Big Tech companies have profited greatly from dominant market positions while riding largely for free over the top of fixed and mobile telecom networks and devices. The entire Information and Communications Technologies (ICT) ecosystem is enabled by a variety of interoperability technologies including 5G cellular, WiFi and HEVC/H.265 video compression that are openly available in published standards and embedded in components and end-products. How much, if anything, should beneficiaries pay for the capabilities upon which their standard-based implementations are built?
There are great expectations that technology and market developments will provide yet more stellar economic growth and improved consumer welfare in ICT with new innovations in Artificial Intelligence (AI), the metaverse (e.g. Augmented Reality (AR) and Virtual Reality (VR)) and the Internet of Things (IoT). This is a high stakes game with some players having fared rather better than others as computing, communications, applications and Internet-based services have advanced over the last couple of decades. Big Tech companies continue growing handsomely to command a large and ever-increasing proportion of total ecosystem revenues, as I have noted here before.
European policies to regulate ICT markets in various ways that will redistribute rewards and costs are being formulated following various public consultations and extensive lobbying. Regulation is unquestionably required in data protection, child protection and cyber security, as it is in health and safety. Measures to preserve national security are also required, but excessive restrictions there can be a dubious pretext for over-reach with anti-competitive protectionism. Regulating competition in other ways is also questionable and should only be contemplated where there is clear evidence of market failure or harm to consumers. Reformers should also tread carefully to ensure that remedies don’t do more harm than good through unintended consequences.
Three proposed interventions to guide the invisible hand
In unregulated or lightly regulated markets, competition and growth can develop most dynamically among different players, technologies and business models. Nevertheless, significant interventions are being pursued in ICT where there have been many successes with enormous and widespread market growth and benefit to consumers. A firm’s market dominance, abnormally high growth and profits might or might not result from anticompetitive abuse. Making a determination on that — one way or the other — requires extensive investigations and ties up lots of limited public agency resources. We should be wary of those accused of such abuse when they seek to distract regulators from that contention by claiming it is those in other markets who are causing market failure or harm to competition.
Two major EU interventions have been conceived to reign-in the dominance of Big Tech companies over others with whom they compete or depend. A third intervention—with the pretext of protecting Small and Medium-sized Enterprises (SMEs) from abusive patent licensing—will perversely have the opposite effect. It bolsters Big Tech and major industrial firms such as car manufacturers against the major value generators in the ICT ecosystem that create the standardized technologies that everyone benefits from using.
Gatekeepers and other Core Platform Service competitors
America’s Big Tech companies—Alphabet, Amazon, Apple, Meta and Microsoft—are deemed to be so big and powerful that they have been identified as “gatekeepers” by the European Commission under its Digital Markets Act, as has China’s ByteDance. Gatekeeper designations reflect positions in search, browsers, operating systems and video sharing among other Core Platform Services. The success of these companies is illustrated by those American companies’ combined market value increasing by a half to $9 trillion this year. Prospective regulation could limit the extent to which they own and how they offer and operate complementary services, such as in bundling. Similarly, in the US, Alphabet is being sued by the Department of Justice for abusing its dominant position in search to distort the market, for example, by making Google the default on most smartphones and browsers.
It remains to be seen whether regulating gatekeepers will foster more competition, innovation or economic value overall versus other Core Platform Service providers. Figuring out what kinds of structures and behaviors are anti-competitive is difficult in markets where prices are zero for consumers who pay in-kind by being targeted for advertising and who like the simplicity of bundled and integrated offerings. What’s not to like about also getting free deliveries when one subscribes to Amazon Prime Video? A recent article in the Economist heralds Garmin in fitness trackers, Dropbox in cloud storage and Mercado-Libre in Latin American e-commerce as examples of companies that have succeeded in growing revenues in competition with the Big Tech firms. Market failure and harm is difficult to prove because counterfactuals—in the but for world— cannot be observed. Attempts to block acquisitions by Big Tech companies, manipulate their offerings or even break them up will surely be met with extensive and vigorous legal challenges.
