An Internet ecosystem with strong imbalances
The current European Internet ecosystem is heavily imbalanced. The last decade has seen an immense transfer of value not only from European telecom operators to large Internet companies, but especially from all European citizens to these large companies. This situation is hardly sustainable and cannot be the basis for the evolution towards the next stage of the Internet, that of Web3 and the metaverse. This new stage requires a new model.
The current imbalance stems from decisions taken in the early days of the commercial Internet in the mid-1990s. These decisions were intended to drive the development of the Internet, and were undoubtedly extraordinarily successful, but they have also contributed to the creation of positions of dominance. These positions have resulted in a very unbalanced ecosystem: a few players get the lion’s share of the value generated by the ecosystem.
The shared success of the Internet
The Internet is one of the technological disruptions that has had the greatest impact on today’s economy and society. Its success is due to a shared effort by all companies and users who, since the beginning of the Internet’s commercial era in the mid-1990s, have contributed to its expansion and development.
In those early years, companies, and especially telecommunications operators, took several decisions that fostered the development of the Internet and contributed to its success. These decisions encouraged both the incorporation of new users and the creation of new Internet content and services to attract more users.
On the user-driven side, the most decisive decision was the offer by telecommunications operators of flat-rate Internet access tariffs. After some initial years in which the price of Internet access depended on the time of use, or the data traffic consumed by the user, telecommunications operators began to offer flat rates at the end of the 1990s, in many cases linked to the emergence of a new technology, ADSL.
On the content side, a model of interconnection between the different networks that made up the Internet was adopted that favoured service and content providers who did not have to face the costs of getting their content to users. Internet content providers were able to think of “attractive” content, and the widespread consumption of such content found an ally in the Internet interconnection model.
These two decisions, among others, gave rise to a virtuous circle of content creation and user adoption that has led to the Internet becoming a global phenomenon that is now the basis of the 21st century digital economy and society.
For the operators, this strategic commitment implied that the sole source of revenues were and still are consumer flat-rates to meet, inter alia, the costs of this access and the content transport service.
Thirty years have passed since these decisions were taken, and the success of the Internet has progressively resulted in a digital ecosystem with strong positions of dominance of a small number of companies, which benefit from the advantages granted by the model to capture a large part of the value of the ecosystem. This model, the result of decisions taken in the 1990s to boost and develop the Internet ecosystem, is not sustainable today.
A flat-rate model to drive Internet access and content demand
The monthly flat rate has been one of the most decisive elements in the popularisation of the Internet. This fee eliminates users’ fear of accessing content if they cannot estimate in advance the price they have to pay. The flat rate encouraged millions of users to connect to the Internet with the certainty of a known monthly cost.
The success of today’s streaming content distribution platforms, or of the large video broadcasting platforms, would be unimaginable if they were not supported by users who enjoy flat-rate Internet access. The success of an Internet dominated by video content is not conceivable without the existence of these tariffs.
In the first, no doubt hasty, reactions to the telecommunications operators’ proposal for a fair contribution from large traffic originators, the comparison with the electricity market was surprising. Some reactions alluded to a comparison with an electricity market in which electricity distribution companies would demand payment from appliance manufacturers. It is difficult to understand this statement when comparing a pay-as-you-go market such as the electricity market with a market dominated by flat rates.
Based on this difference, any comparison is unfortunate. Think of the behaviour of companies with energy and with Internet traffic: nobody leaves the lights or heating on when they are not needed. On the internet, not only is the opposite the case, but such use is encouraged. For example, after watching a video on Youtube, another one is automatically played without the user’s request. Youtube gets more viewing time for its content and therefore more advertising revenue without increasing its costs. The operator, on the contrary, increases its networks costs and does not generate any extra income.
An Internet access market based on pay-per-use would be radically different. In such a market, the claim for a fair share from large traffic originators would require a different analysis. But this is not nowadays the debate in our societies.
An interconnection model to boost the creation of content and services
The Internet is a network of networks, the result of the interconnection of thousands of networks. In the early years of the commercial Internet, a model of interconnection between all these networks was defined that sought simplicity and tried to encourage the connection of as many networks as possible.
All the networks together had to pay for the service that would connect the networks to each other and access any user or content anywhere in the world. As opposed to making direct connections, this intermediate service, called transit service, was provided by a small number of large operators, which made up the Internet backbone. The rest of the networks had to contract the transit service from these operators to gain access to any user and any content on the Internet, anywhere in the world.
In addition, networks could also be connected directly using so-called peering agreements. Unlike transit service, peering agreements only connect two networks to each other, but do not give access to other networks. These direct connections have always been governed by negotiations based on parameters such as the users and content available to each of the interconnecting networks. Many of these negotiations resulted in interconnection agreements where the price was compensated and settled at zero between the parties because the volumes of traffic exchanged between the two networks were equivalent.
This interconnection model has favoured large content providers. The service of transporting their content to their users over the operators’ networks in a given country (national backbones and access networks) has been largely free for content providers. Their business models have been able to save a key cost in any similar business conducted in the physical world: the cost of distributing their products and services. It is not hard to imagine what a great advantage this model has been for these types of companies.
Not having to bear that network cost encouraged the proliferation of content and service providers, leading the Internet to the success it is today. But it also made these content providers insensitive to the real cost to telecommunications operators of the traffic their services generated.
An inefficient and unsustainable system for citizens in need of overhaul
This cost has so far been borne partly by Internet users in their access tariffs and partly by telecommunications operators when providing the wholesale service without remuneration. If the increase in data traffic caused by new services and content, generates an increase in telecommunications operators’ network costs that calls into question their business model. The solution that the large originators of Internet traffic seem to advocate would be to increase prices to users. But Internet access is a two-sided market, in which right now only one side, that of the users, is paying for the service, but the other side, that of the large traffic originators, is not.
If the current model does not change, the transfer of value from users to the big Internet companies will be perpetuated. Users have financed with their access fees the telecommunication networks used by these large companies in their business, without them contributing in any significant way, and irrespective whether users enjoying or not the services provided by such large companies.
An increase in costs caused by companies whose business model is not affected by these costs creates inefficiency in the system. The fact that as few as 6 companies are responsible for 60% of the traffic flowing through all the networks should be a very clear sign of the need to review such an unbalanced model. A model that benefits a very small number of companies, to the detriment of the rest of the ecosystem. If this situation were to occur in the transport infrastructures of the physical world, there would be no doubt about the need to change the model.
The demand for payment of this price for the service provided has been part of Telefónica’s public conversation for more than ten years. It has also been part of the bilateral conversation with the platforms that are major traffic generators. If such a rational agreement has not been possible, it is simply because of the market power enjoyed by these global companies.