Fact Check the Danish Government’s Non-Paper on Broadband Fair Share, Consolidation and Spectrum

The Danish Parliament’s Climate, Energy and Utilities Committee ’s published a 4-page document titled “Danish non-paper on the European Commission’s Public Consultation on the future of the electronic communications sector and its infrastructure” on May 2. This appears to be a preliminary document for Denmark’s response to the EU consultation closing May 19. The document appears to represent the view of the current set of ruling parties in Denmark: the Social Democrats, Left (a classic liberal party) and the Moderates. The document is not official, hence it is a “non-paper”.  The document was not informed by any public process or hearing, hence it should not be considered as a stakeholder assessment. Indeed the non-paper observes that it “sees a clear need for an open and transparent debate before initiating any proposals in this field.” However, the documents appears to have come to a conclusion without any such debate taking place in Denmark.

The non-paper from Denmark is important because the country is recognized as a leading digital society for high levels of broadband access, use and skills, an outcome of long-standing, multi-party cooperation. However, the non-paper makes a series of unsupported points which should be fact-checked. Fortunately Strand Consult could use Denmark’s strong laws for transparency and access to government documents to inquire how and who created such a document.

Strand Consult, based in Denmark, is an independent provider of research and analysis in the fields of mobile telecommunications, information technology, and public policy. An important part of our work is to create transparency and conduct fact checks on policy information. We have established a Global Project for Broadband Cost Recovery to collect, analyze, and share the policy research to close the digital divide and develop sustainable business models for broadband.

Strand Consult’s request for access to the documents which supported the creation of the non-paper resulted in an email from the Danish Agency for Data Supply and Infrastructure noting that the following documents were consulted in its creation.

• Axon Partners Group report ‘Europe’s internet ecosystem: socio-economic benefits of a fairer balance between tech giants and telecom operators’.
• WIK-workshop om ‘New Rules for the Digital Decade’, 6.-7. September 2022.
• Ofcom conference om ’Net neutrality for an evolving internet’, held 12 January 2023.
• WIK Consult GmbH report ‘Competitive conditions on transit and peering markets’.
• BEREC’s preliminary assessment of the underlying assumptions of payments from large CAPs to ISPs (BoR (22) 139).

While it is helpful to know which documents informed the non-paper, these should be referenced in the document itself with the specific point being made.

The Danish document consists of four sections which correspond to the consultation (Technological and Market Developments; Fairness for consumers; Barriers to the Digital Market; and Fair Contribution by all digital players.).  This research note reviews the Danish document and comments on its credibility. The first two sections are not controversial. However the third and fourth section make unsupported claims about radio spectrum, consolidation, and broadband fair share. Strand Consult provides the relevant facts, academic research, and economic theory.

Fact Check of the Danish Government Non-Paper

In the first section on Technological and Market Developments, the Danish government observes that the EU should maintain a strong focus on transparent and predictable framework conditions that will ensure a strong and well-functioning market for electronic communications with a high level of private investments and the continuation of a technological neutral approach to regulation in the field of telecommunications.

In the second section on Fairness for Consumers, Denmark recognizes that an EU level framework for rules on universal service obligations is a useful tool to ensure that at least the electronic communications services (adequate broadband internet access and voice communications) are available to all consumers at an affordable price in the Member States. Denmark says that any initiatives within the EU regulatory framework on electronic communications must be flexible and should not disturb the market in a way that would disincentivise private investments.

Spectrum

In the third section, Barriers to a single market, Denmark observes that the EU regulatory framework must maintain flexibility in electronic communications so that Member States may take national circumstances into consideration in the political decision-making process. Denmark suggests that an integrated radio spectrum market in the EU risks sparking a consolidation in the market to the detriment of competition, innovation and growth and ultimately consumers and businesses.

The Danish non-paper does not cite evidence or theory why an integrated spectrum market would incentivize consolidation. Spectrum was not a key theme of the aforementioned sources. Indeed, it is possible to imagine that a larger, integrated market for spectrum could enable new and smaller players, as theoretically there would be more supply of spectrum, which could lower its price and enable market entry.

