Research Notes

Who’s weighing in on broadband fair cost recovery? Fact checking the arguments from governments, trade associations, and think tanks

Reports and papers have emerged over the last year in the global debate for broadband fair cost recovery.  Some reports, like that commissioned by the German government, reflect the need to educate and inform policymakers about the change and challenges of global data markets. Companies, trade associations and think tanks attempt to tell a story and advocate for a particular corporate interest. Academic papers use a set of tools and methods to uncover truth.

Some of these papers can be read as attempts to justify and maintain the regulatory status quo, to discredit the view that broadband providers should enjoy two sided markets, and to diminish the broadband policy success of South Korea, a country which has forged a unique, if not, contrarian approach. Strand Consult has analyzed and fact checked these reports so you don’t have to. Get these Strand Consult reports today so you can fast-track your knowledge and strategy.

Here are a few, among the many, points covered the reports.

Regulatory reluctance to address long-standing policy when the architecture of the internet has changed drastically and fundamentally.

Germany’s Federal Network Agency of Germany (Bundesnetzagentur) published Competitive conditions on transit and peering markets – Implications for European digital sovereignty (February 2022, 141 pages). It commissioned a study on competition in transit and peering markets. Noting that the issue hasn’t been examined by the Body of European Regulators for Electronic Communications (BEREC) for at least 5 years, the report includes the results of a recent survey of regulators on their knowledge and experience of disputes in international data markets.

The report observes that internet traffic in Europe grows 25 percent year over year; that 80 percent of this traffic is video, social media, and games; and that just 5-6 players (e.g. the platforms Netflix, Amazon Prime, YouTube etc.) account for more than half of all traffic. These players have more international backbone capacity than the world’s broadband providers and have jettisoned third party transit in lieu of building their own backbones, undersea cables, and data centers. The transit business has declined as a result. The platforms largely avoid internet exchanges where prices are transparent, instead building bespoke networks for their proprietary content and maximizing the efficiency and profitability of their services.

The massive development and expansion of backbone and delivery infrastructures by these players has permanently changed the overall global architecture of the internet, the structure of interconnection, and the relationship between platforms and broadband providers, creating competitive disadvantages for operators. The sustained growth of internet traffic continues to shape the dynamics of the internet’s architecture, with the continued disproportionate growth of video streaming and cloud services having the greatest impact. Private network provision has many advantages, though conflicts can emerge when parties exchange data, particularly with the market power disparities between the entities. While the internet architecture has changed drastically in the last decade or so, the legal and regulatory framework for traffic flows has changed little, and the largest platforms are essentially unregulated in these international data markets. The exception is South Korea with its unique approach to broadband policy and recognized global leadership.

BNetzA should be applauded for commissioning the report and publishing it in English, as it gives helpful insight to the German government’s view, though not necessarily an endorsement. The need to commission a report demonstrates the irony that regulators and authorities who purport to regulate the internet (or parts thereof) know very little about it. The very policy promised to preserve the internet as “open and free” appears to have changed it irrevocably to a series of parallel, proprietary, and unregulated internets. Moreover, the regulators, who purport to be “guided by evidence”, lack systematic, independent, and public data which could inform and support their decisions.

Notably the US faces a similar situation, which the proposed bipartisan Funding Affordable Internet with Reliable Contributions Act or the FAIR Contributions Act could resolve by tasking the Federal Communications Commission to perform a similar study.

The German report exposes intellectual contradictions. On the one hand, it acknowledges that the premise of the internet and its architecture has changed. This would suggest that policy should be updated. But on the other hand, the study could be interpreted as a desire to keep policy the same. From the European Union perspective in the post-Brexit era, there is a need to ensure policy legitimacy ex post, even if policy has failed to deliver promised benefits. Sadly, the EU has little to show for its many “level playing field” efforts. Today the market value of the European internet is just 2 percent of the world’s total, and the region is on track to be surpassed by Africa in 2023.

The report also notes a desire for “digital sovereignty”, which can refer to data protection, cyber security, and/or strategic interests and notes “…digital sovereignty is about finding a balance between achieving one’s autonomy and maintaining a diversified portfolio of providers and international trade relations, which are important for many EU economies.”

Mischaracterizing network usage as termination: Policy experts used to love South Korea; now they bash it.

Recall the 2015 New York Times story What Silicon Valley Can Learn From Seoul where one “can glimpse a future where the most ambitious dreams of Silicon Valley — a cashless, carless, everything-on-demand society — have already been realized. Nearly all of Seoul’s residents use smartphones, and many of the services just now gaining in popularity in the United States have been commonplace in South Korea for years.”

South Korea has been celebrated for its leadership in broadband, ubiquitous networks, and digital economic integration. But when South Korean policymakers dared to challenge Silicon Valley with the shocking notion that they should pay for then network resources they use, an army of global experts—Big Tech’s Big Guns—were dispatched. Suddenly the most innovative internet country became a pariah. Silicon Valley loves it when broadband providers invest in next generation networks; they just don’t want to pay for the ride.

Consider the Internet Society’s Internet Impact Brief: South Korea’s Interconnection Rules (May 2022, 11 pages) along with shaming blogs like Sender Pays: What Lessons European Policy Makers Should Take From The Case of South Korea and Old Rules in New Regulations – Why “Sender Pays” Is a Direct Threat to the Internet. The paper asserts, “ISPs operating in South Korea used to be free to negotiate their own interconnection agreements commercially as they saw fit. This allowed for settlement-free peering among ISPs. The rules have been interpreted to imply a paid mutual settlement, also known as a Sending Party Network Pays (SPNP) model, where ISP A must pay ISP B to send traffic to ISP B’s customers, and vice versa.”

