The eCommerce Blog - by Allegro Group

Many European policy makers and legislators believe they have a responsibility to help European players to compete with foreign players. As the Head of Public Policy for one of the leading European Internet companies, this is not altogether unwelcome. But it is not altogether unproblematic either.

The support of European policy makers for the European Internet industry is badly needed.
We need policies and laws that promote an entrepreneurial and risk-taking culture, because that is what drives fast-paced innovation, technological development and economic competitiveness.

We need rules that enable European companies to quickly grow across borders to develop the scale that provides economies a pre-condition for benefiting from big data.

Where markets develop fast, we need to support competition with smarter and more nimble regulators who can step in to fix abuses, but who also know when to leave things alone.

These are big challenges for us in Europe, because our cultures are instinctively conservative; valuing security, safety, predictability and comfort more than they value disruption, instability and risk. But we must overcome these challenges if we are to become producers, rather than consumers, of world-beating Internet companies.

Of course, as I mentioned above, policy makers are looking for the European interest so that they can support it. For decades Europe has boasted some of the strongest telecoms companies in the world. Cable & Wireless, France Telecom, Telefonica and – more recently – Vodafone have become household brands around the world. Against this background, it is easy to see why many people subconsciously regard telecoms as “European”, and the Web as “American”. It is critically important to the success of the European Internet industry that this mindset is overturned. As the first Brussels-based public policy professional from a European Internet company, a large piece of this opportunity and this challenge falls to me!

It’s a big challenge. The telecoms industry is big and powerful. The story it has to tell is important and legitimate, but it is also a story that is rooted in an older and less online mindset.

While I regard colleagues from telecoms companies as valuable allies on most issues our visions of the future of the digital economy diverge in some respects, and it is important to explore this. Here are some examples of where I think they go wrong:

  • Internet companies are free-riding on the telecoms industry’s infrastructure investments.” Not true, because Internet companies pay for their own Internet access in the same way as consumers do. Not to mention the investments they make in the content and applications that drive demand for Internet access.
  • “Web sites that deliver bandwidth-hungry applications like video or gaming are creating traffic congestion on telecoms operators’ networks. If they shared in the costs of upgrading network infrastructure, they would be more efficient about the way they send data over the Internet.” Not true, because web sites already have a big commercial incentive to deliver traffic efficiently – don’t forget, they pay for Internet access too. Bizarrely, there seems to be an underlying assumption that the growth in Web traffic is a problem that needs a solution. It strikes me more as something telcos ought to be welcoming as an indicator of rising demand for the services they provide.
  • “Internet access is a two-sided market with consumers on one side, web sites on the other and telecoms operators in the middle. Economic theory suggests that in a two-sided market, it is normal that revenue can be obtained from both sides.” In fact, Internet access is a two-sided market in very rare circumstances. A consumer’s access provider is highly unlikely to be the same company as a web site’s access provider. A consumer’s access provider is hardly any more likely to be doing business directly with a web site’s access provider; there are probably several other infrastructure providers in between. The Internet is a multi-billion-sided market, because it doesn’t just connect a consumer with a business. It connects every possible combination of people, businesses, academia, government, civil society organisations, media etc.. This is where the fundamental value of the Internet lies. A European telco is not connecting European consumers to web businesses and vice versa; it is connecting consumers to a network of networks, which eventually give access to some other “consumer” of Internet access that may or may not be a business. Once we understand this, the idea that a European telco should get revenue directly from a web site operator quickly begins to look absurd.

The European Commission’s recent publication of legislative proposals for a system of telecoms regulation includes provisions that set the rules for how Internet access should be provided to European consumers. Specifically, it concerns the issue of “managed” (or “specialised”) services – services that a telecoms provider can offer to consumers over its infrastructure and that might compete with similar services offered by someone else. These services are at the heart of the debate on “net neutrality”.

Telecoms operators have long argued that they should be allowed considerable freedom to provide such services at guaranteed levels of quality. They argue that giving them a regulatory blessing to do so would help them get a return on their investments in infrastructure and thereby incentivise further infrastructure investments. It seems very obvious to me that the opposite is much more likely. Providing regulatory protection for investment in managed services would incentivise investment in such services, potentially at the expense of competitors, while likely reducing the incentives to invest in higher bandwidth, since a quality of service guarantee for one service only adds value if the quality of other services (the remaining Internet access) is lower. Who would buy high quality access to YouTube if the same quality of service was available via the normal Internet connection?

Policy makers need to understand that the regulatory framework is likely to produce sub-optimal levels of infrastructure investment if the incentives it creates are not clearly pointing in that direction. While I don’t have all the answers, I am certain that there must be better ways to incentivise infrastructure investment.

There is also a critically important point to make here about innovation. It is well known that most of the game-changing (“disruptive”) innovations that have shaped our digital world today came from the “edges” of the Internet – from entrepreneurs working alone or in small groups and then either developing the scale needed to become global businesses or being acquired. Most of the time, when a big company like Microsoft or Google wants to get into a new business, it buys the talent and technology that it needs to do so. The added value big companies provide is much greater in terms of strategic focus, the resources and the route to market that they provide to the innovators. Facebook didn’t create Instagram’s innovations, but it used them to make the Facebook product better and more appealing to its customers and thereby also brought the innovations to market in a way that Instagram was struggling to do by itself.

When we apply this knowledge about how digital innovation works to the debate about managed services, it quickly becomes apparent that by incentivising big telecoms companies to invest in such services, we are likely to be promoting services that will be secure, safe, predictable and comfortable – not the “disruptive” and innovative services that we need to help move Europe to the forefront of global digital innovation.

I sincerely hope that European policy makers adopt an Internet- and innovation-focused mindset as they debate issues like net neutrality. There is some truth today in saying, “Telecoms is European and the Web is American”. But in my opinion policy makers have a responsibility to help change that, not to reinforce it.

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