Strengthening Europe’s digital infrastructure for our digital future

“What technological advances do you think will have the greatest impact on the electronic communications industry in the next 10 years?” This was the first question the European Commission recently posed to the public in the framework of a consultation that aims to assess the need for regulatory action to make Europe’s internet infrastructure future-proof.

This question was not asked in the conditional, and rightly so. 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 (IoT) and edge computing have already begun to shape 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 rollout of 5G and FTTH, leadership in new cloud technologies, digital inclusion and the double green-digital transition.

Currently, market imbalance blocks the symbiotic partnership between telecom operators and content providers

The fact is that today we are not where we should be. The lack of investment in European telecommunications networks and services has caused a deficit of 174,000 million euros to achieve the objectives of the EU Digital Decade. Closing this gap is crucial, but telecom operators and consumers will not be able to continue to bear this burden alone, given general declining or stagnant industry revenues, returns below cost of capital, weak market valuations and high levels of debt.

This deadlock between telecom operators and content providers – historically symbiotic partners – negatively affects all parties involved, including consumers. Finding a solution that unlocks this otherwise beneficial relationship is crucial, so Telefónica has made its views available and responded to the Commission’s public consultation to help find the right solution.

Telefónica provides information on the financial context of European telecommunications operators

In addition to responding to the Commission’s questionnaire, Telefónica has provided further relevant context to assess the need for regulatory intervention in an annex. For example, Telefónica demonstrates that the decrease in the income of European telecommunications operators, the return on investments and the general deterioration of their financial situation are affecting the sector’s ability to make the investments required by the objectives of the Digital Decade. of the EU.

The dissociated trend between the evolution of data traffic and telecommunications revenue shows the challenge of the telecommunications industry to monetize the new investments necessary to meet the growing demand. While data traffic is growing rapidly (CAGR of 35% in 2011-2022 and over 50% for mobile data), operators’ revenues are declining (at a CAGR of -3%). Nearly a third of the revenue from the European telecom market has been destroyed since 2011. Average revenue per user (ARPU) in Europe will be about half of US ARPU in 2021, both on fixed broadband (21 .8 euros compared to 50.6 euros in the US) and mobile (14.71 euros compared to 37.37 euros in the US). The European telecoms industry is suffering, with a shrinking share of the global industry revenue market, almost 6% less than a decade ago. This situation is not sustainable.

Potential solutions to address clear market failure with minimal regulatory intervention

At the center of the current debate on the contributions of Large Traffic Generators (LTGs) to telecom operators in response to this growing demand for data traffic is the fundamental question of the existence or absence of a market failure. To get to the bottom of this issue, Telefónica commissioned the economic consultancy Compass Lexecon to analyze the status quo of Internet infrastructure investments. The authors found that a structural problem has arisen that prevents European telecom operators from negotiating with LTGs their contributions to infrastructure investments. This not only harms telecom operators. The current imbalance in the market also hurts LTGs, since the limited capacity of the network ends up limiting the subscribers to their services. The study suggests regulatory intervention in the form of mandatory bilateral negotiations with telecom operators to rebalance the market. This would help ensure the sustainable well-being of all parties involved, including consumers.

Why Europe shouldn’t copy the US Universal Service Fund and why Fair Share doesn’t touch net neutrality

In the annex, Telefónica also sheds more light on why a solution like Fair Share would suit Europe better – and decidedly better than copying the US Universal Service Fund. It may make sense for LTGs to pay into a fund that has been around since 1934, as is the case in the US. However, it would take strong regulatory intervention and considerable effort to create a similar fund from scratch at European level and define rules among all Member States on who should contribute and benefit. The proposed Fair Share initiative represents a much lower regulatory burden and would allow for situation-specific solutions.

Another turning point in the debate has revolved around fears that a contribution from LTGs to telecommunications operators threatens Net Neutrality. In the annex, Telefónica details how the two are not related and how the claim that a contribution from LTGs to telecommunications operators would jeopardize the principles of Net Neutrality has no legal or factual basis. In this context, a prominent but often misunderstood example is South Korea. Telefónica sheds some light on what did and did not happen in this case, and why it is not an obstacle to the successful application of Fair Share.

Lastly, the Telefónica annex contains more detailed information on what the Fair Share proposal is like. This proposal has the support of the European telecommunications sector through the GSMA and ETNO associations. It is a simple solution based on the regulatory obligation to agree payment terms with arbitration as a mechanism of last resort to guarantee the resolution of commercial agreements. In case of dispute, an effective arbitration process based on the “Final Offer Arbitration” is proposed. The scope of application is limited to LTGs, based on an agreed threshold, and transparency and accountability measures could be applied to ensure that OTT payments effectively contribute to a rapid and wider deployment of very large networks. high capacity.

Both with its responses to the consultation and with the annex, Telefónica hopes to provide useful ideas to the Commission and support the development of a fair and workable solution that guarantees Europe’s readiness for the digital future.

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