The Revival of the “Fair Share” Debate for Telco Networks Will Create Nothing but a False Sense of Security for Mobile Network Operators

This year’s Mobile World Congress (MWC) in Barcelona showed once more that Mobile Network Operators (MNOs) are in a very difficult position financially. On one hand, revenue from the consumer domain is almost flat (thanks to a nearly perfectly competitive market). On the other hand, MNOs struggle to unlock new market opportunities, particularly when it comes to enterprise connectivity. Against this backdrop, the idea to charge large data traffic generators (e.g., Netflix, Google, or Amazon Prime) for using carriers’ cellular network infrastructure experiences a revival—particularly as the European Commission (EC) is now looking at regulations that would force these Large Traffic Originators (LTO) to financially contribute to cellular network rollouts.

Of course, the “fair share” debate is not exclusive to Europe, but is present in a range of other national/regional telco markets. Often referred to as one of the pioneers, South Korea proposed a solution for fair contribution toward funding the rollout of cellular networks. In 2018, the Korea Communication Commission established the so-called “IP interconnection regulation.” This framework establishes a compensation model based on the imbalance of the volume of traffic exchanged between operators. The model also applies a traffic ratio rule. However, should traffic exchange exceed this ratio, the originator sending a higher volume of traffic through the telco network must make payments on the interconnection according to a regulated price​.

Looking at it from a market economic perspective, any framework that is trying to regulate allocation of funds between the different players is a market distortion that should be considered very carefully, as it can have serious consequences on the communications market in any given country. To understand why this is the case, national regulators and government bodies will need to remember that their countries do not exist in a vacuum and that any intervention concerning market economics will affect the competitiveness of their national markets compared to their immediate neighbors.

In South Korea, for example, the regulatory framework has led to significant legal and business discussions. Most notably, several LTOs decided to reroute traffic through neighboring countries to avoid having to pay network operators for using their cellular infrastructure, creating a classic lose-lose situation. By rerouting traffic outside the country, South Korean operators do not generate any additional revenue from LTOs. Meanwhile, rerouting traffic results in higher latencies and, therefore, lower levels of user experience. This, in turn, decreases consumers’ willingness to pay increased prices for these services, which could, in theory, fund hyperscalers’ contribution toward cellular network rollouts.

Of course, every country has its own specific geographical characteristics. Therefore, effects from the national market cannot automatically be applied to other regional markets as well. After all, it is much easier to reroute traffic to neighboring countries around South Korea, while it would be difficult to reroute all European network traffic to countries outside of the European Union (EU). Nonetheless, it shows that LTOs are prepared to forego user experience to circumvent financial contributions to cellular network rollouts.

As the South Korean case study shows, this “fair share” debate is only a band-aid covering the fundamental problem that network operators will continue to face. Even worse, it provides operators with a false sense of security and, therefore, prevents them from innovating in terms of business models and monetizing strategies. Instead of focusing their efforts on trying to get application developers and large traffic originators to pay for their cellular network expansion—which, as the previous section discussed, will most likely not work out in the desired way anyways—network operators should invest all their time and energy in disrupting their old business models and developing net innovative monetizing strategies together with application developers. In this context, the current revival of network Application Programming Interfaces (APIs) (see the recent ABI Insight, “The Discussion around Telco Network APIs Celebrates a Great Revival, but the Chances for Commercial Success Are Slim”) and increased interest from network operators to monetize them, is a step in the right direction to try and attract application developers.

The development of network APIs, however, needs to be integrated into a new enterprise monetization strategy—not just offer the same “build it and they will come” approach as in the consumer domain, which will likely not work. Instead, MNOs will need to work closely together with hyperscalers and application developers to first understand their requirements, and second, to generate the demand accordingly. This can take several forms:

1. Develop Standardized APIs: In order to be remain profitable, network operators will need to focus on a few select APIs to begin with. They should work together with hyperscalers to develop and adopt standardized APIs that ensure interoperability between different networks and cloud services.
2. Foster Innovation and Co-Creation Initiatives: To facilitate this joint development of standardized APIs, operators should consider establishing innovation labs or incubators to foster startups and developers in creating applications using network APIs, with support and guidance from both telco operators and hyperscalers.
3. Creating an Ecosystem for Developers: To make it easy for application developers to use network APIs efficiently, network operators and hyperscalers should provide comprehensive tools, Software Development Kits (SDKs), and documentation.