[NEWS IN FOCUS] To pay or not to pay ― Netflix, SK enter phase two of legal battle

Tech

Published: 26 Mar. 2022, 07:00 Updated: 10 May. 2022, 19:30

[NEWS IN FOCUS] To pay or not to pay ― Netflix, SK enter phase two of legal battle

Broken Ethernet cable is seen in front of Netflix logo in this illustration taken March 11, 2022. Netflix and SK Broadband entered into the second phase of the legal battle over the payment of network usage fees. [REUTERS/YONHAP]

Netflix and SK Broadband entered into the second phase of the legal battle over the payment of network usage fees after the U.S. streaming giant appealed the court decision last year that sided with the Korean internet provider.

The first hearing of the appeals court, brought on by Netflix against the internet company, took place on March 16.

This comes eight months after the video streaming service appealed in July a court decision made last June that it has to negotiate with SK Broadband over paying for server maintenance.

Netflix reiterated that it has no reason to pay SK Broadband for network usage because it’s the internet operator’s job to manage its network quality, whereas the internet company said that the huge traffic that Netflix generates makes it just as responsible to pay as any other internet services that fork out network usage fees.

As of the fourth quarter last year, Netflix took up 7.2 percent of all internet traffic in Korea, according to the Korea Communications Commission (KCC). It has more than 5 million subscribers in Korea, according to Media Partners Asia.

Naver and Kakao, who each take up 2 and 1 percent of Korea’s internet traffic, reportedly pay around 70 to 100 billion won ($57 million to $82 million) every year to local broadband providers.

Dean Garfield, Netflix vice president of public policy, answers questions from local reporters during a press conference held in central Seoul on Nov. 4. [JOINT PRESS CORPS]

Lawyer Kang Sin-seob of Shin & Kim LLC, center, the attorney for SK Broadband heads to the Seoul High Court to file a counter-suit against Netflix on Sept. 30 with his team. [SK BROADBAND]

Bill-and-keep vs. unjust profit

While both companies maintain their stances from last year, new arguments have been brought to the table to back their respective claims.

During the latest hearing, Netflix said that internet services balance out each other’s costs for the transaction that occurs between their users through a practice called “bill-and-keep,” which SK Broadband then claimed only applies to the relationship between internet providers.

The pricing technique is where internet service providers (ISPs) do not charge each other for the traffic made through the interconnection of each other’s customers. For instance, SK Broadband will not charge KT and vice versa if their customers call or text each other using their respective networks, because the costs will ultimately be covered by the end users’ subscription fees.

Netflix argued that the bill-and-keep rule applies to the relationship between content providers (CPs) and ISPs as well.

“It is one of the basics of the internet ecosystem that companies and services do not charge each other when they are connected for the benefit of each other,” Netflix said.

“Just as the ISPs do not charge each other, it is the order of the internet world that CPs and ISPs each pay for their own costs when they connect.”

However, SK Broadband refuted that bill-and-keep is a pricing method exclusively between ISPs, not between a streaming platform and an internet provider.

“Not only is the bill-and-keep rule not applicable to a CP, which does not give an ISP any internet connection back, it is not a written rule that can give legal backing in a case like this one,” SK Broadband’s legal attorney Shin & Kim LLC said.

SK Broadband further claimed that Netflix is generating unjust profit by freeriding on its service and therefore must compensate the company.

Netflix made 415.4 billion won ($340.7 million) in 2020 while SK Broadband lost 27.2 billion won due to the two companies’ transaction, SK Broadband said. The company did not specify an amount it sought for compensation, but explained that it will be decided as the trial proceeds.

“As an ISP, SK Broadband invests 700 to 800 billion won every year to establish and manage networks,” the company said. “Through this network, we provide a special internet network for CPs, which means there is no reason for us to allow Netflix to use it for free.”

SK Broadband and Netflix logo

Netflix repeated that SK Broadband can use Open Connect Appliances (OCA) instead of charging it for internet access. But SK Broadband, according to Netflix, is refusing to use the OCA and demanding money “using monopoly power.”

Instead of paying SK Broadband, Netflix has been insisting that it offers the technology called OCA that lessens the traffic burden for internet companies.

The OCA as an alternative was brought up last year during court and once again by Dean Garfield, Netflix vice president of public policy, when he visited Korea in November to talk to the local lawmakers and press.

It is a type of content delivery network (CDN) that sets up storage spaces within an internet service provider’s networks so that content — here, Netflix’s content — can be delivered faster to local users.

“Netflix is connected to over 7,200 ISPs around the world, none of which have filed a suit demanding a network usage fee, except for SK Broadband,” Netflix said.

“SK Broadband is refusing the free option of installing the OCA [in Korea] and only demanding money. In a situation where we cannot deliver our content to SK Broadband users without going through SK Broadband, the company is using its monopolist position as a gatekeeper to collect a toll.”

SK Broadband said that it is willing to use the OCA as long as Netflix agrees to pay for the network maintenance fee that will “inevitably” occur even after paying for the installation of the technology.

