Data debate between mobile operators and content creators/rights owners takes another step as Netflix uses MWC2023 keynote to lay out the media industry perspective, writes Adrian Pennington. Additional reporting and photography by Andrew Williams.
Netflix has hit back at mobile operators demanding that it pay them for the “unsustainable” cost of data delivered over broadband networks.
In a keynote at Mobile World Congress Netflix co-CEO Greg Peters said: “I believe in a clear and direct symbiotic relationship between a thriving creative industry and a thriving network ecosystem. It shouldn’t be a binary choice between big telco and entertainment companies.”
This was Peters’ first major speaking engagement since promotion to co-CEO from chief product officer last month. His presentation either showed remarkable prescience that this topic would dominate conversation, or was hastily re-written following criticism from the likes of Orange and Deutsche Telekom earlier this week.
Operating margins a point of debate
“Our operating margins are significantly lower than BT or Deutsche Telekom,” Peters claimed. “We could argue that they should pay entertainment companies for the cost of our content which is what happened under the old pay-tv model.”
He was responding to rare explicit criticism from operators who want companies like Netflix, Google, Apple, Amazon, Disney and Microsoft to pay their ‘fair share’ for the exponentially rising volumes of data being carried over telco networks. Telcos claim that they are bearing the brunt of capital investment and running costs while Netflix and Co cream off the profits.
”These concerns aren’t new”, he said, “I remember being here in Europe about 10 years ago talking to our partners and talking to regulators about the same conversation, the same concern, but the last decade has shown and telco leaders have recently affirmed that rolling up internet usage is actually a huge opportunity. It reflects the growing demand for the services that we all provide together. Of course, increasing usage requires investment…”
Peters pointed out that Netflix has invested more than $60 billion in content over the last five years.
“That’s roughly 50% of all of our revenue in that timeframe. That is the part we play in creating this virtuous fly wheel leading to more people willing to pay for broadband services.”
Conversely, he suggested internet service providers’ costs have been relatively static despite claims companies like Netflix put excessive stress on their networks. “State regulators have highlighted this too recently, calling out that infrastructure costs are not very sensitive to traffic,” he said, “growing consumption is offset by efficiency gains.”
Collaboration not confrontation
Peters also noted that Netflix is partnered with more than 160 ISPs and telcos many of which bundle the service directly into consumer offerings, he said this showed the value of collaboration.
He cited Open Connect, a content delivery network in 75 countries which Netflix “offers for free to ISPs” specifically to stream Netflix content from local data centres as evidence of the company’s investment in managing data loads.
”This includes over 18,000 servers and 6,000 locations carrying Netflix content to 175 countries. That means that when our members press play, rather than streaming that film or TV show from around the world, it’s actually streamed from just around the corner. That’s great and improves efficiency for operators while ensuring that those consumers have a high quality, no lag experience”, he detailed.
The company’s proprietary compression technologies have halved its bitrate between 2015 and 2020, thanks to improved encoding technology, he claimed.
He directly addressed proposals by some telcos that entertainment companies should be taxed to subsidise investment in network infrastructure.
“This would have a significant adverse effect,” Peters warned. “It would reduce investment in content, it would hurt local creative communities and its hurts consumers.” He also pointed the finger at broadcasters like the BBC which are increasingly turning to the internet for content delivery.
“As broadcasters continue to shift away from linear to streaming they will generate significant internet traffic,” he said. ”As you can see from this chart, in the United States and the UK, Netflix is under 10% of total TV time, then around the world, places like Brazil,Mexico and Poland that number is significantly less. In comparison, traditional local broadcasters account for over half of all TV time, many places around the world significantly more than half.”
Paying the piper?
Finally, Peters argued that broadband customers already pay for the development of networks in mobile or broadband subscription fees.
“Requiring entertainment companies to pay more on top would mean ISPs are charging twice for the same infrastructure. As consumer group BEUC has pointed out, there is no suggestion these levies would be passed onto consumers in the form of lower prices or better infrastructure,” said Peters, ”I believe a much better approach is for entertainment companies and operators to focus on what we both do best and through that create a rising tide that will lift all boats.”
Netflix found support among industry analysts. Giving an interview to Mobile World Live, Kester Mann, director consumer and Connectivity, CCS Insight said, “I don’t buy the argument that Netflix should pay. It is an operator’s own customers that are using the network, not the big tech companies themselves. Operators need these relationships [with big tech] to upsell services and customers onto new tariffs.”
The heightened vocalisation around “fair share” should be set against the backdrop of the energy crisis and spiralling costs that are hitting telcos. Their margins are being squeezed, consumers are reluctant to spend more and there’s uncertainty about the macro-economic environment.
