Chickens, eggs, Telefónica and the internet pie

As the wireless world’s biggest bash got underway in Barcelona this week, the words of Telefónica Chairman César Alierta loomed ominously over web content providers, search engine operators and internet users alike.

Ten days before the start of the three-day Mobile World Congress, the world’s largest exhibition for the mobile industry, Alierta had announced plans to make internet search engines pay for using the telecommunication company’s mobile networks.

“Internet search engines use our network without paying anything at all, which is good for them but bad for us. It’s obvious that this situation must change, our strategy is to change this,” declared the boss of Spain’s largest telecommunications firm and the world’s third-largest mobile operator with around 200 million clients.

Alierta was merely voicing in public what other telecoms bosses had been grumbling about in private for months. In doing so he kicked off a debate over mobile operators’ business models just in time for the Barcelona congress.

Where’s my slice?

The problem, from the perspective of people like Alierta, is that the boom in internet access from mobile devices – whether to surf webpages, stream video or play online games – is benefitting handset manufacturers, chipmakers, content providers (Google, Yahoo and other search providers included), advertisers and, evidently, internet users themselves, but not the companies that own the networks over which this increasing amount of data must flow. And it is the mobile network operators who must foot the bill for upgrading infrastructure to stay ahead of the rapidly rising demand for bandwidth.

“We put up the network, we do the peering, we put the system there, we do customer care, installation service…we do everything,” Alierta complained during a conference in Bilbao on February 5.

Other operator bosses, among them Vittorio Colao, the chief executive of Telefónica rival Vodafone, the world’s largest mobile operator, have since come out of the closet in agreement with Alierta, stressing that current business models must change. It later emerged that representatives of several big operators apparently met in secret last year to discuss precisely that issue.

Even the Spanish government has hinted that it might consider regulatory changes to make Alierta’s double-revenue dream come true.

“It’s an option which we should discuss and which we should consider as a possible option,” Industry Minister Miguel Sebastian told reporters at the Barcelona congress.

It is certainly understandable that operators want a slice of the succulent pie now being baked on the back of mobile internet access and mobile services. But why do they want to bite into content and search providers’ share rather than continuing their current utility-like business model and simply charging end users more to cover the cost of carrying the services they consume?

Part of the reason is the fierce – and at times deceptive – competition in the sector that has brought the sticker price of mobile internet access down to unsustainable levels if network saturation is to be avoided. Consumers may think that the latest low-cost offers are a good deal, but they will often find it comes at the expense of freedom of use and access.

To preserve profit margins and save bandwidth without having to invest in new technology and infrastructure, mobile operators customarily throttle or limit traffic. Mobile users will find they can’t watch YouTube, get kicked out of their online game or can only access some sites. For many users, what seemed like a fantastically cheap offer at the time of purchase (who reads the fine print before they sign up?), may in reality not turn out to be such a great deal after all.

So much for net neutrality

On the cost side, operators are therefore saving money and keeping the cost of access for consumers (seemingly) low by using traffic management to slow the pace of investment in new infrastructure; net neutrality, which advocates no access restrictions to internet content, sites, or platforms, be damned.

So what about the revenue side of the equation? Operators and their shareholders still want their slice of pie after all, and if users won’t pay, then, as Alierta is suggesting, they’ll just go elsewhere for the money: content providers, search engines and the like. And, in the end, net neutrality, be double damned.

For if a website or web service provider, which already has to pay for servers and hosting, also has to pay for people to be able to search or access its content then it is likely only the biggest, revenue-producing ones will survive. In a future in which more – if not most – internet users will be mobile, that means the smaller websites and web services will disappear – or at least find themselves confined to fixed-line purgatory. Online freedom, open access and innovation will be out the window and the cacophony of voices that has made the internet the most participatory form of mass speech ever developed will be silenced.  Mobile web users will instead find themselves trapped inside closed networks filled with pre-selected content created and provided by large corporations.

Google – a large and omnipresent corporation by any measure, but which makes most of its money from supplying advertisements to web surfers – has baulked at this possibility.

Addressing the Mobile World Congress, Google Chief Executive Eric Schmidt urged mobile operators and content and search providers to work together on addressing the challenges of the mobile internet.

“Find a way to say yes, not no, is our thesis,” Schmidt told journalists. “We need [operators] to go ahead and invest these enormous amounts of money at great risk and in return they need us to continue to build powerful new reasons to upgrade the connections and get a new phone.”

Perhaps then, instead of salivating over the mobile internet as a lucrative pie ready to be bitten into, operators should consider the bandwidth and revenue problem as a chicken and an egg: if they don’t get the eggs they want (diverse internet content and free ways of searching for it), consumers will probably not be willing to pay the chickens (operators) at all. And if they realise that, perhaps the operators will stop squawking in the henhouse.