On the 31st of May 2022, PubAffairs Bruxelles organised an afternoon discussion on whether large digital content platforms should be charged for the usage of telecommunication networks with Ms Rita Wezenbeek, Director, Connectivity, European Commission, Directorate-General for Communications Networks, Content and Technology (DG CNECT); Mr Ramon Fernandez, deputy CEO, Orange; Mr Thomas Volmer, Director, Head of Global Content Delivery Policy, Netflix; and Mr Nicolas Cote-Colisson, Global Head of Communications, Equity Research, HSBC.
The event was moderated by Mr Matthew Newman, Chief Correspondent, MLex.
Matthew Newman introduced the debate on whether digital content platforms should make a financial contribution to network usage. Indeed, he clarified that several European telecom companies, such as Orange, Telefonica and Vodafone, have called for new EU measures that would ensure that large digital content platforms pay their “fair share” of the costs of using their respective networks. However, large digital content platforms have opposed this stance by arguing that consumers already pay for network usage and that content platforms’ innovative services drive demand for better quality and higher speeds from operators, he added. While the proposal of a compulsory “fair contribution” is not new to the EU public debate, the moderator explained, there has been a renewed attention on the issue from European Commission officials. Indeed, while former Commissioner for Digital Agenda, Ms Neelie Kroes, in 2014 once expressed the opinion that telecom operators should be grateful that digital content providers drive demand, more recently Executive Vice-President for a Europe Fit for the Digital Age, Ms Margrethe Vestager, and Commissioner for Internal Market, Mr Thierry Breton, have welcomed the idea of a “fair contribution” from large digital content platforms to telecom networks’ costs. In addition, Commissioner Breton suggested that EU legislation may be proposed by the end of this year. These open stances have reignited the debate on the so-called Over-the-Top (OTT) players and their possible contribution to the network they use. There are notably many sides to this question, from a revenue squeeze for the telecom operators and a dramatic increase in data traffic during the pandemic to the issue of preserving net-neutrality, the moderator concluded.
Rita Wezenbeek opened the debate on the issue of “fair contribution” by acknowledging that the public discussion on networks has again been put in the spotlight of EU digital-related policies, and by elaborating on the issues emerging from the state of play of digital transition in Europe and on whether content providers should contribute to the financing of telecommunication networks or not. Ms Wezenbeek remarked that the Digital Decade policy programme has formulated EU connectivity targets for 2030 and explained that these targets are necessary for Europe’s digital transition, which is notably of fundamental importance to both Europe’s economic competitiveness and social development. Without connectivity and without modern infrastructure, Ms Wezenbeek continued, Europe cannot reach the targets of a fully-fledged digitalisation both for the public and private sector. In addition, she stated that the EU ambitions regarding quantum and edge computing would also not work without a successful transition and, to this end as well, European networks must be fit for purpose.
She further pointed out that the European Commission put forward the Declaration on Digital Rights and Principles containing a number of principles on what citizens should be entitled to when they are in a digital environment, including access to affordable and high-speed digital connectivity. In addition, she stated that the Declaration on Digital Rights and Principles includes, in the context of solidarity, a principle that all market actors should contribute in a fair and proportionate way to the costs of infrastructure, public goods and services. This is the overarching framework, from which Ms Wezenbeek wished to introduce the issues at stake.
At the same time, the speaker from the European Commission stated that operators are already moving on with the rollout of networks both in the fixed and mobile industry, and that the EU executive body would like to support the aim of reaching gigabit connectivity, at speeds of around 1 gigabit download and 200 or more megabit upload for all European households and businesses. The European Commission, the speaker added, is also willing to support the 5G coverage rollout in all populated areas across Europe. In this regard, Ms Wezenbeek stated that studies show that massive investments are needed in order to help the telecommunication industry avoid possible financial gaps.
The speaker continued by stating that there are several sources of EU funding available in order to try to cover the financial gaps of the European digital transition, such as the Recovery and Resilience Facility, for which EU Member States have already committed to 15 billion euros to investments in digital connectivity. She added that another large funding possibility comes from the Connecting Europe Facility – Digital (CEF-Digital), on the basis of which 2 billion euros will be allocated over 7 years for high-performance connectivity infrastructure, backbone interconnection, submarine cables and 5G networks. She also mentioned other funds, such as the Connecting Europe Broadband Fund and InvestEU. Ms Wezenbeek further stated that the adjustments to the state aid and regulatory frameworks aim to both foster investments and promote a fair return on investments (ROI). In this regard, she added that the possible future legal instruments will certainly promote connectivity and the take-up of high-capacity networks. She further elaborated on these matters by highlighting that the EU regulatory framework, in particular the European Electronic Communications Code adopted in 2018, has been promoting co-investments, cooperative agreements and wholesale-only operators in order to encourage and incentivise the rollout of extended and efficient telecommunication networks across Europe.