News flash: There has been a regulatory regime for internet protocol interconnection for telecom providers since 2004 in South Korea. All companies in this category must engage per the rules.

SPNP only applies to Tier 1 broadband providers in South Korea (Korea Telcom, SK Broadband, and LG Uplus). If the traffic exchange ratio between the two operators is 1:1.8, they will pay the same amount of interconnection fee. If the ratio between the two operators is 1:2, then broadband provider A pays the amount of traffic to broadband provider B and receives amount of traffic 1.2 (1+ 1- 0.8) from broadband provider B. The traffic fee corresponding to 0.8 exceeding 1 is exempted.

SPNP does not apply between content/application providers and broadband providers.

This should not surprise anyone with basic familiarity in telecom law. Rules evolved to ensure that networks could interconnect, so that people on one network could talk to those on another.  The historical pricing of telecommunications included the components or origination, transmission, and termination. These elements reflected the design of the network and its flexibility to interoperate with other networks. Notably in the early days of the telephone, there were many phone companies. Having discrete pricing allowed multiple networks to flourish and interoperate because they were able to recSPNP only applies to Tier 1 broadbandover costs. Note that this model is predicated on a single service, voice, with a relatively uniform set of network elements.

Today’s internet with a vast array of services, components, and networks is vastly different, but this does not mean that the cost to build networks is free. Moreover, technical requirements and network behavior differ remarkably across services and applications suggesting variable pricing. A movie puts different demands on a network versus a short message.

Fast forward to 2016. South Korea adopted a voluntary framework for network usage compensation.

Called the Service Stabilization Act, the policy ethos reflects a recognition of shared responsibility between broadband providers and content/application providers to ensure service quality, data delivery, and user experience. In practice, policy ensures cost recovery of the installation and maintenance fiber from the content provider to the broadband provider’s core router and provides dedicated bandwidth for the given content/application. This protects against the degradation of the network experience for users which don’t access that particular app.

Importantly, this practice has nothing to do with termination of the traffic to end users. However Internet Society, CCIA, Analysys Mason, and others appear to confuse–on purpose–network usage (which describes the relationship between a broadband providers and content/application providers) with the termination regime of SPNP, which only applies to telecom companies.

The South Korea network usage framework is suggested only for companies comprising more than 1 percent of the nation’s traffic or having more than 1 million users. Moreover, companies can opt out of the framework by downgrading their bandwidth requirements, as Twitch did by configuring its service to run at 720p instead of 1080p.

While cost recovery is encouraged in South Korea, it is not mandatory, and hence large US players game the regime.  For example, Netflix rejected claims for cost recovery and brought a broadband provider to court, saying it had no obligation to pay for the broadband network upgrades required to manage Netflix traffic which increased 26-fold near overnight.  Netflix lost, and the case is on appeal.

Similarly Facebook wanted South Korea’s broadband providers to install Facebook servers inside their networks for free. The broadband providers balked as the servers have costs and cannot be repurposed for other content, and hence are inefficient and redundant. Facebook re-routed its traffic, creating overflows in other networks and degrading the end user experience. The Korean telecom regulator fined Facebook for hindering end users’ access. Facebook challenged the action in court and won, but it got the attention of the South Korean Assembly, which has stepped to stop the abuse of Big Tech refusing to supply requested content.

The Facebook incident served as an opportunity to introduce the Korean Service Stabilization Act. The act imposes an obligation on the very largest content providers to consult in advance with the broadband provider to prevent user damage if the very large content provider changes the traffic transmission path and suddenly puts traffic burden on the specific broadband provider’s network.

The Assembly proposes and amendment to the Telecommunications Business Act which stipulate that companies engage in a good faith negotiationwith requirements for data and pricing transparency. There is no imposition of fees or price controls.

Two sided markets for me, not for thee.

Many internet experts are US-centric and aligned with US tech companies. This presents a challenge of how to characterize countries which develop their own paths. The Carnegie Endowment for International Peace makes a useful attempt and posits that India and South Korea are forging alternative models of data governance, breaking the binary of global control by the US and China. “Instead, they are pioneering their own approaches, mixing and matching elements of their unique democratic institutional frameworks with national requirements and policies derived from distinctive political cultures,” they write. Their fulsome August 2022 paper of some 200 pages from a variety of scholars focuses on three important issues: online authentication and data access control; cyber defense and data resilience; and data localization.

However tacked on to this authoritative discussion is a non-sequitur of 4 pages bashing Korea for pursuing network cost recovery. In other words, it’s justified for South Korea to forge its own path in data governance, but it cannot contravene the corporate interests of Google, Amazon, and Microsoft. While it is fine to purchase cloud services from these companies and “pay by the bit”, it is unconscionable that Big Tech should deign to pay when it uses someone else’s network. In the same breath extolling the virtues of South Korea’s digital society–the product of its unique approach–the authors warn that cost recovery will “mess with success,” “flip the entire business model of the internet”, reduce competition, degrade services, and drive content offshore.

Rather than imposing the upgrade costs on all end users, as some countries do, South Korea recognizes that there is a two-sided market for broadband just as there is for every other internet business. Google subsidizes its searches through advertising so end users don’t pay out of pocket, and it also offers premium services for a fee. Broadband providers should have the same pricing flexibility. There are a range of price points to incentivize participation on both sides of the market, and this makes the network robust. Getting more parties to participate at different price points is exactly what’s needed to close the digital divide and to recover revenue for further network investment.

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