Network cost sharing
Telco industry groups GSMA and European Telecommunications Network Operators’ Association (ETNO) have demanded that companies such as those above they depict as Large Traffic Generators (LTGs), and that are sometimes called Large Traffic Originators (LTOs), should pay their “fair share” of the costs to provide broadband Internet access. The sender-pays principle is based on a long-standing grievance of large telecom operators that Big Tech companies generate the majority of traffic and reap most of the benefits of the Internet economy while not chipping in with the costs. The European Parliament concurred in a June 2023 resolution:
“that the economic sustainability of telecom networks is essential to achieving the 2030 Digital Compass connectivity targets and high-performance connectivity for all citizens within the EU without jeopardizing competition rules; urges the commission to address and mitigate persistent asymmetries in bargaining power as set out by the European Declaration on Digital Rights and Principles for the Digital Decade; calls for the establishment of a policy framework where large traffic generators contribute fairly to the adequate funding of telecom networks without prejudice to net neutrality.”
Most network traffic is video and this proportion continues to increase. Alphabet’s YouTube, Amazon’s Prime Video and ByteDance’s TikTok among others are evidently major originators of network traffic.
There is a clear need to keep increasing network capacity to accommodate data traffic growth. According Ericsson’s Mobility Reports, mobile network traffic has doubled every couple of years over the last decade or so. Fixed network traffic has also surged in multiples over recent years. A WIK-Consult study for the Commission found that €174-200 billion is needed to achieve Europe’s 2030 Connectivity Targets, including 5G coverage of all populated areas and gigabit-speed fiber. As reported by Compass Lexecon, ETNO estimates previous investments of €36-40 billion per year, of which roughly half are traffic related and could have been saved absent the largest content providers’ traffic. According to HSBC, the average return on invested capital for major listed European telcos fell from around 8% in 2012 to around 5% in 2020, with many not achieving their cost of capital.
There is disagreement about those investment figures. Opposing interests argue that the correct figures show there is no investment gap, and so subsidization by tech would result in excess profits for big telcos. However, the validity of the sub-par return on invested capital figure above does not appear to have been challenged. Big Tech companies have much higher rates of return.
A Compass Lexecon research paper concludes there is market failure. Its economic analysis shows that, where data usage is unlimited for a fixed price per month, there will be under-investment in access networks. Network operators do not have the incentive to maximize investment where incremental traffic generates no additional revenue. While LTOs invest in infrastructure such as content delivery networks, they have no incentive to increase their own costs by investing in access networks to the benefit their direct competitors. Perversely, Europe’s Open Internet Regulation (i.e. net neutrality requirements) only exacerbates this shortcoming because it prohibits allowing a traffic generator to make payments to prioritize or improve its services versus competitors’.
Incremental capacity investments need to generate incremental revenues to provide a return on such investments. There is a very clear and direct causal relationship between the amount of traffic generated and the network capacity required to carry it. For example, 1 Gbps connections that can reliably carry 1 Tbytes per month will be required as video streaming almost entirely displaces multichannel terrestrial, satellite and cable distribution, eventually. The Big Tech firms can afford to contribute because they derive incremental revenues as the traffic they originate (e.g. as requested by customers) or generate themselves (e.g. advertising) increases. If charges on them are even-handed versus their direct competitors they will all benefit, as will end users and the network operators. There is precedent elsewhere for cost sharing. In Korea, SKBroadband and SKTelecom have ended their dispute with Netflix and instead forged a partnership in which Netflix service is purchased in a subscription that presumably enables some of the network operator’s costs to be covered.
Transparency and predictability in SEP licensing
While the Commission’s own studies have found no market failure in Standard-Essential Patent (SEP) licensing, proposed legislation requires licensors to register their patents and have some of them checked for essentiality. Proposals also include the setting of aggregate royalties, and mandatory but non-binding conciliation in the determination of Fair, Reasonable and Non-Discriminatory (FRAND) royalty rates.