On another note, the speaker started elaborating on the principle of “fair contribution” and added that the Declaration on Digital Rights and Principles is currently subject to interinstitutional negotiations. While pointing out that the principle of “fair contribution” has not yet been adopted, Ms Wezenbeek remarked that two questions will surely need to be asked. The first one would be whether there are circumstances that would prevent all market actors from making a ‘fair and proportionate contribution’ to the cost of infrastructure. If that is the case, the second one consists on how this issue should be addressed, and whether it should be through regulatory action.
Within this context, Ms Wezenbeek stated that a number of studies have been published by various actors on both sides of the argument, while saying that the EU institutions must identify whether the root causes of the alleged problem consist of an imbalance in the wholesale level of the telecommunication market or not. Regarding the questions of peering and transits in particular, she stated that there may be an asymmetry in the bargaining power among the players involved and remarked that there is a need to look into a regulatory playing field in these markets. She also stated that there is a growing imbalance in the volume of traffic that had to be dealt by European networks. Indeed, according to a recent study, she highlighted the fact that 80% of the data put into the old continent’s networks is now originated by large digital content platforms, and that this fact in particular has raised the issue of a “fair contribution”. At the same time, the availability of content placed on the systems by the platforms increases the demand of end-users for more and better communications networks.
Ms Wezenbeek also added that certain questions are relevant to this debate, such as the reasons why consumers and businesses do not seem to pay or underpay for network investments. With regard to this very question, the speaker noted that one of the most recent studies estimated the costs related to traffic per subscriber of fixed and mobile services. Another question related to this discussion, she added, is the issue of 5G as a whole new ecosystem in which industries will be the main customers of 5G networks through network licensing and targeted applications to their own needs. On this last matter, the speaker opened the question of whether there would be different business models to take into consideration.
Ms Wezenbeek also elaborated on what drives the costs of investment and whether large platforms are already paying for the infrastructure. Over the past years, large platforms have made massive investments in submarine cables and other backbones for instance, and in content delivery networks that actually take a share of the burden by bringing content to consumers. Regarding this last matter, the speaker asked whether large platforms’ investments are negligible compared to those made by telecom operators and, as a result, to which extent this factor is to be taken into account.
As a conclusion of her introductory speech, Ms Wezenbeek stated that once it is identified that there is an imbalance or a fairness issue, the subsequent question would be how to address it. She noted that the European Electronic Communications Code does not contain rules with respect to the relationship between European telecom companies and content providers. According to the speaker, the assessment could focus on the length of the period during which this traffic imbalance has occurred. In addition, she posed a question whether arbitration mechanisms and the creation of funds to limit the increase of prices for end-users could also be possible solutions to the vast question of network capacity and expansion.
The moderator then invited the next speaker, Mr Ramon Fernandez, deputy CEO of Orange, to take the floor.
Ramon Fernandez, while praising EU institutions for their current efforts enshrined in the Digital Decade, started his speech by stating that progress has been made over time. However, he also remarked that European telecommunication operators face difficult challenges ahead. In this regard, the speaker explained that the question of “fair contribution” is not to be interpreted as telecoms seeking compensation from large digital content platforms, but rather as a part of a broader and fundamental policy agenda for Europe. Mr Fernandez then specified that, in order to achieve the targets of a Digital Decade and to foster Europe’s digital sovereignty, the current discussion on networks is indeed of paramount importance. He subsequently argued that if telecom operators do not get a better share of the value created in the new digital world, Europe could be faced with a collective problem, or even worse, with a potential market failure regarding strategic infrastructure that is highly needed for the EU economy and society.
Mr Fernandez subsequently enumerated several focal points which have mattered and still matter in order to be able to manage the challenges ahead. Firstly, he stated that the Covid pandemic has confirmed how vital networks are. Secondly, he added that European policy-makers have valuable expectations regarding gigabit connectivity for all and the 5G rollout, a fact which is notably going to entail massive investments from telecommunication players. Thirdly, he explained that telecom operators have massively invested over the past ten years, as confirmed by figures which attest to around 500 billion euro of total investments across Europe, 60 billion euro of which are from Orange alone.
