Richard Feasey – until recently Group Public Policy Director at Vodafone plc and currently an adviser and lecturer on business strategy - argues that regulators should welcome the development of telco platforms, provided they have support from both to digital producers and consumers. Many years ago, writing about net neutrality to the Federal Communications Commission in the United States, I argued that the internet was not some kind of historic monument, to be preserved in its current form for the benefit of future generations. The FCC didn’t listen, and adopted a set of rules which required the network operators to operate as they had always done, recovering all their costs from a single set of retail customers on one side of the platform and none from the internet companies or applications providers on the other. The Europeans copied the Americans in 2015.
Both sets of rules leave exemptions for what are sometimes called ‘specialised’ or ‘managed’ services, to which most net neutrality rules do not apply. Unfortunately, nobody quite knows what these services are. In 2010, the FCC offered VOIP, IP TV, e-readers, heart rate monitors and energy sensors as examples of what it had in mind. In 2015 it added ‘automotive telematics’ and I think it is reasonable to suppose that a large number of IoT applications would qualify today. The rules say that such specialised services can only be provided if this is not ‘to the detriment of the availability or general quality of internet access services’ to the other users of the network. Since all users will be sharing the same set of underlying network resources and there is always bound to be some degree of contention it is probably sufficient that this conflict never becomes apparent to the average internet user. European regulators are now currently trying to work out how they might police this.
Unsurprisingly, the effect of these rules has been to discourage telco operators from pursuing ‘multi sided’ charging models under which they might charge both their retail consumers of the service and the provider of the services or applications in question. That said, it is noteworthy that Netflix did agree (apparently modest) charging arrangements for peering with some US and later European operators shortly after new net neutrality rules had been adopted in 2015. Peering is considered to operate outside of the net neutrality rules, and it seems that without the regulator involved the parties found they could reach mutually acceptable commercial arrangements.
The rhetoric on both sides has been toned down since then. Telco operators like AT&T and Verizon have instead turned their attention to how they use retail pricing (and ‘zero rating’ in particular) and their customer relationships to promote their own recently acquired TV content. This involves gaining customers and additional revenues by applying a much more traditional ‘linear’ business model in which they own all the assets themselves. Whether the shift by AT&T and Verizon towards this model is a response to the net neutrality rules or to other factors (such as the competitive threat from cable in the US) is difficult to judge. In Europe, a group of operators pushed hard (but unsuccessfully) to be allowed by regulators to impose ‘data termination charges’ on the internet companies back in 2012, but they now seem to recognise that any future payments are going to have to be consensual in nature. European operators are now pursuing a variety of strategies, but there seems to be a similar tendency to vertically integrate into content or to enter into exclusive partnerships (e.g. in IoT applications) rather than to build ‘open platforms’ which might allow internet service and applications developers to access network resources in return for payment.
However, the business model could change yet again as operators begin to ‘virtualise’ their networks by separating the software which manages and orchestrates the services from the underlying hardware of the network. This creates the possibility for the emergence of ‘multi sided’ charging models in which third party applications and service providers – whether of ‘specialised services’ or other types of service – could rent resources on the network as and when they needed them. In contrast, I find it difficult to see how the many opportunities offered by network virtualisation could ever be fully realised under a more traditional, linear business model.
Coincidentally, a new leadership at the FCC is determined to amend the net neutrality rules and is currently consulting on what to do and how to do it. There is no reason to think that the current prohibitions on telco operators charging internet companies for access to the network might not be lifted, either altogether or with conditions attached. But in my view ‘network virtualisation’ will also raise even more fundamental questions for regulators about who we will hold responsible for ‘managing’ the network in future and what the ‘network’ which we are trying to regulate might actually be said to consist of.
The irony, as so often with regulation, is that while today’s net neutrality rules claimed to promote technological and business model innovation, their effect seems to have been to nudge operators like AT&T back towards the pursuit of more traditional, vertically integrated, linear business models, in which they own all the assets themselves. AT&T is now seeking to acquire the content business of Time Warner, 17 years after it was first acquired by another network company, AOL. In the meantime, AOL’s content assets are now owned by Verizon. I am not sure this is what the internet companies and other advocates of net neutrality rules intended or anticipated back in 2005, nor that it is necessarily what they want for the future.
In contrast, the kind of open, non-proprietary platforms that are associated with network virtualisation are just what regulators have said they wanted telco networks to be. They also seem to be supported by many of the large internet service providers who are participating in the standards activities to bring virtualisation technologies to market. The lesson for both sides is that progress can only be made if network operators and service and applications providers pursue consensual commercial arrangements which are to their mutual benefit. In contrast, trying to use regulation to impose your preferred business model on the other party, as some of the internet companies did with net neutrality and as the European telcos attempted back in 2012, is likely to end badly for everyone and takes years to unwind.
‘Multi sided’ charging models for renting network resources will emerge as and when all parties to the platform derive sufficient benefit from them. Provided they do not harm existing internet users in the process – an important condition that all parties will need to think how to demonstrate – then I see every reason for regulators in either the US or Europe to welcome these developments and to interpret or adapt the net neutrality rules accordingly. Regulators can be creative too…when they are given good reasons to be.
Richard Feasey advises, lectures and writes about the communications industry, having previously worked for cable, internet and mobile companies since 1991. He was the Group Public Policy Director at Vodafone plc between 2001 and 2013. His current roles include being an associate at Frontier Economics, an adviser to Wiley Rein LLP and Gigaclear plc, research fellow at the Centre on Regulation in Europe and he was the expert adviser to the House of Lords enquiry into Online Platforms in 2015-6. He lectures at Kings College and University College, London and at the Judge Business School in Cambridge. He advises businesses around the world on issues of strategy and public policy, publishing some of his writing at www.fronfraithltd.com