A South Korean court has upheld a fee charged Netflix by SK Broadband for network usage. Netflix has appealed, and SK Broadband has gone to court again to enforce the payment. The case brings back an old problem to the headlines. In the US and Europe, telecom operators have in the past called for similar fees to be imposed on internet companies (at one point it was VoIP companies), but the clamour has died down in recent years. If Netflix cannot escape the fee in Korea, it could withdraw its service for SK Broadband customers. If they are forced to choose between the (unique) content from Netflix and (generic) connection from SK Broadband, the decision is quickly made.
Without knowing the legal specificities of the case, the court ruling is a surprise. Two issues show why these kind of fees are not welcome: why would only Netflix have to pay and why should only SK Broadband receive the money?
As for the first issue, the questions is whether other streaming services should pay. And if all of them, then why not all websites in the world? The difference between Netflix and other websites is gradual, not structural.
The second issue is the creation of a precedent. If SK can ask such as fee, why not every other internet provider around the world? This would create serious financial problems for Netflix and other websites.
Netflix argument and figures
Netflix has a number of arguments against the fee (similarly based on the above):
- This charge could put the whole entertainment sector in South Korea at risk.
- The fee is arbitrary. In effect, the ISP could submit a bill for any amount.
- Netflix is investing significantly in South Korea - although this argument is not really relevant.
- Netflix would be forced to raise its prices, harming consumers.
According to a report from Deloitte, Netflix has around 3.8 million subscribers in Korea, contributes USD 4.7 billion to the economy, has produced 80 films/series at a cost of USD 650 million (since passing USD 1 billion), set up two studios, and created 16,000 jobs. SK Broadband is calling for a payment of USD 23 million for 2020, equal to 6.5 percent of annual revenues.
SK Broadband argument
SK Broadband's reasoning, that Netflix is responsible and should pay for the increase is costs, does not have much logic. Netflix offers its content on a strongly decentralised CDN (content delivery network). The Netflix CDN (Open Connect) is used by some 1,000 ISPs worldwide, but not at SK Broadband. The system can reduce data traffic costs by up to 95 percent.
On its own this does not create any traffic on the ISP's access network. It's the customers of SK Broadband who request the content and generate traffic. It makes more sense to ask the end-user to cover the costs, who is already paying for the broadband subscription.
To look at a parallel case, do we ask Philips, the maker of many electrical devices, to take responsibility for rising energy costs? If we use more electricity, we pay more.
That broadband is offered without a volume cap is not Netflix's problem.
In a worst-case scenario, Netflix could go black for SK Broadband customers. This often happens in the US when broadcasters and pay-TV providers cannot agree distribution terms. Sometimes that means a channel is not available for a while. In practice, 'the market' solves the problem. It seems completely clear that Netflix in such case has the stronger position: SK Broadband customers will move en masse to other ISPs, as broadband is a generic commodity whereas Netflix content is unique.