In addition, Mr Fernandez explained that financial markets and investors are averse to capital expenditures (CapEx), due to the fact that the value associated with these investments is not clear to them. Mr Fernandez continued by explaining that the recent evolutions in terms of traffic implied that telecommunication players had to swiftly switch from traditional services to data-based services. Indeed, he specified, the data traffic’s exponential increase highlights the fact that a new ecosystem has emerged over time. For this very reason, Mr Fernandez stated that the current discussion is not comparable to the one from ten years ago. Indeed, he said that nowadays 70% of the global internet traffic derives from video, social networks and gaming, with video in itself contributing to more than half of the global traffic. He also remarked that this mere fact has forced the idea of putting forward a series of incremental investments in networks within a context where large digital content platforms are driving more than 50% of the internet traffic.
On the same note, the speaker from Orange stated that few players are concentrating a very large part of the traffic and that this process resulted in a significant shift in value creation. Indeed, Mr Fernandez said, the figures of the ICT world show that twenty years ago, 22% of market capitalisation was held by telecom players, while now it is at a 4% level. However, he specified, the opposite has been observed for large content platforms. As a result, the speaker reiterated his warning that if network providers will not be able to cover their cost of capital, Europe’s digital transition and sovereignty could be in danger in the foreseeable future. In fact, Mr Fernandez noted that the return on investments for several important European telecommunication players is now below their cost of capital and this process is putting immense pressure on their capacity to sustain this very level of investment.
By taking Orange as an example, Mr Fernandez said that his company is going along this path by representing one of the highest ratio of capital expenditures to sales, while adding that being the number one fibre provider in Europe comes at a cost. For these reasons, he stated that Europe must find a way to give a better retribution from those contributing to the capital expenditures needed for Europe’s digital transition.
The speaker continued by stating that large digital content platforms have already been identified in Europe by two recent regulations, namely the Digital Markets Act (DMA) and the Digital Services Act (DSA). The public discussion on the question of “fair contribution” is also ongoing in other parts of the world, as the previously mentioned possible market failures and the necessity to act have been considered as priorities in other countries outside Europe. Within this context, Mr Fernandez advocated for the elimination of asymmetries resulting from the current imbalanced market bargaining power distribution. In addition, the speaker acknowledged that the challenge is how to continue to invest on large-scale projects to hold out and expand network capacity, as well as the already available funds. However, he also pointed out that a stark difference remains in terms of a comparison between public and private funds.
Mr Fernandez concluded his speech by stating that, in order to create jobs and growth, as well as to lower carbon emission, there is a need to provide the correct market incentives. To this end, the speaker emphasised the need to discuss possible solutions, some of which have already been mentioned by Executive Vice-President Margrethe Vestager and Commissioner for Internal Market Thierry Breton. However, the speaker also envisaged this process to constitute a collective and cooperative effort from all stakeholders in order to find ways to solve the questions emerging from network usage and connectivity goals in Europe.
The moderator subsequently turned to the Netflix representative, Mr Thomas Volmer, in order for him to share his insights into the issues at stake in this debate.
Thomas Volmer started by explaining that Netflix’s philosophy consists of the belief that great stories can be made from anywhere and enjoyed everywhere, reason for which the company invests billions of euros in Europe for content creation, while acknowledging that content is available thanks to information storage and processing systems (ISPs) like Orange. Furthermore, he stated that, while the question of the debate refers to paying for the usage of networks, the problem statement must be further clarified, especially in terms of the players’ forms of contribution to networks. Indeed, the speaker immediately remarked that content providers already contribute valuably to the functioning of the internet.
Mr Volmer also wished to address some of the ideas included in a study that had recently been published by Axon and commissioned by the European Telecommunications Network Operators’ Association (ETNO) on how to tackle Europe’s capacity to swiftly achieve connectivity targets by coming back on the core of the issues at stake. In this regard, the speaker quoted an excerpt from another ETNO report to address the new internet ecosystem, which was released 10 years ago: “Today, there is a huge disproportion amongst revenues and a clear shift of value towards OTT players who are not contributing to network investment. Traffic and revenue flows must be realigned to ensure the economic viability of infrastructure investments and the sustainability of the whole ecosystem”. In addition, Mr Volmer added that 10 years ago, the top 10 websites around the world included Yahoo, MSN, Craigslist and MapQuest, there was no 4G or fibre, and there were only three mobile operators in France.
