22 February 2022
“Digitising Europe” is the new ELF Blogposts series that engage with policymakers, industry experts, and academics in order to contribute to a better understanding of how technological change is also driving social, political, and regulatory affairs.
By Gerard Pogorel, Professor of Economics Emeritus, Institut Polytechnique de Paris, Telecom Paris, CNRS Interdisciplinary Innovation Institute I3
The recent proposals by European telecommunications operators’ executives, aiming to have the major digital content providers contribute to the “costs of networks”, and “to ensure their economic and environmental sustainability” illustrates the extent to which Digital markets present significant conundrums for various actors, consumers, and governments. Most public arguments by actors only reflect partial realities.
Let us try to put things straight.
Our economies and societies continue to rely more and more on digital infrastructures for work, education, and entertainment. The number of retail users of these varied services is in the hundreds of millions, but a very limited number of content providers account for the bulk (70%?) of the traffic. In the meantime, data network operators who provide internet access struggle to have their investments keep pace with traffic increases. To figure out how to deal with such a situation, we must refer to two realities of the telecommunications industry and platforms, which largely obscure or bypass Economics 101 pure competitive markets principles.
Firstly, telecommunications are a regulated market. If telecommunications and content provision services were a purely competitive market, it would be up to the final consumer to pay entirely for both access and content, with subscription rates covering operational expenditures as well as capital expenditures.
Such a simple assertion sounds out of place in our world, as we have put in place complex, well-intentioned, pro-competitive rules that have developed a life of their own, brought in unexpected outcomes, and put the actors in a bind to confront unexpected evolutions in markets and services. Telecom regulation has been put in place in countries worldwide to manage network effects which would spontaneously result in the creation or restoration of telecommunications monopolies. This has resulted in a market design that ensures that a certain level of competition is maintained among a restricted number of operators operating in each market. The way this competition is enforced has asymmetric outcomes on the subscription rates paid by consumers. For instance, they are significantly higher in the US, which has adopted a model for telcos different from Europe, less competitive, resulting in higher tariffs at the consumer level, partially solving the investment capability problem.
In Europe, the actors in charge of building the badly needed data infrastructures are corseted in a competitive regulation framework which results in consistently lower tariffs and dramatically declining income and revenue: consumers today get access to an infinite world of information, entertainment, games, knowledge, for the monthly price of a slice of pizza, no cheese. Europe is partially addressing the investment gap issue by easing the constraints on shared infrastructure investments, but it is not enough. Consequently, operators struggle to invest at the required level.
Then comes the second consideration. For a long time now, the ability of private actors to build on their own highly capital-intensive communications infrastructures has been questioned. This applied to railways and highways. Today it applies to telecommunications networks. Beyond self-funded investments, other sources have been called for. Public funding of infrastructure is a growing part of the picture. In most countries, it is in place for the sake of universal access to communications services coverage of non-profitable low population density areas. This public funding of investments is highly significant, in the tens of percent proportion range. However, it has limitations in Europe, which refers to a competitive framework, as it should not damage competition and evict private investments.
The two major funding sources, subscriptions and public funding being constrained, infrastructure building operators point to where the money is. Platforms and streaming services are the primary beneficiaries of infrastructure developments. They have already contributed specific data traffic fees to operators in certain countries, not to forget their significant involvement in submarine cables, which, in a way, makes them guilty as charged. The size, revenue, and income of GAFAMs, Netflix, Disney, not only dwarf those of telcos, but are continuously expanding: the market cap of telcos is a fraction of theirs. In addition, GAFAMs tend to look bad as they have a reputation for paying little tax. Bottom line, why not have the investments in infrastructure funded by those who benefit from it?
As Europeans are not ready to switch to a US light regulatory model, which would result in higher tariffs at the consumer level, having platforms contribute to infrastructure investments looks like an appealing argument. All considered, it would offer a pragmatic, if partial, solution to the low tariffs-low investments vicious circle we are experiencing in Europe. We should not, however, underestimate the difficulties. Defining the base of the contribution will be tricky. Should the fee be traffic based or value-based? If all internet service providers contributed in proportion network usage, red tape would be a nightmare of sorts. Should then the fee apply only beyond a certain level of traffic, leaving aside smaller players, it would introduce a new bias. Furthermore, the fee should be harmonised within the EU to avoid tax and network investments discrepancies.
For the sake of simplicity, and all considered, a second-best trade-off in Europe could be to piggyback on the GAFAMs taxing effort, if it succeeds, and have the EU, governments, and the EIB enhance their contributions to network investments while preserving the European competitive framework.
Gérard Pogorel is Professor emeritus of Economics, Institut Polytechnique de Paris-Telecom – Paris Graduate School of Engineering, CNRS Interdisciplinary Institute for Innovation. An independent international expert in telecommunications, media, and the digital economy, he has worked with the European Commission, national authorities, and scientific committees in Europe, Japan, and Thailand. He was Chair of the European Union Framework Research & Technology Development Programme Monitoring Panel and Chair of the Monitoring Committee of the EU Information Society and Technologies Research Programme.
Published by the European Liberal Forum. The opinions expressed in this publication are those of the author(s) and do not necessarily represent those of the European Liberal Forum.