Research Notes

A global movement for broadband fair cost recovery is underway. John Strand talks with internet policy experts Roslyn Layton and Petrus Potgieter

Why do you have such a big interest in the way companies charge for traffic on the internet and what you call “fair cost recovery”? CEO John Strand talks with internet policy experts Roslyn Layton and Petrus Potgieter.

JS: Through your academic work, I can see that you, Roslyn Layton and Petrus Potgieter have helped to create political and regulatory awareness of the costs associated with building and operating broadband networks. 

You have helped to open policymakers’ eyes in the United States and around the world. More people are talking about fair cost recovery based on your research. In fact, your research helped support the provision of $1 billion for the expansion of the middle mile in the United States as part of the Infrastructure Investment and Jobs Act.

Tell me more about this process and how you have experienced it.

Q: What was the reason you did the preliminary academic research which became the basis for Strand Consult’s report Middle Mile Economics: How streaming video entertainment undermines the business model for broadband

Answer: Roslyn Layton. For my PhD in internet economics at Aalborg University’s Center for Communication, Media and Information Technologies, I spent 5 years studying traffic patterns on mobile wireless networks across 50 countries. I found that network traffic was dominated largely by a handful of Silicon Valley players which account for the vast majority of downloads and revenue in the mobile ecosystem. I was curious what patterns I could observe by looking at wireline networks. After testifying in Congress about my research for a hearing on broadband, a group of rural fiber to the home providers asked me whether I would study their networks. I asked them for their data and turned the project into a postdoc of sorts and enlisted the help of my colleague Petrus for mathematical modeling.

Answer: Petrus Potgieter. My research in the economics of media started with an International Telecommunications Society conference paper on the availability of movie titles on peer-to-peer piracy networks. I then got involved with the multi-year International Media Concentration Collaboration project, led by Eli Noam at Columbia and contributed a country report to the 2016 Oxford University Press book Who Owns the World’s Media? that came out of the research. My academic background in mathematical modeling and theoretical computer science (which I teach at post-graduate level at the University of South Africa) has helped me a lot in thinking about network and digital economics and when Roslyn approached me with the data she had from rural broadband providers, it was a good opportunity to further pursue these interests.

Q: When you collected your data and did the calculations, were you surprised that the cost of sending video traffic through a broadband network was so high?

Answer: Roslyn Layton. I have long known that disproportionate traffic patterns would make it hard to recover broadband network costs, particularly because broadband providers offer flat rate pricing on wireline networks. However, I did not realize where in the networks the cost increases were experienced and how. For rural broadband providers, the middle mile is key. This is the area in which providers must purchase equipment to process and store the video entertainment traffic. One could expect that a charge could be levied just for the use of networks, but in rural broadband, providers must provision the network with more equipment (servers, switches etc), software, labor, and energy.

Answer: Petrus Potgieter. It was not a huge surprise but striking. Broadband access is a capital intensive business, just like traditional telecommunications, but it is very distinct from telephony in that it requires continuous reinvestment as the nature of the product evolves. The occasional loading of a static website and the sending of e-mail requires a qualitatively different connectivity than online gaming and video streaming do. In the early years of the Internet, people thought that Metcalfe’s law (the value of the network grows proportional to the square of the number of users) explained the business case but by now it is clearly governed more by Sarnoff’s law (the value of a broadcast network grows proportional to the size of the audience). One of the problems with delivering content over a broadband network rather than broadcasting it is that everything between the viewer and the “broadcaster” (content provider) needs upgrading.

Q: How has the reaction to your research been to other people with the same academic background as you?

Answer: Roslyn Layton – Actually I was surprised by how few people have thought about this problem, even though the academic/regulatory community has been studying shortfalls in broadband funding for decades. Moreover, telecom regulators have little to no insight to internet traffic. I had assumed that they would use enterprise tools to study such questions, but they don’t.

Answer: Petrus Potgieter. Our initial study has already been cited in other academic papers and I am currently working with an associate at the Institute for Technology and Network Economics on a more theoretical study about the range of possible interactions between access and content providers. The report that we did on the original rural ISP study, I am proud to say, is pioneering work on actual costs incurred by broadband providers.

Q: How has the reaction been among telecommunications companies outside the U.S.?

Answer: Roslyn Layton. Fair cost recovery is a global issue. It impacts broadband providers in cities as well as rural areas. However large broadband providers have a bigger customer base over which to attribute cost. The issue is acute for rural broadband providers which may only have a few thousand, or few hundred, subscribers. All broadband providers struggle to recover costs and not all have the ability to cross sell and cross subsidize their services. This makes pricing flexibility and middle mile pricing all the more critical for policy to close the digital divide.

Answer: Petrus Potgieter. Especially since the EU and UK authorities have started talking about content providers contributing to the cost of network rollout, there has been renewed interest in our work. I do not think that fees levied by regulators on content providers is necessarily the optimal way to address this issue though – cost recovery on a commercial basis is likely to go further towards promoting a viable and vibrant market.

Q: What did you think of the reaction from the political and regulatory side in the U.S.

