Should big tech, meaning the companies whose business is to deliver content over the Internet, pay for part of the cost of capacity upgrades? That’s not an academic question, because that’s what EU operators have proposed and what the EU seems to be seriously considering. The issue is tangled with broader questions of “net neutrality”, politics, public policy, and a lot of other things. It’s also been around for a long time, without any resolution. What might happen now if the EU agrees with its telcos?
The most important thing to watch in the EU decision here is less the question of whether they’ll accept the big-tech-contributes notion than how the settlement would be implemented. There are many views on this, and many ways that the idea of settlement might work. It might be a positive revolution for the space, or it might pose almost-insurmountable challenges for all.
All the telcos I interact with tell me that they believe that big tech should indeed make some contribution to cover the infrastructure costs associated with creating their conduit to their users. They point out that up until the Internet exploded, services always involved settlement among the operators who participated. If you made a phone call, you paid for making the call, and your operator then paid a termination charge to the operator who completed it. Business data services involved settlement when traffic crossed a “network-to-network interface” or NNI. The majority of operators think that some form of settlement is the best solution, given that it’s been proven in past practices.
Big tech, of course, doesn’t agree, and many Internet and “net neutrality” advocates feel the same. Not only that, the firms who are most impacted by a settlement move are the same firms who are currently under pressure because some or most of their revenues come from advertising, whose credibility as a revenue source is currently in serious question. Many think that big tech is reeling already, and that settlement costs would only add to their angst.
Would they? Would operators even benefit? The answer lies in the basis for the settlement. Past services that relied on settlement were all connection-oriented, voice calls being an example, but Internet-based activity would almost have to be settled based on traffic exchange, a fee per packet or for a fee for total bytes transferred. However, unless regulators took the step of defining a formula for applying traffic-based settlement, it’s likely that ISPs would negotiate with big tech, perhaps defining settlement based on multiple factors, including the number of users.
A terabyte of data for a single user would represent a lower benefit to big-tech firms that either rely on ad sponsorship or are looking for a high addressable market, than a terabyte divided across a hundred users. In fact, it’s very possible that ad-sponsored firms would want to settle with operators/ISPs based on the number of potential tech users the latter could provide.
The settlement mechanism is important for three reasons. First, it could distort the entire Internet market if it’s not fair and relatively immune from being gamed by those who want to avoid payments. Second, the mechanism for settlement would likely determine whether the big-tech-contributes notion spreads beyond the EU if it’s approved there. Third, the impact of the settlement mechanism could impact the stock price of both big-tech companies and operators.
I think that a “fair” settlement strategy would likely be seen by both big tech and the ISP community as acceptable, perhaps preferable to either risking loss of investment in Internet access or regulatory intervention. Thus, it would likely spread. That addresses our second reason why the mechanism is important, so let’s look at the other two.
If we assumed no regulatory intervention, free-market principles would likely result in a strike price for subsidies that both parties could accept. The problem is that the only way this can happen is that either party could simply refuse to participate if they didn’t believe things were fair. That could mean that an ISP who didn’t want to accept the offered settlement for carrying Brand X Video’s content could simply refuse to deliver it. While we have a similar risk today with the streaming TV aggregators and the networks (there have been risks of or even actual blackouts of networks for some users because agreement wasn’t reached quickly), public outcry would be sharp if one of the big-tech players, like Meta, suddenly became unavailable.
That illustrates the big problem the EU will face in the settlement model(s) it accepts. If you set the policies in law, you have to take responsibility for whether the parties are unequally impacted, which could make things worse. If you don’t, then you have to establish how the settlement agreements would be reached without unreasonable impact to the public.
There are technical issues that impact all of this too. One is the impact of content caching, meaning the use of content delivery networks (CDNs). A content provider pays a CDN operator for caching video, for example. Does the CDN operator settle with the ISPs, or does the content provider? If an ISP decides to be its own CDN, does that mean there’s already a form of settlement if the content provider caches with the ISP? In any CDN situation, what counts as settlement traffic?
Another question is whether only some traffic should be subject to settlement. Google has a search engine many use. Google caches some pages, too. Should searches be free from settlement? Should search results, if clicked on, require that the content owner settle, or should Google settle? If Google does cache content, does the traffic it caches get settled by the content owner or Google? And, of course, if some traffic is immune from settlement charges, how do we identify traffic types to prevent gaming the process?
There are a lot of questions here, but the first one to answer is whether the EU goes along. It’s hard to get a reading on something like this, but my friends tell me that they are leaning toward an approval. It may be just a measure to study the settlement options, but something is likely to come out of it. Will it be good for the industry?
Most likely it will cause some convulsions. Any hope of settlement subsidies will make the operators more reluctant to step outside their safe zones, particularly if their stocks gain on the news. The devil will be in the details, and there is a real risk that a bad model for settlement would hurt both operators and the big-tech firms, contributing to a problem that’s hitting tech investment overall. While the EU has, historically, been fairly smart with respect to regulatory policy, this issue is so hot, so critical, that you’d be justified in hoping that they decide not to intervene at all.