The principle of net neutrality may be under a threat as the European Commission (EC) considers a proposal to direct Big Tech firms to pay telecom companies for using their network infrastructure. One of the EU Commissioners, Margraethe Vestager, floated this idea at a news conference after suggesting that there were companies who generate a lot of data traffic but do not invest towards building infrastructure.
Understanding Sending Party Pays: The principle of ‘Sending Party Pays‘ is premised on the idea that it should always be the sending party network (a company like Netflix or Google) which must pay for packet delivery across the interconnect link between two network service providers. It means that Vestager is looking to impose an interconnection charge on Big Tech companies as they drive a majority of data traffic in the European Union (EU) according to a report sanctioned by the ETNO (European Telecommunications Network Operators’ Association).
The report held that these OTT providers contributed nothing to the “development of national telecom networks” despite accounting for 56 per cent of all network traffic in the EU. The ETNO is a lobbying group consisting of European telecom companies as its members, similar to that of India’s COAI.
The major tech companies held responsible for a majority of data traffic in the report were as follows:
Why it matters: Many digital rights organisations have termed the EU proposal as detrimental to a free and open internet. Its implementation can pave the way for a ‘splinternet’ because companies will have*** to negotiate terms for accessibility in every country as other countries will look to adopt similar provision for their jurisdiction.
- Moreover, the measure, if implemented, may end up threatening net neutrality protections around the world given that many countries tend to use Europe as reference to shape their own tech policy.
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What will be the fallout?
What is net neutrality: It is the notion that internet service providers (ISP) must treat all content flowing through their networks in an equitable fashion. It means that a company like Meta or Amazon should not be able to pay your ISP to deliver their content via fast lanes to your devices, or that accessing them should cost you less or more in terms of data charges. It also means that network service providers should treat them the same way that they treat all content providers.
Vestager’s proposal was met with concern by several net neutrality advocates. An open letter was sent by 34 civil society organisations from over 17 countries which argued that the proposal undermines core net neutrality protections in the European Union.
“The proposal will harm freedom of expression, freedom to access knowledge, freedom to conduct business and innovation in the EU. It will hurt Europe’s internet economy and create unprecedented bureaucratic barriers that will slow growth in a recovering economy,” read the letter.
The letter contended that large telecom companies from Europe have been lobbying for ‘Sending Party Pays’ proposals since 2012 but these proposals have been rejected by governments. The organisations were ‘shocked’ by the support offered by Vestager to the proposal despite a lack of public consultation with public-interest groups, regulators, internet-based companies or small businesses.
The letter called out the EU’s plan as flawed, and based on a “fundamental misunderstanding” of the workings of the internet. It added that telecom companies are compensated by their own internet service customers for transporting data over their access networks.
“They simply want to be paid twice for the same service,” read the letter.
It painted a grim picture on the impact of this measure as it threatens to splinter the global internet. The organisations contended that telecom companies in other countries would follow suit
“Principles of end-to-end and global level playing field would be lost, and the internet would become a ‘splinternet’ in which the provision of cross-border services requires bureaucratic procedures to negotiate terms for accessibility in each and every network,” the letter warned.
The letter labelled the idea as “dangerous and unworkable” and urged the Commission to not give in to demands of the telecom industry and sacrifice an open internet.
‘Definite impact on Net Neutrality’
Internet Freedom Foundation (IFF) was one of the signatories in the letter. Its Policy Director, Prateek Waghre, listed the following problems with the EU’s proposal in an email interview with Medianama:
- Net Neutrality: “There are definitely net neutrality implications here because if a subset of companies whose traffic is delivered on ISPs pay them additional amounts either as differentiated tariffs or investments/large payouts that support infrastructure – there is a strong incentive for ISPs to treat their traffic differently, potentially favourably, and at the expense of other websites/apps/services,” Waghre explained.
- Dependence: Waghre stressed that the concerns about the dominance of a handful of large technology companies were “real” but did not think that creating a greater dependency on these companies to address tangential market issues was a “sustainable long-term answer”. “On the contrary – greater dependency could mean even more risks for Net Neutrality,” Waghre cautioned.
