“Which technological developments do you expect will have the largest impact on the electronic communications sector in the next 10 years?” This was the first question that the European Commission recently asked the public as part of a consultation that aims to assess the need to take regulatory measures to make Europe’s internet infrastructure future-proof.
This first question wasn’t an “if”, and for good reason. It is undeniable that in the coming years, digital technologies and connectivity will become an increasingly important pillar for our societies and economies. 5G, the Internet of Things and edge computing have already started shaping our digital decade and will continue to do so. The European Union is in a “lead or lose” moment, and our strategic ambition must be to lead the future of connectivity: we must stay ahead of the curve in roll-out of 5G and FTTH, leadership in new cloud technologies, digital inclusion and the twin green-digital transition.
Market imbalance currently blocks previously symbiotic partnership between telco operators and content providers
The simple fact is that today, we are not where we should be: underinvestment in European telecom networks and services has led to a €174 billion investment gap to reach the EU’s Digital Decade targets. Closing this gap is crucial, but telecom operators and consumers won’t be able to shoulder this burden themselves any longer considering overall declining or flat revenues in the sector, returns below the cost of capital, weak market valuations and high levels of debt.
This impasse between telecom operators and content providers – historically symbiotic partners – negatively affects all parties involved, including consumers. It is crucial that we find a solution that will unlock this otherwise beneficial relationship, so Telefónica has made available their insights and has answered the Commission’s public consultation to help find the right solution.
Telefónica provides background on the financial context for European telecoms operators
In addition to answering the Commission’s questionnaire, Telefónica has provided further context relevant to assessing the need for regulatory intervention in an annex. For example, Telefónica demonstrates that European telecom operators’ declining revenues, returns on investment and their overall deteriorating financial situation are affecting the sector’s ability to make the investments required by the EU Digital Decade targets.
The decoupled trend between data traffic evolution and telecoms revenues shows the telecom industry’s challenge to monetize the new investments required to address increasing demand. While data traffic is growing rapidly (CAGR of 35% in 2011-2022 and above 50% for mobile data), operators’ revenues are declining (at a -3% CAGR). Almost a third of the European telecom market’s revenue has been destroyed since 2011. Average Revenue Per User (ARPU) in Europe is about half of ARPUs in the USA in 2021, both in fixed broadband (€21.8 vs. €50.6 in the US) and mobile (€14.71 vs. €37.37 in the USA). The European telecom sector is suffering, with a shrinking share in the global sector’s revenues market, almost 6% percent points lower than a decade ago. This situation is not sustainable.
Potential solutions to address clear market failure with minimal regulatory intervention
At the heart of the current debate around contributions from Large Traffic Generators (LTGs) to telecom operators in response to this growing data traffic demand is the fundamental question of the existence or absence of a market failure. To get to the bottom of this, Telefónica commissioned economic consulting firm Compass Lexecon to scrutinize the status quo of investments in internet infrastructure. The authors found that a structural problem has evolved that prevents European telecom operators from negotiating contributions to infrastructure investments with LTGs. This is not only to the detriment of telecom operators. The current market imbalance also harms LTGs as limited network capacity ultimately limits subscribers to their services. The study suggests regulatory intervention in the shape of mandatory bilateral negotiations with telecoms operators to rebalance market powers. This would help ensure the sustainable welfare of all parties involved, including consumers.
Why Europe shouldn’t copy the USA’s Universal Service Fund – and why Fair Share doesn’t touch on Net Neutrality
In the annex, Telefónica also sheds more light on why a solution like Fair Share would suit Europe best – and decidedly better than copying the US American Universal Service Fund (USF). It may make sense to have LTGs pay into a fund that has existed since 1934, as is the case in the U.S. However, it would represent a heavy regulatory intervention and significant effort to set up a similar fund from scratch on a European level and to define rules among all member states about who should contribute and benefit. The proposed Fair Share initiative represents far less regulatory burden and would allow for situation-specific solutions.
Another inflection point of the debate has evolved around fears that a contribution from LTGs to telecom operators would threaten Net Neutrality. In the annex, Telefónica details how the two aren’t related and how the assertion that a contribution from LTGs to telecom operators would jeopardize the principles of Net Neutrality has no legal or factual basis. In this context, a prominent but often misinterpreted example is South Korea. Telefónica sheds some light on what did and didn’t happen in this case, and why it is not a barrier to Fair Share being successfully implemented.
And finally, Telefónica’s annex contains further detailed information on what the Fair Share proposal looks like. This proposal is supported by the European telco sector through the associations GSMA and ETNO. It is a simple solution based on a regulatory obligation to agree on payment terms with arbitration as a last resort mechanism to ensure settlement of commercial agreements. In case of dispute, an effective arbitration process based on “Final Offer Arbitration” is proposed. The targeted scope is limited to LTGs, based on an agreed threshold, and transparency and accountability measures could be implemented to ensure that payments from OTTs effectively contribute to a swift and broader deployment of very high-capacity networks.
With both their answers to the consultation and the annex, Telefónica hopes to provide helpful insights to the Commission and to support the development of a fair and workable solution that will ensure Europe’s digital future-readiness.