The Europeans “Get It”

Service providers are flooding networks with no incentive to cut costs.

I have written several articles about how Internet capacity is not being built out as fast as the demand for data is growing. I did not make any dire predictions that the Internet will collapse under the weight of this increased demand but I did point out that companies that build out Internet capacity have little incentive to continue to do so because there is little or no return on their investment.

The Europeans have recognized this and have put forth a solution that makes a lot of sense. They want Google, Apple, Facebook, and others to, “pitch in to help pay for the billions of dollars of network investments needed for their bandwidth-hogging services.” They go on to state, “As mobile and web companies add videos, music, and games, operators including France Telecom SA, Telecom Italia SpA, and Vodafone Group Plc want a new deal that would require content providers such as Apple and Google to pay fees linked to usage.

“Service providers are flooding networks with no incentive to cut costs,” France Telecom Chief Executive Officer Stephane Richard said last month. “It’s necessary to put in place a system of payments by service providers as a function of their use.”

This request is being made because today there is a mismatch between investments and revenue levels that “is set to compromise the economic sustainability of the current business model for telecom companies.” Essentially, companies such as Google, Yahoo!, and others use Telefonica’s networks for free. While this may be good for the Internet companies, it is a tragedy for us, stated one Telecom spokesperson.

There are many parts to the broadband puzzle. First is customer access to the Internet and wireless broadband, next is the robustness of the Internet and the wireless broadband networks, and lastly is the issue of who is making money delivering content to customers. Only a few years ago, the network operators were able to share in the revenue for the content. However, customers called for the end of the practice known as the “walled garden” operators permitted access only to applications and services they controlled on a wireless broadband network.

Today the walled gardens run by the network operators have been replaced by another form of walled gardens controlled by vendors such as Apple, Google, and others. Further, if a company such a Yahoo! does not control content, access to their services is still free to customers who pay only for broadband access. Network operators are seeing their revenue per user plunge while at the same time the demand for broadband services is rising. The operators are trying to keep up with the demand, but their contention is that the content being accessed is making money for others and not for them, making it difficult to continue to build out additional bandwidth because of their falling revenue.

The other side of the debate is that many of the operators are posting record profits. According to one source, France Telecom’s data revenue was up 24% in the last quarter to almost 32% of network revenue. However, the predictions are that the number of data connections will increase 15% a year to 270 million by 2014 but that broadband revenue will drop by 1%, and the operators have already spent almost $4 billion this year alone on network improvements.

There is a possibility that this type of revenue sharing could be mandated by the European Union since it tends to pass legislation that favors EU companies and the EU is not fond of watching revenue flow back to the United States and elsewhere. This is the beginning of a battle I believe will rage on for years, but if companies such as Apple, Google, and others are smart, they will not fight this trend only to have it mandated by the EU but will work with the content providers to come up with a plan to share revenue with the operators.

Wired operators around the world have been basically relegated to bit pipes when it comes to the Internet, mostly because they did not see the Internet coming at them and merely reacted. Wireless telecom operators are very aware of this and are trying their best to stay ahead of this curve. It seems to me that all of the stakeholders involved in the creation and delivery of content should find a way to work together and share in the total revenue pie. It would certainly be better to do this now so both the wired and wireless networks will be able to afford the infrastructure to keep up with the increasing demand than to wait for these networks to begin slowing down under the weight of the new traffic and demand.

Unfortunately, even in a free market economy there are still those whose business motto seems to be, “I got mine and I am not sharing.” In this case, I believe that way of thinking to be very shortsighted because the “mine” is dependent on others in the delivery food chain. Everyone is forecasting huge increased demand for both wired and wireless broadband services. Even if you take these predictions with a grain of salt and cut the numbers by 50%, they are larger than anything we have ever seen when it comes to transporting information across the street and around the world.

I think it is time for everyone involved to “play nice” with each other. It is possible that a failure to do so now could result in data overloads in the future, which would have a much greater impact on a company’s bottom line. Network operators responded to the press and customers when they ended the “walled garden” practice, but that does not mean others should build their own walled gardens without paying for the roads to and from their data and information.

Andrew M. Seybold