Apple, Google asked to pay up as operators face data flood
PARIS: Google Inc., Apple Inc., and Facebook Inc. need to pitch in to help pay for the billions of dollars of network investments needed for their bandwidth-hogging services, European phone operators say.
As mobile and Web companies add videos, music and games, operators including France Telecom SA, Telecom Italia SpA and Vodafone Group Plc want a new deal that would require content providers like Apple and Google to pay fees linked to usage.
"Service providers are flooding networks with no incentive" to cut costs, France Telecom Chief Executive Officer Stephane Richard said last month. "It's necessary to put in place a system of payments by service providers as a function of their use."
Richard, who may address the issue at the "Le Web" conference in Paris today, has joined Telecom Italia CEO Franco Bernabe and Telefonica SA CEO Cesar Alierta in what could turn into a cold war with Web companies. As more consumers access the Internet on mobile devices, the cost of building bigger networks may outstrip revenue growth for wireless operators, slicing their return on investment.
The mismatch between investments and revenue "is set to compromise the economic sustainability of the current business model for telecom companies," Bernabe said.
While the number of mobile data connections in western Europe will rise by an average of 15 percent a year to 270 million in 2014, overall end-user revenue will decline about 1 percent a year, Interactive Data Corp. estimates. In the same period, operators' annual spending on network gear will surge 28 percent compared with last year to about $3.7 billion, according to research firm Canalys.
Companies such as Google and Yahoo! Inc. "use Telefonica's networks for free, which is good news for them and a tragedy for us," Alierta said in February. "That can't continue."
To be sure, operators are benefitting from the surging popularity of mobile data use. Domestic data revenue at France Telecom, the biggest seller of Apple's iPhones after AT&T Inc., surged 24 percent in the third quarter, rising to almost 32 percent of network revenues.
Still, faced with slowing overall revenue growth even as data usage soars, the operators are trying to pass on some of the costs to the service providers.
"There's a clear competitive response by the carriers to try and make moves to ensure that the likes of Google and Apple don't have it their own way," said Paolo Pescatore, an analyst at CCS Insight in London.
Last month, the tensions threatened to spill into public after a plan by Apple to introduce a so-called soft SIM in its next iPhone prompted threats from European operators to cut subsidies for the device, the Daily Telegraph reported.
A soft SIM would make it easier for consumers to switch network providers by eliminating the need for a new, physical SIM card issued by an operator to do so.
While Apple backed off for now, the technology will eventually be introduced, Sanford Bernstein analyst Robin Bienenstock said in a note to clients, calling the iPhone-maker a "frenemy" for operators.
Apple, Google, Facebook, and online-calling service Skype Technologies SA "increasingly look like integrated operators in the telecom network sector," Telecom Italia's Bernabe said.
Service providers and phone operators have begun to experiment with new models. In the U.S., Google and Verizon Communications Inc., the biggest domestic mobile operator, urged regulators to exclude mobile Internet connections from potential net neutrality rules, which could bar operators from selectively slowing some traffic.
The exception, which wasn't adopted by the Federal Communications Commission, would have allowed operators to charge consumers or content providers a premium for delivery of certain videos, games or other applications.
Rules encouraging payment for network use are more likely in Europe, where companies like France Telecom and Telefonica are some of the biggest employers, New Yorkbased Sanford Bernstein analyst Craig Moffett and Bienenstock wrote in a note.
Operators are meanwhile looking for ways to win revenue from data-hogging customers. Vodafone, the world's largest mobile provider by revenue, plans to shift to so-called tiered pricing based on data use, following a similar move away from unlimited plans by AT&T Inc. Unlimited data plans will become increasingly rare, said Rosalind Craven, an International Data Corp. analyst based in London. Service providers, meanwhile, say they already pay enough. "Currently about 40 percent of our expenses go to networks anywayservers, peering, our content delivery network, and other resources," said Giuseppe de Martino, the legal and regulatory director of Paris-based online-video provider Dailymotion SA. -Bloomberg