2022 has been an important year in the 'fair share' debate
At the beginning of 2022, the European Commission (EC) committed to developing a so-called ‘fair share’ regulatory framework, looking to make market players benefitting from the digital transformation contribute towards the cost of connectivity. Shortly after that, leading European telecoms operators Telefonica, Vodafone, Deutsche Telekom and Orange co-authored a letter supporting the EC’s commitment and urgently calling upon legislators to introduce rules at the EU level. This view was later supported in a public statement by a much wider group of European telecoms operators. Following that, a report commissioned by the European Telecommunications Network Operators’ Association (ETNO), proposed that content and application providers (CAPs) be required to negotiate a ‘direct compensation’ fee with internet service providers (ISPs).
In 2016 South Korea implemented new rules for IP Interconnection requiring ISPs to charge for the traffic they receive (a ‘sending party pays’ system). This, combined with the absence of net neutrality regulations, allowed ISPs to charge these costs to local CAPs. In parallel with the ongoing litigation between Netflix and SK Broadband, several draft bills which seek to extend these rules to international CAPs are currently being debated in the country.
Meanwhile, the debate in Europe seems to be shaping up differently. In October 2022 the Body of European Regulators for Electronic Communications (BEREC) published a preliminary study on the ETNO proposal and the UK regulator Ofcom issued a consultation on its review of net neutrality. Neither found evidence that a direct compensation mechanism would be justified given the current state of the market.
Why is this becoming so critical now?
Since the 2010s, firms such as Facebook, Amazon, Apple, Netflix, Google and Microsoft (so-called 'Big Tech') have been growing dramatically in popularity and have transformed the ways in which billions of people worldwide communicate, connect, shop and entertain themselves. This has also had transformational impacts on the telecoms sector, most notably since mobile data surpassed voice traffic globally in 2009 and has been growing at double digits annually since.
Network providers have been supporting this evolution by upgrading their networks from the legacy copper and 3G-based solutions of the early 2010s, to more advanced networks including fibre to the home (FTTH) and 5G. However, with data demand pressures increasing, substantial additional investments are needed. With Big Tech firms now estimated to account for almost 57 percent of network traffic (according to application and network development company Sandvine), there is an emerging question as to whether they should contribute towards this spend.
A proposed framework for economic assessment
Different arguments in favour and against a direct compensation mechanism have been put forward by ISPs and Big Tech firms respectively (see Table 1).
Table 1. Arguments for and against a direct compensation mechanism
As the debate progresses, regulatory authorities are also grappling with a number of key questions, which will need to be addressed with more detailed analysis (see Table 2).
Table 2. Key questions to consider as part of the debate
What happens next?
No intervention in the context of the fair share debate has been agreed in Europe yet, and initial views from Ofcom and BEREC seem to be leaning towards the status quo. Furthermore, a report commissioned by BNetzA in Germany identified a decline in diversity of online content and other expected detrimental effects to consumers within the South Korean market. This may not make the South Korean approach on this issue desirable in other markets.
In addition, there are less interventionist measures that could be considered, such as enhanced collaboration between ISPs and CAPs, aimed at optimising network efficiencies and reducing data wastage (and costs) as a result.
We will keep following developments on this issue closely and await key milestones in the following months, including responses to the Ofcom consultation early next year and a consultation from the EC in the first half of 2023. This will further inform the direction and potential outcomes of this debate.
If you are interested in discussing this issue with the DT Economics team please get in touch with Sean Kennedy or Chiara Garbellini.