There are currently two OCA networks set up in Asia — Japan and Hong Kong — and the data from Netflix, in Seattle, to Korea is essentially stored in and transmitted from those two regions, for a cheaper cost than if it were to come directly from the United States. Bringing an OCA into Korea would further reduce, though not completely eliminate, these costs.

“Even with the OCA, Netflix has to deliver its traffic through the backbone network to SK Broadband’s customers,” SK Broadband said. “We are not saying no to installing the OCA, but requiring Netflix to negotiate on the cost that will incur in the process of delivering the traffic after the OCA is installed.”

Two charges, not double

Lying at the core of the case is the question of whether or not it is fair for an internet provider to charge both consumers as well as content companies, which Netflix argues is double-charging but SK Broadband says is fair.

Netflix argues that SK Broadband is double-charging Netflix, because the internet provider is already receiving money from end users who pay their subscription fees, which needs to go to maintaining its network quality.

The broadband company opposes this idea, saying that it provides a different service to CPs than to consumers and therefore it is fair for it to charge different prices to different customers.

Roslyn Layton, a senior columnist at Forbes and a visiting researcher at Aalborg University Center for Communication, Media, and Information Technologies [ROSLYN LATON]

This notion was supported by Roslyn Layton, a senior columnist at Forbes and a visiting researcher at Aalborg University Center for Communication, Media, and Information Technologies, who held an online interview with the local press Wednesday.

Layton wrote a column titled “Should 23 Million South Koreans Pay More for Broadband When Only 5 Million View Netflix?” for Forbes on Feb. 23.

“It’s an established fact that the internet is a two-sided market,” Layton said. “Netflix might not like it, but that’s the way it is.”

A two-sided market is where a company can charge fees from both its business customers and its individual consumers.

“We can take the example of the newspaper industry,” she continued.

“On the one side, there are advertisers who make adverts and the other side are readers who buy subscriptions. The advertisers will be charged for different sizes and prices for their adverts and the paper will sell subscriptions to end users. There are different sets of fees and therefore it’s not double charging.”

Like a newspaper, SK Broadband has both corporate customers and end users and provides them with different services. To only receive subscription fees “would make newspapers go out of business” and the results would be “disastrous,” according to Layton.

Installing the OCA will also be unfair to internet users, because it means that all internet subscribers would have to divide the increased traffic load and pay for the cost that went into installing the OCA in Korea in their subscription fees, Layton argued.

“It’s not fair to charge all cost to broadband users for Netflix, when only some of them subscribe to Netflix,” Layton said.

“There are 23 million broadband users in Korea and only 5 million people who actually watch Netflix. It isn’t fair to make all customers pay for Netflix when only some of them are watching it.”

In this file photo taken on Oct. 19, 2021, the Netflix logo is seen on the Netflix, Inc. building on Sunset Boulevard in Los Angeles, California. [AFP/YONHAP]

A fight for the future

The outcome of the case will echo loudly in the global tech industry and help back other countries trying to put forward legislations regarding network fees, according to Layton.

“There is no doubt that the pressure is growing globally for Netflix to pay its fair share of using networks,” she said.

“There is a movement in the United States Congress, and the Federal Communications Commission is studying this presently. And the European Parliament and the European Commission will take up this issue from a policy perspective.”

Should SK Broadband win this case, it would act as a good support material for policy makers to make new laws to regulate CPs instead of seeing companies go through litigations, the columnist said.

Korea also has lawmakers trying to push for regulation against Netflix and other large content companies, to spell out the price they need to pay to network companies.

The so-called “Netflix law,” a revision to the Telecommunications Business Act, went into effect in December 2020 mandating big tech companies to "provide users with convenient and stable telecommunications services." However, it has not been largely effective, hence the ongoing trial.

The Seoul High Court will rule whether or not Netflix has to negotiate with SK Broadband, and also whether it needs to pay up.

The Seoul Central District Court had ruled against Netflix last year. The streaming giant had asked the court to confirm that it has no obligation to pay network usage fees to the broadband company, but the case was dismissed.

“It is up to related parties, not the court, to negotiate on whether a contract has been signed and what payment will be made as a part of the deal,” the ruling said.

“It can be said that Netflix is receiving a service from SK Broadband that allows Netflix to access, or at least connect or stay connected to, SK Broadband’s internet network and therefore must pay.”

Netflix appealed in August and SK Broadband filed a counter-suit, demanding payment from the video streaming service.

The second hearing will take place on May 18.

It is not very likely for the court to overturn the ruling of the first court, according to Lee Seong-yeob, a professor at the Graduate School of Management of Technology at Korea University.

But regardless of the decision, the case will have a global resonance among ISPs from other countries, which is why Netflix is trying to defend the case with all its might, he said.

“In the short-term, Netflix may have to face similar lawsuits in other countries if SK Broadband wins this one,” Lee said.

“But in the long term, the case may also influence other similar cases in the future, especially when the metaverse becomes more commonplace. Virtual reality [VR] and augmented reality [AR] content require much more traffic than just videos, and they will naturally lead to similar network usage litigations.”

BY YOON SO-YEON [yoon.soyeon@joongang.co.kr]