While highlighting these facts, the speaker acknowledged that the decade between 2010 and 2020 brought about vast changes, as 4G became ubiquitous and in the case of France a fourth mobile operator entered the market, while prices halved and full coverage of the 4G network was achieved. He also noticed that fibre is on track to be a great success in countries such as France and Spain where over 70% of households are connected on fibre. He also added that in the last decade, Netflix was launched in Europe and showed that it was possible to stream HD or even 4K content over the internet without the need for so-called “fast lanes” or specialised services. The speaker also stated that Craigslist, MapQuest and Yahoo have fallen, while several companies have emerged since then, such as Spotify, Snapchat, Uber and WhatsApp.
Mr Volmer stated that, on top of these processes, the Covid crisis made Europeans reliant on broadband to be able to communicate and that authoritative sources (BEREC) confirmed that networks suffered no congestion. The speaker added that traffic has increased 40 times over the last decade while prices, costs and margins have remained steady. As a result, Mr Volmer concluded this part of the speech by saying that the claim the model was unsustainable 10 years ago proved to be wrong and he questioned whether the current claim of financial unsustainability would not follow the same pattern as the one which was put forward a decade ago.
Nonetheless, the Netflix representative acknowledged the point of Mr Fernandez about the close ties between connectivity and content by defining the relationship between telecom operators and content providers as symbiotic. Indeed, he added, end-users subscribe to internet connection to access any content they wish, Zoom for instance, for remote work or education, and Netflix or any other streaming service, such as video games, for recreational use. However, he also stated that European consumers subscribe to the internet in order to have access to a broad range of content without discrimination, a fact which represents the core of the notion of net neutrality, a fundamental principle which already regulates the relationship between platforms, or internet content providers, and telecom operators.
The best example of the abovementioned ties and possible cooperation can be found in France, he added, particularly in the partnership between Orange and Netflix. On the same note, Mr Volmer remarked that internet content providers invest to make networks more efficient and sustainable in order to more efficiently deliver content that internet users consume. In the case of Netflix, for example, the speaker said that the company invests in content delivery networks, as implemented with the Open Connect programme, and added that his company has cache servers all over Europe in more than 700 locations in order to deliver the stream to the end-user’s doorstep. The burden on networks, whether long-distance or medium-distance, is virtually non-existent thanks to content delivery network investments, he remarked.
Mr Volmer continued by stating that the other example of investments to make networks and bandwidth usage more efficient is the investment that Netflix has made in encoding technology, the codex and the algorithm that make the video watchable over the internet. Indeed, in the past five years, he explained, the size of videos for the exact same quality has been halved. In other words, the same HD stream will need half the bandwidth compared to five years ago, he specified. A Netflix HD stream represents no more than 4 megabits per second, while it is common today on cable, fibre or even on DSL to get 20 to 100 megabits. Orange now offers 2 gigabits download on their fastest plans and, as a result, Mr Volmer asked how a 4 megabits stream can be a burden on the network.
After broadening the perspective on the problem statement, Mr Volmer touched upon the ideas suggested by the latest ETNO report on connectivity, as, in the speaker’s opinion, it would be somewhat premature to discuss possible solutions to a problem that is not yet fully defined. He also questioned again the notion of unsustainability of the current internet ecosystem by both affirming that content providers do contribute to the networks and by expressing the opinion that there are some harmful proposals in the above-mentioned report which will go against the principle of net neutrality in particular.
Within this context, Mr Volmer stated that the most harmful proposal contained in the latest ETNO report is the notion of direct payments to operators, a process which would risk turning the internet model of connectivity upside down with three unwanted effects. Firstly, this way of conceiving the internet would entail double charging, since any content available online should be accessible to the customer who adheres to a monthly subscription plan at the right connection speed. Secondly, there is a risk of adding barriers to market entry, as nowadays, when content is posted on any hosting service or cloud, it is available to the entire world. He subsequently elaborated on this issue by saying that, if Netflix were to negotiate bilateral partnerships with ISPs all around the world, this would constitute an immense barrier to entry for the availability of content. While large global companies could pull this off, the speaker said, smaller content providers would not make it.
As a result, the speaker remarked that the notion of direct payments, in his opinion, is misguided. Lastly, Mr Volmer highlighted that some of the proposals included in the latest ETNO report could create the wrong incentives for networks to ask for direct payments. Indeed, instead of putting into place fruitful cooperation actions such as Open Connect or bringing caches closer to the users to make the networks more efficient, telecom operators would rather rely on standard practices. This process, Mr Volmer said, has occurred time and time again and represents a perverse effect of direct payments.
