The discussion regarding a cost-sharing framework between telcos and digital content providers is resonating ever louder in Europe. As the region faces an economic inflection point, building long-term resilience requires a smarter and more innovative approach.
The European Telecommunications Network Operators’ Association (ETNO), which represents Europe’s main telcos, warned that “a large and growing share of network traffic is generated and monetized by large technology platforms.” Hence, telcos such as Orange, Vodafone and Telia argue that network investments from their side disproportionately benefit the Big Tech companies because they don’t share the costs for network upgrades.
Big Tech should contribute to the “costs of networks to ensure their economic and environmental sustainability” as networks are the essence of connectivity and at the heart of telecom operators’ business. With increasing competition from OTTs and hyperscalers, operators’ focus has shifted beyond coverage and speed to the quality of experience and value creation.
Network Upgrades Come With Cost
Tech companies are being pushed to help pay for the rollout of 5G and fiber cables across the European Union. These shared investments are also vital in contributing to more sustainable economies and driving efficiencies. Countries like France, Spain and Italy have petitioned the European Commission to formulate a legal framework to mandate OTT platforms into financing network infrastructure.
The cost-sharing argument by telcos is based on the notion that these digital content providers are consuming more bandwidth, which can put a strain on network capacity.
To be able to handle the surge of data traffic, telcos must upgrade their networks accordingly. A Frontier study has calculated the cost of delivering OTT traffic on European networks and determined an annual cost ranging from €36 billion to €40 billion.
As a result, network operators are persistently negotiating to involve OTTs in order to receive fair payment for conveying their traffic to end customers. Creating an economic model that can rationalize the cost and benefits shared among all network participants must be fair and not put anyone at a disadvantage.
In the current digital era, deploying next-generation networks (NGN) has much higher fixed shared and/or common costs as compared to legacy networks. Thus, an effective cost allocation method of services is required. This reflects the relationship between traffic volumes, service quality and capacity. As recommended by experts, an allocation key using quality of service (QoS) and bandwidth requirements is ideal instead of the traditional network utilization process.
In defense, streaming and internet companies said that they do have their own investments in systems that positively impact telcos. These include vast networks of data servers that allow content to be delivered at the edge — closer to a telco’s networks — which shortens the distance data travels and reduces costs to consumers for “transit charges.”
More Digital Requires Better Service, Cost Reduction
To be fit for the digital age, mandating tech companies to share telecom infrastructure costs is one of the considered options for optimization. As we know, telecom services are offered to two distinct groups of customers with quite different patterns of demand: business and individual customers.
Accenture Strategy analysis suggests that established CSPs are only targeting a fraction of the cost reduction they need to capture profitable new market growth. It has been revealed that the top 50 CSPs’ current cost-reduction plans will achieve only 35% of the savings needed to invest in growth and infrastructure.
The network upgrades being done provide extra capacity for growth and will future-proof the network as new and growing technologies, including fiber-to-the-home (FTTH) and 5G, are rolled out commercially. Network upgrades are a significant long-term investment that ensures telcos can continue meeting customer expectations, both now and in the future.
These significant investment requirements increase the urgency to save costs further. With uncertain macro-factors at play, telcos must implement strategic measures to optimize their cost structure in order to increase and sustain profitability amidst delivering quality and value-added services.
Telcos will continue to be forced to make major network investments, and the cost of doing this alone is expected to result in a drop in revenue in the order of 15 to 30%.
Having a mix of technology-enabled solutions and collaborations will allow the telco business model to transform in the years to come. What we are seeing as a trend in the telecom sector now is a shift from offering basic connectivity to enabling critical services across Industry 4.0 industries.
Thinking digital is deeply embedded in the present-day telco business models; it not only provides their own digital products and services but also the essential connectivity infrastructure needed to function and grow in the digital economy.
In the UAE scene, etisalat by e& (Etisalat UAE) and du have deployed LTE networks providing national coverage, while the 5G penetration rate is the second highest globally. To help increase the capacity of 5G networks of today and keep up with growing data demand, the government has allowed for the 2G (GSM) networks to be closed down, letting the spectrum and other assets be re-purposed for 5G by the end of 2022.
The rising prominence of digitization and advanced technological requirements offer great potential for ICT services in both the public and private sectors. CSPs then need cost-effective tools that not only support delivering on the promise of 5G but also strengthen their ability to get a more valued RoI.
Analysys Mason's research found that CSPs can realize IT cost savings of approximately 25% over a five-year period by adopting telecom services delivered through a software-as-a-service (SaaS) model.
The Next Generation of Telecom
The future of telecommunications is data-centric and new horizons are being opened by spectrum, Wi-Fi offloading, backhaul optimization, alternative vendor models and infrastructure sharing. To prepare for the next generation of telecom growth, particularly in the MEA region, operators will need to make sufficient investments in their core business to maximize revenue and garner funds to build or buy the infrastructure needed to deliver better services.
From a regional perspective, the telecom sector in the MEA region is in the midst of strong growth and investment, driven by a technology explosion and strong demographics. The growth engine of the future telecom industry is a digital ecosystem, propelling the growth in demand for data services as well as financial and commercial offers.
A huge potential will be captured by operators who, by making smart investments in the core business of connectivity, will become leading digital telcos in the years to come.