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New Study on the Internet Questions Its Commercial Viability and Calls for Rebalancing of Economic Relationships Along the Value Chain

New Study on the Internet Questions Its Commercial Viability and Calls for Rebalancing of Economic Relationships Along the Value Chain

 

21 December 2010 (London)—A.T. Kearney has today released a report on “A Viable Future Model for the Internet”, which explores the technical and commercial sustainability of the current explosive growth in traffic and services, especially video.

The report analyses investment in fixed and wireless networks required to support the dramatic increase of Internet traffic. Even without fibre roll-out to all homes and businesses, the industry will need to invest 8 billion euros p.a. above its current trend rate just to maintain current service levels and prevent the Internet choking on the rapid growth in video content. Yet those who benefit from higher traffic volumes are those who generate it (typically content sites and over the top providers) and those who consume it (typically end users), while telecommunications companies today earn almost no revenue from the incremental traffic. Incentives for more efficient usage of bandwidth and for investment in future capacity are therefore depressed by this “structural disconnect”.

Mark Page, an A.T. Kearney partner and lead author of the report commented: “Recent traffic growth figures and mid-term forecasts for future growth are impressive but raise serious challenges regarding the viability of the current Internet model”. Without significant improvement in price signals and investment incentives, this will put innovation at risk and have knock-on effects for those sectors which hope to launch new services dependent on high performance networks.

The report therefore analyzes four potential ways to address the imbalance: modifying customer pricing; introducing traffic dependent wholesale charges (mainly impacting over-the-top players); launching a new set of enhanced quality services over the public Internet, and offering similar enhanced quality services based on bilateral agreements between market players. The report quantifies each of these options and finds that, although all of them could contribute to make the Internet more viable, none of them alone is enough to solve the full problem. Therefore the solution is likely to be a blend of options.

Page added: “Policy makers should adopt an open and supportive approach regarding new business models which are emerging now. Some of the recent public debate has not been helpful: for instance a misguided belief that the Internet—or even fundamental principles of free speech and free enterprise—would suffer from the introduction of more balanced and rational charging. The opposite is true: without clear economic incentives, network congestion will choke off innovation and usage.”

This report was commissioned by four leading European telecommunications companies (Deutsche Telekom, France Telecom-Orange, Telecom Italia and Telefónica) as an independent contribution to the policy debates currently underway about sustaining economic growth, realising the goals of the European Digital Agenda and preserving an open and competitive Internet.

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