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Miguel Vidal

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Why Internet companies should pay for their data traffic

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Rapidly increasing Internet traffic, heavy network infrastructure investment, sustainability and climate protection pose major challenges for the digital industry. Should major Internet companies contribute to the costs of data transmission in broadband and mobile networks? Two new studies are giving fresh impetus to the debate: data traffic from the major digital platforms costs European telecommunications companies in total up to 40 billion euros a year. Not only the digital industry, but the entire European economy would benefit from fair cost sharing – and so would climate protection. 

Data volumes in European broadband and mobile networks are growing exponentially, largely driven by traffic from the major Internet companies. Telecommunications companies are investing billions year by year to ensure that broadband and mobile networks can handle this traffic growth. To date, it is the telecommunications companies' end-customer revenues that finance network expansion – Internet companies contribute next to nothing. The debate about fair cost sharing is in full swing: the CEOs of the major European telecommunications companies – including Tim Höttges – are calling for fair burden sharing and for a contribution from the major Internet companies to traffic-related network costs. The European Commission also set the goal that all market participants should make a “fair and proportionate contribution” to the costs of the infrastructure.

Costs for carrying major Internet companies’ data traffic: up to 40 billion euros per year

What are the costs to European telecommunications companies of rapidly increasing data traffic? A new study by Frontier Economics shows for the first time that across Europe, traffic-related total network costs are between 36 and 40 billion euros – per year. On a per-user basis, this amounts to an average of between 40 and 47 euros per customer in the fixed network and between 43 and 46 euros in mobile communications. In some countries, the figures can be significantly higher. Frontier's analysis is based on extensive cost data provided to the consultancy by Deutsche Telekom, Orange, Telefónica and Vodafone. It is worth noting that the high costs for FTTH roll out are not included in the calculation because it is assumed that the deployment of access network components in the fixed network is not directly driven by traffic load. 

20220427-03-Datentransport-EN

Global traffic share of OTTs, 2021“ (Source: Axon based on Sandvine).

Internet companies play out their market and bargaining power 

Another new study by Axon analyzes the imbalance in the interaction between Internet and telecommunications companies and its consequences. The study documents that six major Internet companies – Google, Facebook, Netflix, Apple, Amazon and Microsoft – account for more than half of the traffic on the Internet. Their economic power is enormous: the market capitalization of these six companies is thirty times that of the eight largest European telecommunications companies combined. While the FANG have increased their revenue by 500 percent since 2015, the revenue of European telecoms has fallen by 7 percent over the same period. 

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Comparison of OTTs and EU telco market capitalization (Source: Axon based on Bloomberg).

The core problem, according to the Axon study, is that telcos are unable to negotiate fair commercial terms for the use of their networks with the large internet platforms. Internet companies benefit from the indispensability of their content to users, from their dominant market position, and ultimately from the absence of any economic, regulatory or political mechanisms that could help restore a level playing field. As a result, IP transit charges (the wholesale prices for data transport) are plummeting, and some tech companies even want to eliminate them altogether. 

According to Axon's diagnosis, exploding data traffic, high costs for network deployment, falling telecommunications revenues and a lack of burden sharing have massive disadvantages for the European telecommunications market: investments for the expansion of modern FTTH and 5G networks suffer, digital innovations and service quality are affected, and climate protection loses out. 

Fair cost sharing: network deployment, economy and environment benefit 

What if major Internet companies paid fair fees for their data traffic? Axon experts have investigated this question and analyzed three scenarios that assume that large Internet companies pay 10, 20 and 30 billion euros respectively to Europe's network operators for carrying their data traffic. The results are impressive because, due to multiplier effects, the impact would extend far beyond the digital sector. For example, a contribution from Internet companies of 20 billion euros a year, which facilitated accelerated network deployment, would boost economic output across Europe by up to 72 billion euros by 2025. Furthermore, it could create 840,000 new jobs, boost network experience and innovation activity, and significantly reduce energy consumption and CO2 emissions. 

What needs to happen now? 

The goal must be to create a balanced framework that ensures negotiations on an equal footing between the major Internet and European telecommunications companies. New requirements at EU level are best suited to solving the problem of unequal bargaining power that has led to the current imbalance in the digital ecosystem. Such requirements could, for example, enshrine the "sending party pays" principle in law, provide a mandate for commercial negotiations on fair and reasonable terms, and establish arbitration mechanisms – in case no agreement is reached in negotiations. Ultimately, it is for the EU Commission, the EU Parliament and the Member States of the Union to decide how the new requirements at EU level are to be structured in detail. But it is time for lawmakers to be more committed to the question of what solution will best help. The right measures would give Europe's digital economy a significant boost and ensure the long-term sustainability of digital infrastructures in the interest of all Europeans.

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