Proximus CEO disappoints with net neutrality stance

Thursday 4 January 2018 | 13:57 CET | Market Commentary
Proximus CEO Dominique Leroy has given a twist to the discussion on net neutrality in order to reintroduce a well-known theme. The CEO noted that Google, Facebook and Netflix need more capacity, which they do not pay for. It is disappointing to get this outdated position from the CEO of a major telecom company.

The US will have to accept a market without net neutrality regulation. One advantage of this: the rest will be able to establish experimentally whether these regulations are necessary.

US will experimentally determine whether net neutrality (NN) control is required

First, a short word about net neutrality. It is such a complicated subject that it is difficult to take a balanced view. Operators must always perform 'traffic management' to properly distribute scarce capacity. It is not only about bandwidth, but also about quality, as Vodafone recently emphasized. NN was recently in the news again due to the reversal of NN legislation in the US. A few years ago, operators told the FCC that NN legislation was not necessary because they would behave in line anyway. The FCC has now come back from its position and told the Federal Trade Commission (FTC) to keep an eye on the market.

We will have to see if this prevents 'throttling' and 'blocking'. The large internet companies are in favour of NN legislation, although they are the ones that can benefit from its abolition, at least on paper. Incidentally, moderate Republicans in the US came up with a bill to reconcile the parties. One positive to take from this situaiton: it can now be determined experimentally how the market will behave in the absence of NN regulation.

Major internet players cannot contribute to broadband investments

And now the theorem of Leroy and why this argument about broadband investment falls apart completely. The position surfaced years ago in the US and was taken over by Ad Scheepbouwer (then CEO of KPN). When he left in 2011, he came back to it. Eelco Blok also fell into the trap and perhaps he, at his forthcoming resignation, will come to the conclusion that this position does not work. The arguments against the statement are as follows.

  • The statement goes against how cash flow works. ISPs (operators) are paid by end users. They recover costs from them. The fact that the broadband market is competitive and offers little room for price increases is independent of this. There has hardly been mention of this last argument over the past few years, considering the annual price increases at KPN and Ziggo, among others.
  • Google, Facebook and Netflix invest billions in infrastructure. Think of data centres, sub-marine fibre optic connections and cache networks in the operator exchanges. When it comes to investing, the 'last mile' is the domain of the operator, not that of the major internet players.  
  • Also in other sectors, upstream partners do not pay for 'last mile' infrastructure costs. Think of broadcasters which receive money from operators for the transmission of channels (content). The electricity network can also serve as an analogy: manufacturers such as Philips ensure that consumers use electricity, but do not pay for the costs of the electricity network.·
  • A simple calculation shows that Google, Facebook and Netflix cannot pay. The free cash flow (according to their own definition) of these companies over the past 12 months was roughly at +USD 24 billion, +USD 16 billion and –USD 2 billion. Even if we took a large part of this amount (say 10%), we are talking about USD 3.8 billion, to be spread across roughly 3 billion fixed broadband lines and 7 billion mobile worldwide. That amounts to a contribution from these three parties of less than USD 1 per year per line. So completely insignificant.

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