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Carriage vs Content
July 2012

Geoff Huston

Does anyone remember the Internet before Google? And no, using Google to ask about the pre-Google Internet is not going to work all that well! For those of you who can recall the Internet of around 2000, do you also recall what debates were raging at the time? Let me give you a hand in answering that question. One big debate at the time was all about the relationship between the carriage service operators and the content providers, and, as usual, it was all about money. The debate was about who owed who money, and how much. Ten years later and it seems that nothing much has changed.

It's International Telecommunications Regulations (ITR) season once more, and all these traditional and well rehearsed debates about who owes who money seem to have resurfaced. After all, if I can get a government-blessed regulation to support my claim that you owe me money, then my financial prospects are looking a whole lot better! On this topic, this is the latest pronouncement from the European Telecommunications Network Operators (ETNO), an organization that represents a number of European network operators:

6 July 2012


"The Executive Board of ETNO reiterates its call for a new sustainable economic model for the Internet, insisting that it should be based on commercial agreements between all players of the value chain. The ITRs must reflect market changes and encourage future growth and sustainable development of telecoms markets, without changing any of the guiding principles that have contributed to the success of the Internet so far", says Luigi Gambardella, ETNO Executive Board Chair.

What is this "new sustainable economic model for the Internet"? What sustainable model is so unsustainable that it is only achievable through a path of regulatory intervention and the imposition of ongoing regulatory measures within the supply chains of carriage and content services for the Internet?

I guess that the reference to "all players of the value chain" is a bit of a give away here. What this appears to be alluding to is a case being constructed by a number of large scale carriage operators in Europe that the content providers should pay these carriage operators to allow content reach their customers. In other words this ETNO position is arguing that content should now pay a carriage toll.

Looking Back: "You owe us money!"

In looking at this I am reminded of the pretty much a mirror image of the same debate that occurred some ten years ago. Lets look back to 2001 and see what we were discussing then. I'd like to reproduce a part of an article that I wrote on this topic at the time:

Around ten years ago the Internet content industry was having a hard time. Providing content on the internet was a task of devotion and faith, as the activity was generally without remuneration. Almost everything the content folk had tried in terms of sustaining an Internet-based content economy was failing. Nobody was buying subscription services. Banner ads were widely viewed as an annoyance. The all-important click rate on banner ads was just too low to sustain a rich content industry. Portals and attempts to corral the user, such as the much touted Look Smart of the Internet boom of the preceding years, were now looking distinctly passé and certainly not a revenue opportunity. And efforts to use search engines as advertising platforms got nowhere once it was revealed that some search engine's ranking result order was essentially for sale. Nothing seemed to be working as a viable content model.

So content looked for where the money was at the time, and lo and behold they saw the access service providers, who were billing every customer every month. We heard the strident call from the content providers: "Access is only useful if there is content. Access is essentially reselling our content, but not paying for it. This is theft! You owe us money!"

Of course they were not quite as rude as me! The rhetoric we were hearing at the time from the content providers sounded more like: The structure of the Internet market must reflect market changes and encourage future growth and sustainable development of the Internet, without changing any of the guiding principles that have contributed to the success of the Internet so far.

Yes, that should sound familiar. It's the same argument we are now hearing from the carriage operator, now arguing that there should be a monetary flow in the opposite direction!

The Different Paths of Content and Carriage

Aside from the obvious amusement value, what is there to learn from this volte-face that the industry has managed to achieve in the past decade? What happened?

I suppose that the major shift was a dramatic change in the advertising model, and the best example I can think of to illustrate this comes from Hal Varian, a noted economist in the information space who observed back in 1998 or thereabouts that spam is merely a failure of information about the consumer. If you knew all there was to know about that consumer then you could ensure that what you sent to the consumer was not unwanted digital detritus but timely and helpful advice!

What content providers started doing a decade ago was intensively scrutinising their users. What web pages did they linger on? What content attracted their interest? What makes a user come back to a content site? What is the user wanting to purchase? Can we help in facilitating this purchase? What could we do for the user that would provide even more knowledge about the user's preferences? Would running their mail service provide that depth of information? How about running their document storage system? How about helping them create their documents? All of these online services might be free to the user, but at the same time they are immensely valuable services. They provide a rich vein of real time information about each and every user. And its this stream of information that can be sold to advertisers as intimate knowledge of a consumer's preferences and interests.

This form of mining of the data exhaust that each user generates in this online environment has proved to be transformational for the content industry. And until now it has not been a battle between the carriage operators and the content providers over the money. It's been a battle within the content industry itself, where the Internet has been pitted against the traditional content behemoths, the newsprint industry. At stake has been what was described by Fairfax, a newspaper publisher in Australia, as the "rivers of gold." At stake is the newspapers' advertising revenue. And the Internet has won this struggle. The factors of declining readerships, falling advertising revenues, the shrinking pool of journalists, are all visible across most of the print newspaper world. At the same time the stock prices of the hypergiants in the Internet's content factory, such as Google, continue to show an optimistic outlook.

