Antecedentes nacionales

As previously pointed out, there are a vast variety of vertical integration options. In the introductory chapter, integration into the server landscape, online content platforms, third-party services and targeted advertising were mentioned. While all of those options might be valuable for ISPs, only those options which have a direct impact on the interaction with relevant commercial partners are being considered here. This excludes in particular aspects of vertical integration which have mere cost implications for the ISP.

For example, ISPs could move further into the provision of server landscapes and enter further into the field of infrastructure-based content aggregation. Basically, investment into content delivery networks has two effects: firstly, content delivery networks allow delivering traffic with higher qualities. Secondly, ISPs can reduce the amount of traffic routed within their system holding the volume of delivered traffic to the end users constant. With sufficiently low investment costs into content delivery networks, an ISP might thus prefer to invest in this type of infrastructure over an overall expansion of the transmission capacity. In other words, faced with a need to double the capacity of its network, a system of “smart server caches” might achieve a similar effect at a lower cost. In consequence, ISPs might decide to invest in content delivery networks independent of the question of whether they offer differentiated qualities of services. However, the incentive to invest in content delivery networks is likely to be stronger if ISPs decide to offer different qualities. This vertical strategy is thus not further examined. According to a study by Ovum (2010), some operators such as AT&T have recently pushed into this market already.89 _{The study acknowledges in particular that ISPs might be very} well-positioned to enter this market as they might benefit from deep financial pockets, strong brands and extensive local networks. This strategy focuses on

89 _{Ovum (2010).}

64 Assessment of a sustainable Internet model for the near future

traffic steering and delivery and does not aim primarily to affect the bargaining position vis-à-vis relevant players, therefore it is not considered here.90

Another element of a vertical integration strategy could hinge on building a strong online content platform integrating own content as well as third party content. Many of the major ISPs have already got a platform presence online. The question would be to what extent this platform is pushed in the future, whether an open or closed approach is adopted and which other services are made available within the platform. Within the context of an online content platform, but also independently of it, several other third-party services such as billing or standardized technology interfaces could be offered. As an example in this area the recent acquisition of “ClickandBuy,” an online payment provider, by Deutsche Telekom can be mentioned.91 _{Here, in particular the question of which player holds the access to} the end user in terms of billing might be crucial for the split of the surplus between content providers and ISPs. To a large extent this depends on whether consumers’ trust is more with the eyeball ISP or with the content provider. Furthermore, ISPs might also have some cost advantages due to economies of scale. Those factors directly affect the bargaining outcome between content providers and the ISP and are thus considered as a relevant vertical strategy within this context.

In many classical examples of two-sided markets, end users are not priced involving financial payment streams (or not only), but instead they pay in terms of the nuisance costs of advertisement. This is, for example, the case in newspapers (online and offline), TV programming, online platforms such as search engines and social networks or offline search platforms such as Yellow Pages. Similarly, ISPs could propose a new business model with respect to end users that offers subsidized Internet access on the basis of accepting targeted advertisement in return. This would imply that ISPs offer new services to advertisers – a new customer group. This would also mean that the two intertwined two-sided markets, online search engines which coordinate advertisers and eyeballs on the one hand and Internet access platforms coordinating search engines and eyeballs on the other hand, converge further. However, this type of targeting of advertisement might breach consumer privacy directives and is not considered any further within this report.92

90 _{Notwithstanding the fact that entering the market of content delivery networks will of}

course affect the relationship of an ISP with current content delivery networks.

91 _{See press release at http://www.telekom.com/dtag/cms/content/dt/de/838220.} 92 _{See for example the UK case on Phorm http://ec.europa.eu/unitedkingdom/press/press_}

Billing technologies and other third-party services might help to gain bargaining power and increase the value proposition of the ISP which in turn allows for transferring content providers into more efficient and profitable pricing schemes. This is of particular importance in the “Best Effort Plus” model where innovative services are marketed to the end customer, however, the provision of third-party services might also be of relevance – in particular for the smaller content providers – in the “Quality classes” model.