at least for some services and apps less central to affected firm revenues. 

Twitch, the South Korean gaming service owned by Amazon, shut down at the end of 2023 and some observers say costs imposed by South Korea’s “fair share” payments by content providers to internet service providers. 

That is difficult to assess since there is no public information on the payment structure, assumed to be some form of a fee on earned revenues in the South Korea market or traffic volume or both. 

The South Korean "Fair Share" rules, under the Service Stabilization Act, only apply to a specific set of large content providers/ 

The law focuses on the five largest content providers in South Korea, based on daily user numbers and traffic share. As of 2023, these companies include Google; Netflix; Meta (Facebook, Instagram, etc.); Naver (South Korean search engine) and Kakao (South Korean messaging app). 

Those five companies are estimated to represent over 41 percent of all South Korean internet traffic.

The rules apply to firms with a minimum of one million daily users and representing at least one percent of South Korea's total internet traffic.

Small and medium content providers, including startups and individuals, are not subject to these rules. 

Before Twitch, Pandora TV went out of business because they could not afford to pay the network fees, says South Korea’s Open Net. That might not be the case, as Pandora TV suffered with revenue issues and does not appear to be covered by the law.

Connectivity Service Provider Revenue Growth to 2025 is About What You'd Expect

Connectivity provider revenue growth between 2024 and 2025 should be about as most would expect, with a global average of about three percent per year, with slower growth possibly in the one-percent range in North America and Europe, with higher growth in the four percent to 4.5 percent range in Asia-Pacific and Latin America, according to S&P Global Ratings.

source: S&P Global Ratings 

To be sure, executives might wish for faster growth rates, but growth rates in mature markets, especially in industries with “utility-type” characteristics, often are slow. 

Industry	Growth Rate (%)	Source
Telecom	3.2%	Deloitte
Passenger Airlines	7.4%	IATA
Seaborne Goods Transport	3.1%	World Maritime News
Retailing	4.1%	Statista
Retail Consumer Banking	2.7%	PwC
Electricity	4.8%	IEA
Natural Gas	2.1%	IEA
Wastewater Services	3.4%	Global Water Intelligence

Though growth rates in various utility-style industries vary over time, none of these industries are early in their adoption curves, when growth is much faster.

source: Corporate Finance Institute 

As the ILC applies to the connectivity service provider industry, while generally mature, segments within the industry that might be likened to “products” can be at different phases of their life cycles. 

The fixed network voice portion of the industry clearly is declining; the home broadband segment growing. The mobile industry routinely introduced a new generation of mobile services every decade, while sunsetting the older legacy generations as that happens. 

Within the mobile industry, growth is fastest in Asia-Pacific and Latin America; slowest in Europe. 

Industry	2000-2005	2005-2010	2010-2015	2015-2020	2020-2023	Source
Telecom	6.5	4.1	2.8	2.3	3.2	Statista
Electricity	3.8	4.2	3.6	2.4	4.8	IEA
Railroad	4.2	5.1	3.8	2.1	2.7	Statista
Aviation	5.8	5.3	4.2	4.6	7.4	IATA

If one looks at computing devices, “personal computing” clearly has moved through a personal computer stage to a mobile phone stage to a smartphone stage. 

The Economist

At a high level, only fixed network voice is clearly in its “decline” phase. Mobile service is expected to continue replacing its lead platform every decade.

Service	Product Life Cycle Stage	Trends
Fixed Network Telecom Service (e.g., Landlines)	Decline	Facing declining use due to substitution by mobile services and internet communication options (e.g., VoIP).  Limited market growth potential.
Mobile Service	Maturity	Widespread adoption and high market penetration.  Focus on differentiation through network coverage, data plans, and value-added services.  Potential for continued growth in emerging markets.
Home Broadband	Maturity/Growth	High market penetration, particularly in developed economies.  Growth potential in developing economies and through offering higher speeds and bundled services.
Virtual Private Networks (VPNs)	Maturity	Established technology with widespread adoption by businesses.  Potential growth in emerging markets and with increasing security concerns.
Managed Security Services	Growth	Growing demand for cybersecurity expertise and protection against evolving threats.
Data Center Services	Growth	Rising demand for cloud computing and data storage solutions.  Shift from on-premise infrastructure to cloud-based solutions.

AI Revenue in the "Picks and Shovels" Phase

Some idea of the ultimate creation of revenue within the artificial intelligence ecosystem, broadly defined to include many of the same participants in the internet ecosystem will shed light on ultimate outcomes. 

Right now, the clearest identifiable revenues are earned by providers of infrastructure, such as graphics processing units or providers of computing-, storage-, models- or inferences-as-a-service. 

In the U.S. internet ecosystem, for example, some $3.3 trillion is estimated to be earned annually by firms in the ecosystem. As always, many of the products in the ecosystem use the internet in some way to support the features and value of their products. 

Not all semiconductors, devices, advertising, platforms or e-commerce and content, for example, are directly and fully attributable to “the internet” in specific. 

In some cases, as with home broadband, it is infrastructure that continues to supply much of the revenue. But even there, revenue earned supporting the use of mobile devices produces the majority of revenue, and internet access is only part of the value proposition. 

Segment	Estimated Annual Revenue (USD Billion)	Source
Semiconductors	200	[1, 2]
Devices	500	[3, 4]
Apps	150	[5, 6]
Advertising	300	[7, 8]
Platforms	500	[9, 10]
Connectivity	250	[11, 12]
E-commerce	1.2 trillion	[13, 14]
Content	200	[15, 16]
Total	3.3 $Trillion

Sources:

[1] Semiconductor Industry Association: https://www.semiconductors.org/

[2] Gartner: https://www.gartner.com/en/newsroom/press-releases/2023-04-26-gartner-forecasts-worldwide-semiconductor-revenue-to-decline-11-percent-in-2023

[3] Consumer Electronics Association: https://www.cta.tech/

[4] IDC: https://www.idc.com/

[5] App Annie: https://go.appannie.com/AppAnnieLite_IWD_Form.html

[6] Sensor Tower: https://sensortower.com/

[7] Interactive Advertising Bureau: https://www.iab.com/

[8] eMarketer: https://www.insiderintelligence.com/topics/category/emarketer

[9] Meta Platforms Investor Relations: https://investor.fb.com/home/default.aspx

[10] Alphabet Investor Relations: http://abc.xyz/investor/earnings

[11] CTIA - The Wireless Association: https://www.ctia.org/

[12] Federal Communications Commission: https://www.fcc.gov/

[13] Digital Commerce 360: https://www.digitalcommerce360.com/

[14] Statista: https://www.statista.com/

[15] National Endowment for the Arts: https://www.arts.gov/

[16] Bureau of Labor Statistics: https://www.bls.gov/

For such reasons, the ultimate winners within the AI ecosystem will likely be more difficult to identify with precision. Specific AI hardware and software will continue to be a source of revenue for some providers within the value chain. 

But most of the AI-related revenue upside will come in more-indirect ways, as AI becomes a feature of many products and services but not a direct and identifiable revenue stream.