Research Notes

Fair Share: South Korean court orders network usage fee methodology for intractable Netflix. Broadband cost recovery update.

There is growing global interest in broadband cost recovery, the rational, linear process to identify and resolve shortfalls in broadband network investment and adoption. Policymakers increasing recognize the disproportionate economics of networks; a handful of global players dominate network traffic and revenue while nations struggle to recover costs for next generation broadband investment and close the gaping digital divide. South Korea, recognized for years as the global broadband leader by the ITU and OECD, innovates in the in the cost recovery policy domain with the view that market actors should resolve shortfalls with minimal government intervention. Strand Consult has covered South Korea for more than 25 years and was the first to highlight its technology leadership in the early 2000s with 3G.

The South Korea experience is instructive to study for market-based negotiation, particularly as one party, Netflix, holds that it has no obligation to pay or negotiate for the use of other’s networks.  South Korea is one of the countries covered in Strand Consult’s Global Research Project for Broadband Cost Recovery. In a series of detailed reports and research notes, Strand Consult describes how the issue plays out in South Korea and debunks the myths promoted by US tech companies and the consultancies and advocates they fund.

This research notes provides an update on the litigation brought by Netflix against SK Broadband (SKB), now in its third year and 10th court appearance. In this last iteration on July 12, 2023, the court only decided on the assessment of unjust enrichment earned by Netflix at the expense of SKB and will appoint an assessment organization. The court has not yet ruled on Netflix’s appeal arguments.  Strand Consult has chronicled this case in its exclusive report Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea.

This case is relevant for the European Union where market-based negotiation is also contemplated. The ruling is also important as the court concluded in the first round that net neutrality is irrelevant to the dispute. It further accepted the view that the internet conforms to a two-sided market model in which broadband and content providers can engage in business-to-business transactions where payment is exchanged.

The Netflix Litigation

In the first case in 2020, Netflix argued that it had no obligation to pay or negotiate for the use of SKB’s network. A year later, the court flatly rejected that argument but left payment terms to the parties. Netflix rejected that outcome and filed an appeal.

In its appeal, Netflix argues that the global norm is settlement free peering, and hence it has no contract with SKB. The court has not ruled on this argument, however it is moving forward on deciding the methodology for network usage fees. These usage fees address SKB’s counter claim of unjust enrichment. Despite the dispute with Netflix, SKB continues to invest significantly to enable dedicated capacity to deliver Netflix’s exploding traffic, an increase of more than 24x since 2019. Importantly, end users’ quality experience of Netflix is maintained.

In any event, Netflix has refused the various options proposed, so the court is ordering a network usage fee compensation model to be determined. It orders that the compensation methodology to be determined by one of two leading Korean scientific institutions, the Electronics and Telecommunications Research Institute (ETRI, the agency which performs the calculation for interconnection fee between telecom providers) and the Korea Information and Communications Policy Research Institute (KISDI).  The suggested method includes a statement of the total network cost which is then apportioned to the relevant content provider based upon its respective traffic. Importantly, network traffic figures are published for the country on a regular basis by the Ministry of ICT; Netflix accounts for at least 7 percent of the total traffic in the country.

Netflix had proposed three individuals to assess the claim of unjust enrichment. However, none had experience in network costing. Two appeared to be hostile to the notion of cost recovery; one is a board member of the discredited OpenNet advocacy organization and the other, a professor of copyright who published op-eds opposing the Network Free Ride Prevention Act. The court rejected the proposed experts.

SKB proposed using existing private paid peering cases arrangements between Korean broadband providers and foreign content providers and content delivery networks as compensation templates. US firms Alphabet and Meta already pay usage fees in South Korea, as do Korean firms Naver and Kakao. SKB suggests settlement of the traffic at ratio of 0.3:99.7.

Netflix attempted to argue that the usage assessment should take into account and ideally be lowered because of a series of factors like whether or not there is paid peering, the transit cost the broadband provider pays to larger foreign firms, the broadband providers’ submarine cable costs to transmit Netflix, the cost of international submarine cables required for the installation, the use of Netflix’s Open Connect Appliance, and the fees that the respective broadband provider receives from its subscribers. The court sees Netflix’s arguments as irrelevant to its assessment of unjust enrichment.

The parties are to submit further documentation on the selection of ETRI and KISDI to the court by the end of month with a follow-up court date to be determined.

Broadband Cost Recovery Policy in South Korea and the Global Context                         

South Korea’s policy recognizes that ensuring quality content delivery is a shared responsibility between content and broadband providers. The Service Stabilization Act enshrined in Article 22-7 of South Korea’s Telecommunications Business Act and administered by the Ministry of ICT requires that the largest content providers engage with broadband providers for cost recovery. Compensation is determined by the parties and is private. The government does not set price levels nor mandate fees. The law is only applicable to the five largest content providers: Google, Netflix, Meta, Naver, and Kakao, a group which together comprised more than 41 percent of all South Korean traffic. For eligibility, these providers must have at least 1 million users per day and comprise at least 1% of South Korea’s traffic. This is important as it is not intended to include the long tail of content providers.

Big Tech has lobbied globally to forestall the outcome now unfolding in South Korea. It has commissioned various actors and reports to claim that the broadband ecosystem has been harmed in South Korea. Strand Consult has fact checked these claims through multiple reports and research notes. Strand Consult has also fact checked foreign government reports which have erroneously reported on South Korea.

Its Ministry of ICT provides transparent information to facilitate individual market-based negotiation between the 5 largest content providers and Korean broadband providers for cost recovery on private, confidential terms. This ensures that Korean networks are best in class while reducing financial burdens on consumers. Unsurprisingly, South Korea enjoys the world’s highest rate of fiber to the home adoption and 5G. Moreover, it is the world’s seventh largest content creator, a result of a similarly holistic policy for domestic content. Notably the country which has ubiquitous networks is also one where Google and Netflix booked record profits last year.  More network investment means more bandwidth to show ads and movies.

Many are familiar with the role that advertising played to support the development of radio, TV and print in the US. This fostered the development of a content industry without making consumers pay media license fees, as they do in Europe. Similarly in South Korea, payments from content providers have helped accelerate the development of broadband networks, importantly at a lower cost to end users. The critical mass of end users online in South Korea has been an important domestic market for content creators. The Korean inventions of K-Pop, K-Drama, and K-Webtoon are now international phenomena bringing billions of dollars of revenue to South Korea.

Notably policymakers would like to see bottom up, market-based resolutions for cost recovery, however, there is demonstrated behavior and evidence that the largest parties like Netflix, Meta and others resist coming to the table. This may force regulatory intervention in some locations. Market-based solutions can only work if there is respect for property rights. Broadband networks are private property just like the intellectual property which Netflix licenses an protects with its own cost recovery efforts to crack down on account sharing, which is estimated to account for at least $1 billion annually.

Academic Assessment

While Netflix argues that settlement free peering is the norm, that does not necessarily mean it is a good thing. The lack of contracts for internet data exchange between broadband and content providers could be seen as market failure; funds which otherwise would further network investment are not expended, and consumers suffer. The2001 Nobel Memorial Prize in Economic Sciences, won jointly with George Akerlof,  Michael Spence and Joseph Stiglitz “for their analyses of markets with asymmetric information.” At issue for cost recovery is not whether one side gets the better or worse deal, but that a deal is never concluded.

Strand Consult observes half a dozen empirical, quantitative, peer-reviewed academic papers published in the last year showing that paid peering can benefit consumers.

Order Strand Consult’s report Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea today so that you can learn about the case and what it means for your region.