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Twenty years of ‘network neutrality’ – time for a break? Consumers have a long-term interest in cost recovery and value sharing

The catchy term ‘network neutrality’ was coined by Tim Wu of Columbia Law School in a widely read and thoughtful 2003 paper. At the time, the internet was relatively fresh and new and telecommunication firms were mighty behemoths. A concern that innovation in the internet economy would be suppressed by broadband providers who were either protecting their own turf or just being silly was justified as at the time (as Wu documented) many US providers prohibited either immoral or indecent use, running a server at home, having a WiFi network, using virtual private networks (VPNs) or all of the above. Over time, these prohibitions withered away and the broadband providers slowly became ‘dumb pipes’ albeit very useful ones.

Christoper Yoo actually pointed out early in the life of the concept the ‘network neutral’ service was a product that could easily be offered and purchased. In a conference paper nine years ago, I drew attention to the fact that you need only VPN service in order to escape from a broadband provider’s possibly obscure traffic policies as it would be easy to monitor just the VPN connection. At around the same time, Jan Krämer and others looked at alternative remedies and concluded that “it is evident that the case for strict net neutrality regulation is viable only if many, if not all of the proposed remedies are believed to fail.” Much more recently, Wolfgang Briglauer and his team concluded that network neutrality regulations slow down the deployment of new fibre home connections.

On the occasion of the tenth anniversary of Wu’s catchphrase, Deborah Tate (a former FCC commissioner) argued with great eloquence that there was no need for heavy-handed regulation along those lines. As it happened, the US has since gone through another cycle of on/off network neutrality regulation and it remains a politicised topic there as well as in the EU which has more of an on/on approach. It appears to be largely an affliction of the northern hemisphere as the rugby nations of Australia, South Africa and New Zealand have absolutely no network neutrality regulation, little discussion of the topic and no discernible shortage of any online content or service. In much of Latin America, regulators have had to create exceptions for zero rating to ‘network neutrality’ regulation because of strong popular demand. In Columbia however, a civic organisation in 2022 sued the government about zero rating in constitutional court.

The concept has had new life breathed into it over the past few years by the cost recovery debate, exemplified by the ongoing legal struggle between SK Broadband (SKB) in South Korea and Netflix over the payment of network access to SKB. Briefly, many broadband providers feel that they should be compensated for delivering the bulk of internet traffic (as much as 65% of it, video) generated by a handful of companies who cite the sanctity of ‘network neutrality’ in defence (especially in the EU) even though all of them also apparently happily operate in countries without such regulation.

The internet was not initially designed as a delivery network for commercial content but because of its great versatility, faute de mieux and aeons of (wo)manhours of developers’ time and ingenuity, it has become the platform for a large part of human business and cultural life. One can discern three phases of commercialisation to date. The adult content industry has usually been the first to enter the next phase. The transition between the phases is of course gradual.

IE-mail, file transfer, ancillary websites for existing business activities and for online ordering etc.All traffic monetised by ISP through monthly access charge.
IIThe above plus ad-supported content, including online newspapers, first social networks.Almost all traffic monetised by ISP through monthly access charge.
IIIThe above plus and completely overshadowed in volume by subscription content, especially video-on-demand but also gaming, software updates and video conferencing.Most traffic also monetised by a handful of global tech companies who charge customers directly, bypassing the ISP who fully monetises only a small share of traffic.

It is worth reflecting on the differences between phase II and phase III. In phase II, the ISP delivers ad content for which the content provider charges the advertiser and which traffic is therefore not directly monetised by the ISP. However, this is nuisance traffic for the end-user and the websites carrying the advertising have an incentive not to overdo it, lest they lose ‘eyeballs’. Since the end-user pays only the ISP, the broadband provider monetises the full value of the traffic to the end-user. The fact that this traffic also has value for the content provider (and the advertiser) is of secondary importance.

We are now in phase III where the bulk of the traffic is of subscription content for which the end-user pays the content provider (for example, Netlix) directly. The ISP delivers traffic to the end-user, the value of which (to the end-user) it cannot fully capture since the end-user has already paid the content provider. Furthermore, the traffic volumes are enormous and growing at a crisp rate through (a) increased time spend in front of a networked screen and (b) steadily higher resolution/quality of content.

Since the originators of the traffic are few and easy to identify, it seems natural for the ISP not only to charge the content provider for delivery of the data (‘cost recovery’) but also for it to seek a partnership with the content provider in order to monetise part of the value which the content has for the end-user (‘value sharing’). The dogma of network neutrality makes both

  • cost recovery; and
  • value sharing

impossible. Although this is to the short-term benefit of content providers, it is detrimental in the medium term to the development of end-user broadband infrastructure. The right balance between cost recovery and value sharing would probably develop naturally between large ISPs (with bargaining power) and content providers – in the absence of regulation around network neutrality. It almost certainly has in places like Australia and the USA. Elsewhere, it seems as if ‘network neutrality’ is a convenient rallying point for content providers which allows them to maintain a joint position and both cost recovery and on value sharing.

The concept of policed network neutrality has always presupposed the ability to distinguish between reasonable traffic management (for network stability) or blocking (of computer virus communication or harmful and illegal content) and supposedly unreasonable prioritisation or throttling of content. Commercial prioritisation or throttling of content would not be allowed, in the putative interest of protecting diversity. If we consider the 5% or so of content that resembles the internet of 20 years ago (essentially, websites and e-mail), the diversity is still there. For the rest, the traffic is dominated by a very small number of companies, even in the EU which has been a fairly strict adherent to network neutrality for long and where European operators claim a cost underrecovery of around $40 billion annually due to streaming services.

More importantly, network neutrality harms consumers by restricting their choices. Perhaps it is time to take a break from the concept ‘network neutrality’, in the happy knowledge that in the worst case, it will be just like Australia everywhere.

Related academic papers

Briglauer, W., Cambini, C., Gugler, K., & Stocker, V. (2022). Net neutrality and high-speed broadband networks: evidence from OECD countries. European Journal of Law and Economics, 1-39.

Krämer, J., Wiewiorra, L., & Weinhardt, C. (2013). Net neutrality: A progress report. Telecommunications Policy, 37(9), 794-813.

Potgieter, P. H. (2014). Alternatives to network neutrality: A South African perspective. In 20th ITS Biennial Conference, Rio de Janeiro 2014: The Net and the internet-Emerging Markets and Policies (No. 106880). International Telecommunications Society (ITS).

Tate, D. T. (2014). Net Neutrality 10 Years Later: A Still Unconvinced Commissioner. Federal Communications Law Journal, 66(3), 509.

Wu, T. (2003). Network Neutrality, Broadband Discrimination. Journal of Telecommunications and High Technology Law, 2, 141-176.

Wu, T., & Yoo, C. (2007). Keeping the internet Neutral?: Tim Wu and Christopher Yoo Debate. Federal Communications Law Journal, 59(3), 6.