As European telecom operators struggle to monetize expensive network upgrades, some say it is time for Big Tech to pay up.
Both tech and telecom companies rely on next-generation internet and mobile networks to fuel future growth. Of the two sectors, telecom companies tend to spend more on direct network upgrades as they build, manage and bill customers for greater network access. These companies have struggled to generate strong returns on their investments in recent years.
Looking at the six leading telecom companies in Europe — Deutsche Telekom AG, BT Group PLC, Orange SA, Vodafone Group PLC, Telefónica SA and Liberty Global PLC — half reported negative five-year compound annual growth rates for revenue in fiscal 2021. Liberty Global reported the steepest negative growth rate at -5.6%, followed closely by Telefónica at -5.4%. In comparison, Big Tech companies reported positive five-year CAGRs between 11% for Apple Inc. and 33% for Meta Platforms Inc.
The growing divide between the tech and telecom industries' financial performance has led telecom leaders and some regulators to call for new rules that would require large tech companies to contribute more to Europe's telecom networks. Telecom operators want tech to pay to access their networks. The European Commission is studying the matter and is expected to release a proposal in the fall.
"If we don't fix this unbalanced situation, Europe will fall behind other world regions, ultimately degrading the quality of experience for all consumers," the CEOs of Telefónica, Orange, Vodafone and Deutsche Telekom said in an open letter to European legislators earlier this year.
Network traffic
The six largest technology companies — Apple, Alphabet Inc., Amazon.com Inc., Meta, Microsoft Corp. and Netflix Inc. — are responsible for generating more than half of global internet traffic, according to Sandvine's Mobile Internet Phenomena Report for 2022.
"If you are a major corporation, if you are a hyperscaler, and your business is disproportionately affecting the network, it is a fair scenario that you contribute to the delivery of that infrastructure," said a spokesperson for the GSM Association, an industry organization representing the interests of mobile operators.
The idea has seen increasing support from within the European government. European Commissioner for Competition Margrethe Vestager said in May that something should be done about the "issue of fair contribution to telecommunication networks," arguing that those generating the most internet traffic, like Big Tech, should contribute more to network development.
In July, the European Commission proposed a declaration on digital rights and principles that called for "developing adequate frameworks so that all market actors benefiting from the digital transformation assume their social responsibilities and make a fair and proportionate contribution to the costs of public goods, services and infrastructure."
National telecom associations in Romania, the Czech Republic, Italy, Belgium, Spain, France and the Global System for Mobile Communications applauded the proposal, saying, "All European network operators investing in gigabit networks — no matter whether alternative or traditional, small or big — should be able to rely on a fair and proportionate contribution by Big Tech companies to the network costs they generate with their traffic."
Counterarguments
Other countries such as Germany, Ireland and Sweden called for a wider debate before the European Commission made any formal proposal.
Should European regulators move forward with requiring Big Tech to contribute to investments in telecom infrastructure, the details of what funds would be collected and how remains unclear. The European Telecommunications Network Operators' Association proposed a rule that would require the largest traffic creators to negotiate directly with telcos regarding network access.
More than 50 members of the European Parliament objected to that proposal, saying it would mark "a disastrous return to the economic model for telephony" that allowed phone companies to charge high rates for access.
Another 34 nongovernmental organizations, including European Digital Rights, raised concerns about potential breaches of the net neutrality principle, saying that creating financial ties between network operators and large tech companies could result in those tech companies getting preferential treatment.
A similar proposal from the European Telecommunications Network Operators' Association in 2012 was dismissed by the Body of European Regulators for Electronic Communications and the regulators.
"There is no evidence of market failure in the telecom sector to warrant a tax on internet traffic from Big Tech companies," said Alexandre Roure, a director at Computer & Communications Industry Association, a nonprofit organization for technology companies. Roure pointed to telcos' history of paying shareholder dividends as a sign that they run successful businesses.
Among Europe's largest telecom operators, Deutsche Telekom paid the most dividends, returning $3.72 billion to shareholders in fiscal 2021. Deutsche Telekom also reported the highest five-year CAGR among its peers at 8.2%. Telefónica, which reported one of the worst CAGRs, paid out $730 million in dividends in fiscal 2021.
Growing divide
The six largest Big Tech companies that generate the most traffic have been outperforming the largest six telecom companies in Europe for years. The return on capital of Big Tech in the latest fiscal year ranged from 6.5% for Amazon to 35.2% for Apple, according to data from S&P Global Market Intelligence.
In comparison, the return of the largest six telecom companies ranged from 1.6% for Vodafone to 5.0% for BT Group.
Capex growth
Defenders of the status quo say Big Tech is already contributing to the development of the ecosystem by investing heavily in product development and efficiency. Telecom companies are benefiting from a higher demand for traffic that Big Tech creates as they charge customers more for faster broadband speeds and higher capacity.
Netflix is building cache servers closer to final customers to put less pressure on networks. Alphabet's Google, Meta, Microsoft and Amazon have been investing in undersea fiber-optic cable for years and now dominate this area.
"Big Tech companies invest a huge amount in their services," said Mohammed Hamza, principal analyst at Kagan, a media research group within S&P Global Market Intelligence. "It is their services that drive much of consumer internet usage."
On average, capital expenditure of Big Tech companies has grown from 7.9% of revenue in 2012 to 9.2% in 2021, and a rising share of that spend went to network infrastructure. European telcos boosted their capex spend from 12.9% to 16.4% over the same period.
Next steps
Most industry observers agree there are structural issues in the European telecom sector that contribute to European operators typically underperforming their counterparts in the U.S. The largest three U.S. telecom companies — T-Mobile US Inc., AT&T Inc. and Verizon Communications Inc. — outperform their European peers in terms of revenue growth and return on capital.
Kagan's Hamza said the European regulatory regime could be partly to blame for the discrepancy, given that market consolidation has historically been discouraged and acquiring spectrum for next-generation mobile networks is expensive.
"There are other solutions to help [telcos]," Hamza said. "Charging Big Tech is too easy a concept to be a fair one."