Why telcos should rethink their approach to network fee demand

Telcos have, of late, aggressively stepped up demand for OTTs to share their network set-up cost by paying a network usage charge to telcos. The demand is premised on the argument that OTTs are large traffic generators (LTGs) and thus should pay a fair share to compensate for the investment made by telcos.

In support of their above argument, these interests are citing the South Korean law of SPNP (Sending Party Network Pays), in which the OTTs are mandated to pay to the telco, whenever the user downloads an application/service. Unfortunately for the telcos, this is a very wrong example to cite and actually helps establish the opposite. Telcos are failing to appreciate that the SPNP models failed in South Korea itself due to the following:

• According to TeleGeography, the cost of data transit in Seoul is typically 8-10 times that of London and Frankfurt. And in Asia, due to technological improvements in OF technology and vigorous competition transit costs fell about 20 percent per year. In fact, Korea might be the only country in the world whose bandwidth prices are bucking the global downward trend.
• A report of Internet Society has claimed that none of the country’s three largest ISPs currently participate in the Korea Internet Neutral Exchange (KINX).
• According to Prof. KS Park, founder of www.opennetkorea.org, increase in the cost of broadband has caused some companies, such as Facebook and Netflix, to suspend or degrade the services in South Korea.
• As WIK-Consult report (bit.ly/ 47CEEQh) shows, South Korea’s action led to the dramatic price hike, less diverse content, slower internet coupled with decline in investment in sector.
• It forced many small content and app providers to exit the South Korean market.
• Shifting of content by Korean OTTs to overseas and shift of Korean consumers to foreign content providers negatively impacting innovation, and sustainability of small internet providers.
• Impact of regulations are felt by small and medium internet companies and these views has been expressed by Kyung Sin “KS” Park, Michael R Nelson in their article “Korea’s Challenge to the Standard Internet Interconnection Model” as several small internet providers are fighting cases in Korean courts.
• A dozen civil society organizations including Net Korea (in South Korea), Access Now, and European Digital Rights (EDRi), have called on the government of Korea to repeal the new Content Providers’ Traffic Stabilization Law and the SPNP law.
• Both above points clearly establish that the Korean law is heavily against the interests of small and medium enterprises, many of whom have exited the country due to the adverse environment. India can ill afford a repeat of this since we have a key dependence on startups, innovation and MSMEs for the digital economy.
• Analysys Mason in its white paper, Report for KISA has made it clear that there is no clear economic rationale for imposing termination charges just like it was done for normal telephony as end users pays, commercial negotiations have been effective and maximise incentives to all without imposing regulations, and regulators and policymakers around the world have consistently rejected the idea that OTTs pay mandatory usage fees to ISPs.
• ITIF report states that the best real-world example of an SPNP policy has resulted in wasting resources without benefits to consumers. The South Korean experiment with SPNP is clearly a policy failure.

Continued reliance on the Korean example could irretrievably harm the telcos, the consumers and the economy.

Europe was where the controversy started but that is also where the telcos’ arguments have been investigated by the regulatory authorities and administrators and summarily dismissed. The European regulatory authority, BEREC, concluded that deviating from the current principles might be of significant harm to the internet ecosystem, as ISPs could exploit their termination monopoly in a similar manner to the traditional telephony termination monopoly. Payment disputes between ISPs and CAPs could result in a loss of quality of the connection.

BEREC after a detailed study of the market and traffic analysis came out with its independent findings in October 2022; highlights given below:

a) Replacement of ‘bill & keep’ by “SPNP” introduces monopolistic market.

b) Traffic is generated by customers of telcos and not by OTTs. Consumers ‘pull’ the content, instead of OTTs pushing the content. Contrary to the argument made by the telcos.

c) There is no evidence to hold streaming services accountable for free riding.

d) BEREC also concluded that the imposition of such a fee/charge by telcos towards OTTs may lead to price hikes for consumers, disincentivise Big Tech from making investments.

e) Compensation from large CAPs/OTTs to large telcos could endanger the principle of net neutrality and lead to market distortion by putting smaller and medium-sized ISPs at a disadvantage despite the fact that such players often account for a considerable amount of the fiber network roll-out.

f) India is firmly committed to Net Neutrality for several years now and the telcos’ proposal could severely retard the development of the digital economy. Concerns in this respect were voiced strongly even by the Hon’ble Minister of State for Electronics & IT.

g) The Proposal in the EU has been rejected by a majority of the EU nations (At least 19 out of 27).

It is equally ironical to ask OTTs to pay despite lack of consultation and involvement of OTTs in the decision making process of telcos with respect to their decision of equipment vendor, procurements, and negotiations, bidding for license for 5G spectrum and while committing investments. Further, telcos enjoy tariff forbearance, which allow them to charge a fee from their customers to cover their cost. India has witnessed data ARPU grow from Rs.36.38 in March 2019 to Rs.126.70 (an increase of Rs. 90.32) in March 2023, a growth of 248 percent and the total ARPU grew during the same period from Rs. 84.7 to Rs.146.96 (an increase of Rs. 62.26) (Reference TRAI Reports for March 2023 and March 2019). This more than abundantly establishes that it is the OTTs and the data demand increase that have aggressively driven the total ARPU up by a huge 73.5 percent. Hence, asking CAPs/OTTs to pay for infrastructure development is nothing but blatant double-dipping, which is totally unacceptable under any circumstances.

Payment by telcos to OTTs is more logical and fairer. It is an admitted fact that a major chunk of telcos’ network traffic (ca 70%) and revenues is due to customers’ heavy utilisation of video streaming and other OTT apps by telcos customers. Given this position, it is only fair for telcos to be asked to share their revenues with OTTs as fair and legitimate share because customers are paying telcos/ISP internet charges and in case OTT apps are taken off then what will telcos do with their empty pipes? Without the much coveted OTT apps, why would their customers want to stay in their particular network or service?

In fact, during the Covid pandemic, the telecom pipes and networks would have mostly remained idle and unused and the general public would have suffered hugely if OTT content like VC platforms, payment apps, e-healthcare, edutech etc had not been available.

The crying need of the hour is therefore to maintain and boost the healthy growth of the digital economy by maintaining the current facilitating environment and safeguarding customers’ interests through enhanced liberalization and competition.