On Friday 1st February, a surprisingly warm winter afternoon, Marc Lebourges, Director of European and Economic Regulation at France Telecom Orange, greeted a room full of TSE researchers and students to begin the first of the New Year’s Business Talks on the issue of Net Neutrality.
Net Neutrality has been at the centre of a heated debate which originated in the US, but has now made its way over the Atlantic and will undoubtedly become a key focus in developing countries in the near future. In the literature, Net Neutrality refers to the fact that ‘internet service providers (ISP’s) charge consumers only once for Internet access, do not favour one content provider over another, and do not charge content providers for sending information over broadband lines to end users (consumers)’ (Wallsten).
Advocates of Net Neutrality have raised the issues of freedom and democracy but the economic literature has focused on two main issues. Transferring information through the Internet requires infrastructure and this is obviously finite in supply. The first element of Net Neutrality is the “zero pricing rule”; content providers are not charged. Some of the literature considers whether the necessity of traffic management justifies ISPs charging content providers a fee proportional to the volume of traffic they generate. This is considered as a cost allocation issue in a two-sided market framework with imperfect information; should it be content providers or consumers who pay? Bruno Jullien, a TSE and IDEI researcher, is currently working on a paper in this area.
The second characteristic of Net Neutrality is around the issue of “no discrimination”, i.e. the same access speed for all users. The literature considers whether ISPs should be able to adopt a tiered system; for simplicity, imagine a two-tiered system for transporting traffic, a ‘fast-access’ and ‘slow-access’ connection speed. The focus of the literature has been on whether this is welfare enhancing and, in particular, whether it leads to incentives to increase the capacity of the network. If the ISP is able to discriminate, then it can generate more revenue and therefore becomes incentivised to invest. However, the ISP could provide a very low quality slow-access in order to force people to pay for the fast-access. If the ISP cannot discriminate, it may find it optimal to not invest at all, resulting in a uniform but slow service for all users.
Broadly speaking, proponents of Net Neutrality are Over the Top (OTT) companies such as Google, Amazon, Skype, Microsoft and eBay, as well as consumer groups, while opponents are telecom and cable companies (such as Orange). Orange supports a neutral Internet and thinks it has provided Internet access on a rather universal basis. In his presentation, Mr Lebourges was very considerate and fair in his argument and made clear the issues that Orange faces. Orange believes a sound pricing system is the best long run solution to guarantee neutrality. Despite considerable industrial and academic research no definitive conclusion has been determined at this moment.
Industrial groups related to the Internet, IT and Telecommunications are experiencing growth throughout the world. The only area that seems to be experiencing a contraction is Telecommunications in Europe. This is evident when considering the major European players: France Telecom, Dutch Telecom, Telefónica, Telecom Italia and KPN. Apple represents just 40% of their combined revenue but is a staggering 200% of their combined share value. This indicates that investors anticipate high future earnings for Apple compared to those of European Telecommunications.
OTT services (such as search engines, e-payment systems, cloud computing services and news aggregators) are complementary to Orange’s Internet access and connectivity services. However they also compete; Orange provides electronic communication services such as SMS and calls, while OTTs provide instant messaging and video streaming services. Microsoft makes revenue on software, which it uses to subsidise Skype. Likewise, Google makes its revenue on Search functions and then heavily subsidises Youtube. Orange however makes its money on electronic communication services to subsidise its access and connectivity services. Quite simply, the revenue generating service for Orange is in competition with the subsidised services of the OTTs.
To compound Orange’s disadvantage, OTTs and Orange have to answer to different regulators. Orange and its industry rivals are incentivised to ensure competition, as there is the constant threat of market intervention from Competition Authorities who consider Electronic Telecommunications a priority. Lighter regulation for OTTs has been favourable for their relative performance and has allowed a dominant few to obtain market power. Evidently Orange is in favour of common regulations between telecommunications and OTTs, which it sees as necessary for fair competition. They would argue this reform would be welfare enhancing, as it would increase their investment in infrastructure. The Internet is a major part of the World Economy; nevertheless a definitive solution to the Net Neutrality issue is yet to be found. Net Neutrality is likely to be a major issue in both industry and academia in the coming years.
Jullien, B. Congestion Pricing and Net Neutrality.
Wallsten, R. H. The Economics of Net Neutrality.