Google, Facebook, Netflix, Others Squeezing Telcos in $6.7 Trillion Internet Revenue – Report

GSM Association (GSMA, the global body of mobile network operators, has revealed that online services providers such as Google, Facebook (Meta), Netflix among others are riding on the infrastructures provided by telecoms companies (telcos) to claim the largest chunk of internet revenue at the expense of the telcos.

The body, in its 2022 Internet Value Chain Report, says aggregate revenue from the various segments of internet value chain peaked at $6.7 trillion as at 2020, pointing out however that the online service providers alone raked in 57% of the entire revenue.

GSMA warned that while bearing the huge cost of putting connectivity infrastructures in place, the telecoms operators are at the risk of being trapped predominantly as access providers with their returns to shareholders remaining flat but those of online service providers multiplying up to six folds.

What the Report Says

Since 2015 the internet has continued to grow at pace. There were over 4.6 billion users in 2020, representing 59% of the world population. However, there is much more to do to connect more people to what has become an entire economic system.

In terms of commercial size, the revenues of the segments that make up the internet value chain were $6.7 trillion in 2020, up from $3.3 trillion in 2015. The strongest growth over that period has been in content rights (23% per annum, from a low base), and online services (19% p.a.), which now make up 57% of the entire value chain in terms of revenues.

The enabling technology segment grew at 13%, and the internet access connectivity and user interface segments at 11% and 6%, respectively.

Factors Responsible for the Internet Revenue Growth

Growth of online services since 2015 has been driven on the consumer side by the emergence of many gig-economy services and consumers shifting more of their entertainment spend to online services, including online gaming and video streaming services, while search and social media services have continued to grow strongly.

On the enterprise side, there has been a strong, ongoing migration of on-premise IT applications to cloud-based services. The growth in entertainment has prompted increases in the activity and revenues of the content rights segment, with online video services paying more for exclusive television and movie content and the growing value of influencers creating content to reach their followers directly.

Gaming content is also an active subsegment with the gaming platform companies increasingly investing directly.

The revenues of the enabling technology segment have also grown, offering more advanced services including the sophisticated advertising ecosystem and advanced, hyperscale infrastructure services enabling more services to migrate online, and the expansion of payment gateways to support the ever growing volume of internet transactions.

Revenues of the internet access connectivity segment have grown at 11% per year since 2015 as more people and devices are connected to the internet, but all of this growth is a substitution for previously offline or private network services (e.g., voice, MPLS and VPN services).

The user interface segment has grown at only 6% per annum in total revenue. While there has been growth in the volume of connected devices, including Smart TVs and smartphones, much of the growth has been at the value end, so average unit prices have declined.

Distribution of Internet Returns

As these trends play out, a study of the economics of the subsegments shows that the returns are not equally distributed, since each subsegment has different underlying economics (e.g., capital intensity, scale factors, market concentration) and operates within different competition and regulatory frameworks.

The online services and user interface segments are benefiting most from value-chain growth and generating the largest shareholder returns, whereas the internet access connectivity segment has generated relatively low and even single-digit returns on capital.

Over the past six years, average total shareholder returns have been almost flat across the internet access connectivity segment, while other segments have at least doubled investors’ stakes and some user interface players have delivered almost sixfold returns over the same period.

At a time when a greater load is being placed on internet connectivity infrastructure, requiring network operators to increase speed, capacity and coverage, their business model is being squeezed.

First, enterprises are replacing highmargin MPLS and VPN services with more basic internet access services, resulting in an overall loss of revenue and margin for the operators.

Second, the scope of operator activities is being narrowed. As virtualisation of core network functions takes place, hyperscalers can develop and run these services at a global scale, playing a greater role in core service and network orchestration, while operators in many markets are separating their infrastructure (i.e., into fibre and tower companies) and selling selected assets.

If these trends play out to their full extent, telecom operators risk becoming predominantly internet access providers, fulfilling the sales and service function but with significant capex requirements to build and maintain the access infrastructure.

GSMA’s Chairman José María Álvarez-Pallete Remarks

He said that although the internet value chain is growing strongly, the benefits and returns are flowing principally to players in the online services segment, while the telecom operators building and running the connectivity infrastructure which underpins these services are not benefitting as strongly as one might expect.

He noted that while the operators continue to invest in extraordinarily complex networks that enable the entire ecosystem, the low returns raise questions about the robustness of continued investment in capacity, coverage and speed of the networks to connect internet users with services.

“Business leaders and policymakers need to consider the interdependence of the many services making up the internet to ensure that market distortions, regulatory requirements or other factors do not limit the ability of participants across the internet ecosystem to make sufficient returns and that the right incentives are in place to promote the long-term growth of the value chain and to realise the full potential of technology and service innovation

Other Findings of the Study 

• GSMA says the study also finds that revenues across the internet value chain nearly doubled in five years, from $3.3 trillion in 2015 to $6.7 trillion in 2020. Much of this growth comes from online services; they saw a 19% increase in revenue per annum in 2020.
• Paid-for online services will soon exceed $1trillion in revenues, driving huge capacity demand on global networks. With an annual growth rate of 7.5%, the number of users being connected to the internet globally shows no sign of slowing.
• Traffic per user grew at 27% per year, with almost 80% of that being driven by video traffic.

About the Report

The latest report is an updated edition of the Internet Value Chain report, building on the internet value chain framework used in the previous report published in 2016.

The report assesses the overall size of the value chain, key trends and dynamics playing out across it, and the economics of individual segments spanning content rights, online services, enabling technology, internet access connectivity and user interface, which includes hardware devices.