Netflix, Korea Broadband Settlement May Signal Funding Trend (2)

A settlement between Netflix Inc. and SK Broadband Inc. for network usage fees in South Korea concludes a five-year dispute that’s seen as a bellwether for fair share proceedings underway in the US, India, Thailand, Indonesia, the Caribbean, and Brazil.

A European Commission inquiry on the future of connectivity infrastructure revealed that Netflix is the primary contributor to traffic on fixed networks, and the cost to provision the traffic growth of 20% to 30% year-over-year exceeds benefits of content delivery networks and compression technologies.

The EU consultation is a roadmap to the Digital Networks Act with a “fair contribution mechanism” including duty, dispute resolution, and arbitration elements highlighted in the Korean context.

Netflix praised the SKB partnership to advance AI-enabled innovation for consumers and allow Korean broadband providers to bundle Netflix products while sharing revenue to network usage cost. The end user price doesn’t change. Contrary to claims such usage fees would be harmful, they allow Netflix to improve its product, expand distribution, and reduce churn.

The first round of the Netflix litigation in 2021 showed Netflix drove 27.2 billion South Korean won—some $20 million in network usage fees.

That amount reflects an eight-fold traffic increase in traffic from the prior year, while Netflix traffic increased at least 24-fold since the beginning of the dispute—today accounting for at least 7% of South Korea’s total traffic, according to an official statistic reported by the Korea Information Society Development Institute. A network usage deal concluded with Facebook in 2019 amounted to 20 billion won ($15 million) in 2019.

Fair share critics claim such deals would increase prices, reduce content, or otherwise harm the ecosystem. However, no actual reports of harm have emerged. Netflix and Google reported in 2022 a 90% profit increase in Korea from the prior year.

Netflix’s third-quarter result of 22.4% net profit margin and subscribers up to a new high of 247 million was better than expected. New paid share and ad-supported products offer users lower-priced entry points, while Netflix has doubled the price of its mainline service over the last decade.

Felling the Netflix Goliath

In South Korea, the victory of SKB against global behemoth Netflix was seen as a David and Goliath battle. The court declared the case a straightforward business-to-business dispute and balked at Netflix’s arguments it had no obligation to negotiate or pay for use of another’s network, and that traffic delivery is free.

Netflix appealed the decision, and SKB lodged a countersuit of unjust enrichment. While a non-disclosure agreement masks the exact amount Netflix paid to SKB (which likely includes the cost of undersea cables from other Asian countries and other investments in capacity), it’s clear SKB won the second round.

The developments over 10 courtroom hearings show Netflix folded in the face of the court’s reasoning, public opinion, and pressure from South Korea’s National Assembly.

Under the rubric of the Network Free Ride Prevention Act, seven bills introduced in the assembly proposed to address purported abuse by foreign content providers over usage fees that have long been paid by Korean firms.

The bills describe abuses such as content providers engaging in unfair, discriminatory conditions, or restrictions in contracts; unfair delay or refusal to conclude contracts; refusal to pay for fair use of the network; refusal to supply content; and failure to explain or falsely explaining service charges, terms, and conditions in contract negotiation.

Korean operators have complained or raised concerns about US companies using hard NDAs to block broadband providers’ information sharing about network usage fees and best practices.

This could be a strategy to prevent fair share arrangements in other countries and protect Google—which generates four times as much traffic as Netflix in Korea and could be liable for $80 million to $100 million annually under the current system.

Google Korea came under fire last fall for a viral online petition it released on YouTube protesting cost recovery and for funding a civil society group that failed to disclose roughly $1 million in Google donations.

Broadband providers aren’t the only ones to have buyer’s remorse with NDAs. Korean content players see an imbalance of bargaining power with Netflix and Amazon taking more than a fair share of intellectual property and distribution rights.

The legislative push continues. Lead lawmaker Byun Jae-il declared this month, “It’s time to conclude this five-year-old issue. The chairman of Korea Communications Commission said he would follow global standards, but there is no such thing. It is to be created. Korea should take the lead, and the rest of the world is watching.”

Corrects paragraph 1 to clarify settlement may influence fair share proceedings in the US, and paragraph 4 to state that end user price doesn’t change.

Corrects paragraph 9 mention of South Korea’s broadband entity to SKB, and $1 million in Google donations in paragraph 16.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Roslyn Layton is executive vice president of Strand Consult. The author has no financial relationship to parties mentioned in the article and holds no related securities.

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