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The impacts of the internet giants on the telecom operators and on the economy of countries

The impacts of the internet giants on the telecom operators and on the economy of countries

Nowadays, the American giants grouped under the name GAFA (Google, Apple, Facebook and Amazon) are dominating the global digital market and are the largest bandwidth users in the world. Consequently, they record increasing sales figures and major market capitalizations. And the impact of these internet giants on telecom operators and on the economy of certain countries are becoming so noticeable that some engineers, economists, lawyers and politicians are beginning to debate it publicly. Thus, to mention but the fiscal aspect, in May 2014, the European Commission reported that the four aforementioned internet giants paid as tax abroad only 2.2%, 1%, 1.5% and 0.5% respectively as a percentage of their turnover achieved in the world.

As a result of these recent developments, the American giant Apple joined Dow Jones on March 19th, 2015. For the record, Dow Jones, created in 1896, represents the 30 leading American companies. As of March 19, 2015, Apple, worth over $ 730 billion as a market capitalization, has replaced the telecom operator ATT. The latter came out of Dow Jones after integrating it in 1916. If Apple’s turnover in 2014 was 42 billion dollars, an increase of 12% compared to 2013, ATT’s turnover in 2014 was 132.4 billion dollars compared to128.8 billion in 2013, showing an increase of 2.9%. Apple’s entry into Dow Jones means that the various shareholders in Apple see it as a value that will bring in more in the future.

With its entry in 2015, Apple joined Microsoft, IBM, Intel and Cisco. And the exit of ATT leaves Verizon as the only telecommunications operator in Dow Jones. To stay in the latter, the US telecom operator Verizon was compelled to buy America Online (AOL), the provider known for its mastery of content and advertising on the internet, for 4.4 billion USD in May 2015.

The problematic is quite clear and sufficient data are available to assert that there is a problem between the Internet giants and telecom operators on the one hand, and between the countries and these giants called GAFA, at the economic level and particularly at the fiscal level, on the  other hand.

As for the other internet giants such as Google, it advances the argument for innovation and consumer-friendly competition. Its engine, essential for everyone, is provided free to Internet users for daily access to the world’s first knowledge base. And today, users worldwide cannot do without the various services offered by these internet giants.

Of course, these problems between these different actors can only be solved internationally, particularly through the involvement of international organizations. Thus, the International Telecommunication Union (ITU) recently held the Economic and Financial Forum for the Arab Telecom Region in Manama, Bahrain on November 29th, 2015, where a session was devoted to the above issue. All presentations given at the Forum are available on the ITU website at https://www.itu.int/en/ITU-D/Regional-resence/ArabStates/Pages/Events/2015/11_AREF/default. aspx.

The objective of this article is to attempt to review part of the debate devoted to the above problem internationally. If the Internet giants report that their existence and their growth are a consequence of scientific and technological progress, the operators claim that these internet giants are not involved enough in the efforts they invest in their telecom networks. As for the countries, they call for more involvement on the part of the internet giants in the effort of economic development including the payment of taxes in relation to sales they make in their countries.

The Internet is a global service open to the public, in which access is through the various telecommunications networks: fixed, mobile or satellite. Internet data is easily exchanged on these networks, ignoring borders, and this is due to a standardized set of data transfer protocols.

As for the OTT (Over The Top), it is defined as a multimedia content service broadcasting technology on the Internet thanks to the various connected terminals. Most provided services consume significant bandwidth as search engines, online trading/ e-commerce, video on demand, etc.

The economic model of the Internet giants that practice OTT is based on the principle of the absence of telecom operators in the business relationship between the suppliers of OTT services and the customers. Therefore, no fees are paid to operators from the consumption of OTT services outside of traditional Internet access charges paid by the subscribers to operators.

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In recent years, there has been a separation between voice and the data. Operators’ Networks are used for calling for a price paid out to them and the same networks are used for browsing the internet upon payment of a fee. Voice was generally billed in per minute or per second and the internet is generally billed in as a flat rate. And the operators earned money and paid taxes to the state. Data are separate from voice. Prior to 2002, VoIP (Voice over Internet Protocol/Voice over IP) did not represent an issue because it was less developed due to the complexity of the early servers, the high cost of bandwidth and the low implantation of broadband in businesses. After 2002, an actual acceleration of the VOIP has been observed especially after the emergence of new signaling protocols such as SIP (Session Initiation Protocol).

Upon starting this acceleration of VoIP, regulators and telecom operators were less fussy about this development in order not to disturb innovation. After the Internet giants took advantage of technological progress, they began to offer free services such as voice over the Internet, SMS and sending video sequences with voice, and they earned a lot of money in return through advertising and the sale of data profiles of internet users to Big Data applications.

At a time when the Internet giants have become necessary since they are currently offering various indispensable services, such as daily access to the world’s knowledge base, they have also generated two major problems. The first one is related to the taxation of services in a given country, and the second is related to the fact that telecom operators are hindered by the growth of the Internet giants. Regarding the first issue, these giants are also beginning to offer telephony, messaging, videoconferencing, access to content, while they are not subject to VAT or corporate tax.

