The impact of tech companies' network investment on the economics of broadband ISPs

This report is intended to bring a clear and evidence-based perspective to the global debate regarding whether network usage fees should be introduced. It explains the interdependence of various stakeholders in the internet ecosystem and the mutually beneficial arrangements that they currently enter into for internet interconnection. In particular, we consider the relationship between content and application providers (CAPs) which provide online services and content that end users and other stakeholders demand, and the internet service providers (ISPs) which provide residential and business end users the means to connect to the internet from their homes, offices, and mobile devices. We examine the implications of mandating that CAPs pay ISPs network usage fees linked to traffic flows between their networks in order to reach ISPs’ end users, and we conclude that such a mandate would be harmful to end users and the global internet ecosystem.

We first highlight the significant investments that CAPs make in global internet infrastructure (over and above their investments in content, innovation, research, and development). Contrary to the assertions that CAPs are not investing in internet network infrastructure, we find that in the last decade, CAPs invested USD883 billion in digital infrastructure. This builds upon analysis conducted since 2014, and we find that between 2018 and 2021, CAPs increased their annual spend by over 50% compared to the 2014 to 2017 period, investing over USD120 billion in digital infrastructure, including hosting, transport, and delivery networks. These investments not only support the delivery of CAPs’ own services, but also support the ISPs’ business. 

The combination of investments by CAPs and ISPs as well as freely negotiated interconnection on the internet has evolved over time to support increased traffic demand from end users. Investments made by CAPs to bring traffic closer to end users improve quality of experience for broadband users and save ISPs over USD5 billion each year in network and transit fees. The voluntary agreements between CAPs and ISPs ensure that growing demand from end users can be handled sustainably without increasing network costs over time. This framework ensures that ISPs do not shoulder all the cost of digital infrastructure, while enabling end users to gain access to diverse and high-quality online services.

We find that the imposition of network usage fees would risk creating barriers to entry and growth for smaller and new CAPs. In broadband markets, mandated network usage fees also risk increasing costs for many ISPs, by reducing CAPs’ incentives to invest in infrastructure and processes that help optimize traffic delivery for ISPs, such as caching content closer to end users. Higher cost of traffic delivery for CAPs and higher network costs for ISPs may translate into lower quality of experience for end users. Higher costs for ISPs would heighten barriers to entry and growth for smaller and new ISPs, reducing long-term ISP competition and investment in broadband. Consequently, end users are likely to face higher ISP prices, less ISP choice, and reduced quality of broadband services, while also receiving diminished quality of experience for online services and less innovation and choice online.

Current proposals for mandating network usage fees rely on arguments that falter under scrutiny. Proponents of these fees tend to mischaracterize the relationship between traffic delivery and cost, while  understating ongoing investments by CAPs in internet infrastructure, as well as private- and public-sector investments in ISP networks. Some arguments made in favor of network usage fees also appear to be based on an inadequate understanding of internet interconnection. If introduced, network usage fees would result in a shift away from the voluntary interconnection regime that continues to drive the rapid growth and impact of the internet. Policy makers should therefore scrutinize any network usage fee proposals carefully, while taking a holistic perspective on the potential harmful impact of those fees on the wider internet ecosystem.