Meta recently asserted that any call by network operators for negotiations about network fees are baseless because Big Tech’s investments in OTT content “drive the business model of telecom operators.” Meta went on to say the “development of the metaverse will not require telecom operators to grow capital expenditures for greater network investment.”
With the May 19th deadline for the European Commission’s exploratory consultation on connectivity and infrastructure looming, I’d like to give a bit of a reality check.
ISPs, whether fixed, mobile, cable, or satellite providers, want the right to negotiate new business models with OTT providers because their toplines are shrinking. Though their EBITDA is holding at 20-30%, they are not growing. Their increasingly higher CapEx budgets are necessary to keep up with growing demands for more data, more speed, and less latency. Current business models and regulations are forcing them to compete primarily on price, leaving them little means to recoup that CapEx.
As we pointed out in our 2023 Global Internet Phenomena Report, there was a 23% increase in internet traffic volume in the first half of 2022, driven in large part by content and services from Netflix, Alphabet (i.e., YouTube), Meta, Amazon, TikTok, Disney+, XBOX, Playstation, Microsoft, and Apple.
That means that even before metaverse, AR/VR, cloud gaming and other expected internet phenomena really come to fruition, there already are steady increases in internet traffic year over year. Video in all its forms and the explosion of user-generated content, the growing sophistication of HD devices, the increasingly complex fusions of different content types – these are all recent factors fueling exponential internet traffic growth.
Add in the current challenges of inflation, energy prices, and overall slumps in business and corporate applications, and you see that margins are going to get thinner, not fatter, unless something changes. In fact, the "Telecommunications Network Operators: 3Q22 Market Review" cites a revenue drop of 6.6% on a YoY basis for the industry.
We also have to consider how internet traffic volumes will grow as initiatives to deliver gigabit connectivity for all, or to close the digital divide begin to bring many millions more people online in the years to come.
Meanwhile, the top-5 Big Tech companies (Microsoft, Meta, Alphabet, Amazon, and Apple) are expected to hit $1.5 Trillion in sales in 2023. Despite that, consumers are paying more for internet access and content, and service providers are paying more for fiber and 5G. Is there a reason Big Tech can’t pay fees proportionate to what they are actually using?
The analogy could be the acceptance of taxes and tolls for highways. Big trucks carry goods ordered by consumers and businesses, who pay shipping and transport costs. Part of that money goes toward paying taxes and tolls. Big trucks pay more than smaller vehicles because they are a greater burden to the infrastructure. The money goes into the building and maintaining the roadway, ensuring a smooth and enjoyable ride for everyone, as opposed to an experience full of jarring potholes.
While ISPs and Big Tech share the same customers, it’s ultimately the ISPs that are held accountable for end-user experiences. That’s why it’s not sustainable for Big Tech to endlessly raise the expectations of what their services will deliver, with zero input from the ISPs.
Why is getting Big Tech to the negotiating table so difficult? Because they have nothing to lose, and everything to gain by not negotiating.
Their contention that the “right of internet access” for consumers and businesses is mutually exclusive to fairer business models between themselves and ISPs is inaccurate. It is possible to protect the right to internet access and competition, while also ensuring ISPs get a fairer share of the OTT revenues they are enabling over their networks.
This is why network operators like Orange, Telefonica, Deutsche Telekom, Telecom Italia and others in the European Union are requesting an obligation on qualifying content and application providers to negotiate conditions.
Consider for a moment that Meta’s predictions come true and the metaverse takes off in education and industrial training, gaming, and e-commerce. According to the World Economic Forum, the metaverse could reach 700 million people worldwide by 2030, with the $163 billion projected revenues from gaming and $201 billion from e-commerce.
But the metaverse can only take off if the networks are there to support it.
The best-case scenario for everyone is one in which a symbiotic relationship exists, with Big Tech and ISPs both having an equal opportunity for profitability and growth. Empower ISPs to negotiate fees based on the content and value they are delivering over their networks on behalf of Big Tech, and it will be the consumers, businesses, governments, and economies that stand to benefit the most.
Absent this type of symbiosis, we will all continue to wait for networks to slowly and iteratively get better over time, with apps slowly getting better in parallel increments. That means more consumers and businesses will get less than what they want or deserve in terms of application experiences.
To see accurately what is happening over your networks, schedule a demo of AppLogic, and check out our recent Mobile Magazine Profile.
Other resources
TelecomTV Interview
Global Internet Phenomena Report
Sandvine on YouTube