Answer: Roslyn Layton. I am pleased that after long last Congress is finally recognizing that the issue must be studied. The bipartisan FAIR Contributions Act would tasks the FCC with performing the needed study. However, I am surprised that the FCC knows so little about this issue.

Answer: Petrus Potgieter. As Roslyn points out, there is a fair degree of awareness of the issue, especially as it affects universal service contributions and programs that support connectivity in rural and disadvantaged areas. This is a good start.

Q: In Korea, there is currently a lawsuit between Netflix and SK Broadband, you can tell us a little bit about that case and what it’s going to mean for the market outside of Korea.

Answer: Roslyn Layton

South Korea is considered the world’s #1 market for broadband access, use, and skills. It’s a highly advanced and competitive market with robust investment in networks as well as local content.  South Korean policymakers have been on the forefront, recognizing the need to optimize the inputs to a networked society.  It is fitting that South Korea’s policymakers would be ahead of the curve to understand that content providers also have a responsibility to ensure the quality of their data. Today all third party content providers which have 1 million or more users or comprise more than 1% of total traffic on a given network pay a fee to the respective broadband provider to ensure quality. US and Korean companies have been paying this fee for some time. Notably Netflix has been waging a lawsuit against it, but their claims fall flat when they claim they have no responsibilities or obligations when their data explodes 24x overnight. Netflix lost its lawsuit with courts rejecting Netflix’s claim that it had not obligation to pay or negotiate for the use of other’s networks. It is on now on appeal and policymaker continue to study the cost recovery, as it is seen as reasonable.

I have written this up on Strand Consult’s new report Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in South Korea 

Answer: Petrus Potgieter. The case in South Korea is of great interest. Although I would not necessarily say that regulated termination rates (which South Korea has) are the only viable approach, the Netflix “we shall pay nothing” attitude clearly runs counter to South Korean law and every expectation of reasonable business practice. Since South Korea is a strong and advanced market with many local content providers that do comply with the traffic termination regulations, such regulations are clearly not particularly detrimental to the Internet ecosystem.

Q: What is your view of Europe?

Answer: Roslyn Layton. European broadband providers have a legitimate grievance, but they need more systematic and credible evidence to demonstrate their case. Our study is unique and defendable because it relies on actual traffic data. Many European providers opted not to use the empirical approach because it is cumbersome. Ultimately broadband providers must demonstrate and document the cause the problem, the amount of traffic, its location in the network, and the associated amount of cost.

Answer: Petrus Potgieter. European operators have tended to focus on their own contribution to coverage and universal service and the complete absence of any such contribution from the tech giants. Their point is valid and perhaps chosen to appeal to regulators but the long-term interests of the industry would probably be served better by a focus on commercial cost-recovery.

Q: Is this an area that you are working on now and if yes what are your plans.

Answer: Roslyn Layton – Right now, we’re doing a big study in the U.S. where we’re getting data from many of broadband providers across the US. It’s a large-scale version of our first research project.

Answer: Petrus Potgieter. The first data that we’ve already received in a new round of consultations is very interesting both for the overall picture and for some of the individual responses. It covers a far greater and more diverse set of operators than the initial study.

Q: Is your research relevant to operators outside the United States, operators using technologies other than fixed broadband. What about mobile operators and operators in emerging markets.

Answer: Roslyn Layton – Highly relevant

Answer: Petrus Potgieter. I come from South Africa and have been doing global research in telecommunications for more than 15 years. Since I live in a country where easily 90% of users are reliant exclusively on mobile data networks, it is of particular interest to me. Many emerging markets have flexible approaches to zero-rating and to content discrimination which has helped mobile networks deal with content delivery issues. Fiber networks are to some extent isolated from the issue because they cherry pick areas to serve. Nevertheless, recent research in South Africa suggest that low-income households consume more data than high-income ones, once they are on unmetered connections. This is in part because of larger household size but is to come extent attenuated by the fact that urban lower income households are in high population density areas which are cheaper to serve and where there is little or no resistance to overhead infrastructure. I expect a lot more interesting data to come from these markets.

Q: What do you think about the business models for billing traffic on the Internet are the relevant ones today.

Answer: Roslyn Layton – The broadband subscription models used today were implemented before the invention of streaming video, and they have not evolved for the new application. Ultimately I’d like to get a to a place in which middle mile traffic is managed through a transparent, seamless interface like the purchase of cloud computing, ideally with minimal regulation. When you buy cloud services on Amazon, you specify the amount of traffic you want to compute, the level of quality, and the type of service. There is no reason we can’t do this for broadband.

Answer: Petrus Potgieter. Business models have not evolved with the technology development. Right from the start, it was clear that the Internet was going to be very useful but not so clear how it was going to be commercially viable. The initial answer was advertising supported content and, for lack of a better expression. It is becoming clear that this might not be the best business model today where so much of the content is supported by payments directly from the consumer to content providers. If you want a facile analogy, you cannot run Uber Eats on the same basis as an all-you-can-eat buffet.

JS: Thank you for your response we look forward to you finishing the next edition of the report. Our report will contribute to the ongoing policy discussion of the way companies charge for traffic on the internet and that you call “fair cost recovery”

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