Purported objectives for “improving the SEP licensing system” include providing transparency and predictability—for example, to SMEs with little or no expertise in licensing. However, licensors claim the associated costs and delays will weaken their positions and devalue their SEPs.
Some MNOs lobbied to lower royalties as handset costs increased with the introduction of 3G and then 4G in the 2000s. Mobile phones were significantly morphing from mere voice and text devices to smartphones back then. Today’s Big Tech companies showed little interest in mobile SEP licensing until the introduction of the iPhone in 2007 and of Android in 2008. Many Original Equipment Manufacturers (OEMs) subsequently entered the smartphone market without ownership of SEPs.
Comments favoring the Commission’s proposals to regulate royalty rates and licensing are significantly by Apple, automotive manufacturers and trade groups representing implementers and in some cases funded by the above. The current Spanish Presidency of the Council of the EU is also a fan. The proposed new ministry of patent counting that will also be responsible for setting royalty rates will be at the EU Intellectual Property Office (EUIPO) in Alicante. Major SEP owners and licensors are largely against the proposals. Among the 78 responses to the Commission’s request for feedback on its proposed SEP legislation, the only response from a network operator was from Japan’s NTT DoCoMo, which is also an SEP owner. It also notes that “Regulation imposes excessive tasks and costs on SEP holders, even though it is unclear whether SEP holders will receive a fair and adequate return for their efforts.” It seems Europe’s network operators are prioritizing their more pressing concerns about network costs, as indicated above, over getting involved too deeply in the public debate on SEP licensing.
Europe has enormous existing assets and potential in development and exploitation of new ICT including 5G Advanced, 6G, IoT and AI. For example, Ericsson and Nokia are global leaders in innovation and standards development for communications and video compression technologies. This needs to be nurtured not undermined. They have each invested around one billion dollars in R&D annually over many years. SEP licensing growth to support further innovation in standards should be fostered not attenuated by regulation. Licensing growth with bilateral and multilateral programs to increase licensing in verticals will encourage development of valuable standard-essential technologies that focus on those verticals. For example, SEP licensing in cars by Avanci has encouraged development of C-V2X technologies in 4G and 5G. Licensing charges at a maximum of $20 for 4G and $32 for 5G per car are small in comparison to the existential threat posed to incumbent OEMs by them being marginalized in provision of value-added ICT services by Big Tech platforms or by being entirely displaced by new-entrant OEMs in Electric Vehicles (EVs), with alternative distribution and customer relationship models, such as Tesla and BYD.
Harms, litigation and cures
It is abundantly clear that Big Tech platforms are commanding the lion’s share of any economic surplus in consumer ICT markets. Network operators, standard-essential technology developers and many implementers are much less profitable or rated far more modestly for expected growth.
While I doubt examples of growth by Garmin, Dropbox and Mercardo-Libre will be sufficient to placate the European authorities, market failure and harm to other Core Platform Services providers will be difficult to prove. Vigorous legal challenges to any proposed interventions are inevitable.
Elsewhere, intervention is warranted in dysfunctional markets where some companies are flourishing while others upon whom they depend are unable to make the investment and returns required to provide what consumers want and need. Society will benefit socially and economically from ubiquitous fixed and mobile gigabit per second and gigabyte per month broadband.
However, the EU’s proposed regulation in SEPs will diminish SEP licensing costs to the detriment of the licensors who invest in developing the standard-essential technologies that are openly employed by numerous others. No good will come from biting off the hands that feed the entire ecosystem with new and useful standard-based technologies. There is no sign of harm from the SEP licensing business model. On the contrary, this has substantially enabled the very success that America’s Big Tech companies and the predominantly Asian smartphone OEMs have enjoyed from cellular and video standards with an increasingly mobile-first approach in the provision of many ICT services. In most cases these companies contribute little to the cellular and video technology standards development processes. In technology standards development it is a relatively small number of companies that own and license the vast majority of patents declared standard essential, in comparison to the many more firms that implement them.
