It’s starting to look like the meat of the issue of telco subsidies by OTTs is emerging. A recent piece on the topic makes the comment that the big problem with the EU proposal on subsidies is that the EU “essentially attempts to regulate the internet like the telephone network.” The question that raises is both simple and profound, and it’s “What is the Internet?”
There are two basic pieces that make up our Internet experience. One, the most important to Internet users, is the “over-the-top” or OTT piece, which is made up of websites that host information, content, and services. The other, which is fundamental to accessing this desired piece, is the collection of Internet service providers or ISPs who provide connectivity for both users and OTT providers. In the earliest days of the Internet as we know it, this second piece was for Internet users, highly dependent on the telephone network because it leveraged existing infrastructure. OTT access also typically comes via ISPs, but also through a set of content delivery networks (CDNs) that cache popular content closer to points of user access to improve quality of experience.
Early Internet infrastructure consisted of private OTT resources, telephony-centric user access resources provided largely by the telcos, and interconnect facilities to link everything. The latter was really the only true Internet-network piece of the puzzle; everything else was a pure commercial venture. Today, most of the interconnect requirements are met by “private peering” or connection between ISPs themselves.
The reason all this is important to the question of regulation is that the two pieces we call “the Internet” are now and have always been separate, and that regulatory practices have codified that separation. In the US, we have “telecommunications services” and “information services” that correspond to the two pieces, and a similar separation is defined in other major markets. It’s also true that the two pieces have separate business models. Virtually all the ISP services are paid for by the user, and the majority of the OTT services are ad-sponsored, though there are also some (like cloud computing and streaming video) where users pay at least some part of the service fees.
The argument that the Internet is being regulated like a telephone network is correct at one level, because the access piece of it is deployed and paid for the way telephone services have been. Yes, it’s regulated that way. The rest of the Internet is largely unregulated. So if someone suggests that it’s bad to regulate the Internet like a phone network, they run afoul of the basic truth that part of it a phone network (the evolution of one at least) and the other was never regulated that way. But let’s get past that semi-semantic point and address the question of how it should be regulated.
I think that a completely unregulated view of both pieces of the Internet is hard to defend. First, we’d have to transition the access piece to an unregulated model, which is at the minimum a major regulatory shift. We’d have to address the question of whether an ISP, facing ever-declining revenue per bit, would stay in the access market at all, or would instead try to shift to a different business. In the EU, many of the telcos established subsidiary operations in other countries to attempt to sustain revenue/profit growth. Would more of that shift be a result of deregulation, and if so would we face the risk of losing investment in access?
In the US and EU, there’s also a contrary trend, which is to add regulations to the OTT piece. There’s major concerns about digital privacy and the use of online social media and other sites to spread propaganda, lies, hate, and so forth. But would imposing liability, for example, on OTTs for what’s posted on their sites raise their cost of operation by raising the cost of policing content? If that happened, would the profit potential of these sites decline, meaning that ad sponsorship might no longer be possible and consumers would have to pay for these services?
All of this has to be considered in addressing the subsidy issue, because you could argue that the implicit principles on which the Internet was founded collide with the natural business model of networks. Up to the Internet, operators settled among themselves for services that spanned more than one operator’s infrastructure. With the Internet we got “bill and keep” where every ISP gets paid by its customers and keeps all the money regardless of whether there’s traffic exchange with others. Some peering agreements might require a measure of balance of traffic or even payment, but in the main we don’t have settlement. That’s one driver behind the move to subsidize one piece of the Internet from the other.
The other is national politics. Most OTTs are US companies, where the ISPs are typically serving a specific national market (or, in the case of the EU, a continental one). As new uses for the Internet, new OTT services, grow, the demand for access capacity grows, and ISPs find themselves facing more traffic without (because of the lack of settlement) more revenue. Given that the OTTs driving the traffic are from another country, it’s no surprise that national-centric telcos are asking for relief, and may well get it.
Do they need it, though? That’s the real question, and the one that’s hardest to answer because it’s one of those thorny two-part things. The first part is whether the current profit-per-bit problems of the telcos are enduring problems that actually demand a new solution, and the second is whether that solution should be subsidies or something else.
My analysis of telco/ISP costs suggests that the problem with profit per bit is largely due to the need to deploy new access mechanisms to accommodate broadband Internet needs. A study Omdia did earlier this year showed that access infrastructure accounted for roughly a third of costs, the great majority of which has been made up of the deployment of new media, including fiber, CATV, satellite, and 5G. In most major markets, that media shift is well along, which means that the contribution it’s made to cost (and the negative impact it’s had on profits) is likely to decline over time.
Wireless may be an exception here; 5G has driven a major investment in new infrastructure. However, can we blame OTT traffic for that? Operators have promoted a vision of 5G that’s beyond what simple ISP missions would demand, and I think most 5G costs can be attributed to that vision and not to Internet requirements. I think 6G risks being even more directed at non-Internet missions, or at least at missions not currently supported on the Internet.
But suppose that there is a continued profit-per-bit shortfall? Well, for one thing, it’s not totally clear that profit per bit constitutes a reasonable measure of return on infrastructure. You can clock an Interface at a high bit rate if the media will support it, but does that mean your cost has risen and so your ROI has fallen? See my first point on how access costs work. For another thing, could operators take other steps to reduce costs or raise revenues? Finally, is this, in the end, really more about boosting stock prices for operators?
I think that much of operator profit pressure from access modernization will tail off, so the problem is likely not acute in a pure financial sense. I also think that since operators are no longer given a guaranteed rate of return or operate as an arm of the government, they’re simply private companies. You have to expect these private companies to act to support shareholder interest, which means that they have to be able to show the stock price has growth potential, there’s a good dividend to be paid, or both. Thus, I think that there is a reason to want to see operators’ profits are at least stable and hopefully a bit better year over year. Can that be done?
Not decisively or quickly. I think cost management strategies could be helpful, but what can really be saved there at this point is problematic. The big thing is new revenue, and for that to happen we have accept subsidies, eliminate bill-and-keep for some form of settlement, or encourage the operators to get into other areas. To avoid having those other areas erode investment in infrastructure we need them to exploit infrastructure much as OTTs do.
The AT&T concept of “facilitating services” seems the best hope to add revenues without threatening infrastructure investment, but it probably will require some regulatory attention in some markets, and it surely demands having a good idea of what services need facilitating. That’s the big hole in the story, I think, and since operators were demonstrably inept in promoting specialized 5G applications (and even in knowing what ones might be credible) it’s hard to see how they can do better here, quickly.
My analysis suggests that it may be premature to jump into subsidies at this point, or even to try to change the Internet settlement model. However, it seems very likely that governments will have to take some action to prevent investment in access infrastructure from stalling, and so if subsidies are to be avoided they should start thinking about how to develop that facilitating services ecosystem with at least some facilitation on the part of regulators.