Network Operators and Content Providers: Who Bears the Cost?

Abstract

A number of network operators have recently claimed (1) that their costs are exploding due to increased Internet broadband traffic associated with video; (2) that, due to market defects, consumers need not and do not pay the increased costs of the broadband service; and (3) that it may therefore become necessary for content providers to subsidise the cost of the consumer's Internet service - especially as networks evolve to fibre-based Next Generation Access (NGA).

Under close scrutiny, none of these claims is persuasive. (1) Internet traffic is indeed increasing, but usage-based cost per subscriber in the fixed network is fairly constant - technological improvements are in balance with the growth in traffic (which is in fact considerably less, in percentage terms, than it was in past years). (2) Prices for fixed broadband service are stable because costs are stable - this is a success of the competitive market, not a failure. In those instances where costs truly are increasing, network operators seem to be able to raise prices accordingly. (3) The argument for cross-subsidies rests on the theory of two-sided markets, but that theory does not necessarily imply that subsidies should be flowing from content providers to network operators. If the greatest challenge to NGA migration is that the incremental willingness of consumers to pay for ultra-fast broadband is insufficient to fund the corresponding network upgrades, then what is apparently needed is more high value high bandwidth content. One could just as well argue that subsidies should flow into the content provision industry as out of it - a detailed examination would be needed.

Keywords: Internet, content provider, network operator, two-sided market

JEL Classification: H54, L51, L86, L91