The speaker continued by stating that the notion of traffic being only about a handful of large platforms is also misguided, as it also would be impractical or sometimes impossible to discriminate between internet traffic. In addition, he questioned how to assess all internet traffic and how to collect the fees from websites in remote places around the world, as this process would hurt the European base websites first and would resemble an internet tax with a transit fee.
Thomas Volmer concluded his introductory statements with the wish that all stakeholders, including consumers, would be included in the discussion, as it is imperative, in the speaker’s opinion, to listen to different perspectives from the whole internet community in order to gain a broad overview of the state of the play of the issues at stake in the current public discussion.
The moderator then gave the floor to the fourth and final speaker of the day, Mr Nicolas Cote-Colisson from HSBC, to elaborate on some of the financial burdens and investment challenges for telecom operators.
Mr Cote-Colisson started his speech by giving his view from an equity analyst’s standpoint and from the equity investors’ point of view and by explaining that the telecom industry is now central to the whole EU economy. He stated that the demand for connectivity is now growing in double digits. However, he also added that this industry is now facing a major squeeze in the form of flat revenue and increasing CapEx intensity. Indeed, Mr Cote-Colisson explained, incumbent operators in Europe will reach an all-time high CapEx in 2022, calculated at around 60 billion euro. The combination of high and still growing CapEx together with a low revenue growth is a recurrent concern for investors, he highlighted, as the consequence of that long-standing squeeze with weak revenue, on the one hand, and high CapEx, on the other hand, constitutes a weakness in terms of financial returns.
Indeed, he continued, if one compares the post-tax operating profits the business is delivering with the value of cumulated investments for European incumbents, the amount is about 7%, a figure which is more or less in line with the current cost of capital. As a result, Mr Cote-Colisson said that one can conclude that this is not a great outcome and certainly not the type of return on capital the majority of investors are seeking. Indeed, he stated, a double-digit type of return would be a much more acceptable outcome.
The speaker continued by saying that one may wonder how we can have a strong demand for gigabits per second and an industry that is not able to do better than 1% growth and is struggling to achieve double digit returns. Mr Cote-Colisson answered this question by providing some insights into the telecom industry: indeed, he explained, the telecommunication sector is a fixed-cost industry which requires massive investment to build, at least, on a nation-wide infrastructure. Once that is achieved, he said, a certain level of scale is required to get to the point of not only covering fixed costs, but also making profit. Given that only a few operators can afford building a national infrastructure, investments should de facto constitute a barrier to entry, the speaker explained. In this regard, he stated that the investments made over the years have not turned into a barrier to entry, due to regulatory actions taken more than a decade ago, which opened the telecom market.
This regulatory stance, Mr Cote-Colisson explained, has led to a situation in which several players have accessed the already built networks at a very low cost, based on long-term incremental costs and without bearing the burden of committing capital. Therefore, new market players have captured a large share of the revenue with less fixed costs than the incumbent which has been left with high fixed costs and a low portion of the revenues. As a result, the speaker raised the question of how long this status quo could last and how it could change. The speaker also explained that the revenue cap squeeze may be an issue regarding the achievement of certain targets, including those enshrined in the Digital Decade programme of the European Commission, and warned that one should not take for granted that the level of investment will be very high forever.
Consequently, Mr Cote-Colisson raised the question of which actions could change the status quo and touched upon three paradigm shifts which would represent positive evolutions and be welcomed by investors. The first paradigm change would be on market structure, the speaker said, as the case for consolidation in the European telecom sector is an issue which has been set aside and has lost its role of driver to upgrade the value of European telecoms. In addition, in terms of fixed costs and scale, there can be a constructive change for operators, as the discussions between HSBC and its investors suggests. This last possible solution, the speaker added, could not necessarily negatively impact consumers in the short-term, while benefits for them could come from sustainable investment in the long-run. The second paradigm change revolves around access regulation, as there the trend is to regulate less rather than more, which is something operators and investors should welcome. The third paradigm change, the speaker continued, would be a contribution from large content players, notably a longstanding controversy in Europe and in the United States, whose arguments and counter-arguments have remained nearly the same in the last decade.