Waghre also underscored that the stress in telecom companies is not a market failure that warrants regulatory intervention just because there is no willingness among users to pay more for units of data.
Risk of Big Tech dominance
An article by Konstantinos Komaitis cautioned that such proposals risk restricting users into walled gardens (such as those of Meta or Google) and cementing the dominance of a few tech companies. Komaitis is a well-known name in the world of internet policy after having spent nearly a decade at the Internet Society.
Komaitis pointed out that these deals will “create an even greater financial interest in maintaining Big Tech’s dominance”. The arrangement will exacerbate the problem of Big Tech’s dominance as these companies will become centres for more kinds of user interaction, he added.
“While Google and Facebook may be able to afford huge payouts to host publisher content and travel on telecom provider networks, smaller companies cannot. This means more users will be limited to increasingly walled-in ecosystems and services with more concentrated threats to user privacy and expression, especially as smaller players get shut out of such deals,” Komaitis wrote in the article.
He also warned that if Big Tech’s reach were to cover the internet infrastructure, we will see more privatised networks which will further entrench their position as a one-stop shop for users.
Thomas Lohninger**, Executive Director, epicenter.works, said that the proposal would lead to an unhealthy market which “only favours the big players who are able to establish global reach and who are able to grow towards new markets whereas small entrants and SMEs would be excluded from becoming global players”. He said that the small companies will be sidelined because growth will become painful and costly suddenly.
He also explained that the incumbent in the telecom market with the most subscribers will accrue a double benefit of having most customers and then OTT providers will pay a fee in order to be “reachable in the network” because they have the biggest user base. Lohninger was also the author of the open letter sent by the civil society against the proposal.
Mozilla Foundation’s Vice President of Advocacy Ashley Boyd wrote a letter saying that it was “alarmed” by the Commission’s plan to get “certain online service providers to make dedicated financial contributions to telecommunications network operators”.
“The ‘sending party pays’ policy approach, as this is known as, would violate a core tenet of net neutrality, and would have harmful knock-on consequences for European consumers, creators, and innovators,” read the letter.
The letter said that the ‘sending party pays’ model would “harm consumers because the online services that are subject to the levy would inevitably seek to pass those costs down to consumers in one form or another”.
Rise in consumer prices
Ryan*, a senior executive at a Big Tech company, told Medianama that there’s a risk that consumers will end up with “poor quality service at higher prices” if the policy were to come into existence.
They elaborated that content application providers will face high prices for providing their service by paying infrastructure at the wholesale level. It means that content providers may not want to invest locally and keep servers in another country instead, which will then compel ISPs to go and fetch traffic from a foreign country in turn subjecting users to delays.
The executive also added that the policy can force start-ups to only focus on their home market because a start-up is unlikely to pay additional costs.
It will restrict their ability to access the global market, to reach end users around the world. It will impact the online economy. They added that if not consumers then advertisers will have to bear the increased cost depending upon the business model of the company.
Risk of abuse of power: There is a chance that content providers may not want to comply with payment of fees to a telecom operator if the policy is implemented.
“What happens if the content provider says they are not going to be able to pay that fee? The consumer’s right to access content of their choice is affected because the telecom operator will block that content if they don’t get the money,” Ryan explained, adding that it breaches net neutrality.
No guarantees: There is no assurance that telecom companies are going to start building more infrastructure if they get more money. There is no incentive for these companies if they are getting money without doing anything. “It doesn’t encourage competition, it doesn’t encourage actual investment and innovation,” Ryan said.
Is there merit in claims of telcos?
This is not the first time that telecom companies have demanded an interconnection fee. The companies have been clamouring for a fee since 2012 when the International Telecommunication Union was convening a conference to negotiate new international telecom regulations.
Proposals in the past
The ETNO had lobbied for a ‘sender party pays’ system for internet interconnection at the conference. It would have allowed service providers to prioritise certain types of internet traffic and get a company like Netflix or Youtube to pay for the privilege of reaching consumers. Nothing came of it in 2012.