Many leading authorities have described the benefits of a pan-European spectrum market including but not limited to improving the rollout of 5G, economic growth and productivity, and improved mobile coverage and public safety (according to a 2021 ITU panel).  Moreover, the EU itself has raised this issue noting its benefits, at least twice in 2023 (See here and here). Indeed, many authorities have recognized the value of such a market, and further, the presence of conflicting national rules for spectrum creates barriers for a single market.

Consolidation

Moreover, it does not follow that consolidation is harmful to competition, innovation, and growth. Strand Consult has documented how South Korea completed a 5 to 3 merger in year 2000.  South Korea consistently rates as the world’s leading broadband nation in studies by the OECD and ITU. South Korea boasts the highest rollout of 5G and FTTH in the world. Indeed a single market for spectrum in South Korea allows that country’s mobile operators to achieve economies of scale and compete for its 73 million mobile broadband customers. Strand Consult’s report on 4 to 3 mobile mergers provides an insightful look on the topic and examines 150 analyses of 4 to 3 mobile mergers around the world.

Fair Contribution By All Digital Players

It is interesting that the half of the 4-page document is devoted to this topic, even though it only comprises a quarter of the EU’s consultation. The following section notes the claim by the Danish non-paper followed by Strand Consult’s assessment.

Danish Non-Paper Claim: Denmark says it “is skeptical in principle of measures intended to make large OTTs or other digital players contribute to the cost of the deployment of networks, and strongly opposes any form of mandatory contributions, including taxes or funds based on the traffic that end-users request from CAPs or other digital players.”

Strand Consult’s assessment: The giveaway from the earlier statement is the phrase “traffic that end-users request”. As Strand Consult details in its research note fact checking this claim and in its fact check report, users may request some data, but they can’t control its size and behavior. Indeed Netflix’s adaptive bitrate technology expands to fill the available bandwidth in the broadband network, reducing availability for other data, notably social benefit services. More largely, end users receive plenty of data they never request like advertising (as much as 25% of mobile traffic), software updates, and spam.

As for the use of the term “mandatory contributions”, there is no such regime in the world which uses that presently. It is unclear which path the EU will take. South Korea has market-based negotiation; there are no mandatory fees between broadband providers and content providers for network use. The parties conduct a negotiation and the terms are confidential.

The USA does consider bringing large tech companies into the Universal Service Fund; however a bipartisan Senate bill suggests that the first step is a study is to determine the efficacy of such a move. Denmark has no basis to oppose this without further information. Indeed, a study of Australia’s News Media Bargaining Code is instructive to demonstrate the success of such a regime, reportedly bringing AUS $200 million to small, medium and large media in Australia and covering editorial costs.

Danish Non-Paper Claim: The paper further observes “Denmark is of the opinion that the solution to ensuring the necessary investments in roll-out of networks lies in effective competition policy, including the specific regulation in the EECC, along with programs like CEF Digital.” This is followed by the statement that “Such measures deviate from the principle of net neutrality. Deviating from this important principle would only be proportionate if the measures are necessary as well as effective.”

Strand Consult’s assessment: First, as the EU itself observes, the proceeding has nothing to do with net neutrality which by EU law is defined as rules governing the broadband provider’s behavior toward end users on the last mile. It says nothing about the relationship between broadband providers and content providers. Even when there have been disputes in Germany and South Korea over payment agreements with content providers, the broadband providers have never punished their customers for content providers’ refusal to pay or negotiate for the use of their network.

The Committee has a naïve view that insufficient investment is just a geographic problem. After all Denmark has a higher level of investment than most EU countries. This reflects in part about a dozen Danish energy companies received some DKK 67 billion. Having a large sum of cash they invested in fiber to the home (FTTH) network. However these investments have not made the high returns expected given the heavy competition in Denmark for other broadband technologies. These energy companies have since consolidated considerably, something the Committee fails to observe. In any event, the EU suffers a €300 billion gap of investment versus its needed targets. That is a key reason why the EU has launched the consultation. It is stunning how Danish bureaucrats could be so uninformed.

