[Q&A] "Big Tech Selfishness Ignored by Network Usage Fees... Netflix Act Needed"

SK Broadband Overseas Expert Interview Reveals
Ignoring Payment for Network Usage Fees... Considering Only Own Profits
"Netflix Is a Large Truck... Need to Consider Traffic Efficiency"

[Image source=Yonhap News]

[Asia Economy Reporter Minyoung Cha] With Netflix filing an appeal after losing to SK Broadband, the second round of the domestic dispute over the obligation to pay 'network usage fees' has begun. The issue of network usage fees is a significant topic not only in Korea but also in the US and Europe, intertwined with carbon neutrality concerns.

International telecommunications expert Dr. Roslyn Layton pointed out in the 'SK Broadband Overseas Expert Interview' held via video conference on the 23rd that "Netflix's ignoring SK Broadband's request for network usage fee payment is a move considering only its own profits," criticizing the selfishness of major big tech companies. She emphasized that since voluntary negotiations are difficult, discussions on legal regulations are necessary.

The core point Dr. Layton highlighted is that big tech companies like Netflix, akin to 'large trucks,' recklessly speed on the 'network' highway while avoiding a 'fair burden of network costs.' Network usage fees are the essential foundation for maintaining and servicing communication networks, which in turn sustain the entire internet ecosystem. Internet Service Providers (ISPs) bear the burden that Content Providers (CPs) should pay, leading to a 'Digital Divide' phenomenon in Europe. It is also time for CPs to consider ways to efficiently reduce excessive video traffic. Additionally, she presented a new perspective that Netflix's content-dedicated cache server, Open Connect Appliance (OCA), could exclude other CPs and hinder fair competition.

Dr. Roslyn Layton. Photo by Roslyn Layton

The following is a Q&A with Dr. Roslyn Layton.

- What do you think about Netflix's claim that under the 'Bill and Keep' principle, it has no obligation to pay SK Broadband network usage fees?

▲ Netflix's claim that 'there is no need to pay for sending content traffic over the internet network' is incorrect. The Bill and Keep method is one of the interconnection methodologies and may not be appropriate in this case. The precondition for using Bill and Keep is that both parties exchange traffic at mutually similar levels and agree to use Bill and Keep. This method developed from traditional telephone communication where traffic volumes were equal on both sides. In the current internet era, Netflix sends ultra-high volume traffic through SK Broadband's network, but SK Broadband does not send the same amount of traffic to Netflix. We must remember that Bill and Keep is based on voluntary agreement, is not mandated or regulated by law, and is typically used among companies within the same or similar industries. It is inappropriate in cases like this where the parties are not in the same industry.

- Netflix argues that installing OCA on SK Broadband's network can significantly reduce traffic, so SK Broadband's demand for network usage fees is unfair. What is your view on this?

▲ Netflix's argument is not altruistic but motivated by its own interests to reduce potential network usage fees payable to SK Broadband. The amount of traffic generated seems secondary. The OCA installation plan maximizes Netflix's profits and may prevent SK Broadband from receiving network maintenance costs or usage fees, which could harm SK Broadband's interests. Studies in the US showed that after OCA installation, network costs increased significantly along with traffic. Because Netflix's content is vast, excessive electricity, equipment, labor, and maintenance efforts are required. Netflix's insistence on installing its OCA could also hinder competition from other content providers since Netflix's OCA is used exclusively for Netflix content delivery. Installing OCA requires physical space and equipment, which other content providers cannot access, thus creating competition barriers. From the internet network operator's perspective, if all content providers demanded OCA installation like Netflix, operation would become very difficult. Network users want to maintain a content-neutral strategy and operate in an energy-efficient manner.

- A Forbes article mentioned that internet network operators bear $0.48 in costs per $1 of revenue. What is the basis for this calculation?

▲ The study was conducted on four small US network operators in rural areas to check if streaming companies abuse market dominance. Consumers paid $50 and $25 monthly to network users and streaming service providers, respectively. The $50 paid by consumers covered the last mile costs for network operators. OTT providers like Netflix need to invest additionally within the network (mid-mile) to deliver high-quality video, resulting in the $0.48 cost. Network operators actually incurred a $12 monthly loss per streaming consumer. Many US and European network operators tried to negotiate with Netflix, but Netflix's refusal caused significant issues. The video streaming industry grows annually at 38%, faster in Korea. Large network operators in the US and Europe can negotiate with Netflix, but small rural operators have less bargaining power. Personally, I am pleased that SK Broadband raised this issue with Netflix.

- The main issue in the Netflix lawsuit is 'who holds the content transmission obligation.' Netflix claims it fulfilled its responsibility by uploading content to its servers. What is your opinion?

▲ 'Transmission obligation' is a legal concept. As I am not a Korean legal expert, I am unsure about its application, which varies by country. Technically, this claim is incorrect. Netflix argues that streaming occurs because users request content. However, Netflix controls the content. Netflix decides streaming quality such as UHD or standard, so it is under Netflix's control, not SK Broadband's. When users request content from Netflix, Netflix designates specific servers to stream. Decision-making is done using Netflix's own algorithms. Of course, SK Broadband plays a facilitating role in streaming.

- Is charging CPs network usage fees by ISPs considered 'double charging'?