Still on the second problem, telecom operators blame the Internet giants for not having rules imposed by regulators. They operate worldwide through open protocols based on IP without needing neither interconnection nor frequencies. Because they have no license to operate, they pay no taxes and no contributions such as those relating to universal service mechanisms. However, it is the telecom operators, who instead target a globally local market, that are subject to national obligations (license tax and frequencies as well as payment of various other contributions, etc) and in addition they must ensure necessary investments and incur costs of their use of the network. The principle of net neutrality is based on a founding principle of the Internet currently in force, which excludes any discrimination against the source, destination or content of information transmitted on the web Internet.

To solve problems of taxation, some propose amending tax law by creating virtual tax institutions for each of the Internet giants so that they have a stable representative institution and from there can be taxed. The National Digital Council in France proposes to provide mechanisms to ensure fair tax treatment of all the actors involved in the same market, regardless of the place of the head office. It is a concept of permanent virtual institution that allows the re-taxation the profits of all stakeholders located outside a country. Pascal Perri, author of books related to the impact of the Internet on the economy, reports that in the past, a peripheral radio refused to pay taxes in France on the grounds that its headquarters and its transmitter were located in a principality outside of France. Intervened in the conflict, justice then ruled in favor of French tax services since both listeners and advertisers were French. For this purpose, the radio in question could not separate the financial framework from its real economic activity.

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As for Telecom Operators GAFA problems, the operators are investing in telecom infrastructure, but it is the internet giants who earn more money indirectly. To ensure bandwidth availability and guarantee the investment in and operation of telecom networks, telecom operators are seeking a significant part in the value chain to pay their efforts more. In the absence of a proper and legitimate sharing model, telecom operators, among others, are campaigning for the non neutrality of the net.

To ensure the availability of bandwidth, telecoms operators offer to guarantee a minimum quality of service in terms of speed by launching the internet access offers « premium » that would ensure a minimum flow to subscribers, including at times of network congestion. However, to ensure these flows during periods of congestion, it would necessarily restrict access to those who have not subscribed to this offer.

And to assure investment in networks, telecoms operators want to share revenues with internet giants, like Google that cash in significant returns, in order to be able to recover their investments in infrastructure.

Already in the past, some operators have tried practices in relation to non-net neutrality. In 2007, a French operator blocked access to the video website Dailymotion, the equivalent of YouTube in France, during trade negotiations. This practice is called Discrimination Against Sites. Since the mid 2000s, some operators in France have offered Internet packages that block VoIP services (Skype). This practice is called Discrimination Against Content.

Also, at the same time, Bouygues Telecom set up an offer guaranteeing a « priority » access to the rest of its customers in case of network congestion. This practice is called Discrimination Against Customers. As elsewhere, in France we have just seen telecom operators, who are against OTTs that exploit all the potential of their networks without investing in their deployment or maintenance, calling for a specific regulation for these platforms by the state. These operators blame the Electronic Communications and the Post Regulatory Authority (ARCEP) and the Competition Authority in France for their position which is to affirm that the regulation is not the solution. The President of ARCEP in France recently stated: « We clearly cannot manage Google the same way do with an operator like Orange. And in general, we regulate things. After all, telecommunications are pipes. Platforms offer services. » As for the President of the Competition Authority, he believes that « we must go beyond the mere law of competition and that we must transform labor rights, markets, [and] financing. He hopes that a democratic debate would be engaged on all these issues. We must invent new ways of measuring power on the market for example by gauging how to collect, exploit, [and] appreciate personal data ». In Europe, the internet giants are alarmed as European telecom operators are lobbying alongside the European Commission to introduce for example royalties on online content distributors.

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While waiting for the adoption of possible solutions to these conflicts, some operators such as Verizon in the US have opted for solutions along the lines of the evolution of technology: deploying deals with billing data volume and voice communications are mostly free as in the model of WhatsApp.

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Others suggest some technical solutions for blocking or reducing the quality of voice service over IP. The latest discovery is the one designed by the company Shine that consists of installing a smartphone application called Adbloker that allows blocking the display of advertising sent through the Internet. Such a smartphone application will be a means likely to be used to better negotiate with the internet giants. But the latter have already begun to react to this solution claiming that they would block access to certain websites for the internet users using this Adbloker application.

To conclude, we can say that it is scientific progress and technological development that have allowed the emergence of the internet giants (GAFA). Nowadays, consumers, globally, can no longer do without OTT services, provided especially by internet giants. But the emergence of these giants has had negative financial impacts on the economy of countries and telecom operators. The clearest impact today is the one affecting telecom operators. The geolocation and Big Data applications only reinforce the global power of these giants and the relationship with the client, initially held by the operators, shifts to GAFA. To ensure their survival, telecom operators have to fight for the establishment of non-net neutrality or the introduction of fees on online content distributors. The concerned international organizations and telecom regulators worldwide are all involved in establishing new rules to protect the interests of all the actors operating in the telecom value chain.

Ahmed Khaouja is a consultant in Telecoms and ICT. This article is translated from French.

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