[Comprehensive Report 2] Despite First Trial Loss, 'Free Riding on Content', Pay Usage Fees... SKB Countersues Netflix

[Asia Economy reporters Seulgina Jo and Minyoung Cha] "Netflix has shown no intention of paying network usage fees even after the first trial ruling, which is why we have filed a counterclaim. Using someone else's network without payment constitutes unjust enrichment."

SK Broadband has filed a counterclaim demanding network usage fees for the past three years from Netflix, the 'global online video service (OTT) giant' that generates massive traffic but pays no fees domestically. This is the first direct reimbursement lawsuit regarding network usage fees worldwide. Criticism is pouring in that Netflix's 'free-riding' on networks, even after the court's first trial ruling, has gone too far.

◇"Return unjust profits" SKB files counterclaim... Demands network usage fees for 3 years

On the morning of the 30th, SK Broadband filed a counterclaim against Netflix to claim network usage fees based on the unjust enrichment return principle of civil law. This is a follow-up action after the Seoul Central District Court ruled against Netflix Service Korea, the plaintiff in the lawsuit seeking confirmation of non-existence of debt (no debt) filed by Netflix against SK Broadband in June.

The claim covers actual network usage fees for three years. Kang Sinseop, a lawyer from Sejong Law Firm representing SK Broadband, said after submitting the counterclaim to the Seoul High Court, "The basis for the claim corresponds to the right to claim return of unjust enrichment under civil law," explaining, "Simply put, it is using someone else's network without paying."

The first hearing is scheduled for December 23. The amount claimed for unjust enrichment will be determined through an appraisal procedure supervised by the court, as in ordinary trial procedures. SK Broadband initially claimed 1 billion KRW. Lawyer Kang said, "We will know after the court's appraisal," adding, "It could reach hundreds of billions of won." He added that the reason for filing the counterclaim at this point was, "Netflix said they would submit their appeal brief late, so we could not wait any longer."

In particular, SK Broadband emphasized that although Netflix benefits from transmitting data to users based on domestic and international data transmission networks that SK Broadband has built and leased, it pays no compensation, causing losses corresponding to network usage fees.

Netflix, which dominates the domestic OTT market, has seen traffic generated on SK Broadband's network increase exponentially every year. From about 50 Gbps in May 2018, it surged approximately 24 times to about 1200 Gbps as of September this year. This sharp increase was confirmed after SK Broadband connected a dedicated line to Japan for Netflix in June 2018. As traffic surged, SK Broadband's losses for managing and maintaining the network inevitably increased.

This lawsuit proceeds simultaneously in the same court as Netflix's appeal (main suit) against SK Broadband. Netflix has also appealed against the domestic judiciary's ruling that it must pay network usage fees. In the first trial, the court ruled, "Netflix should be regarded as receiving a paid service of internet network connection through SK Broadband," and "It is reasonable and equitable for Netflix to bear the obligation to pay for this."

It is expected that the court will request an external appraisal for a more accurate judgment. University research institutes or the Electronics and Telecommunications Research Institute (ETRI) are likely candidates during the recommendation process. There is also a possibility that legal hearings involving relevant government ministries, which did not occur in the first trial, will take place. Lawyer Kang said, "We will apply if necessary."

Regarding the double charging controversy raised by some who ask, "Why should Netflix pay when consumers already pay?" he drew a clear line, saying, "The roles of content providers (CP) and internet service providers (ISP) are clearly different," and "It is not charging twice for the same internet network." When Netflix delivers high-definition videos through the general network, other general users inevitably face outages, so ISPs including SK Broadband have no choice but to install a separate dedicated network, which incurs construction and maintenance costs.

◇Pays abroad but 'free-rides' domestically... Controversy over 'reverse discrimination' with domestic companies paying hundreds of billions

The controversy over free-riding on networks by global CPs including Netflix is not new. Among the top 10 operators by average daily traffic in Q2, overseas CPs such as Google and Netflix account for a staggering 78.5%. They earn huge profits based on domestic infrastructure but do not pay network usage fees.

Kim Sanghee, Deputy Speaker of the National Assembly, pointed out, "Domestic CPs like Naver and Kakao pay hundreds of billions of won annually in network usage fees (to ISPs) while cooperating in stable network management and expansion," adding, "Meanwhile, Google YouTube, Netflix, etc., which account for the majority of the surging traffic, ignore network usage fees." It has been confirmed that Netflix pays network usage fees to overseas ISPs such as Comcast, Verizon, and AT&T.

Netflix's indifferent attitude toward frequent outages and connection failures is also frequently criticized. In just half a month between May and June last year, Netflix experienced two outages totaling about 4 hours and 30 minutes but issued no apology or compensation plan.

The National Assembly is also examining related issues. However, looking at Netflix's recent actions, it is clear that despite the addition of provisions to secure service stability for value-added telecommunications service providers in the amended Telecommunications Business Act passed in June last year, it has been insufficient to prevent free-riding by overseas CPs. Deputy Speaker Kim said, "I will propose an amendment to the Telecommunications Business Act at the upcoming national audit to seek ways to ensure overseas CPs pay fair network usage fees."

The legal battle between the two companies escalated when Netflix filed a lawsuit before the Korea Communications Commission's mediation result on network usage fees conflict with Netflix, which SK Broadband requested in November 2019. At that time, controversy arose as a telecommunications operator with domestic sales in the trillions bypassed the regulatory authority's mediation.

◇Ahead of platform audit, self-praise of 'win-win'... Criticism of ignoring responsibilities and lack of sincerity

Netflix, which has remained silent on the long-standing controversies over free-riding on networks and tax avoidance, is now facing criticism for rushing to self-praise and defensive publicity ahead of the National Assembly audit.

Netflix held a 'Partner Day' media event yesterday, revealing survey results claiming an economic ripple effect of 5.6 trillion KRW over five years through investment in Korean content. As movements targeting platform operators continued across National Assembly standing committees, this is interpreted as Netflix hastily emphasizing coexistence and mutual growth. Currently, Netflix Service Korea is selected as a general witness for the National Assembly Science, Technology, Information and Broadcasting and Communications Committee audit.

However, Netflix's actions of calling for mutual growth while ignoring the obligation to pay network usage fees and tax avoidance controversies are being heavily criticized as inappropriate.

An official from the National Assembly Science and Technology Committee said, "It is true that Netflix has contributed to the content ecosystem, but it is ignoring the network ecosystem and tax obligations. Boasting about coexistence and mutual growth while ignoring responsibilities pointed out by the National Assembly for years lacks sincerity." Some also express concerns that Netflix's acquisition of domestic content rights and intellectual property (IP) could reduce Korea to a content subcontractor.

The tax avoidance controversy surrounding Netflix, along with free-riding on networks, has been pointed out annually in the National Assembly. Netflix reportedly recorded sales exceeding 400 billion KRW domestically last year. However, the corporate tax Netflix paid last year was only 2.18 billion KRW. Domestic IT companies with similar sales recorded corporate taxes of 15.8 billion KRW.