Internet value chain can’t grow if telcos aren’t making money

internet value chain
Image by higyou | Bigstockphoto

ITEM: A new GSMA report warns that market imbalances between network operators and online services providers may put global growth prospects at risk across multiple sectors of the internet value chain, and urges policymakers to consider the interdependence of online services and other growth sectors on the underlying infrastructure investment to ensure that everyone in the internet value chain can profit from it.

On the surface, this looks like a variation on a theme the GSMA has been promoting for ages – Google, Facebook and other OTT players eat up tons of telco bandwidth to make billions in profits, while telcos are scraping by, and this is horribly unfair, not least because telcos are overregulated, overtaxed and overcharged for spectrum, thus depriving the world of fabulous GDP growth and realizing the UN’s SDGs, etc.

On the other hand, it’s not wrong – and the GSMA’s updated Internet Value Chain Report breaks down the numbers to make its case that “asymmetric regulation and restrictions, sector-specific taxes, and spectrum costs are squeezing the business models of infrastructure providers whilst allowing Big Tech to thrive.”

For starters:

  • Revenues across the internet value chain nearly doubled from $3.3 trillion in 2015 to $6.7 trillion in 2020. Online services saw a 19% increase in revenue per annum in 2020
  • Paid-for online services will soon exceed $1 trillion in revenues, driving huge capacity demand on global networks.
  • With an annual growth rate of 7.5%, the number of users being connected to the internet globally shows no sign of slowing.
  • Traffic per user grew at 27% per year, with almost 80% of that being driven by video traffic.

But operators aren’t benefiting much from all this, and in fact are finding their business models squeezed. ROI on infrastructure investment is between 6% and 11%. Operators are under pressure to keep investing capex at rates of up to 20% of revenue to meet ever-growing demand for more capacity, coverage and speed, while revenues  and margins drop as enterprises replace high-margin MPLS and VPN services with more basic internet access services.

And of course, the GSMA adds, “counterproductive taxation on infrastructure, cumbersome regulatory requirements, and other value-eroding factors” that operators must bear aren’t helping.

However, while the GSMA report (predictably and understandably) calls for policymakers to consider the full landscape of taxation and regulation to ensure that operators are incentivised to build and upgrade the networks that underpin online services, that’s just one aspect of the broader point the GSMA is trying to get across – the overall internet value chain suffers if the sector building the pipes and access networks can’t afford to build infrastructure robust enough to meet demand. Growth for everyone will stall if this imbalance isn’t addressed.

Consequently, the report says, policymakers need to stop thinking of the internet value chain as separate industries with separate regulatory issues, and start looking at it more holistically as an interdependent ecosystem:

Business leaders and policymakers need to consider the interdependence of the many services making up the internet to ensure that market distortions, regulatory requirements or other factors do not limit the ability of participants across the internet ecosystem to make sufficient returns and that the right incentives are in place to promote the long-term growth of the value chain and to realise the full potential of technology and service innovation.

The report is available for download here.

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