Netflix ends three year litigation in Korea over network usage costs. Fair share update by Strand Consult

Netflix, SKBroadband, and SKTelecom announced a strategic partnership today and the end of 3 years litigation brought by Netflix and the countersuit of unjust enrichment brought by SK broadband. This note reviews the terms of the partnership, the background on the litigation, and what it means for the market in future. Strand Consult has chronicled the David and Goliath battle of global behemoth Netflix challenging the competitive South Korea operator SK Broadband. See Strand Consult’s report Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea  and collected research notes on the topic.

The Outcome

According to Netflix and SK´s press releases, the parties agree to “convenient viewing experiences and payment methods on smartphones, IPTV etc. and to prepare various bundle plans.” An additional product would be Netflix delivered on SKTelecom’s “T Universe”, an AI enabled product to offer Conversational UX and Personalized Recommendation Technologies. Additionally, there is to be an SK version bundled with advertising-supported Netflix. The strategy is to not only by provide “top-tier communication services but also streaming services of the highest caliber.”

Netflix announced “Going forward, SK Telecom will continue its journey to transform into an AI Company by collaborating with other global companies through strategic partnerships. This announcement is another example of Netflix’s ongoing investment in putting its members first around the world and in Korea, a country that defines the cultural zeitgeist and is widely acknowledged for fostering a world-class creative ecosystem”

Netflix added,“This strategic partnership with Netflix originates from the philosophy of SK Telecom and SK Broadband, where customer value is prioritized, and comes as part of our efforts to provide customers with an enhanced media service environment.”

Ostensibly this means that in future, Netflix users on SK networks would purchase Netflix through their broadband subscription. This would appear to be the way to ensure that the usage cost of Netflix on SK’s network is covered. This suggests a revenue share between Netflix and SK  ensures that SK’s network usage costs are covered. Such up-sell and cross-sell arrangements are common in many industries, and indeed are used in the telecom industry With such a partnership SK can compete in the market for its ability to ensure a superior Netflix experience. Hence the larger policy goals for competition are preserved. Moreover, the maintenance of the various product levels, notably ad-supported Netflix, suggests the commitment to affordability. 

Netflix has grown its customer base significantly in South Korea since launch and notes some 6 million customers today. The new products are expected to be rolled out in the beginning of 2024. It is also expected that KT and LGP U+ will offer similar bundled products.

While the releases make not specific mention of usage fees, such payments are presumed to be included in the settlement, according to an article by a leading Korean newspaper.

In any event, the debate about how to recover costs for continued investment in next-generation networks continues in South Korea, widely-recognized as the world’s leading broadband nation, and remains critical. The country was first in 3G, 4G, and 5G, and expects to continue leadership in 6G.

While the disputes may be settled, the policy discussion is far from over.  Rep. Cho Seung-rae, a member of the National Assembly’s Science, Technology, Information, Broadcasting and Communications Committee, said, “We welcome the amicable resolution of the issue between the two companies, but fundamental institutional improvement is still needed to resolve the network use issue.”

Representative Yoon Young-chan (Democratic Party of Korea) said, “This is the first step toward further change for fair network use. “However, there is still one global company (Google) that free-rides in the domestic ICT market, so fair laws and systems must be reformed. We will work hard to create the level playing field,” he promised.

Background for the case

Network traffic from Netflix ballooned on SK Broadband’s network in a relatively short period, on the order of 24x. Netflix accounted for as much as 7 percent of South Korea’s total traffic even though it only had a few million Korean subscribers. SK Broadband attempted to negotiate with Netflix for cost recovery and sough mediation from the Korean Communication Commission. Netflix rejected that process.

Netflix then brought a lawsuit against SK Broadband claiming that it had no obligation to pay or negotiate for use of SK Broadband’s network. The court rejected Netflix’s claim, said that broadband is a two-sided market in which parties negotiate the terms of data exchange, and said the terms of compensation could be resolved by the parties themselves. Netflix appealed saying that it had no contract with SK Broadband, and SK Broadband countersued claiming unjust enrichment. The litigation went through 10 court hearings. It appeared to grow progressively worse for Netflix with the last instalment seeing the court assign a national institute to set the terms of compensation.

Strand Consult described the Netflix vs. SK Broadband case in thereport Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea.

Conclusions

The outcome is significant in important ways.

1. The partnership symbolizes the recognition of the need for broadband providers to recover costs and to find sustainable business models. This partnership works for Netflix and SK as both entities have financial relationships with the end user, and the parties are in position to share the revenue accordingly. Notably the end user still bears the cost, but Netflix’s revenue is ostensibly reduced.  Such an arrangement works for streaming but not necessarily for the large search and social network platforms as they do not have financial relationships with end users. However, it does signal that broadband providers could do more to partner with video streamers, and this could be helpful for competitors to Netflix. It is also important to address video streaming as it is a cost key driver of network traffic.
2. The partnership also signals that Netflix’s claims that usage fees would increase prices on consumers are unfounded. Rather, Netflix is willing to keep its price the same while sharing revenue with SK to cover the cost of Netflix usage.
3. The partnership could signal a change in the way streaming is priced in the market, as other broadband providers are expected to adopt the bundled model.
4. With a model that has been agreed, Netflix will likely reduce customer acquisition cost and churn. This means that Netflix will continue to have profitability in South Korea, even with usage fees. Notably, the usage fees are reasonable, on the order of cloud storage charges. As a recent South Korea Assembly hearing has shown, broadband  prices have not increased and remain competitive
5. The companies’ statements on putting the customer first are mutual and consistent with messaging and behavior through the case. Never during the three-year period did end users on SK’s networks suffer any degradation of Netflix. This is an important takeaway for policymakers and advocates. Separately an incident in South Korea involved Facebook degrading its users in protest to usage fees, an event which brought a fine by the Korean Communications Commission and which ultimately led to policymakers’ launching the Network Free Ride Prevention Act to protect against such anti-competitive refusal to supply tactics.
6. Netflix’s decision to settle is telling. It suggests that Netflix’s arguments about being entitled to free use other networks and that data exchange and settlement are free are not justified. If other parties set theterms of compensation, it is less likely to be favorable to Netflix, as the compensation could include years of past usage and many investment elements like undersea cables, servers, ports and so on. At the same time, it is unfortunate for policymakers not to have the transparency about the settlement. Tech giants are cognizant of the growing global movement to hold tech giants accountable, and a loss for Netflix in the courts with the decision made public would empower nations seeking cost recovery and compensation. It is not hard to imagine that Netflix feared disclosure more than the nominal cost of network usage. The fact remains that costs related to video streaming are real and must be covered.   
7. The outcome may come as a relief to many who had grown fatigued of drawn-out litigation over three years. It does leave questions for how emerging nations are to recover costs as the cost to deliver content and ads from tech platforms is significant, and end users have low income. 

The global movement for broadband cost recovery is hardly ending; it is just beginning. To learn more, check out Strand Consult’s Global Research Project for Broadband Cost Recovery and order the 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