The Digital Networks Act as a solution to the imbalance on the Internet

In July we launched the EC White Paper series, presenting Telefónica’s contribution to the public consultation on the White Paper. As a result of this consultation, the Commission will present a legislative proposal, the Digital Networks Act, which will determine the future of the European Union and the telecommunications sector over the next decade through a new regulatory framework.

The first article analyzed the proposal for the future of the telecommunications sector, the second article looked at the new challenges facing the new Commission. In this third post, we look at internet imbalance and the new way to restore it.

The end of the original Internet

The Internet as we knew it when it began in 1992 no longer exists. The Internet was a distributed, hierarchical network with highly symmetrical traffic flows. Users and service providers connected to local networks, which in turn connect to a higher level network, etc., up to top level or Tier-1 networks.

Within the same layer, the networks exchanged traffic peeking Arrangements where free billing occurs based on a relationship between peers providing the same service to each other, granting each other access to their respective customers and subordinate networks, exchanging traffic in a highly symmetrical manner and with similar cost structures Fact determined that the cost of the service received was similar to the income from the service provided Peer, Agreements known as free peering.

The Internet of 1992 has transformed into a commercial Internet

Internet content and service providers (ISPs) on the one hand and Internet access service providers and network operators on the other formed a symbiosis in which both mutually benefited from increased demand; The more services and content available, the greater the telecommunications companies’ demand for Internet access, and the more customers the telecommunications companies have, the more users have accessed the CAPs’ services.

The Internet of 1992 has given way to a commercial Internet. The network of networks is now highly concentrated: only five companies generate more than 70% of Internet traffic. Data flow is highly asymmetrical and the network architecture is much flatter.

As the CAPs grew larger, they moved to connect to higher levels of the network, demanded equal peering treatment, and enforced free peering agreements, although they were different in nature and did not have peer-to-peer relationships with the network operators.

Over time, the largest CAPs have deployed their own network of undersea cables for their exclusive use and have moved back down the Internet hierarchy to connect directly to local networks. In this way, they deliver traffic directly to their users without additional intermediate networks and enforce the free billing model in which they do not pay network operators for the service of transmitting IP traffic: for the distribution of their traffic across the national distribution of ISPs and access networks to their end customers.

The relationship between CAPs and network operators is no longer symbiotic, but purely commercial (and unbalanced).

As the Internet has changed, the relationship between CAPs and ISPs has also changed, becoming a purely commercial and unbalanced B2B relationship.

More than 75% of CAPs’ revenues are related to online services based on the transmission of IP traffic. Their business models, either subscription or free ad-based models, generate more revenue the more traffic they distribute.

With free models, the more traffic they distribute, the more advertising will be shown; and in subscription models, increasing monthly fees are set according to the quality of the video distributed – the higher the quality (SD, HD, 4k) and therefore the more bandwidth and data traffic required, the higher the subscription price.

In contrast, despite continued Internet traffic growth of over 25% per year over the past decade, telecom operators’ revenues have remained flat or even declined.

Traffic growth has resulted in increased revenues, profits and profitability for CAPs and increased expenses for ISPs in the form of investments required to increase network capacity to meet growing traffic demand. These increased investments, which are not linked to the generation of additional new revenue, have reduced ISPs’ profitability.

Specialized companies – Ericsson, Arthur D. Little – continue to forecast growth in Internet traffic in Europe at a level of between 15% and 20% per year. Video will continue to drive Internet traffic growth, growing by 7% on fixed networks and 12% on mobile networks, accounting for 74% and 72% of total Internet traffic, respectively. To maintain the quality of the Internet, continued investment in expanding network capacity will be required.

By not paying for the distribution of traffic on the ISPs’ networks, the large Internet traffic generators or GGTs develop policies aimed at unlimited traffic growth and therefore at maximizing their profits: automatic and continuous playback of videos, algorithms to maximize the Attention of users, sending massive advertisements, etc. However, in addition to generating this unwanted traffic for their customers, which is estimated to represent up to 20% of the traffic received by users, they also make unilateral decisions without the knowledge or involvement of their customers the volume of traffic sent: you decide on the codec to use, on configuring prefetch and adaptive video rate techniques, or on adapting the video quality to the size of the display screen.

Since there is no cost associated with traffic distribution, they make these decisions that determine the volume of data to send without efficiency criteria: for example, using outdated codecs or not adapting video quality to screen size. The result can be seen in significant differences – up to 50% – in data consumption for similar services from different providers and even for the same service from a single provider, depending on the mobile operating system of the cell phone, Android or iOS.

Network operators are required to enter into agreements with major Internet traffic generators (TMGs) for the service we provide to transport IP traffic data over our networks. These commercial negotiations between the parties should be strengthened by the introduction of an arbitration mechanism whereby a competent authority determines the conditions for the provision of services in the event that both parties are unable to reach a free agreement within a reasonable time.

An arbitration mechanism would ensure balanced agreements between telecommunications companies and GGTs for the provision of IP traffic transport services

Pricing the service received would not only improve the profitability of the networks associated with the provision of the service, but also promote efficient traffic generation and therefore lower traffic growth by providing a price signal.

Both factors will undoubtedly contribute to the sustainability of networks by making them more attractive to investors and reducing the need for further investment to increase capacity due to slower growth in transport demand.

The development of DNA entrusted to Commissioner Virkkunen will restore balance to the Internet and ensure the sustainability of investments in very high capacity networks

The work commissioned by the President of the European Commission, Ms Von der Layen Mission letter The proposal, addressed to the Commissioner-designate for Technology, Sovereignty, Security and Democracy, Ms Virkkunen, includes the development of the new Digital Networks Act (DNA) to encourage the development and investment in secure, high-speed broadband fixed and mobile networks to the Commission’s public consultation on the White Paper of February 2024. The DNA therefore represents the most appropriate legal instrument, in terms of scope, timing and the Commission’s own prioritization, to balance the Internet and the sustainability of investments in very high capacity networks to restore.

In the next post we will take a closer look at the new regulatory framework.