Indeed, he agreed with Mr Volmer on the fact that an exact replica can be made from comments on the contributions of the US Federal Communication Commission’s ruling seven years ago and the same wording of 2013 can be used today by telecoms and large digital platforms in Europe. For these reasons, Mr Cote-Colisson stated that the public debate is still in the phase of assessing what should be a reasonable framework regulating the relationship between operators and content providers. To complete his general overview, the speaker also mentioned the question of the imbalance of traffic and opened the question of whether OTT players are truly forcing operators to carry the traffic at an overly high level and whether a substantial part of the problem would be the lack of cooperation between content providers and operators. To conclude his overview on the issues at stake, Nicolas Cote-Colisson highlighted two other focal points, the first being the observation that the European Commission has made a valuable change on this particular matter, while adding that no one should underestimate the economic and social ramifications of this debate.
Mr Cote-Colisson subsequently stated that investors are impressed by what the European Commission has put together in the past few months, including the DMA and DSA, which are two sets of regulation deemed impossible three years ago. In fact, the European Commission’s work has, in his opinion, given confidence to telecom operators to reopen the debate around their relationship with large digital platforms, including the question of a “fair contribution” of large content providers to the costs of running networks. If the imbalance between market players can be proved, there should be a proper consultation process where all stakeholders are involved in order to find possible solutions.
Mr Cote-Colisson’s final point went beyond the “fair share” discussion, as, in his opinion, this debate represents a massive opportunity for the telecom industry and regulators to think collectively about the raison d’être of the telecom industry. Every major player, from large platforms to telecom operators, to the European Commission and end-users, should benefit from well invested networks with coverage for entertainment, remote work, digitisation of companies or to live the dream in the Metaverse eventually. In this regard, the speaker highlighted the importance of asking if Europe can rely on fragmented markets to bring connectivity everywhere.
A final note of caution was expressed by Mr Cote-Colisson with regard to the risk of not being blinded by the current relative good performance of the telecom sector on the European stock-market year-to-date, as it is mainly a combination of a catch-up and a reflection of a complex economic and geopolitical environment, he explained. Hopefully, he concluded, a non-Manichean and holistic approach could benefit every stakeholder, including investors, small and large digital companies, telecom operators and end-users.
Matthew Newman then asked Ms Wezenbeek to clarify some of the next steps for the European Commission and what one could expect in terms of policy actions.
Rita Wezenbeek responded by stating that there are indeed several proposals under development, which the European Commission will finalise soon, in particular the review of the Access Recommendations, and the review of the Broadband Cost Reduction Directive (BCRD). The speaker, however, stated that this forms a large part of a broader reflection and that a discussion on the next step in the EU institutions’ policy actions is premature. The European Commission is indeed rather in listening mode in order to evaluate facts and figures, she added. Reading the very question of a “fair contribution” from large platforms, as things stand, the position of the European Commission is not yet defined. As a result, the EU executive body may also formally or informally further investigate these matters, and Ms Wezenbeek added that no specific timeline is set on when a potential proposal may be put forward.
Matthew Newman elaborated on the question of the telecom market structure and telecoms’ poor return on capital. The moderator subsequently turned to Mr Ramon Fernandez in order to stimulate a reply from his side.
Mr Fernandez started his reply by acknowledging that debates, which include different perspectives and different sectors, are needed in order to find common ground and try to find solutions to such complex issues as network usage. However, Mr Fernandez disagreed with Mr Volmer’s point on the fact that the context of the discussion of ten years ago is the same as today’s.
Indeed, the speaker said, the exponential growth of traffic, which is documented by a number of studies, indicates that this increase has entailed a 15 billion yearly increase in CapEx from network players to absorb it. In addition, Mr Fernandez stated that telecom players in Europe had been in control of their networks since a decade ago, whereas in recent years, several operators have been de facto forced to sell their infrastructure assets. These assets also include fixed broadband networks and fibre networks, the speaker clarified, as telecom players have been forced to sell their core assets in order to continue to invest.
In addition, he warned that if this trend continues, in a few years questions on the independence of European players will be raised, especially if they were forced to sell infrastructure to actors coming from other parts of the world. To achieve a fully-fledged gigabit society in Europe, there is a need for a better balance, he affirmed. Mr Fernandez stated that the capacity to mobilise investments can soon be severely challenged. He also affirmed that some companies will not be able to pull this situation off, as in the current economic environment accounting standards put an enormous pressure not only in the long-term but also in the short-term. Nonetheless, Mr Fernandez added that telecommunication players had no choice but to invest, as the right path of the rollout of fibre in Europe, decided ten years ago, demonstrates. However, he also highlighted that the fibre rollout is still lagging behind compared to other parts of the world, due to insufficient returns, which would entail that we would not get the gigabit society in Europe if we do not have a better regulatory framework and adopt a more holistic approach.
