Will Internet Companies Have to Share Profits With Telcos?

|
 |  Includes: EBAY, GOOG, YHOO
by: MGI Research

There are renewed industry rumors that telecom companies may try to force Web giants such as Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO) and others to accept a differentiated fee schedule for access to bandwidth.

[See the article in BusinessWeek for some background on the issue that has been termed Net Neutrality.]

The bottomline is that the Web Giants (Google, eBay (NASDAQ:EBAY), Yahoo!) will undoubtedly have to spend more for unlimited network access in the years ahead. The question is how much more.

Pressure from the telcos is not new and has been applied before in different guises in early 2000 without much success for the telecoms. The argument that telecom providers put forward is one of fair use of resources - if Google and others use the fiber of the telcoms to collect billions in Internet ad and transaction revenues, then telecom companies should be entitled to a portion of! the proceeds, i.e. the telcos decided that it is time to become a "partner" and share the true infrastructure costs (and rewards).

When the idea first appeared it had little chance of success - Google was barely on the horizon, the dot.com bubble had burst hard and telecom companies were fractured and gasping for air amidst a sudden glut in bandwidth. Today's environment is perhaps a bit more favorable to the telcoms - Google, eBay, Yahoo! and others are raking in billions and the telecom industry consolidation has left the current set of telco providers ("MaBell 2.0") in a much stronger position.

How would Internet companies react to this money grab by the telcos? Most likely with a two-pronged strategy that on one hand would force the issue into the courts, and on the other hand accelerate efforts at effective by-pass. If this fight comes out of the legal backpages and spills onto the front pages of the media, the Internet companies are likely to see their valuations under short-term attack. Telecom companies will have difficulty rallying a unified front demanding a change in the status quote and the US Congress is not likely to be sympathetic. Several times in recent years it has passed legislation explicitly banning all kinds of attempts to impose taxes and other extra fees on Internet commerce. Moreover, if the telecoms do attempt to act in concert, that could generate charges of monopolistic, anti-competitive practices - not a good place to be after the recent wave of telecom consolidation and a desire to stabilize/raise prices.

Google and others have been taking a serious look at building an alternative network - sort of an Internet Future World, - one that is both much faster and also free of current traffic and legacy spaghetti infrastructure. Any of the above actions could divide the Internet into two or more factions and would cost the Web giants lots of money. Stay tuned.