Korea should not require companies to pay to deliver digital content

By Robert D. Atkinson

Since the emergence of the broadband internet, there have been disagreements about who should pay to transmit data. When a Korean user downloads an episode of "Squid Game," who should pay for transmission of that data from the server hosting the episode to the user's computer: the company hosting the content or the internet service provider (ISP) that the consumer pays for to obtain broadband access? For the most part, virtually all nations have concluded that as the one requesting the content, the consumer should pay (through fees to their ISP). After all, if a Korean user wants to download a video from itif.org (the think tank I lead in Washington, D.C.), why should ITIF pay? We already pay a company to host our content.

Yet that is what Korean ISPs and the Korean government want. Starting with a 2016 amendment to Korea's Telecommunications Business Act (TBA), same-tier ISPs (of comparable size) have had to compensate each other based on the volume of traffic they exchange under a sending-party-network-pays policy (SPNP). In turn, consumers' ISPs regularly pass these costs on to providers of online content like Netflix, and thus their customers through higher prices.

This payment scheme effectively penalizes high traffic volume, since it assesses fees based on the volume of data being transmitted, so it disincentivizes large content providers from positioning themselves in a content chain that ends in South Korea. This process creates inefficient traffic flows that the government has tried to ameliorate by mandating large content providers to ensure stable services. It has also increased the costs of doing business: 2021 internet transit prices in Seoul far exceeded those in Paris and New York.

Unsurprisingly, content providers who don't have to do direct business with South Korea ― large international providers with their choice of customers ― try to avoid the restrictions. This situation can include reducing the quality of some high-bandwidth content to reduce the volume of traffic sent, or limiting the domestic availability of content and leaving it outside the country for Korean ISPs to pick up. Both reactions leave Korean consumers worse off, and they are a logical consequence of the increased restrictions. For example, if the Korean rules were applied to all websites, ITIF would simply block access to its website for Korean users, rather than pay.

Korean commentators criticize these developments as discrimination, wherein global content providers leverage their stronger position to restrict business with Korean companies unreasonably. But these developments are the natural consequence of South Korea repeatedly tightening its regulatory grip in response to problems created by its own regulations.

Having painted itself into a corner, the government now proposes to regulate its way out. The latest amendment to the TBA would mandate that international content providers such as Netflix participate in SPNP. Ironically, the government also plans to increase tax credits for domestic content providers, alongside other measures to stimulate domestic innovation and a preference for homegrown content.

Large international players' evasions of the existing regulations have already engendered costly legal disputes. Netflix was entangled in litigation with a Korean ISP after refusing to pay a network usage fee for increased traffic volume. More recently, Twitch cut down services offered to Korean consumers and is rumored to be considering leaving South Korea altogether.

The reality of the payment scheme is that international content providers can avoid the fees, while domestic providers cannot. Facebook, for example, when faced with a bill from Korea Telecom, which hosted Facebook's cache server, declined to pay and instead moved its cache out of South Korea altogether. Domestic content providers with no such option have to cope with the higher costs.

Nonetheless, it is the SPNP regulation itself, not its unequal application, which has thrown the system out of whack. Attempting to rebalance Korean networking practices on that faulty foundation will further undermine the richness and diversity of the Korean content market. Content moves across the internet in a complex process. Both content providers and ISPs benefit from, and take part in, that process, and frequently decide to exchange traffic without fees. This situation is why a 2016 study found that almost every interconnection agreement surveyed was settlement-free.

When companies negotiate peering deals, these negotiations implicitly account for a vast universe of information and arrive at the best, market-generated price ― often zero. Because there are three parties in the online content market (content providers, end users and ISPs), additional fees for content providers raise prices for consumers, too ― although Korean policymakers may want these increased prices to be paid mostly by consumers in other nations. The reality is that mandated peering fees do more harm than good, and Korea's troubles show that playing out in real time.

Given the harms caused by the SPNP regime, South Korea should cut its losses, not expand them even further.

Dr. Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation (ITIF), an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. The views expressed in the above article are those of the author's and do not reflect the editorial direction of The Korea Times.