Another Look at the Debate on the ‘Fair Share’ Proposal: an economic viewpoint

Senior Managing Director Jorge Padilla and Vice-President Zita Vasas co-authored a paper, joint with Daniele Condorelli named “Another Look at the Debate on the ‘Fair Share’ Proposal: an economic viewpoint”. The paper discusses the fair share debate between telecommunications operators (‘telcos’) and large traffic originators (‘LTOs’) such as Netflix, Youtube or TikTok, which evolves around the question of whether LTOs should pay telcos for the use of their networks thereby contributing to the funding of new (5G) network investment.

Abstract

The fair share debate between telcos and LTOs is all about who should be bearing the costs for the funding of new network investments in 5G. Telcos want LTOs to pay for the use of their networks in order to fund new investment, while LTOs don’t want to pay because they claim consumers already pay enough for investment to be profitable. In their paper, funded by Telefonica, the authors conclude that the fair share proposal by telcos makes economic sense in order to overcome market failure. That is, LTOs should contribute to new network investments and the level of their contributions should be determined during compulsory bilateral negotiation between telcos and LTOs, backed by mandatory arbitration.

Policy Implications

• In the absence of payments from LTOs, telcos will underinvest because they fail to internalise the positive externality their investments generate on LTOs.
• Telcos’ incentives to invest can be increased if LTOs contribute to fund their investments either directly or by means of traffic-related payments.
• If correctly set, these payments will unambiguously increase joint industry profits and also increase consumer welfare. Larger LTOs should contribute more and will do so if the payments are traffic-related.
• There is a risk that the current unregulated arrangements result in no payments from LTOs due to asymmetries of information between industry participants, free-riding among LTOs, and the large imbalance in bargaining power between LTOs and telcos.
• Thus, some form of intervention will be needed to address the underinvestment problem we have identified.
• One option is to regulate telcos’ investments and the LTOs’ contribution to funding them. This option is informally demanding and hence unlikely to be feasible in practice.
• An alternative would be for the regulator to mandate both sides to negotiate a deal involving payments contingent on investment, and institute a mandatory arbitration system in case such negotiations stall. However, this is also likely to prove infeasible in practice, since network investments may not be contractible, either because the nature and magnitude of the required investments may be uncertain ex ante (i.e. when the contract is negotiated), or difficult to monitor ex post (i.e. once the telcos have sunk their investments).
• Another alternative is to mandate negotiations based on per-unit traffic fees. Unlike network investments, traffic is contractable, since it can be monitored and verified ex post.

Properly calibrated per-unit traffic fees can provide telcos with the appropriate investment incentives and resolve the underinvestment problem. These fees will affect access prices (will fall) and content prices (will increase) but their net effect on telco’s investment will be positive. These traffic fees would be the result of bilateral negotiations occurring under the shadow of arbitration and not the outcome of a regulatory process, which is unlikely to be able to deliver the right fees due to informational asymmetries.

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The views expressed are those of the authors only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees, or clients.