The issue at stake is broader than merely about “fair contribution”, which is not the silver bullet solving all problems, he continued, and added that a few extra billion from large digital platforms would not be the only solution but may yet be part of the wider solution. Referring to the point by Mr Volmer on net neutrality, Mr Fernandez insisted that no one is challenging the Open Internet Regulation. However, regarding large platforms, some regulatory distinctions on the principle of net neutrality have already been observed, such as in the cases of the DMA and DSA. For this reason, he said, there is a need to have a discussion on peering and investments among different parties.
The speaker also added that large content platforms do invest in content delivery networks (CDNs) and in submarine cables but not in the capillarity of the network which, in the speaker’s opinion, is the most challenging part. Mr Fernandez then continued by acknowledging that large platforms are contributing to a certain extent, such as in the case of Netflix, which is investing in cache. However, he also remarked that this is only a part of the required investments to achieve the goals of the Digital Decade. For this very reason, and since the fundamental issue of return on capital is a key metric on which companies need to make these investments and decisions, European institutions should address this problem, he affirmed.
Mr Fernandez subsequently expressed the opinion that it is possible to make the “fair share solution” complementary to the Open Internet Regulation without putting at risk the principle of net neutrality. However, he also agreed with Mr Cote-Colisson that a broad view is needed. Mr Fernandez also stated that the telecom industry is open to discuss any possible option such as ex-ante or ex-post approaches or new sources of funding. Indeed, it is the opinion of Orange that a direct contribution is going to help support this investment effort from telecom operators within a framework to do so. Mr Fernandez concluded his speech by wishing that a common framework will be agreed upon by all stakeholders, as otherwise, he warned, one may face a deadlock which would not be beneficial for Europe as a whole.
The moderator then asked Ms Rita Wezenbeek whether there would be a problem with net neutrality rules if a transit fee or contribution to only certain kinds of players would be put in place.
Rita Wezenbeek replied to this question by recognising the complexity of the issue, as net neutrality is a principle, which has been beneficial to the European Union and must not be jeopardised. The Open Internet Regulation, Ms Wezenbeek said that it does apply to the treatment of traffic on internet service providers’ (ISPs) networks, on telecom networks, but not per se prohibit payments between content providers and ISPs.
Ms Wezenbeek mentioned the judgement put forward a few months ago by the European Court of Justice on “zero rating”, which concerned the interpretation of the Open Internet Regulation and that not many could have anticipated. However, she continued, net neutrality does not per se prevent commercial agreements, including those related to peering and traffic. Ms Wezenbeek also expressed the opinion that the net neutrality principle becomes more difficult to comply with when such agreements would de facto result in undermining the essence of the end-users’ rights to have traffic treated in an equal and non-discriminatory way.
She stated that if the parties, and in particular telecom operators, start to take measures in order to put pressure on the platforms to obtain higher revenues, one would enter into more dangerous territory and this possible setting would have to be carefully assessed in the context of the principle of net neutrality. Ms Wezenbeek added that, if the internet service providers take measures in a way to treat traffic less favourably based on agreements on payments, one would also enter dangerous territory. Ms Wezenbeek concluded her reply by stating that the issue is not straightforward, yet some elements of the current discussion can be distinguished and probably could be maintained, subject to careful legal scrutiny, as was the case in the domain of “zero rating” a few months ago.
The moderator then gave the floor to Mr Volmer to further develop the net neutrality argument also in relation to other parts of the world.
Mr Volmer echoed what Ms Wezenbeek explained in the sense that Europe has been leading the way and constitutes the gold standard in terms of Open Internet Regulation. At the end of the day, he said, it is rather more a consumer issue, namely whether end-users would receive all the services available on the internet at the speed they paid for. He added that interconnection would play a role if it is used in a way to limit the ability of content to travel over the internet. Mr Volmer stated that people have seen this happening and that in the case of South Korea, where networks that seek payments for interconnection are incentivised to make interconnection more difficult, content players are forced to pay artificially more or seek hosting outside the country. In his opinion, these sorts of perverse effects, such as direct payments or discrimination to pay for traffic, are going to be scrutinised from a net neutrality angle, which would be difficult to reconcile.
