Sustainability of current Internet Economics, an open debate

Since the Internet is increasingly playing an important role in the life of citizens and for our economy and business, it is not surprising that it is in the spotlight also of Public Policy activities. How to encourage investment and innovation, how to establish a level playing field for competition, and how to set the right model to govern consumer and user rights are some of the challenging questions that governments and regulators have to answer today.

Before this background recently the debate on the sustainability of Internet economics has got increased attention by all stakeholders and decision makers. This debate points out one of the greatest challenges which the Internet and Communication sector is currently facing: the relentless growth of data traffic, mainly through video, while at the same time revenues generated by this traffic remain stable or even show a downward trend. Internet traffic delivered via fixed networks is growing at 35% per annum and via mobile networks it is even an amazing 100%.

This trend could threaten to swamp available network capacity and cause unacceptable levels of congestion for users of all services, resulting in the worst case in what some analysts have named the “crisis of current Internet economics model”. To avoid this situation it will be needed to realign in the next few years values and benefits with necessary investments across the Internet value chain.

Two interesting reports have recently being published focusing on this issue:

• A viable future model for the Internet by ATKearney, and
• Assessment of a sustainable Internet model for the near future, by ESMT

ATKearney Report

The ATKearney report, supported by major European Telecom operators (including Telefónica), states that maintaining current levels of returns in the Telecom sector while investing to maintain current network performance in Europe would require additional revenue of 28 billion € per annum by 2014 to justify the necessary investments in fixed and mobile networks. This is about 10% of the total Telecom market today. Considering the backdrop of declining revenues from traditional services (especially voice) and the intense competitive and regulatory pressure, raising additional revenue of this order of magnitude will be a challenge, as stated in the research performed by ATKearney.

The report analyzes four possible options for new models which could ensure adequate capacity increase to sustain the correct functioning of Internet in the benefit of all:

• Modification of retail pricing schemes: revision of flat rate schemes and likely expansion of volume-dependent pricing.
• Traffic dependent wholesale charges: introduction of a reasonable traffic conveyance charge at wholesale level, which would constitute an increase over current transit pricing.
• Enhanced quality services over the public internet: widespread, standards-based deployment of differential quality of service.
• Enhanced quality services based on bilateral agreements: further evolution of the market into a series of bilateral commercial arrangements to provide the higher quality required by some services.

The report demonstrates that no single solution can solve all the structural issues related to the crisis of current Internet economic model. Instead, the right answer for the industry would be a hybrid of these four different options. Each of the options has its own merits but it is too early to dictate which ones should succeed and which, if any, should be discarded now, according to ATKearney research.

The major conclusion that can be obtained from this study, besides the detailed analysis of the options, its problems and merits, it is that policymakers should not restrict the process of innovation and competition by which a more viable commercial model for the Internet emerges, especially in the area of exploring the benefits of delivering different services based on different qualities, both to end-users and to content providers, to extend the range of applications and services available to citizens and companies.

ESMT Report

The ESMT report focuses on the relationship between the crisis of current Internet Economic model, and the Net Neutrality debate and regulation. The report analyzes some likely future business models with a view to sustainability in terms of ability to accommodate increasing traffic volumes and social welfare implications. Specifically, four business models are considered:

• Congestion-Based model, stresses the possibility to tackle congestion problems through congestion-based pricing.
• Best Effort Plus, preserves the traditional best effort network but gives ISPs more leeway with innovative services.
• Quality Classes – Content Pays, stresses the observed need of different applications for various degrees of quality of service.
• Quality Classes – User Pays, puts the focus on consumer choice for higher quality levels.

Of course the viability of most of these models depends on the approach chosen in the Net Neutrality debate. The implementation of a strong form of net neutrality would prevent “Best Effort Plus” and “Quality Classes–Content Pays,” but still allows the other two business models. In contrast, the implementation of a weaker form of net neutrality would enable the adoption of a business model which prices content providers for higher qualities. The decision on Net Neutrality will not be irrelevant, since it will have a clear consequence on the business models that could be developed in the future, and so, of the viable and sustainable Internet that could, or not, be in place in the near future.

As a consequence, the reports concludes in a similar way as the ATKearney report, stating that in implementing the new EU regulatory framework for electronic communications, policy makers and regulators should carefully consider its impact on business models. Since it is difficult to predict which business models will dominate in the future, economic analysis suggests that authorities apply a patient “wait and see” approach: closely monitoring market developments and reacting to any emerging competitive threats rather than acting preemptively and therewith preventing some beneficial business models from developing.

We at Telefonica believe that now it is more important than ever that the process of innovation and competition throughout the whole Internet value chain does not get restricted, allowing all parties to explore new and viable commercials model for the Internet. This is what has made the Internet such a fabulous thing for all of us and this is what we need to protect. This is important not only for so-called Over-the-Top (OTT) agents, which provide services and applications on the Internet, but needs to be equally true also for communication and network operators, which provide Internet infrastructure and connectivity. All involved parties need to share the common goal of keeping the Internet as the platform of innovation and growth that it is today.

The exponential growth of traffic is not only a challenge for the communication and infrastructure sector, but is a challenge for the whole Internet ecosystem. All involved parties and stakeholder, private and public, should work together to find a sustainable solution. I believe that it will be a reasonable and sustainable combination of the four options proposed in the ATKearney Report which will solve the challenge of exploding Internet traffic.

The debate on the sustainability of the Internet and the crisis of current Internet economics model without any doubts deserves careful study and attention since it is one of the issues which will have great influence on the development and future of the Internet.

In your view, what are the best ways of dealing with exploding internet traffic? How can we best balance the shared goals of innovation, openness and investments in infrastructure?

Carlos López Blanco, Director of the International Office at Telefónica S.A.