▲ It is not double charging. The internet is a two-sided market. For example, in the newspaper market, newspapers operate with advertisers on one side and readers on the other. Network operators, like newspaper companies, sell different services at different fees to advertisers and end users. The credit card market is similar: consumers pay fixed annual fees, and merchants pay transaction fees. Different services and fees are charged to end consumers and merchants. The most incorrect argument is that not all internet end users use Netflix. Among SK Broadband's 23 million customers, only 5 million use Netflix. However, SK Broadband's costs for streaming content are borne by all network users, which is unfair to end users. From a two-sided market perspective, network operators provide distribution management services to general customers and technical services like traffic processing and DNS to corporate customers. Like newspapers, if a newspaper company only charged subscribers without advertising revenue, it would go bankrupt. There is also a digital divide issue. In Europe, one-third of people cannot access networks. Network investment in Europe requires about 300 billion euros. The difficulty in securing funds is because large CPs like Netflix do not bear network costs.

- Is legal regulation necessary in cases like Netflix, or is a voluntary system sufficient?

▲ Legal regulation is necessary in this case. Regulation is needed when large companies abuse market dominance. It is problematic that Netflix generates massive traffic in Korea without bearing usage costs. Personally, I prefer Netflix to recognize the situation and fairly share network costs as a responsible internet operator. It is also in Netflix's interest for Korea's network to be well maintained. However, Netflix's current behavior seems driven by self-interest to reduce costs, showing no such awareness. Legalizing network usage obligations seems necessary, and similar movements are emerging in other countries.

- Voices demanding fair sharing of CP network investment costs have grown, especially among European telecom operators. Do you think CPs should share network usage fees?

▲ Movements urging fair cost sharing are happening worldwide. In the past, the internet industry did not need to consider video. Early services like email and e-commerce did not require much bandwidth. Now, video is the killer application in the internet industry. Europe also faces issues. An additional 300 billion euros investment is needed for European networks. Telecom operators and governments in Europe are seeking financial models for networks. Discussions on traffic occurred at the National Assembly and Mobile World Congress (MWC). Mobile traffic increased by 40% compared to last year, but mobile operators' profits did not increase. Profits decrease while traffic to be handled increases. For example, cloud service providers can measure their traffic increase by 40% in megabytes, but network users cannot monetize all of it. Many countries are considering forcing Netflix to pay usage fees. In the US, there was a reform called 'Universal Service Obligation,' with moves to apply it to Netflix. Several states also impose indirect taxes on Netflix. The Korean case looks good because it is based on actual traffic volume. Since Netflix is the largest network operator within Korea's network, charging a certain usage fee seems reasonable. Legalizing such network fees could encourage not only Netflix but other providers to innovate traffic management, motivating better coding and more efficient streaming services.

- In Europe, there is opposition to Netflix's OCA because it is a 'cache server' used for one operator, conflicting with carbon neutrality goals. What do you think?

▲ That is correct. Climate policy is an important issue for many network operators in the US and Europe, with many companies and governments striving to reduce carbon emissions. Efforts include adopting energy technologies and clean energy. Netflix is the company generating the most traffic. If compared to trucks, it is a large truck with 18 wheels, occupying much highway space and emitting exhaust. Currently, Netflix lacks motivation to create more efficient, carbon-neutral technologies. Motivation is needed for a clean environment for all.

- What is the global significance of the SK Broadband-Netflix lawsuit happening in Korea?

▲ It is significant for policymakers and network operators worldwide. Korea is a leader in network technologies like 3G, 4G, and 5G and has successfully built a digital society. My research shows Korea recognizes the internet as a two-sided market and believes business models in the internet industry should be beneficial and fair to all parties. Many global policymakers see Netflix as a kind of 'bully.' Netflix prioritizes its own interests, uses political systems, and tries to overturn market principles, causing fatigue worldwide. Many welcome Korea's challenge to Netflix.

- Are there cases where Netflix pays network usage fees to overseas ISPs?

▲ According to Netflix's website and media reports, Netflix has partnerships with many operators worldwide, involving financial relationships, engineering, and marketing innovations. In 2014, there was a major negotiation between Comcast and Netflix in the US. This case was politically used, with Netflix pressured to accept lower fees than Comcast wanted. Netflix has negotiated with internet network operators in several countries, so I find it hard to accept that Netflix refuses in Korea. It would be good if they mutually agree on appropriate cost recovery methods.

- Should all CPs pay network usage fees?

▲ I do not think so. A small number of large content providers generate up to 80% of internet traffic. It is sufficient for large CPs generating overwhelming traffic within the network to pay. Korea seems to be moving in the right direction, setting specific criteria such as companies with 1% network traffic or over one million users to identify liable parties. It seems closer to realization.

- There are concerns that mandating network usage fees through regulation could increase ISP monopoly power and overall internet costs. What do you think?

▲ It is important to examine country-specific solutions and calculate carefully. There is no perfect solution. For Netflix, it would be good if it voluntarily bears appropriate costs for network use as a corporate citizen. I prefer voluntary negotiations led by network operators, but given Netflix's market dominance, regulation may be necessary.

Dr. Roslyn Layton is a senior columnist for Forbes US, a visiting researcher at Aalborg University in Denmark, and Senior Vice President at Strand Consult, a European telecommunications consulting firm. She holds a PhD in Business Economics from Aalborg University.