Netflix and SKB Network Usage Fee Dispute... Growing Pains of the Internet [Cha Min-young's PostIT]

High-Definition Video Demand Increases Traffic 30-Fold in 3 Years
Conflict Between Content Providers and Telecom Operators Over Network Quality Maintenance and Management Responsibility
Complex ICT Issues Including Net Neutrality Principles and Two-Sided Markets
Conflicting Interests in the Internet Market Maturation Process

[Asia Economy Reporter Cha Min-young] #. The internet market is entering a mature phase and experiencing 'growing pains.' This is because the number of users enjoying high-definition content such as 4K and UHD has increased exponentially, causing transmission traffic to surge. Legal battles between Content Providers (CP) and Internet Service Providers (ISP) have become common. In South Korea, the global No.1 Over-The-Top (OTT) company Netflix and SK Broadband, a subsidiary of SK Telecom?the country's top telecommunications operator?have clashed over network usage fees.

The third hearing of the lawsuit for confirmation of non-existence of debt between Netflix and SK Broadband, held on May 30 at the Seoul Central District Court, started at 3 p.m. and ended after 6 p.m. Technical presentations (PT) and cross-examination of technical witnesses were conducted simultaneously. The court's first-instance ruling will be announced two months later, on June 25.

The legal dispute between the two companies began when Netflix filed a lawsuit for confirmation of non-existence of debt against SK Broadband, claiming "we have no obligation to pay transmission fees." In November 2019, SK Broadband applied to the Korea Communications Commission (KCC) for mediation over the network usage fee conflict with Netflix, but Netflix bypassed the KCC mediation and filed a lawsuit in court. According to SK Broadband, traffic has increased more than 30 times over the past three years.

Complex issues including Internet fundamental principles and net neutrality

During the third hearing, arguments from the first and second hearings were repeated. Kim & Chang, the legal representative of Netflix, emphasized the concept of the 'Internet fundamental principles,' arguing that CPs only provide internet access fees. They criticized that if payment of transmission fees is enforced, ISPs would abuse their 'gatekeeper' rights to pursue monopolistic profits.

On the other hand, Sejong Law Firm, representing SK Broadband, focused on rebutting Netflix's previous claims. They explained that even assuming Netflix's distinction between 'access' and 'transmission' is correct, the fact of network usage cannot be denied. Regarding the net neutrality principle, they cited Article 15, Paragraph 1 of the Medical Service Act, which requires medical professionals to treat patients without discrimination, emphasizing that the service is not free of charge.

Issue ① Different interpretations and definitions of Internet fundamental principles and access fees

Netflix repeatedly argued that the roles of Netflix and SK Broadband are clearly distinguished. Previously, Netflix claimed that since it paid access fees to the existing intermediary ISP (ISP A), it did not need to pay separate transmission fees to SK Broadband, the terminating ISP (ISP B). They argued that because the Internet fundamental principles include the concept that 'transmission = free of charge,' transmission fees are not required.

In response, SK Broadband pointed out Netflix's confusing use of terminology. They explained that Netflix, the plaintiff, does not comply with the Telecommunications Business Act, which defines 'core telecommunications services' as 'integrated sending and receiving acts,' by distinguishing between 'access' and 'transmission.' In other words, all acts using the ISP's internet network, including transmission beyond simple access, constitute network usage fees.

Going a step further, SK Broadband argued that even if Netflix's distinction between access and transmission is accepted, payment of network usage fees is necessary. Since Netflix directly transmits content over SK Broadband's internet network, over which SK Broadband holds exclusive usage rights, it must pay fees for both 'access' and 'usage.' The dedicated lines of 500Gbps between Korea and Japan and 400Gbps between Korea and Hong Kong are all private lines for carrying Netflix traffic.

SK Broadband also directly refuted Netflix's premise that transmission fees are free under the Internet fundamental principles. They explained that neither the U.S. Code of Federal Regulations nor European Union (EU) regulations separately define the concepts of 'access' and 'transmission' or stipulate that 'transmission is free.' Particularly, South Korea has introduced the concept of 'interconnection' to regulate compensation for mutual network usage. This is a metered system where CPs pay according to their usage volume?those who use more pay more, and those who use less pay less.