“There may be other ways innovative ways they can monetise the network rather than getting others who piggy back off the network to pay for it,” mused Grace Donnelly, Snr Consultant, STL Partners.
Speaking up for operators was Pablo Iacopino, Head of Research, GSMA Intelligence. “Should Netflix pay? It’s not a black or white decision. I think all big tech companies should contribute to network investment but we need to find the right model. Whether partnership or contribution they need to do more.”
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Operators have been gnashing their teeth about this topic for several years now. What was noticeable at MWC2023 was the tension between this attempt to get big tech to pay arm in arm with a desire to partner with the ‘hyperscalers’ to grow the business.
Alliance with Cloud and Big Tech
The buzzword at this conference has been ‘Open’. The mobile industry is keen to strike partnerships with technology and applications developers as well as with cloud providers to deliver new digital services taking advantage of sunk investments in 5G.
“We are at the doors of a change of era,” declared José María Álvarez-Pallete Chairman & CEO, in a keynote. “There is radical disruption on every front driven by the intersection of telco, computing, AI and Web3. Moving from today’s connectivity to that of the future is a bigger leap than the change from black and white photography to 3D digital reality.”
In the same opening address, Mats Granryd, Director General of GSMA, said, “The new era will make everything digital. Applied AI will effect every area of economic activity. Blockchain ledgers will bring seamless global collaboration.“
The GSMA calculates that operators worldwide will spend $1.5 trillion on mobile capex between now and 2030; over 90% of which is for 5G.
“We’re exploring innovative financial models to achieve this investment,” he continued. “While today’s connectivity is defined by speed, security and mobility, tomorrow’s connectivity will also be defined by processing capability, capacity reliability and customisation.”
Capitalising on this, said Álvarez-Pallete, “required seamless, massive fully interoperable communications and realtime computing.”
To this end 21 major operators including Vodafone, Orange and Telefónica announced a partnership with Amazon and Microsoft. The Open Gateway is intended to simplify the development of new applications that run over multiple operator networks and to scale business opportunities from the cloud to the edge. It is also designed for operators to tap into the AI smarts of the big cloud providers.
Börje Ekholm President & CEO, Ericsson explained, “To drive the next digital decade we need to collaborate and build ecosystems. Advanced networks capabilities exposed through network APIs will drive the next level of digitisation and also give our industry new monetization opportunities in addition to subscription revenues.
“Open and flexible networks leveraging cloud and automation will be a critical next step in evolving our industry,” he added.
Gaming is the new video
Operators hope to make money from 5G with new immersive experiences but these have yet to materialise.
Radhika Gupta, Head of Data Acquisition, GSMA Intelligence, preferred the term “reality+” rather than metaverse. “We have moved too fast in the past year assuming we can all jump into the metaverse immediately,” she said in video interview with Mobile World Live. “Nonetheless gaming and entertainment will be the main consumer use cases for immersive experiences driven by the shift in online consumer online behaviour.”
Gupta pointed out that since the introduction of cloud gaming over mobile “gaming is the new video.”
Industry moves beyond mobile
Estimates suggest that over half of delegates to MWC are from outside the telco industry showing further convergence of major technologies.
“There are an awful lot of non-telecoms people here,” observed Andrew Collinson, Executive Director & Chief Research Officer, STL Partners in a Mobile World Live video interview. “It feels like the industry is growing in a different direction way, changing in quite a profound way, even if the show is not entirely clear of its new identity.”
Paolo Pescatore, analyst PP Foresight said, “MWC has expanded beyond mobile. Everyone has a device connected to the power of a mobile network. The fact that Netflix is keynoting shows how valuable connectivity is to content and that we rely on a converged network to provide exciting new consumer applications.”
Call for more spectrum
The GSMA wants to free up further spectrum and is putting pressure on the World Radiocommunication Conference at its forthcoming meeting in Dubai. The WRC guards the international treaty governing the use of the radio-frequency spectrum and the communications satellites.
“We know that affordable spectrum is vital to our industry. 5G needs capacity to grow. Speed and quality are directly linked to spectrum. We need WRC to deliver spectrum crucial for the expansion of 5G. If we can achieve this we can close the connectivity gap.”
By this the GSMA mean the 3.6 billion of the world’s population which do not use mobile internet. Four hundred million of these are people not covered by mobile broadband at all. The rest live in areas of coverage but do not use mobile internet. Closing the gap requires, Granryd said, affordable handsets, digital literacy and relevant local language content.
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