Mr Volmer stated that he is not in a position to comment on what is the appropriate cost of capital, but he understands that the ETNO report says that the returns are higher in the United States or in other parts of the world. However, he also remarked that there are no forced payments in those areas of the world from content companies to ISPs in order to highlight that the contribution would not be a silver bullet. He also specified that the interconnection market is very small and settlement-free interconnection is the norm. Indeed, consumers recognise in this industry that the value of interconnection and the cost involved in putting a port on a router is little, while stating that the dynamic to take into consideration is that the cost of traffic is flat because, even though traffic grows over time, the cost of capacity decreases.
The moderator pointed to the South Korean approach where the sending party pays and asked Mr Fernandez whether that is what telecom operators envisage as a possible future model.
Ramon Fernandez responded by stating that European telecom operators seek to launch a discussion and that several scenarios are possible. When looking at South Korea, he said, a judge decided that it was fair for a local telecom operator to charge a large content provider. However, he also added that in different jurisdictions the rest would not be the same. Indeed, the question of “fair contribution” must be evaluated, given the European context and the European regulatory environment. The only unacceptable answer would be to ignore the question, he affirmed. Mr Fernandez continued by reiterating that Europe must not be stuck with only one option, as there are several, and expressed his wish that all stakeholders come to an agreement on what is best for Europe. Within this framework, Mr Fernandez stated that Orange is working on a daily basis with large content platforms and is not fighting against them but is trying to get a better contribution to the incremental network cost instead.
Subsequently, Matthew Newman raised the issue of whether a “fair contribution” would only be requested from large content platforms and asked the question of possible implications for smaller players contributing to network traffic.
Ramon Fernandez said that this same argument had already been used with the DMA and the DSA to justify some practices of large platforms. Indeed, he remarked that a definition of “large platform” is already provided in these regulations. The DMA and DSA demonstrate, in the speaker’s opinion, that there is little reason to believe that one could not have the same approach since the definition already exists.
Rita Wezenbeek understood the argument and wished to elaborate on the question of traffic volumes. She first stated that the market is efficiently diversifying, and telecom companies and other players are rolling out their own networks to European consumers. However, she also raised the issue of who should benefit from these revenues.
The moderator added a follow-up question on the possibility that telecom companies receive another revenue stream and asked what would stop them from gaining and serving it to shareholders in dividends only. He added that, from an investment point of view, this might be great, yet from a societal point of view it might be unacceptable.
Telecom operators with higher revenues, according to Mr Fernandez, have higher profitability and a better return on capital. He added that this choice would be discussed among stakeholders, employees, customers, suppliers, shareholders and bondholders, and as a result it is impossible to say that every extra revenue from large content providers would immediately translate into either higher dividend or higher CapEx. The speaker continued by stating that platforms have invented new business models and new fantastic services which are fully acknowledged.
However, telecom players find that the relationship is imbalanced, as the bargaining and negotiating power between large content providers and telecom operators is not even comparable. Indeed, he added that economists would define this state of play as market failure. In any case, the speaker highlighted that if telecom players were to gain extra revenues, the best interests of both the large platforms and telecom operators would be to continue investing in networks.
To wrap up the debate, the moderator gave the floor to Mr Volmer, Ms Wezenbeek and Mr Cote-Colisson for their concluding remarks.
Mr Volmer pointed to Ms Wezenbeek’s comments, showing how the notion of direct payments from traffic network usage fees would not fix the problem of investments in infrastructure. He also stated that this is the beginning of a very interesting discussion where the problem statement still needs to be qualified correctly and he expressed his optimism that policy-makers will be attentive to all sides of the argument. Indeed, Mr Volmer reiterated his wish that consumers, experts and various parts of the industry be involved in this discussion in order to get a full picture. He also expressed optimism with regard to the fact that measures such as direct payments and network usage fees would be discarded thanks to this process.
Ms Wezenbeek highlighted three focal points as a conclusion, the first being a further discussion on how any possible additional contributions should be allocated, whether they should go to alternative operators and not go to those who do not invest in infrastructure. Second, she reiterated that this forms only one part of the much wider debate. In this context, it is certainly not irrelevant that in the regulatory framework one moves from 18 regulated markets to only two and added that the European Commission is currently thinking about smarter regulation to alleviate the burden of price control measures, where possible, which is an important tool that must not be forgotten. Indeed, Ms Wezenbeek stated the need for those infrastructures to be in place to allow a fully-fledged digital transition and that it would be difficult and regrettable if under the influence of current circumstances, with the increase in prices and economic downturns, that this would translate into missing the goals of the Digital Decade.
Mr Cote-Colisson fully agreed with Ms Wezenbeek’s final statements and highlighted the need for Europe to create a holistic debate and consider all possible future scenarios.
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