The European Commission’s recently concluded consultation on “the future of the electronic communications sector and its infrastructure” was a curious phenomenon in which the commission revived the seemingly dead-and-buried idea of a legally mandated “sender pays” network-traffic scheme, despite the fact that it remains as unpopular and discredited as it was when last discussed roughly a decade ago.
What’s more, despite public relations efforts to reframe the proposal, it remains obvious that this idea constitutes special pleading from a small group of large incumbent telecommunications operators. Giving prominence to this initiative is not a good look for EU Commissioner Thierry Breton, given that he used to be an executive of one of the companies that would potentially benefit from the scheme.
The commission’s proposal is driven by the belief that large online platforms, who consume a significant chunk of bandwidth, should contribute more to the cost of telecom networks. We recently co-authored a comment for the International Center for Law & Economics (ICLE) in which we firmly objected to its key assumption that there exists a “fairness” problem that can be addressed via the commission’s proposed means, i.e., a non-market, legally mandated “sender pays” or “network fees” scheme. Our contribution consisted of an issue brief (“Regulatory Myopia and the Fair Share of Network Costs: Learning from Net Neutrality’s Mistakes”) and some direct responses to the questions posed by the commission.
Responding to a query regarding whether major content providers should be obligated to make direct payments to some telecom operators, we agreed with the Body of European Regulators for Electronic Communications (BEREC) and virtually all independent stakeholders that such a proposal would be unjustified. The proposal would not address any purported market failure but would instead jeopardize market dynamics.
To the extent that there are issues of fairness in platforms’ contributions to telecom infrastructure, they are the result of the earlier regulatory intervention to adopt net neutrality. The so-called “fair share” proposal, however, is not well-suited to counteract any potential distortive effects of net-neutrality rules. And rather than call for relaxing the rules that caused alleged distortions, supporters of the proposal engage in rentseeking, lhoping to extract much more than they could have under market conditions (e.g., without net-neutrality rules).
More generally, protectionist interventions to impose financial obligations on successful players are unsuited to address the European competitive and industrial gap.
The proposal is at odds with both the legal obligations of and the economic rationale for net neutrality. By imposing a fee on service providers that transmit more than a certain threshold of data, the proposal discriminates against some online players and against some online services and content (“large” services and not small- or medium-sized providers). With regard to the economic rationale, internet service providers (ISPs) are assumed under EU net-neutrality rules to have insurmountable bargaining power. The “fair share” proposal instead presumes they are small, helpless entities, powerless before Big Tech.
From an economic perspective, given that internet traffic is ultimately generated by consumers, the alternative of substituting direct payments with a payment into an “EU/national digital contribution or fund” would not change the welfare implications.
As we noted previously, there is little reason to believe that there are any fairness issues that could be addressed by either “direct payments” or by a “fund”. Both versions of the proposal are misguided attempts to provide state-mandated welfare transfers to legacy incumbents who would like to be more profitable than they already are.
The “fairness” demanded by the small number of incumbent telecom operators in question is really just special pleading from a group accustomed to extracting monopolist rents. The justification amounts to nothing more than acknowledging that there is a pot of money (that is, major content producers’ profits) available for the taking, and that some of those from whom the money could be taken are currently unpopular.
It is essential to not lose sight of the fact that the digital market is an evolving landscape. Introducing additional financial obligations on successful players, in the guise of “protecting” the market, will only undermine its inherent dynamism and competitiveness. It’s vital to recognize that consumer demand is what drives internet traffic. Therefore, shifting the cost burden onto content producers or establishing a digital contribution fund wouldn’t alter the fundamental economics.
