Don't Put U.S. Tech Firms Under the Thumb of the European Commission
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Unbeknownst to most in Washington, the European Commission (EC) is considering a new policy that would continue a longstanding trend: funneling money from U.S. technology companies to the European Union (EU). So far, this has largely taken the form of digital services taxes and exorbitant antitrust fines on U.S. tech companies. This new policy, if implemented, would force American content providers (CAPs)—like Google and Netflix—to effectively subsidize European internet service providers (ISPs).

The rationale behind this unnecessary financial padding for big European ISPs is that the CAPs creating the traffic “free ride” on the Internet infrastructure built and maintained by the ISPs. This has led the ISPs to propose that the digital players creating the majority of traffic—most of them American—pay new, mandatory fees to ISPs.

This argument misrepresents the Internet’s structure. When a CAP like Netflix creates content (like a movie), that content needs a way to get to the end user, which generally takes a path across ISPs’ pipes. But CAPs already play a large financial role in this process—such as by investing in content delivery networks (CDNS), which are networks of servers that host content near end users, and in undersea cables to bring content overseas. Netflix, for example, has its own CDN called Open Connect.

All CAPs also already pay to get their content on the Internet in the first place, and since the Internet’s inception, the norm has been that customers pay to receive content they request—so the user that generates the traffic also pays a fee.

The proposal even fails on an intuitive level: What customer would subscribe to an Internet with no popular content on the other end? The volume of traffic generated by Facebook, Amazon, and the like is mostly the volume of traffic that Internet users request: The accessibility of popular content is a huge part of the Internet’s appeal. If CAPs were “free riding” on ISPs’ pipes, so too would ISPs be “free riding” on the demand generated by those very CAPs. An ISP selling its service without content on the other end would probably fare about as well as Uber rides offered exclusively to the middle of absolute nowhere: in other words, not well.

Criticisms of the “fair contribution” policy proposal have come from various fronts, from nonprofits to smaller European ISPs. In fact, rarely does a proposal face such widespread opposition. But despite even Europe’s own electronic communications regulator BEREC’s critical take, the EC has moved vigorously ahead with an exploratory consultation foreshadowing real interest in the proposal.

The Internet is no stranger to cost-related disputes: In fact, European ISPs floated a similar proposal in 2012 and were thoroughly shut down. That identical arguments have resurfaced and are now being considered is more due to a shift in the political climate than some sea change in the Internet ecosystem. European ISPs may well be looking for help funding Europe’s “Digital Decade” agenda—an expansive, expensive set of goals to be achieved by 2030 that includes universal gigabit broadband (even though there is absolutely no business or consumer case for such networks). In context, Europe’s sudden interest in a “fair contribution” by CAPs implies a desire to fund these goals with U.S. coins—because the largest CAPs, of course, are U.S. companies generating U.S. content that’s requested by users around the world.

The harms would not stop there: the Information Technology and Innovation Foundation (ITIF) has previously found that, given the preexisting relationship among consumers, ISPs, and CAPs, increased costs of doing business would raise prices for consumers. Mandatory fees would also probably lessen CAPs’ preexisting investment in Internet infrastructure and raise the cost of doing business for ISPs, potentially pushing smaller players out of the market altogether. In short, there is no real economic or practical backing for a “fair share” policy such as this, and the burden of this proposal would fall largely west of the Atlantic.

In its upcoming U.S. -EU Trade and Technology Council meeting, where topics of discussion range from supply chains to digital issues, U.S. delegates should be sure to push back against this “fair contribution” policy proposal. What they should not do is let its guise of technical complexity discourage conversation about what is really an ill-advised tax—one that could undermine the diversity of content and connectivity options and ultimately the structure of the Internet itself.

Robert Atkinson is the founder and president of the Information Technology and Innovation Foundation (ITIF). Jessica Dine is the research assistant for broadband policy at ITIF.

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