The Growing Global Movement For Fair Cost Recovery On Broadband Networks

The pandemic has exposed inequality of those who lack broadband, connected devices and digital skills to work, learn, and receive healthcare online. Policy research has emerged to study why broadband infrastructure and adoption shortfalls remain in a multi-trillion market. The short answer is a lack of business models. More largely, broadband policy has been slow to evolve, and the largest and richest internet platforms have lobbied to insulate themselves from financial obligations for universal access.

Admittedly the notions of universal access differ across time and country and can be addressed in different ways. Presently the costs of connectivity are borne by end users and broadband providers, and yet, a class of companies profit disproportionately from the internet but do not contribute to the cost recovery of middle and last mile networks. Notably tech companies like Google, Facebook, Microsoft, Amazon, Apple, and Netflix invest significantly in infrastructure for their own businesses (undersea cables, data centers etc.), but they focus where they are unregulated to maximize returns.

Compounding the problem is that broadband access business models have changed little from the early days of the internet when the killer app was email. It made sense then to copy-paste the telephone paradigm to the internet as relatively equal traffic exchange could be handled on a settlement-free (zero cost) basis. However this is no longer the case. Today a handful of players account for the bulk of internet traffic and revenue. Enders Analysis report on the United Kingdom demonstrates that online search and ecommerce account for just 1 percent of internet traffic but garner a whopping 87 percent of the revenue.

While the advertising industry employs revenue sharing to recover advertising network costs, those models are generally off-limits to broadband providers, but if allowed, they could help recover costs to expand networks to the underserved. To address digital inequity, increase infrastructure investment, and ensure broadband sustainability, policymakers explore new approaches whether “pay as go”, taxes, or fees.

Netflix Laws

It is fitting that the world’s broadband leader, South Korea, should innovate broadband policy. In 2020 South Korea’s President and the Parliament recognized that both content and broadband providers have a responsibility to ensure the quality of data and that growing internet traffic requires the provision of additional capacity, the cost of which is not free.

In practice, content providers generating 1 percent or more of total internet or those with 1 million or more users pay a fee to ensure the provision of network capacity. Facebook, Disney+, South Korea’s Naver and others pay fees under the policy dubbed the Netflix Law. Netflix is the world’s leading video streaming entertainment provider with 220 million customers in some 200 countries. Even with recent inflationary downturns, its 2021 revenue topped $30 billion, and the platform may deploy advertising later this year to supplement earnings.

In South Korea, Netflix’s traffic exploded 24-fold in less than 3 years on one network and accounts for 7.2 percent of the country’s traffic today (though is as high as 30 percent in some countries). Netflix claimed it has no obligation to negotiate or pay for the use of South Korean networks. The court rejected Netflix’s view that it is entitled to free delivery. Indeed such fees are no different than the postage Netflix pays for delivery to its 2 million DVD by mail customers in US.

Netflix appealed the case and recruited the US ambassador for support, but this position is out of step with 7 of every 10 Americans who think that Big Tech companies should contribute to network cost.

Other Netflix laws require the company to share its revenue for local content development in India, Australia, Canada, many European countries, and increasingly in US cities and states which have suffered lost tax revenue from closed movie theaters, DVD rental stores, reduced cable franchising fees and so on.

Europe’s Top Cop for Big Tech

Following years of policy which has unwittingly strengthened Big Tech, the European Commission grapples with a broadband investment shortfall estimated between €150-300 billion in the region. Executive Vice President Margrethe Vestager is looking into the matter, noting

“We see that there are players that generate a lot of traffic that then enables their business, . . . they have not been contributing to enabling the investments in the rollout of connectivity. We are in the process of getting a thorough understanding of how that could be enabled, to see if there are asymmetries here in the markets that would make it a fair thing to ask for a contribution to the investments in the networks.”

Called the world’s most powerful regulator, Vestager has brought trust-busting cases against Google, Apple, Amazon, Facebook, Intel, Qualcomm, Gazprom, and others. Separately financial analysts suggest that rightsizing EU regulations could bump broadband revenues as much as 10 percent, providing a needed source for infrastructure investment. Indeed coordinated efforts by Big Tech to avoid paying for the use of broadband networks could be investigated as a cartel.

Ad Taxes and Appropriations

The US Congress just appropriated a record $65 billion in broadband subsidies. The amount is not borne by corporations but falls on Americans and their descendants and adds to the crushing federal deficit. Given stratospheric profits and global tax arbitrage by some online firms, Nobel economist Paul Romer advanced the idea of a tax on internet advertising to fund a range of social programs.

EconOne details how a low fee on Google and Facebook could bring a durable $20 billion annually both for broadband builds and upgrades. Unlike subsidies, the cost would be passed on to advertisers, not citizens or end users. While the economics are solid, concerns remain of adding more programs to an unaccountable bureaucracy. Moreover the measure is not directed to the root cause of increasing broadband network cost—streaming video entertainment—which accounts for as much as 80 percent of global traffic and increases by 30 percent annually.

Fair Cost Recovery

Congress and the Federal Communications Commission (FCC) are stepping up thanks to the leadership of Senators Cantwell (D-WA), Lujan (D-NM), Peters (D-MI), and Wicker (R-MI). The bipartisan Funding Affordable Internet with Reliable Contributions Act or the FAIR Contributions Act (S. 2427) would require the FCC to study and report on the feasibility of funding the Universal Service Fund (USF) through contributions from online content and service providers. There is likely broad support for such an effort as evidenced by many filings to the FCC inquiry on USF reform, precipatated by the coming implosion of the USF from an unsustainable, regressive tax on telecommunications users.

Among the significant supporters of incorporating Big Tech into fair cost recovery for networks include the coalition of minority communities represented by Latino Coalition, Allvanza, and the Hispanic Chamber of Commerce; 16 US associations affiliated with Asian American and Pacific Islanders; 7 groups promoting women’s empowerment; and dozens of other groups promoting civil and human rights. One letter explains, ”…all companies who transmit information specified by users and financially benefit from the internet ecosystem…should be obligated to support our nation’s bold connectivity agenda.”

The Digital Progress Institute calls for shifting the burden of contributions away from consumers and onto corporations that profit from universal service. Even the Free State Foundation, known for its small government preference, observed, “contributions from popular online video and voice call providers…would help shore up universal service . . . So long as Big Tech companies do not have to make contributions like traditional voice carriers, universal service lacks competitive neutrality,” a statutory requirement.

Internet Innovation Alliance rejoins, “Tying USF funding to those profiting from the gaming, streaming and bandwidth-demanding content users want would greatly improve the sustainability of the fund for present and future generations, unlike simplistic, regressive proposals.” The Small Company Coalition adds, “We urge the Commission to undertake meaningful reform that would require the entities who use our networks the most pay for their usage.” National Grange, the association for communities and farming reflects, “There is a much wider range of players benefiting, and profiting, from the internet economy than there are those currently contributing to the USF and the vital connectivity programs it funds.” A group of international academics and policy scholars also provided support.

Pay as you go

Realizing digital equity need not require heavy handed government solutions or the participation of every online actor. The cloud services market demonstrates the monetization of traffic usage with a “pay as you grow” model that scales for individuals and corporations. The access price is a function of traffic volume which buyers control through selection of preferred equipment, quality, service, time and so on. Such an innovation would incentivize content providers to make their video content more efficient up front, before it’s dumped into networks where neither end users nor broadband providers can control its volume or behavior. The transparent solution that Big Tech invented could be just the ticket to end its free ride on broadband networks.