Moreover, BEREC (Body of European Regulators for Electronic Communications) rejected the idea in 2012 by stating that there was a “real risk” of inducing an abuse of market power by telecom companies in relation to terminating traffic.
“The resulting shifts in market power would increase the need for regulatory oversight and potentially require regulatory intervention, in accordance with the EU regulatory framework,” read the document.
Lohninger pointed out that the BEREC investigation found the proposal to be a bad idea for the market, for innovation, for expression and so forth, adding.that the investigation was repeated two times since then and it always came to the same conclusion.
What happened in 2022?
The debate around an interconnection fee was reignited in February 2022 by an open letter signed by the CEOs of Deutsche Telekom, Telefónica, Vodafone, and Orange. They wrote that telecom operators have “invested massively” to upgrade their network infrastructure to increase capacity. They added that the current situation was “not sustainable”.
“The investment burden must be shared in a more proportionate way. Today, video streaming, gaming and social media originated by a few digital content platforms accounts for over 70 percent of all traffic running over the networks,” read the letter.
The companies argued that they were not in a position to negotiate fair terms with these companies due to their “strong market positions, asymmetric bargaining power and the lack of a level regulatory playing field”. They contended that they were not able to make a viable return on their investments which put infrastructure development at risk. They urged the EU to legislate rules to get Big Tech to pay their share of network costs in conclusion.
Komaitis had suggested that telecom operators have tried to catch up with innovation, but with little real success. He argued that telecom providers failed to understand that users are mainly paying to connect to the ends of the network and not the middle.
“In other words, the value of the internet connection comes from the fact that Google, Facebook, or TikTok—not to mention smaller and regional platforms excluded from big telecom deals—make it valuable for them. Without large and small platforms and their services, users would have no reason to use telecom providers’ networks,” he explained in his article.
The ETNO report stated that if Big Tech were to make a contribution of €20 billion yearly to the costs of usage of the telecommunications infrastructure in the EU, it would bring “positive economic, social and environmental benefits” to the European ecosystem. The report added that the EU telecom companies incurred costs in billions of euros ($36-40 billion) on account of traffic generated by Big Tech companies.
The problems of these companies emanate from an “asymmetric bargaining power” between internet companies and telecommunications network operators in their commercial negotiation of the terms of transporting IP traffic, the report explained.
What does Big Tech have to say?
Medianama also spoke to John*, another executive at a different Big Tech company, who labelled these demands as “unsubstantiated”.
“They do threaten the open internet. They’re (the proposals) neither new nor are they based on a sound premise. We do not believe there is any evidence that the internet ecosystem is unsustainable,” John told Medianama.
John also said that costs reported by ETNO in its report were unfounded, adding that growth in network traffic is not a driver of cost for ISPs. They also said that ISP network costs were “broadly unrelated” to network usage before concluding that data traffic charges will create “distortions in the online services market”.
“Internet traffic is not a sound metric on which to base payments and fees,” John elaborated.
It was reiterated by the other executive who said that the argument has no basis and an increase in traffic is good for telecom companies. They added that there are a lot of operators which bundle subscription services in their packages.
“Why are you advertising these traffic-heavy content applications if they’re not good for you? The traffic is increasing but the variable cost of additional traffic is close to zero,” Ryan said.
These proposals have been in play for a decade but never gained traction as they are now. There is no clear-cut answer but Ryan told Medianama that the perception, or the reputation, of some technology companies is “not as good as ten years ago”.
The idea coupled with the fact that telecom operators are staring at 5G investments has provided a renewed push to the proposal. The telecom companies were worried and pushed for an interconnection fee ten years ago because they had to invest in 4G, Ryan suggested.
Lohninger reasoned that the Commission’s support can only be explained by a “captured commission that is doing something that will have negative effects on the costs of internet, on the innovative capacity, of the economic capacity of the European Union”.
He added that there was a growing regulatory appetite to rein in Big Tech.
“The idea that something that is bad for the likes of Google and Meta is bringing many ideas into the realm of realistic policy options sadly which otherwise would be deemed unfit,” Lohninger told Medianama.
