A Modest Proposal

In Regulation as Innovation I suggested that the European Telecommunications Network Operators’ Association’s (ETNO) “sender pays” proposal was retrograde rather than innovative, as advertised. Perhaps I was too quick to criticize what at first blush appeared to be an attempt to exact a tax on certain Internet companies or to impose a tariff on “imported” content. After further consideration, I see the advantages of the ETNO proposal and offer a modest improvement that I believe benefits the larger Internet Community, not just ETNO’s members.

The Current Situation and Inherent Risk

Apparently current Internet technical, policy, and economic models, have created an environment that is not conducive to infrastructure providers and could jeopardize the Internet itself. Luigi Gambardella (ETNO’s executive board chairman) stated recently that “we believe that this situation is putting at risk our capacity to invest”. If true, this is a serious situation indeed, no doubt already reported to financial regulators, and should be addressed before any real damage can be done.

Fortunately, ETNO and Mr. Gambardella are aware of the severity of this problem and have proposed a fundamental change to the economic model on which the Internet, and the innovation that drives it, relies. This proposal is known as “sending party pays” and draws on decades if not a century of experience in the telegraphy and telephony industries. It is a well-understood concept and as a consequence should require little discussion or debate.

Since my earlier post, ETNO has embarked on a campaign to garner support for their proposal in BrazilAspen, and no doubt other locales. In Aspen, speaking of the proposal, Mr. Gambardella noted that “This would benefit us because we could have additional revenue” – clearly advantageous. Of course in any zero-sum game, gains must be offset with losses and in the ETNO proposal, it is the Over The Top (OTT) providers that sit on the other side of the scales. (In full disclosure, my employer has been listed as one of the OTT players.)

Benefits of Investment

OTT players fully understand the need to have adequate infrastructure in order for their customers to enjoy the myriad benefits of the Internet. They regularly invest in systems, new technology, security and audits, standards development, high bandwidth Internet connections, content delivery networks, usability studies, Internet governance initiatives, and generally attempt to provide their customers the best experience possible. All of this is funded by revenues generated by innovative business models enabled by a new class of services unimagined just a few years ago.

I have no direct quotes to offer from OTT executives, but I suggest that they might say something like “if implemented, this ETNO proposal would put at risk our capacity to invest”. This too is a situation best to avoid and leaves us with a conundrum in our zero sum game. Infrastructure providers claim to need substantial new revenues and believe OTT providers should be required to give it to them. OTT providers, while sympathetic to the plight of infrastructure providers rely on current OTT income streams to support their businesses.

This appears to be an intractable situation, and ETNO has reasonably proposed that regulation be (re)introduced in order to return the market to one more suitable to them. Given their history in a regulated industry, this is understandable and regulators, knowing how to regulate, might take this opportunity to restore their own “rightful” place in the market. Everyone benefits in this scenario, except the OTT players. Two out of three isn’t so bad in American baseball, but the Internet is global in nature and we can do better.

Progressive Sending Party Pays (PSPP)

Mr. Gambardella has expressed the desire of ETNO members to “have the freedom to make commercial agreements based on the value of the information” as justification for their sending party pays proposal. Ignoring the fact that they have that freedom today, I will agree with that sentiment but suggest that the relationship should be inverse rather than direct. Further by this very slight change to the ETNO proposal, all interested parties benefit and we can address an issue high on the ITU’s current list of expansive initiatives – SPAM.

Everyone, except spammers, hates SPAM and regards it as worthless or worse than worthless. It is a nuisance and represents a significant cost for all in the Internet ecosystem – the ITU reports that 70% of all email is SPAM. Infrastructure providers are forced to provide additional bandwidth to carry traffic, users deal with an ever-increasing onslaught of malicious mail, Internet companies staff fraud and customer service departments to handle complaints, governments enact legislation and prosecute crimes, prison systems must accommodate convicted criminals, and productivity losses continue to mount. Something must be done.

Using the ETNO proposal and progressive income tax systems as guides, I determined that a mashup of the two could provide a solution to the investment problems of ETNO’s members without jeopardizing the economic engine of the Internet. Further, appropriate application of this mashup technique could benefit the entire Internet ecosystem by providing infrastructure funding from those that make significant use of it. This mashup is a win, win, win, win.

Everyone Benefits

My modest proposal is that regulators require that spammers pay for the traffic they generate and that these funds be transferred to infrastructure providers. Further this should be a progressive system so that as one generates more traffic, they are required to pay a higher rate. While somewhat more complex than a “straight tax”, progressive taxes are a well known and generally accepted concept with obvious benefits as evidenced by the number of countries that employ them. Perhaps less obvious, but no less important, is the recognition that an international entity must ensure that payments are made in a timely fashion and to monitor and mitigate fraud and abuse.

As mentioned earlier, this is win, win, win, win. ETNO’s members win because they receive funds for investment they otherwise could not make. OTT providers win because they are not forced to incur unneeded expenses and therefore can continue to innovate. Regulators win with a new set of regulations and a complexity structure that ensures robust and lengthy discussions on a wide range of topics. Lastly, the Internet Community wins with infrastructure enhancements, continued innovation, and regulation not directed at “positive elements” of the Internet economy.

This is but a brief, and swiftly compiled proposal for PSPP. I contribute the mashup to the Internet Community confident that it will be used in an appropriate manner.

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