Research Notes

The national broadcasting and media companies in France, Germany, Spain, Italy, UK and other European countries should support their local internet providers in net neutrality discussion. They’re in the same boat as telecom companies and have the same challenges. Norway has the right idea with a soft approach to net neutrality

Strand Consult has followed the net neutrality debate for some years. Our report Understanding Net Neutrality and Stakeholders’ Arguments looks at how the debate plays out in different countries and the various stakeholders. Those who believe that “hard” approach, or legislation, is the way to preserve net neutrality are misguided. Any law creates winners and losers and that opens the door to endless challenges and litigation. Given the the theory of rational expectations, any rule that unduly punishes one party creates an incentive for a legal workaround.

Norway has the right idea to pursue net neutrality with a soft approach. In Norway stakeholders including internet service providers, content companies, application developers, consumers, and government come together for an ongoing dialogue to create win-win solutions. More important, Norway has chosen a model which builds consensus between national actors that contribute financially to Norwegian society.

Many mistake the net neutrality debate as a battle between the internet providers and content providers. The reality is that ISPs and national media companies have a lot in common: both have local employees and are part of the national tax system. Taxes on telecom services and local media are an essential source of revenue to fund the public provision of health, education, unemployment relief, and pensions. Indeed national media companies themselves are funded through media license fees assessed on citizens. In turn the national media companies provide a vital source of information, news, and entertainment for the country. To say that the national media companies and internet service providers are in conflict are wrong. Both provide vital financial support for informational, cultural, and civic life of their respective countries.

Global internet companies are quite different from national media companies. For the most part, global internet companies do not pay in taxes (as local media do) or contribute to the provision of infrastructure in the places they serve. Their interest in the country extends only to the extent that they can profit. They don’t have the same mission or obligations as national media companies and telcos.

To be sure, content and services such as Google, Facebook, Skype and Netflix are also enjoyed by users in many countries, but they should play by the same rules. By using the legal “Double Irish With A Dutch Sandwich” scheme, revenues can be booked in Ireland for a low tax rate and avoid be taxed in the US as well. Though this arrangement is legal, it’s a festering wound on the global digital trade system.

A subscription from Netflix in Denmark is taxed at just 3% VAT (Netflix is registered in Luxembourg), but a subscription from a European telecom operator or even European over the top provider, has a VAT more than 8 times higher than Netflix.

Another mistake in the net neutrality debate is the notion that search engines, social networks, operating systems, and handsets are neutral. Put simply, the face of discrimination has many faces. To have true net neutrality, rules would need to be applied across the internet value chain, not just to internet service providers. See our research note. Furthermore, net neutrality rules should also be applied to governments which routinely block websites for reasons such as politics and security.

The net neutrality debate is intertwined with the discussion of how to accelerate the deployment of broadband infrastructure. The questions are how to do it and who should pay. The multi-sided market model says that a variety of arrangements that will evolve with supply and demand. Net neutrality, on the other hand, says that only consumers and taxpayers should be allowed pay. Essentially net neutrality creates a legal cartel in which content providers agree to accept the delivery price of zero. Content providers that wish to pay more for improved delivery service, even if it would improve consumer welfare or be a competitive differentiator, would break the cartel.

National media companies have certain challenges compared to global internet companies. Though the BBC may have an international audience, most national media companies create content in a specific language for a specific country. As such, they are nearly totally dependent on the local infrastructure to reach their audience. By contrast, global companies such as Google, Facebook, Netflix, Apple, and Skype, only care about the local infrastructure to the extent that they can earn revenue. They have a business model because another party provides the infrastructure, and the revenue they earn gets favorable tax treatment.

In many European countries high bandwidth video services such as YouTube and Netflix can account for up to 30% of an entire network’s capacity at any time. Traffic to popular websites of global internet companies such as Facebook can exceed the traffic to the top twenty local content providers combined. To be sure, users should have the freedom to access the websites of their choice, but it needs to be recognized that under the current regime, those services that contribute the least financially to the society are able to extract the most benefits. In practice, the efforts to build next generation infrastructure, especially taxpayer-funded broadband networks justified because of need for high-definition video, are essentially subsidies for profitable American internet companies.

While a number of European leaders have recognized the problem of tax arbitrage, it may be difficult to solve in the short term. In the meantime stakeholders need solutions for the net neutrality debate. Norway offers a valuable model to address the issue. In practical terms, the soft approach is a multi-stakeholder dialogue where interested parties express concerns, raise questions, and share perspectives. The forum allows parties to explain their challenges and find cooperative solutions. To be sure, the model is time-consuming, and it requires the vigilance and respect of all participants. The success of the model is also predicated on the high rate of individual respect and civic engagement that Norway enjoys, part of the country’s larger culture of transparency and egalitariansm. Essentially it demonstrates that parties can come together like adults and find solutions to problems without hijacking the legal systems to enshrine special interests.

To learn more about alternative approaches to net neutrality, buy our report “Net Neutrality and Stakeholders’ Arguments”. Request information about the report.

Contact us to get a copy of the report

Request the report