America's tech titans are under pressure from Europe's telcos to pay for the internet's construction

The battle between US Big Tech and European telecommunications firms has reached a fever pitch in Europe

Telecom groups are urging European regulators to consider implementing a framework in which companies that send traffic through their networks are charged a fee to help fund massive infrastructure upgrades, a concept known as the "sender pays" principle.

Their thinking is that some platforms, like Amazon Prime and Netflix, use a lot of data and should, therefore, help pay for adding more capacity to handle the increased demand.

"The simple argument is that telcos want to be properly compensated for providing this access and growth in traffic," PP Foresight media and telecoms analyst Paolo Pescatore told CNBC.

The idea is gaining political traction, with France, Italy, and Spain among those who support it. The European Commission is preparing a consultation on the subject, which is set to begin early next year.

'Riding for free'

The debate is not new. For at least a decade, telecom companies have attempted to persuade digital behemoths to pay for network infrastructure upgrades. Carriers have been worried for a long time that online voice calling apps like WhatsApp and Skype are taking money away from them. They call these apps "free riders."

In 2012, the European Telecommunications Network Operators Association, which includes BT, Vodafone, Deutsche Telekom, Orange, and Telefonica, called for a solution in which telecom companies struck individual network compensation deals with big tech companies.

But it never really got anywhere. Regulators turned down the idea because they said it would hurt the internet ecosystem "significantly."

The conversation shifted following the coronavirus outbreak in 2020. Officials in the EU were genuinely concerned that networks would fail as a result of applications that allow people to work from home and binge watch movies and TV shows. As a result, companies like Netflix and Disney Plus took steps to optimize their network usage by lowering video quality.

This rekindled debate in Europe

In May 2022, EU Competition Commissioner Margrethe Vestager stated that she would investigate the possibility of requiring big tech firms to pay for network costs. "There are players who generate a lot of traffic that then enables their business but have not contributed to actually enabling that traffic," she said at the time during a news conference.

According to a May report commissioned by ETNO, Meta, Alphabet, Apple, Amazon, Microsoft, and Netflix will account for more than 56% of all global data traffic in 2021. A 20 billion euro ($19.50 billion) annual contribution to network costs from tech titans could boost EU economic output by 72 billion euros, according to the report.

Broadband providers are pouring billions of euros ($48.5 billion) into infrastructure to support next-generation 5G and fiber networks, according to one estimate.

The CEOs of 16 telecom operators said in a joint statement last month that US tech giants should "make a fair contribution to the sizable costs they currently impose on European networks." They say that the cost of fiber optic cables and energy has gone up, which has made it more important for them to charge a network access fee.

The debate is not limited to Europe. Companies in South Korea have similarly lobbied politicians to require "over-the-top" players such as YouTube and Netflix to pay for network access. For example, SK Broadband has sued Netflix over costs related to the premiere of its hit show "Squid Game," which involved the network.

The big picture

But there's more to the telcos' push for Big Tech payments.

While overall revenues from mobile and fixed-line services are expected to rise 14% to 1.2 trillion euros over the next five years, the average monthly revenue per user for telecom services is expected to fall 4% during the same period, according to market research firm Omdia.

According to Eikon data, the Stoxx Europe 600 Telecommunications Index has fallen more than 30% in the last five years, while the Nasdaq 100 has risen more than 70%—despite a sharp decline in tech stocks this year.

Telcos are no longer household names that sell the newest gadgets and services, as Nokia once was with its iconic cell phone brand. Faced with declining profits and share prices, internet service providers are looking for new sources of revenue.

According to Pescatore, video services have driven "exponential growth in data traffic" and better picture formats like 4K and 8K, combined with the rise of short-video apps like TikTok, indicate that growth will "proliferate" over time.

"Telecoms don't make any money in addition to the connection fee for giving people access," Pescatore said.

The push toward the "metaverse," a hypothetical network of huge 3D virtual environments, has both excited and worried telcos about the business potential of such worlds.

While a "mass market" metaverse has yet to materialize, "its traffic would dwarf anything we see now," according to Dexter Thillien, lead technology and telecoms analyst at The Economist Intelligence Unit.

Should traffic senders be charged?

Naturally, tech companies do not believe they should pay for the privilege of sending their traffic to consumers.

Google, Netflix, and others say that customers already pay internet providers for calls, texts, and data, which helps them invest in their infrastructure. Forcing streamers or other platforms to pay for passing traffic could hurt the net neutrality principle, which says that internet providers can't block, slow down, or charge more for certain types of traffic.

Meanwhile, tech behemoths claim to be investing heavily in European internet infrastructure — 183 billion euros between 2011 and 2021, according to a report from consulting firm Analysys Mason — which includes submarine cables, content delivery networks, and data centers. Netflix gives telcos free access to thousands of cache servers, which store internet content locally to make it faster to access data and put less strain on the bandwidth.

"We operate over 700 cache locations in Europe," a Netflix spokesperson told CNBC. "When consumers use their internet connection to watch Netflix, the content does not travel long distances." "This reduces traffic on broadband networks, saves money, and helps to provide a high-quality experience to consumers."

Then there's the question of why internet users pay their service providers in the first place. Users aren't concerned with which operator keeps them connected; they want to watch the latest "Rings of Power" episode on Amazon Prime or play video games online, which is why telcos are increasingly bundling media and gaming services into their deals, such as Netflix and Microsoft's Xbox Game Pass.

The Computer and Communications Industry Association, which includes Amazon, Apple, and Google, said "sender pays" fees are "based on the flawed notion that investment shortfalls are caused by services that drive demand for better network quality and higher speeds."

At an ETNO event in September, Matt Brittin, Google's president of Europe, said that the idea wasn't new and that it would go against many of the principles of the open internet.

There is no clear solution

The proposal has a fundamental flaw in that it is unclear how payments to telecom companies would work in practice. It could take the form of a direct tax imposed by governments. It could also be run by the private sector, with tech companies giving telcos a share of their sales based on how much traffic they need.

"That's the biggest unknown," Thillien said. "Are we concentrating on volume, the percentage of traffic from specific websites, what will be the cut-off point, and what happens if you go over or under?"

"The looser the rules, the more companies that can become liable for payment, but the stricter the rules, and it will only target a few (which will be American, with its own geopolitical implications," he added.

There is no simple solution. As a result, tech companies and other critics are concerned that it may be unworkable. "There isn't a single bullet," Pescatore explained.

Not every regulator is on board. The Body of European Regulators for Electronic Communications found no justification for network compensation payments in a preliminary assessment. In the UK, the communications watchdog Ofcom has expressed concerns, saying that it has not "yet seen enough evidence that this is needed."

Concerns have also been raised about the current cost-of-living crisis: if tech platforms are charged more for network usage, they may end up passing costs on to consumers, fueling already high inflation. According to Google's Brittin, this could "have a negative impact on consumers, especially during a period of price increases."