Danish Non-Paper Claim: The non-paper observes, “There is no causality whereby more traffic translates into higher costs for ISPs (Internet Service Providers). Fixed access networks are largely not traffic-sensitive, as reflected by the widespread practice of offering flat rates. The marginal cost of additional traffic in mobile networks is also quite low. There seems to be no clear cost generated specifically by CAPs or other digital players for which compensation is necessary. The demand for traffic is what drives demand for subscriptions. In the absence of content providers, especially those providing traffic-intensive content requiring high data volumes and speeds, end-user demand for speeds, data amounts, quality of service etc. would likely be much lower. The general costs of delivering traffic within the data amount included in an end-user’s subscription are an inevitable element of the business case of network operators. It is not necessary or reasonable to compensate operators for any costs associated with the primary driver of the demand for their product.” 

Strand Consult’s assessment: The passage above is hard to parse, as it is written in a dense, officious English. However it appears that this claim could be attributed to WIK Consult, but there is no such attribution in the Danish non-paper. Strand Consult’s research  demonstrates that every $1 USD in streaming revenue to content providers creates $0.48 USD in unrecovered cost in the middle mile of a rural FTTH network. In the case of South Korea, an explosion of traffic 24-fold also increased cost. So the claim that increased traffic does not increase cost can be debunked.

Then the Danish non-paper then devolves into conjecture that providing “fair contribution” could lower the business case to invest in rural areas. The Danish non-paper fails to realize that the primary financial beneficiary of the roll out of networks is content/service providers, not broadband providers.

Danish Non-Paper Claim: The non-paper further states, “Alternatively, any requirements of specific investments based on the contributions would give rise to the need for complex and bureaucratic monitoring of the use of the contributions.”

Strand Consult’s assessment:  There is no proof for this statement, and it contradicts the reality of South Korea, where there only limited oversight of the market-based negotiation in the form of a period traffic report from the Ministry of ICT. Moreover, the US Federal Communications Commission (FCC) welcomes a cost recovery program and does not see it as administratively difficult. Indeed, the FCC has administered such a program for more than a generation. However, this does not mean that a regulated model is best for Europe. The EU assessment will likely examine costs and benefits of regulatory oversight.

Note, however, that when Big Tech companies lobbied EU governments for net neutrality rules to benefit their businesses, they were not concerned about the regulatory costs.

Danish Non-Paper Claim: It states, “Requirements to invest in specific areas could disrupt commercial market dynamics in much the same way as state aid, as operators’ administrative resources and the capacity of the civil works industry are limited resources. Truly commercial deployment may have to be postponed to fulfil these requirements. Disrupting commercial deployment plans could have adverse effects on investors’ willingness to invest in the telecommunications industry, leading to fewer funds for truly commercial investment. This implies a risk that network operators could become increasingly reliant on “fair share contributions” instead of investing their own funds.”

Strand Consult’s assessment:  The non-paper does not offer any evidence or theory for this statement. More largely, it contradicts what already goes on today in the interconnection market which WIK Consult, Analysys Mason and others say is characterized by “interdependent, symbiotic” relationships.

Strand Consult’s reports on rural broadband in USA show that current investment is depressed in some areas because operators cannot recover the costs of provisioning the middle mile with growing traffic. Prices cannot be raised on end users and tech companies refuse to negotiate for cost recovery. Having a mechanism to recover the shortfall could spur investment.

Danish Non-Paper Claim: “From a consumer’s point of view, any measure of this type may also be harmful. Any potential “fair share contribution” may lead to increased consumer prices for OTT services, which would be harmful in times of increased cost of living. Such increased costs would disproportionately affect low-income citizens and could exacerbate digital and cultural divides between social classes. Earnings from royalties among artists distributing their creations via CAP OTTs may also be negatively affected. Quality and choice in terms of content could also be negatively affected, as the measure could potentially lead to a lower incentive for digital players, e.g. a provider of OTT services, to invest in new attractive European or regional content which could lead to more subscribers, as more subscribers would lead to more traffic which in turn would lead to an increased contribution to the network operator, making it a poorer business case. OTT service providers may also choose to exit markets and deprive consumers of services.”

Strand Consult’s assessment: It is interesting that the Danish non-paper says “any” measure could be harmful. That is a stretch which is not supported. Indeed, it does not cite any actual measure which is harmful. The statement is conjecture. 

As Strand Consult details in its Fact Check report most small broadband providers have no financial relationships with the large content service providers. Most broadband providers simply receive data. Some report attempting to contact tech companies to negotiate cost recovery, but these requests fall on deaf ears.

