[Summary] Google, Netflix, and Others Boldly Claim "Cannot Pay Network Usage Fees or Taxes" with Absurd Arguments

Reverse Discrimination Caused by Regulation③

[Asia Economy Reporter Minyoung Cha] Global IT giants such as Google YouTube and Netflix are making enormous profits based on domestic internet infrastructure but are not properly paying network usage fees. This behavior contrasts with domestic companies like Naver and Kakao, which pay hundreds of millions of won annually as usage fees as content providers (CPs). The network usage fee issue is not simply a matter of contracts between domestic internet service providers (ISPs) and CPs. The ongoing reverse discrimination issues, user fee burdens, and even the overall domestic internet network ecosystem are all affected.

“Global IT Giants Refuse to Pay Network Usage Fees” Legal Battle

According to industry sources on the 8th, global companies such as Netflix and Facebook are continuing legal disputes over network usage fees in Korea. For example, SK Broadband is preparing for the third hearing in late April regarding the network usage fee dispute with Netflix. The issue began when Netflix filed a lawsuit against SK Broadband claiming non-existence of debt, refusing to pay network usage fees.

In this process, Netflix bypassed SK Broadband’s nine negotiation proposals as well as the mediation process by the Korea Communications Commission (KCC) and went straight to court. An SK Broadband official said, “We have reached the limit where we can no longer bear the cost burden.” Netflix’s traffic has surged twelvefold over the past three years. During this period, SK Broadband has paid hundreds of millions of won for network quality maintenance.

Facebook is also in conflict with the KCC over network usage fees. The KCC judged that Facebook deliberately slowed down speeds to gain an advantageous position in negotiations with domestic telecom companies and imposed a fine in early 2018. However, Facebook appealed and won both the first and second trials. A KCC official, who announced plans to appeal, pointed out, “It is due to regulatory loopholes,” adding, “While responding to this, securing enforcement power against global companies is a challenge.”

Network Usage Fees Paid Overseas

This conflict is likely to continue for some time. The global giants at the center of the controversy practically have no intention of paying network usage fees in Korea. Professor Kim Seong-hwan of Ajou University’s Department of Economics said that global CPs are avoiding network usage fee burdens by citing net neutrality (the principle that ISPs should treat all content equally), but “net neutrality was originally a protective regulation for small and medium CPs, and does not apply to Google or Netflix.” They are also criticized for tax avoidance tactics that reduce corporate tax by paying royalties to their headquarters abroad.

It has been confirmed that network usage fees are paid in other countries. When traffic congestion became severe, Netflix signed network usage fee contracts with major U.S. ISPs such as Comcast, Verizon, and AT&T around 2014. Google also signed a related contract with French telecom company Orange in 2013, as revealed by Orange’s management.

According to the Ministry of Science and ICT, as of the fourth quarter of last year, Google’s daily traffic accounted for 25.9% of the total, 18.5 times that of Kakao (1.8%) and 14.4 times that of Naver (1.8%). Unlike overseas companies that do not pay network usage fees, domestic companies are known to have paid about 110 billion won in 2017 alone.

Law to Control Rampant Overseas CPs Introduced, but Effectiveness in Question

As the controversy over ‘free-riding’ on networks by global companies such as Google YouTube and Netflix intensified, the government prepared and began enforcing the so-called ‘Netflix Free-Riding Prevention Act (Amendment to the Telecommunications Business Act)’ last year. Since the obligation to maintain network quality has been legally clarified, it is evaluated that a path has opened to demand fair compensation from global CPs that consume large amounts of traffic.

However, reverse discrimination controversies against domestic companies like Naver and Kakao also follow. For example, it is uncertain whether overseas IT companies headquartered in the U.S. or abroad will comply with administrative agency orders such as submitting related materials. There are concerns that this may only hinder domestic companies.

Attorney Koo Tae-eon of Law Firm Lin pointed out, “Domestic CPs bear a large burden of network usage fees, and additional burdens have been imposed,” adding, “It is practically impossible to conduct operations such as inspecting servers of overseas headquarters in case of non-compliance.” Criticism has also been raised that the fine of up to 20 million won for violating businesses is merely a slap on the wrist. A Democratic Party official said, “After observing the progress since the law’s enforcement, we may consider raising the level to a punitive nature.”

Google, which caused a blackout immediately after the law’s enforcement in December last year, became the first subject of the law. However, since the enforcement decree stipulates that only outages lasting more than four hours are subject, direct consumer compensation is difficult. Unlike domestic companies, YouTube and Netflix have been criticized for not issuing apology notices or compensation plans for frequent outages and connection failures.

Professor Shin Min-soo of Hanyang University’s Business Administration Department argued, “We should induce voluntary improvement plans, such as Apple’s decision to establish a 100 billion won mutual growth fund.” A Ministry of Science and ICT official explained, “For overseas companies, we plan to prepare supplementary measures such as appointing agents to reduce reverse discrimination controversies between domestic and foreign companies.”