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Aug 02, 2023

Telefonica's 'fair share' cost case is mumbo jumbo

A few words of friendly advice for any telco fulminating about fair contribution or fair share, the dubious idea big Internet companies are "large traffic generators" (LTGs) that should pay for

A few words of friendly advice for any telco fulminating about fair contribution or fair share, the dubious idea big Internet companies are "large traffic generators" (LTGs) that should pay for dumping too much demand on your network: If you're citing market research or analyst reports to support the case, it's a good idea to use ones that don't read like Elon Musk's guide to baby names.

Telef�nica commissioned a study from Compass Lexecon that spends 16 pages debating the pros and cons of fair share (mainly pros) before stooping to this Einsteinian-looking nonsense:

The surrounding text is not much help by way of explanation. It includes phrases like "a sufficient condition for TELCOs' investment to be socially desirable is that the change in consumers' surplus plus the change in LTOs' profits has to be positive," where LTO means "large traffic originator," an alternative to LTG. Nope? Me neither.

It's probably all very clever and easily decipherable by anyone who scored a double first in pure math at Oxford, but to the average policy wonk and other stakeholders it might as well be hieroglyphics. Yet as far as Telef�nica is concerned, the case is closed. "Compass Lexecon's economic analysis confirmed the existence of the market failure," said the operator in a blog published this week.

For the avoidance of doubt, Compass Lexecon's study doesn't get more readable. Nobody would have expected an airport thriller, but by page 24 of what is only a 38-page document we've reached this:

The value of charts

My analyst friends are welcome to get in touch and tell me I'm a complete moron, but I'll bet there are much smarter people than this algorithmically challenged reporter who won't understand so much as a coefficient of this, even with the accompanying text. Meanwhile, there is not a single chart or graphic – nada, as Telef�nica might say – despite the adage about a picture telling a thousand words. Something like this would have been useful:

That's based on data published in Telef�nica's own annual reports, where the operating costs are the sum of supplies, personnel and other expenses as well as depreciation and amortization, to account for all that capital spending on networks. Light Reading whizzed it off by email to the operator's press department and asked why, if the flood of traffic is so unbearable, does the data show that operating costs have been relatively stable over a six-year period during which annual petabytes have grown 253%. It did not receive an answer.

Now, this is probably a gross simplification, the very opposite to what Compass Lexecon has tried. Telef�nica's annual revenues have plummeted over this period, from �52 billion (US$56.6 billion, at today's exchange rate) in 2017 to less than �40 billion ($43.5 billion) last year, as it has sold underperforming units and scaled back. Costs have remained stable despite a net reduction to headcount of more than 19,000 roles, not to mention the divestment of towers and other infrastructure assets.

But the point remains – there is no obvious correlation between growth in petabytes and costs, or at least none that Telef�nica has revealed. What would have been more persuasive than Compass Lexecon's mock-up of Einstein's blackboard is a simple formula or chart showing that a petabyte increase in traffic forces an operator to spend x amount more on server equipment, line cards or electricity.

Operators conceivably would not want to reveal such information, regarding it as commercially sensitive. But they did start the debate. A less charitable explanation for any reticence is that no simple correlation exists. Once built, today's high-capacity networks, especially the fixed-line variety, can probably withstand much more than consumers are throwing at them or will throw at them until the Vision Pro's successor takes off. At some point, traffic will exceed capacity like water breaching a dam, and new investments will be needed. But that is not the same as arguing that petabyte growth generates extra cost.

If telcos have not said this directly, it's implicit in much of the lobbying about LTGs and traffic growth. Other publicly available data is not supportive, though. In the early days of the COVID-19 pandemic, the UK's BT said its network was built to cope with as much as 17.5 Tbit/s of aggregate usage and that actual daily usage had risen from 5 Tbit/s pre-pandemic to just 7.5 Tbit/s – well below the dam's upper limit. Electricity consumption at Telef�nica dropped from 6,901 gigawatt hours in 2017 to 6,106 last year.

Allera has a go

But at least one telco exec has attempted to correlate traffic growth with cost. Nearly two years ago, Marc Allera, BT's consumer chief, told the UK's Guardian newspaper that "every Tbit/s [terabit-per-second] of data consumed over and above current levels costs about �50 million [$63 million]." On this basis, levels also seem to be well above the 17.5 Tbit/s upper limit of early 2020. Earlier this year, BT saw a peak of 29.11 Tbit/s, said Allera in a February blog.

If you charitably compare 29.11 Tbit/s with the 7.5 Tbit/s usage levels of early 2020 (and not the 17.5 Tbit/s the network could supposedly handle), Allera's sums equate to roughly �1.08 billion ($1.37 billion) in extra costs. That might sound a lot in isolation, but it works out at just �360 million ($456 million) annually, about 7% of BT's capital expenditure for its last full fiscal year, 2.7% of its operating costs or 1.7% of its revenues. That does not seem like a big deal.

There are other, more philosophical reasons to oppose fair share. Any business – whether it sells books, plates of food, motor fuel or gigabytes – must invest to support growing demand for services. The trick that has been obvious for thousands of years is to make sure you charge enough to cover that investment and even make a little more. Telcos unhappy with their efforts are essentially trying to get someone else to foot the bill. Arguing content companies should stump up for networks is about as rational as saying JK Rowling should pay Barnes & Noble because demand for her latest novel caused wear and tear at stores.

In fact, it is just as logical to argue that telcos should pay Internet companies for the content they supply. Take Amazon, Disney, Netflix and others derided as LTGs out of the equation and see what happens to interest in high-speed broadband connectivity. Would anyone not streaming dozens of gigabytes a month see a need to upgrade from part-copper to full-fiber service?

These are much harder points to rebuff, which probably explains why the fair share campaign has concentrated on traffic and costs. If those are to remain the focus of telco efforts, then establishing a clear link between the two is paramount, along with proving incremental expenditure is no longer sustainable. Ultra-confusing equations are probably not a good place to start.

Update: Telef�nica responded to Light Reading's query after the publication of this article, directing it to this company blog (in Spanish, originally) dated May this year, which argues that: "Approximately one third of investments in fixed networks and about two thirds of investments in mobile networks are due to traffic growth."

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� Iain Morris, International Editor, Light Reading