Obviously the content providers quickly forgot all about their earlier contretemps with the carriage operators, and quickly walked away from their previous strident demands for payment as they turned their attention to a far larger potential revenue stream. The rise in the value of the online market not only stimulated ever greater shifts to online advertising, but also reinvigorated various other forms of sponsorship of content, and even has lead to a revival of the content subscription model. Content was now not only a viable industry, but one that appeared to be growing at such a pace that it was looking as though it would soon dwarf the carriage sector in economic terms.

While the content world had managed to stumble upon a business model that has just worked for them, the carriage world is now working with a business model that is creaking and groaning with age. In 1999 modems were still very common as the last mile access method. A modem, even running at full speed, doesn't carry much traffic. The difference in load between the most intense users and the average user load profile is slight. The "flat fee" retail tariff that did not take into account the traffic volumes was one that was extremely simple and had minimal risk exposure in terms of variations in the load profile of individual users. These days it's all DSL and cable and the prospect of fibre. The variation of data volumes is higher and a uniform flat fee exposes a greater degree of risk for the carrier. The top 5% of the most intense users are probably using upwards of 50% or even 75% of the carriage operator's total capacity when looking at aggregate volumes. But, like the road system, its not aggregate volumes that count – it's the ability to clear the traffic during peak hours, and at these times the baseline average peak use is a critical metric. As long as this peak use profile does not shift dramatically the flat fee access model is sustainable at the current price point. But of course everything changes, and with the advent of content services such as Netflix, Hulu, and the massive uptake of YouTube, today's "average" user during peak hours is looking a lot like yesterday's "heavy hitter" but they are still paying the carriage operator yesterday's flat access fee. The carriage operator is now claiming that they have to beef up their capacity, and spend additional money in augmenting carriage infrastructure capacity. But where are the funds to support this work? Where is the business case?

Today: "No, its you who owe us money!"

The carriage operators are now trying to make the case that their activity is unsustainable, much the same way as the content providers tried to make the same case a decade ago. The carriage operators have been heard to argue that raising retail tariffs for the Internet would be "discriminatory" for their users. Discriminatory or not, the underlying observation is that having established a price point in the consumer market its hard for any single provider to lift their prices without dramatically losing market share, and if all the carriage operators acted in unison the consumer protection agencies and market regulators would tie them up in protracted and expensive proceeding over cartel-like behaviour and abuse of market power. If it's not the user who will pay then the choices are pretty limited.

It's no surprise that the carriage operators' attention has quickly fixated on where they believe the money is. They have turned their attention to the content industry and eyeing them off as their financial salvation, and they are now attempting to enlist government-blessed regulation to assist them in their efforts of financial extortion of the content industry.

But creating structural distortions in the carriage business by imposing a levy on content and passing the proceeds to the carriage providers would be as unwise now as performing the opposite structural cross-subsidy would've been ten years ago.

It's not that the carriage role is unsustainable. It's not that imposing a levy on content to subsidise the carriage industry is essential for any future of the carriage operator. Not at all. It's that yesterday's business models aren't necessarily appropriate for today, let alone tomorrow. There are carriage operators carrying a large portfolio of legacy carriage products, high debt levels with high interest premiums, aging plant and a collection of challenging managerial and shareholder expectations about return on investment that all take their toll on the efficiency of their business model. There is still a continual theme that the glories of the past in terms of the telco monopolies of decades ago can somehow be reconstructed within the landscape of the Internet.

But this is not a universal picture and while many carriage operators, particularly those with a past in the telco sector, are still carrying with them these inefficient burdens of legacy, there are other more recent entrants in this market who see a sustainable role in viewing IP carriage as a commodity utility operation. With more modest expectations about revenues and margins these more recent enterprises are not just surviving, but evidently thriving in today's carriage market. It is evidently possible to operate a carriage service efficiently, and it is evidently possible to meet the demands for delivered capacity in the Internet, but undertaking this role demands the rigours of being a simple utility operator, rather than fostering the lingering pretence of being a "full service telecommunications service provider."

And maybe that's a good thing. Deregulation of this industry did not mean that we unleashed a new set of lumbering behemoths to fight it out in the dinosaur swamps with the incumbent set of behemoths. Exposing this industry to the rigours of competition exposed it to competition from specialist enterprises, who competed for market share within a narrow area of specialist activity. The old behemoth relied on monopoly power over a market in order to sustain structural cross-subsidy of the various component activities. Deregulation and competition has pulled those cosy arrangements apart. The outcomes are all working to the benefit the end user, who is the beneficiary of an immensely rich world of content, information, and personal empowerment, at a price which is still well below what used to be the monthly cost of the rental of those clunky old handsets.

And how should we respond to ETNO's demands for regulatory intervention to impose a "new sustainable economic model for the Internet"?

Our response now should be exactly the same as it was 10 years ago – no!


The views expressed are the author’s and not those of APNIC, unless APNIC is specifically identified as the author of the communication. APNIC will not be legally responsible in contract, tort or otherwise for any statement made in this publication.

About the Author

GEOFF HUSTON B.Sc., M.Sc., has been closely involved with the development of the Internet for many years, particularly within Australia, where he was responsible for the initial build of the Internet within the Australian academic and research sector. He is author of a number of Internet-related books, and has been active in the Internet Engineering Task Force for many years.