According to Greek mythology, on the island of Crete, King Minos ordered the architect Daedalus to build a labyrinth to imprison a fearsome creature: the mythical Minotaur, with the body of a giant and the head of a bull, the fruit of the romance between Pessiphae and the Cretan Bull. It was an intricate and convoluted structure, specifically designed to be difficult to navigate.
The problem with the current Internet model
The existence of a structural problem in the current Internet model that threatens the sustainability of the networks is something that most actors in the internet ecosystem agree on. It is not a problem that the market alone can solve. There is a failure in the market itself and regulatory action is essential.
The European Commission, Parliament and Council are committed to “develop appropriate frameworks to ensure that all market players benefiting from the digital transformation assume their social responsibilities and contribute in a fair and proportionate way to the costs of public goods, services and infrastructure, for the benefit of all Europeans“. To this end, the Commission published a consultation on the future of the telecommunications sector and its infrastructure.
Let’s create a fund to get to the same place much later
While there is a genuine consensus on the existence of the problem, there are differences of opinion as to the solution to be adopted. One of the possibilities under public debate is the creation and management of a fund that would serve to contribute to financing of telecommunications networks. The creation and management of such a fund ex novo would require the definition of:
- The financing procedure
- The contribution criteria
- The parties obliged to contribute. The criteria for allocating the fund and for monitoring and supervising the use of the resources both at the level of the European Commission and the Member States
- The enforcement procedure
This could be referred to as an “indirect payment system”, as opposed to a “direct payment system” in which the parties liable to contribute would pay the network operators, who are precisely those who deploy, upgrade and maintain those networks.
Experience tells us that, with a system of indirect payments, it would be difficult to escape from a massive regulatory management tool that could well result in a “labyrinthine payment system”. Just as this solution would follow a winding and complicated path, the labyrinth represents a process full of obstacles, detours and confusion that prevent reaching the goal effectively.
The revision of the of Universal Fund would not solve the problem either: European operators agree it is an outdated and clearly inefficient regime. It is designed to provide connectivity solutions to individual requests and not to extend coverage in an efficient manner, disregarding the increasing network capacity in response to increased traffic demand.
The time lag between the commissioned operator providing the service and receiving compensation from the fund -after a cumbersome process of determining a net cost- is several years.
In relation to services’ affordability and accessibility, Member States already have programmes targeted at special groups in addition to the universal service itself that are more effective and better designed. Market dynamics have also encouraged operators to have solutions in their product portfolio.
Why follow a direct path: from the party liable to pay to the network operator
Direct payments simplify the process and reduce the steps involved in the transaction. This makes the overall procedure faster, and the contribution reaches its ultimate destination -the upgrading and deployment of networks- sooner.
Flexibility is guaranteed, as the trade arrangements that will determine these payments will depend on each pair of partners.
On the contrary, in the case of the indirect route, it is difficult a priori to find a contribution and fund allocation procedure that benefit all parties given the complexity of the Internet ecosystem, the diversity of services that can be offered and the different relationships that exist between actors. A priori we can say that this regime will be sub-optimal.
In the case of the direct route, administrative costs decrease, as it is the partners -payer and network operator- who would bear the burden of negotiation in the first instance. A dynamic trading solution, adapting to different environments and conditions, would provide an effective solution to the needs at any given time. The consumption of public resources and time is therefore reduced, avoiding a set of strict rules and protocols that may be unnecessary in many cases.
In addition to the above, and of even greater relevance, is that the party obliged to pay would have incentives to be more efficient in the use of the operator’s network resources that it would be using, since it would be paying for them directly. This would discipline their behaviour by reducing the volume of traffic delivered to the network for the sake of their own efficiency, and that of the ecosystem as a whole. In contrast, a fund would decouple each pair of partners – contributor and operator – resulting in a totum revolutum, -multiple contributors, multiple recipients- making it virtually impossible for there to be a relationship between the contribution criteria and the use of each of the networks.
The direct commercial solution between the obliged and the operator respects the principle of causality, as the agreement they reach will be based on the volumes of traffic injected into the network and carried to the end-user. It is precisely these traffic volumes that trigger the operator’s investment needs. These investments are necessary to absorb these traffic volumes and to guarantee the quality of service provided to end-users.
This causal link between the traffic delivered to a particular network and the payments made is lost with the creation of a fund. As previously explained, this is because the obligated party relationship no longer exists.- operator.
About the principle of minimum intervention
The European Commission pursues the principle of minimum intervention in its regulatory activity. The aim is for regulation to be applied only in cases where markets alone are unable to solve the problems, and are not expected to do so in the foreseeable future. This approach minimizes the introduction of distortion as much as possible.
The creation of a fund is a maximum intervention regime. It requires the creation of a bureaucratic, cumbersome and rigid system to solve a problem. The same problem could be solved by the market itself. Simply, the regulator would have to establish the criteria for determining the obligated parties and their obligation to negotiate with operators. From there, commercial negotiations would lead to the agreements that best favour the parties and, therefore, the ecosystem as a whole. As with any regulatory tool, this would have to be accompanied by a dispute resolution and sanctioning regime.
In a system such as the creation of a fund, the criteria, procedures and implementation will need to be public. This per se ensures that level of transparency. However, transparency procedures can also be aimed at the telecommunications operator, enabling the competent authority to track and monitor the network investments it makes as a result of the payments it receives for the service provided. This procedure allows the regulator to verify and monitor the evolution of the investments resulting from the application of the contributions. In short, there is no reason to renounce transparency in a system of direct payments.
In order to achieve the connectivity goals of the Digital Decade 2030 on time, Europe has the opportunity to design a quick, efficient and straightforward solution based on the obligation of negotiation between the parties, avoiding labyrinthine solutions. The creation and implementation of a fund would be a waste of time and resources that the European Union does not have at its disposal.
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