Issue ② CDN construction vs. insufficiency of that alone

[Image source=Yonhap News]

Netflix cited the definition of 'Internet' to downplay SK Broadband's role. They argued that, based on cases in the U.S. and EU, the Internet is a network connecting multiple networks, and 'Internet transmission' must guarantee global connectivity. Therefore, SK Broadband only connects Netflix to SK Broadband users, so the term 'access' is inappropriate. Instead, Netflix's own Content Delivery Network (CDN), Open Connect Appliance (OCA), built at a cost of 1 trillion KRW, completes this function.

Netflix claims that its role is fulfilled by producing content and placing it at connection points. They argue that by investing 1 trillion KRW in their own CDN, OCA, Netflix has replaced global internet access and even established cache servers near South Korea in Tokyo and Hong Kong, fulfilling their obligations.

In response, SK Broadband mentioned that in the global market, CDNs calculate usage fees paid to terminating ISPs, and global CPs pay CDNs including indirect fees. Even though Netflix owns its own CDN, OCA, and cache servers, without the terminating ISP SK Broadband, connection to end consumers is impossible.

Issue ③ Has Netflix paid network usage fees to overseas ISPs?

SK Broadband repeatedly cited cases where Netflix paid network usage fees to overseas ISPs. In a 2014 affidavit submitted to the U.S. Federal Communications Commission (FCC), Netflix's Vice President of Content Delivery, Ken Florence, stated that "Plaintiff Netflix pays terminating network usage fees to ISPs such as Comcast, AT&T, Verizon, and TWC." However, Ken Florence responded that in the current SK Broadband case, "Plaintiff Netflix does not pay network usage fees to any ISP worldwide."

SK Broadband also presented evidence that U.S. telecommunications operator New Charter collected network usage fees from CPs. On August 14 last year, the U.S. Federal Court of Appeals for the D.C. Circuit recognized that "broadband providers can generally receive compensation from edge providers," acknowledging the possibility of collecting fees from CPs. The FCC also interpreted that, given the internet market is a two-sided market, fee increases from CPs would lead to reductions in broadband fees charged to end users. France's Orange received a ruling from the French Competition Authority in 2012 stating that "demanding network usage fees due to interconnection capacity expansion is not an unfair trade practice."

Netflix maintains its position that it has never paid network usage fees. They claim they have never paid transmission fees to any of their 7,200 overseas ISP partners. They argue that other CPs' payment cases differ from the SK Broadband case and are based on 'private agreements.' They also claim that the New Charter case is not a ruling mandating payment of transmission fees. They add that no government or court worldwide has ever forced payment of transmission fees.

Issue ④ Does paying transmission fees violate net neutrality?

Netflix argued that forcing ISPs to pay transmission fees would violate net neutrality. Net neutrality is the concept that telecommunications operators running networks should not discriminate against traffic from content providers delivering content over the internet. It was established to lower the entry barriers for CPs in the early internet market and promote internet market development. They believe that enforcing payment would hinder CP service development and harm consumer welfare.

In response, SK Broadband argued that net neutrality is unrelated to whether network usage fees are paid. Net neutrality does not mean ISPs must transmit traffic free of charge. They added that the South Korean government has adopted net neutrality as a basic policy while recognizing the paid nature of networks for value-added telecommunications service providers. They cited Netflix's own explanation that "the net neutrality principle does not explicitly prohibit charging transmission fees." They also pointed out that the Open Internet Order evidence presented by the plaintiffs dates back to 2011.

Issue ⑤ Network quality management obligation viewed through control

Views on whether 'control' exists, a key point in the network quality management obligation, are sharply divided. Netflix claims that SK Broadband's network is used by SK Broadband's users 'pulling' the content, so Netflix has no control over management. Naturally, SK Broadband claims it controls management. SK Broadband emphasizes 'ultra-high-speed internet quality' and asserts that the obligation to maintain network quality lies with SK Broadband.

In response, SK Broadband argued that Netflix controls the entire streaming process by managing content transmission. From access to content transmission, content streaming server designation, and actual streaming, Netflix controls the entire process. Since video quality equates to traffic, Netflix should share the network quality management obligation.

The ongoing legal battle between Netflix and SK Broadband involves complex ICT concepts such as net neutrality principles, two-sided markets, and open internet. It can be seen as a proxy war between CPs bearing heavy internet fee burdens and telecommunications operators responsible for maintaining network quality. Particularly, domestic CPs like Naver face criticism for bearing hundreds of millions of KRW annually in traffic usage fees, leading to claims of domestic and international corporate discrimination. Some CPs express concerns that a victory for telecommunications operators in this case could translate into increased cost burdens for domestic CPs. The industry is closely watching how this highly anticipated ruling will conclude.