Lohninger explained that the proposal will ensure that the capacity of smaller cloud service providers, video streaming providers, live streaming providers for games, to compete with Big Tech will be afffected.
Is there a need to revisit existing arrangements?
Two of the Big Tech companies which spoke to Medianama clarified that they make sizeable contributions to internet infrastructure. Some companies partner with ISPs and help reduce traffic with the help of engineering innovations.
Ryan said that a customer pays for a broadband plan because of content and applications on the internet. “We are interdependent and it’s a virtuous cycle,” they said.
They stated that there was a lot of rhetoric as people are only looking at profit margins. “There’s a misunderstanding,” Ryan told Medianama. They added that some telecom companies may be under stress but it has nothing to do with increasing traffic.
They, however, added that more partnerships must be encouraged between technology companies and telecom operators. These companies have to embrace the evolution towards a data-driven internet economy. The operators are selling consumers access to the internet, which provides content and services offered by Big Tech companies.
“They’re (telcos) not making much money out of anything else. We’re making them money. I do not think we need to revisit arrangements as much as the dynamic— it’s not telecom operators versus internet companies; we could be a really profitable ecosystem together,” Ryan explained.
Is India at risk of adopting this approach?
Waghre said that the society is experiencing a period of “rapid regulatory contagion” where regulation enacted in one part of the world is quickly adopted/copied in other parts of the world.
He also pointed out the fact that effects and unintended consequences of such regulations are not understood in many cases. “Some of this stems from the situation that many jurisdictions are struggling to deal with technology or technology-adjacent regulatory issues,” he added.
“There is a strong likelihood that ISPs in other markets will clamour/lobby for it if such a policy is enacted in the EU (as we’ve seen with Australia’s Media Bargaining Code),” Waghre stated, adding that markets with a few operators, or struggling operators are even more susceptible to such a policy.
“There will be (a) negative impact on net neutrality and principles that we have agreed on, settled on, may be reopened and even reversed if (this policy is) enacted,” Waghred said in conclusion.
‘There is a risk of proliferation’
Lohninger quipped that many people in the EU “fancy themselves as being the leaders on everything with regards to digital regulation which can be very beneficial sometimes (GDPR) but it can also be very detrimental (Copyright Directive)”.
“I don’t think we have the confidence in the legislature so far to rest easy,” Lohninger told Medianama.
He said that it was “very important” to have a set of rules from Europe that are not based on the hope that they will be limited to Europe. “So we should live up to that responsibility,” he added.
What happens next?
There are rumblings that the European Commission may plan to present a new Connectivity Infrastructure Act in the fall, as per Politico. The new proposal may include a revision of the 2014 Broadband Cost Reduction Directive (BCDR) under “the current working title Connectivity Infrastructure Act”.
The report said that the bill will include measures to oblige certain companies to contribute to the costs of 5G. It also said that European governments have been in favour of the Commission’s intentions.
They had said in May 2022 that “all market actors benefiting from the digital transformation” should assume their social responsibilities and “make a fair and proportionate contribution to the costs of public goods, services and infrastructures”. Ryan said that there was a lot of uncertainty around the issue as there has been no formal proposal yet.
Lohninger revealed that an investigation was underway to examine the merits of this proposal. He urged the Commission to not rush with their proposal and provide time for regulators to do “market analysis”. He revealed that the Commission will hold a consultation before the proposal is passed, adding that he was not sure whether there would be a public discussion.
“We hope that the voices of civic society will be heard in that consultation but the process so far is not making this a safe bet…we are calling on the legislature to let the neutral regulators do their investigation before this one-sided idea is put into law,” Lohninger said.
Medianama’s emails to the European Commission did not elicit a response at the time of writing. The post will be updated if and when they respond to the emails.
*Disclaimer: The names were changed to not reveal their identities as they spoke to Medianama on condition of anonymity.
**Update: This post was edited on August 24, 2022 at 12:15pm to include comments by Thomas Lohninger.
***Update: The post was edited on January 16, 2023 at 12:14 to rectify grammatical errors.
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