Another important part of cost recovery is to implement business models which do not raise fees on end users. The issue of pass-through and how best to avoid it is described by Singer and Tatos, who along with Nobel Economist Paul Romer, argue for ad taxes. Meta and Alphabet earn revenue from advertisers, not end users. Moreover, advertisers bid for keywords in auctions. So Meta and Alphabet are good choices for bear contributions because they can’t pass-through fees unlike Amazon, Apple, Netflix, and so on. This is not to say that Meta and Alphabet should be the only participants in cost recovery.

By assessing the enterprise business services, for example cloud computing, authorities could avoid raising fees on consumers. Strand Consult discusses this in detail in its report  Recovery for Broadband Use: A study of the business model for 50 broadband providers that offer service in 24 American states.

Danish Non-Paper Claim: It notes “In South Korea, the only country to have experimented with a “fair share” system, the contribution requirement has led to OTTs closing their cache servers in the country, leading to lesser quality of service for consumers.”

Strand Consult’s assessment: The non-paper does not provide a source for this statement.  Strand Consult can find reports of disputes over servers (indeed paying them is the heart of the debate), but it cannot find reports of them being close.

Notably the statement falls into the category of purposeful misinformation about South Korea. Strand Consult in two research notes has debunked WIK Consult’s claims on South Korea. See Fair share contributions and broadband cost recovery – When Google and Netflix talk about things being bad in “Korea”, they probably mean North Korea, not South Korea and Who’s weighing in on broadband fair cost recovery? Fact checking the arguments from governments, trade associations, and think tanks.  It does not follow that South Korea has the world’s fastest networks and highest rates of next generation broadband adoption and at the same time, experiences a lesser quality of service. Strand Consult is disappointed the Denmark’s civil servants, who are highly regarded in Denmark, could fail such a simple test of critical thinking and reflection.

Strand Consult has exposed how groups like the Carnegie Institute, Open Net, Analysys Mason, Google, Netflix and others have spread misinformation about South Korea. South Korea remains a leading broadband nation however you characterize its policies.

Danish Non-Paper Claim: It notes, “The content provided by major OTT players in fact constitutes an important use case for broadband that gives consumers an incentive to buy subscriptions with very high bandwidth, and that demand can boost deployment.”

Strand Consult’s assessment: Strand Consult recognizes this statement among the garden variety claims like “Without Big Tech, nobody would subscribe to broadband.” One could equally say that without broadband, there would be no Big Tech. Indeed, if there was no broadband, Netflix would still send its DVDs by mail.  In any event, people subscribe to broadband for a variety of reasons, not exclusively to watch movies. Indeed, this is self-evident because many do not subscribe to the highest tier. However, under prevailing policies, end users don’t know  the real cost of video streaming entertainment.

Strand Consult’s follow up report with surveys of some 50 broadband providers in USA shows that growth of video streaming entertainment has not been a revenue opportunity for most broadband providers.  

Danish non-paper claim: Then the non-paper goes out a limb and writes, “Citizens are unlikely to pay high premiums for high-speed internet subscriptions to access e-government solutions or to enable future technologies. Citizens co-finance internet deployment by buying high-speed subscriptions because of highvolume entertainment content from OTTs. Any measures reducing the availability or quality of high-quality, high-data volume content is likely to create an entirely different funding problem for broadband deployment.”

Strand Consult’s Assessment: It appears that the non-paper is saying that the only way for broadband providers to make money is to charge for entertainment. This claim in part 4 contradicts what was said in part 1: Denmark expects private investment to finance networks. However, if the government wants to curtail how revenue can be earned (insisting that all products be flat rate and insisting that there can be no cost recovery), it will limit return on investment.  

In any event, this is not a technologically neutral pricing program, a violation of another principle which Denmark claims to support.

Strand Consult’s Value Proposition

Strand Consult has established a Global Research Project for Broadband Cost Recovery and has contributed to important milestones in the USA, South Korea, United Kingdom, and other regions. Strand Consult has studied these issue for years and has produced various reports documenting investment shortfall from exploding video streaming entertainment traffic. Strand Consult’s team offers a series of economic, legal, and policy analysis to help policymakers modernize broadband policy. Strand Consult is also engaged in bringing transparency to  regulatory processes around the world.

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