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The economic impacts of internet giants

The economic impacts of internet giants

By Ahmed Khaouja (*)

Several experts note that the giants of the net, which have a high market capitalization, cause two major problems: One is linked to the non-taxation of their services, offered everywhere in the world, especially where they are not physically present.

The other problem is linked to the fact that telecom operators are not paid by the internet giants for the services they offer. Especially since these giants offer telecom services such as telephony, while they are not subject to any taxation, such as that imposed by telecom regulators. These experts expose these problems at a time when GAFA (1) services have become essential, especially in this period of Covid-19.

1-Tax problems and some suggested solution

The problem is clear and the data is sufficiently available to say that there is a tax problem between the internet giants and the countries where they have a virtual presence. Indeed, the internet giants offer various services while they are not subject to neither corporate tax, nor other taxes and fees. This problem arises at a time when the internet giants have become essential, as they currently offer various services that we cannot do without, especially since the outbreak of the coronavirus pandemic. Of course, this tax problem can only be solved internationally, notably through the involvement of international organizations such as the Organization for Economic Co-operation and Development (OECD). The various national regulatory authorities are not in a position to solve these kinds of problems on their own, which are in fact raised on a universal scale.
A draft solution to this problem has been put in place by the French government, which has amended its tax code through the law of July 24, 2019, creating a tax on digital services. This law is modeled on the European Union model where the directive on this subject has not yet been adopted. France has thus instituted a declaration tax of 3% on the local income of large digital companies. It will apply to digital technology companies with a global turnover exceeding 750 million euros and which generate more than 25 million euros in turnover per year in France. For the year 2020, this tax provided France with some 375 million euros.

2- Problems and solutions of Telecom operators and Internet giants

Given that national telecom operators invest and operate telecom infrastructures, to guarantee the availability of bandwidth for users, in order to connect in particular to internet giants, it would be quite normal for these operators to expect these giants participate in the remuneration of their efforts, though, there is currently no adequate and legitimate sharing model.

In South Korea, most foreign content producers, like Apple, and the big Korean players have agreed to pay commissions related to the traffic they mobilize on telecom networks. Also, the operator SK Telecom has argued so as Netflix help finance certain costs of its networks.
The Korean regulator (Korea Communication Commission) recently attempted unsuccessfully to reach a reconciliation between the operator SK and Netflix. The conciliation of the Korean regulator was unsuccessful but the dispute was taken to court and forced Netflix to accept the principle of payment.

In France, while waiting to find a solution, telecom operators are working on the development of rules to limit the traffic of certain large content providers on their mobile networks, capping the resolution of videos to a certain acceptable value on smartphones. According to ARCEP (Electronic Communications and Postal Regulatory Authority), in 2021, more than half of Internet traffic in France comes from four players: Netflix, Google, Akamai and Facebook. On smartphones, nearly two-thirds of the bandwidth is consumed by these same giants. If mobile data growth increased in 2021, then, it is in large part thanks to the streaming giants.

3-Market capitalization of the net giants and some possible solutions for operators

ATT, a major telecom operator in the United States, was ejected from the Dow Jones (2) in 2015 after having accessed to it in 1916. At the same time, in 2015, we witnessed Apple’s entry into the Dow Jones. Apple’s turnover in 2020 was $ 60 billion, an increase of 11% from 2019. Apple’s entry into the Dow Jones, in March 2015, means that the various shareholders see in Apple a high value that will pay more in the future. Apple weighed more than $ 730 billion in 2021, as a market capitalization.
And the exit of ATT leaves only Verizon as the only telecommunication provider within the Dow Jones. To stay there, this American operator was forced to invest in content. It thus bought for 4.4 billion in May 2015, America Online (AOL), supplier known for its mastery of online content and advertising on the Internet and it also bought Yahoo in 2017. In the United States, the telecom operator Verizon has also opted for solutions in line with the evolution of technology, by deploying offers where national voice calls are free, with data billing by volume.

Photo taken from the Dow Jones Basket by The magazine. We see Verizon at rank 14.

Conclusion

It is scientific and technological progress that has enabled the emergence of internet giants such as GAFAM (2). Today, users worldwide can no longer do without the services of these OTTs (3). While waiting to find models allowing the protection of the interests of all the actors, acting in the telecom value chain, we are witnessing conclusive partnerships between the telecom operators and the digital giants. For example, we cite the experience of the partnership carried out by the Telecom operator Orange with Google in France, for the creation of a test laboratory. Through this laboratory, Orange allows companies to test new applications planned for 5G and edge computing (4).
In Spain, the two Internet and IT giants Facebook and Microsoft have already laid a 6,600-kilometer submarine cable in 2017 between the United States (Virginia) and Europe (Bilbao), in partnership with the Spanish telecom operator Telefonica. Another example is the collaboration between Orange and Facebook for the construction of the Africa2 submarine cable.

Philosopher René Guenon had said that “no one can stop progress”. Indeed, and for the record, let us specify that a few years ago, there was a separation between voice and data. We used the operators’ networks to call, for a price paid to them to browse the Internet, with the payment of a data plan. Voice was typically billed by the minute or second, and internet was typically billed as a flat rate. And the operators were making money and paying taxes to their respective states. The data was separated from the voice. Before 2002, Voice over IP was not a problem, as it was less developed due to the complexity of the first servers, the high cost of bandwidth and the low level of broadband, especially in companies. After 2002, a real acceleration of VOIP was observed, following the emergence of new protocols such as SIP.
At the start of this acceleration of voice over IP, regulators and telecom operators were less careful about the development of voice over IP, so as not to disrupt innovation. Subsequently, huge strides have been made by internet giants and innovative startups. Some of these giants have started offering free internet voice, texting, video and audio services. In return, they start to make a lot of money from advertising and selling data.

(1): GAFA: Internet giants grouped together under the name GAFA are Google, Apple, Facebook and Amazon.
(2): Dow Jones: The Dow Jones is an index of the New York Stock Exchange. The index includes 30 of the largest and most listed companies on the New York Stock Exchange.
(3): Over the top or OTT: OTT stands for Over-the-top, which refers to players who offer content through an Internet connection, but over which the Internet service provider has no control. The services offered by the OTTs are therefore decoupled from the infrastructure provider.
(4): Examples of experiments carried out at the Orange laboratory in Châtillon: Piloting drones, analyzing videos to detect fires, measuring product’s quality in real time, setting up a telemedicine service, and connecting in real-time to smartphones and objects.

(*) Ahmed Khaouja expert from ITU

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