Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea

Around the world operators experience exploding Netflix’s traffic exploding on their networks. They feel powerless to negotiate with Netflix for fair cost recovery, and Netflix demands that operators install its proprietary Open Connect Appliance for free, a solution which increases traffic, cost, and energy; sits idle most of the day; and can’t be leveraged for other content. While the problem is universal, few operators dare to challenge Netflix, and none have gotten as far as SK Broadband—with legislation and a lawsuit to require Netflix to pay for its use of the broadband network. Strand Consult’s new report “Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea” describes the situation in South Korea and how one operator has challenged the global streaming giant.

Over two years, Netflix traffic exploded on SK Broadband’s network 26 fold, causing tens of millions of dollars of cost increase. SK Broadband attempted to negotiate with Netflix for cost recovery using the telecom regulator’s mediation process. Netflix broke the process and sued SK Broadband, claiming it had no obligation to negotiate with or pay for the use of SK Broadband’s network. The court rejected Netflix’s arguments, and Netflix has appealed the case. Meanwhile, the National Assembly of South Korea has promulgated the so-called Netflix Law which requires content providers with at least 1 million users and/or whose traffic accounts for 1 percent of more total traffic to pay a fee to cover network use.

The world is watching Netflix’s lawsuit in South Korea to see whether the court rules in favor of SK Broadband. It could set a precedent for operators to recover costs. Operators and investors see that a sustainable regime of cost recovery could means billions of dollars in revenue for network investment and upgrade. Policymakers see new sources of revenue to close the digital divide. Netflix and other Big Tech companies counter that operators are obliged to accept their traffic for free regardless of the cost, volume, or negative impact. This means that prices must rise on end users to cover costs, something that neither end users nor operators find unfair as only a fraction of users on any network subscribe to Netflix. Moreover, operators offer Netflix different services to Netflix like computing, transit, and security, whereas end users get a different set of services, namely account management and customer service.

The conflict reflects that broadband policy and interconnection have evolved little in some 40 years. Internet pricing models were enshrined when email was the killer app of the internet, before streaming video emerged. Neither policymakers nor the internet’s designers knew that entertainment would become a key use case for the internet.

Strand Consult’s report “Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea” provides operators the inside track to the story in South Korea and valuable lessons to develop and pursue their own fair cost recovery strategies with Netflix and other content providers. Policymakers can use the report to understand the issues, stakeholders, and perspectives on broadband equity and related issues of law, economics, and policy.

The report includes

• Synopsis and timeline of the Netflix-SK Broadband litigation based on official Korean language court records, briefs, and court decisions
• Analysis of the companies’ strategies: legal/legislative, business/technology, public relations, communications, and diplomacy
• Review of South Korea’s internet policy, legislation, and milestones
• Policy overview of broadband pricing, interconnection, two-sided markets, fair cost recovery, net neutrality
• Summary of political actions against and regulations applied Netflix to recover tax, licensing, and other usage fees
• Lessons for operators and strategies to pursue fair cost recovery
• Links to articles and resources in South Korea and around the world to strengthen knowledge of these issues.

This report builds on Strand Consult’s coverage of South Korea for over two decades, starting with its ground- breaking reports on South Korean mobile market in 2002. In parallel, Strand Consult conducts a research project on middle mile economics, documenting the problems of exploding streaming video entertainment traffic and solutions for fair cost recovery. Strand Consult’s research is used by policymakers in the United States, Europe, and other regions to review and investigate challenges and solutions for broadband investment, digital equity, and closing the digital divide.

Efforts are underway globally to understand the broadband challenges created by Netflix and other content providers. In the US Senate, the bipartisan Funding Affordable Internet with Reliable Contributions Act or the FAIR Contributions Act (S. 2427) would require the Federal Communications Commission to study and report on the feasibility of funding the Universal Service Fund (USF) through contributions from online content and service providers. Fresh from the ratification of the Digital Markets and Digital Services Act, the European Commission takes up broadband. Executive Vice President Margrethe Vestager and Commissioner Thierry Breton call for an investigation of fair contribution by Big Tech to broadband networks. More largely, many minority and human rights groups express that Big Tech should participate in universal service obligations.

Video streaming entertainment traffic is growing 30 percent year over year. After ignoring the issue the years, policymakers are finally taking notice. Broadband providers are getting smarter to document the problem and propose workable solutions. South Korea, the world’s #1 broadband market as measured by access, use and skills offers a compelling example of policy for broadband fair cost recovery. All operators should study the SK Broadband and Netflix case to get smarter.

Order Strand Consult’s report “Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea” now. Strand Consult is not aware of any other entity which has compiled this information in a way that is useful for operators.