Broadband Network Usage Fee in South Korea

It’s time to adopt a commonplace policy from the world’s leading broadband nation.

The internet is built upon the two-sided market business models, whether for broadband, internet advertising, or video streaming. These models prevail in the online and offline world, notably in newspapers. For example, a person may subscribe to the Wall Street Journal (WSJ)  and pays a monthly subscription fee. These subscribers may be individuals or enterprises. The WSJ also sells advertising, event sponsorships, and other services to enterprise customers. That WSJ can offer different services to different markets and prices allows it to be robust platform for news and information. The WSJ is incentivized the maximize offers to customers in both markets.

So too is the case for broadband. Broadband providers have household subscribers which pay a monthly fee for their account, access technology, premises equipment, customer service, and so on. Broadband providers serve a set of content providers by offering access to their customer base, security, hosting, caching, and other services. Because of the explosion of internet traffic in recent years, the cost of providing the infrastructure to accommodate traffic has increased. Indeed, for some broadband providers, the cost of maintaining and upgrading networks can exceed the fixed costs of connecting new users. Indeed, just a handful of content providers account for as much as 60-80 percent of all traffic globally. A few users on a network watching Netflix can quickly consume a large portion of the network, reducing capacity for others which must use the network for work, school, healthcare and so on. Broadband providers wish to recover costs from the relevant content providers creating traffic, traffic which neither users nor the broadband provider can control. Indeed, much of this traffic is advertising.

However broadband providers have little to no market power to engage with the world’s largest content providers to recover these costs. These content providers engage globally to restrict the policy development for such free-market business models. Over time, this has grown into a free rider problem. Around the world, there is lack of broadband investment in next generation of broadband technologies, a growing gap amounting to trillions of dollars.  About one-third of the world remains offline for lack of affordability.

If compared to WSJ, the paper would be regulated in its ability to offer subscriptions but would be required to provide advertising in paper without receiving compensation for an increasing use of space.

One nation which has addressed the problem is South Korea, where there is law and policy recognition of the shared responsibility for both broadband and content providers to ensure adequate capacity for content delivery.  Content providers, both foreign and domestic pay network usage fees to ensure adequate network capacity and so that prices on consumers need not increase to cover the delivery cost of content. South Korea has long been recognized as the world’s leading broadband nation for technology, access, use, and skills. The government does not mandate prices. Negotiations are private and reflect two-sided market dynamics and incentives.

Some policymakers outside Korea have mischaracterized this policy and some even claims (without evidence) that it harms consumers, the content market, and security. My paper describes it the detail and provides the evidence of its efficacy. 

Read a summary below and access the original paper here.

Layton, Roslyn and Jitsuzumi, Toshiya and Cho, Dae-Keun, Broadband Network Usage Fees: Empirical and Theoretical Analysis Versus Observed Broadband Investment and Content Development. Insight from South Korea. (August 6, 2024). Proceedings of the TPRC2024 The Research Conference on Communications, Information and Internet Policy, Available at SSRN: https://ssrn.com/abstract=4918236 or http://dx.doi.org/10.2139/ssrn.4918236

I have not received any compensation to perform this analysis or write this paper. I completed this paper as a follow up to my doctoral research in business economics and regulation at Aalborg University.

Introduction

Long recognized as a global broadband and information society leader, South Korea is studied for its policies to support its internet sector, its emphasis on comparative advantage, and its national strategy for technological leadership and innovation. South Korea’s emerging policy for broadband network usage fees, now gaining global prominence, is a logical step in Korea’s technological and industrial development and reflects a history in which cultural policy was architected in conjunction with information and communication technology industries.

Broadband internet “not only provides a driving force for new businesses for related industries but also forms a springboard for future infrastructure in the network economy,” noted Korean researchers in 2005. Today Korea is a recognized cultural superpower and ranks seventh in the world’s export of culture. Native Korean cultural products like Naver, Kakao, webtoon, and others emerged with Korean broadband networks. South Korea has created a digital empire that brandishes important soft power competition to US and Chinese digital hegemony and serves as a democratic capitalist counterbalance to its autocratic, communist neighbor to the north.

Many nations investigate strategies to close the broadband digital divide. However essential internet services may be, many consumers have limited budgets to purchase broadband, and broadband providers are constrained in their ability to recover costs for network deployment. Broadband pricing in many countries is relatively inflexible due to policy and regulatory conventions that dictate how broadband is sold. This reliance on consumers to generate the revenue to recover investment costs persists despite the fact that consumers receive significant traffic they do not control.

For example, the shift in advertising from traditional channels like radio, television, and print to online has not been driven by consumer request but advertiser returns. In 2023, online advertising was estimated to comprise at least one-fifth of internet traffic, a trend driven in part by “hidden ads” that consumers do not request. The US-based Internet Advertising Bureau (IAB) 2023 revenue report observes that “Video, including connected TV and online video, now accounts for 23.2% of all advertising revenue, bringing in $52.1 billion over the course of 2023. This represents a sizable 10.6% YoY growth.” Leading streaming platforms like Netflix, Amazon Prime, and Disney include advertising components that allow a lower cost to the consumer but increase the total traffic level of the service, a shift that places a burden on broadband providers, who struggle to recover costs.

Meanwhile, network traffic is increasing at approximately 20-25 percent annually. While this growth rate is a decline from earlier stratospheric levels, it still represents a significant linear increase year over year. At this constant rate, total network capacity must double every 3-4 years, requiring continued financial investment. A survey of 50 US fiber broadband providers showed that fixed and variable costs to enable increasing video traffic on networks grew three times faster than revenue.

The Korean model is worthy of study for its policy recognition that cost recovery for network usage is a shared responsibility of content providers (CPs) and internet service providers (ISPs), not just consumers. South Korea’s network usage fee can be traced to its Telecommunications Business Act and has been in effect for almost a decade. With some exceptions, Korean CPs and Korean ISPs have largely engaged constructively and in good faith for market-based negotiations to ensure the quality of content delivery and commitment to improving end-user experience for some years.

Netflix-SK Broadband Dispute

Netflix launched in South Korea in January 2016, providing its content via the Seattle Internet Exchange. Netflix grew quickly on SK Broadband’s (SKB) network. The parties initially agreed to interconnect through Tokyo’s Internet exchange BBIX. However, Netflix traffic continued to increase, and SKB expanded the international network capacity at its own expense.

By October 2018, Netflix traffic exceeded 50 Gb. SKB requested network usage fees for the international network capacity between Tokyo BBIX and South Korea and domestic network usage within South Korea. Netflix refused to pay. SKB then filed an application for adjudication to the Korea Communications Commission (KCC), requesting negotiation on payment to set up the international networks and for domestic network usage. The dispute escalated to a court case in which the Seoul Central District Court ruled against Netflix, acknowledging the obligation to negotiate fees. Although Netflix appealed, it later reached a private settlement with SK Telecom in 2023, ending litigation.

Literature Review and Market Impact

Network usage fees are informed by key papers on two-sided markets. This literature suggests that both ISPs and CPs aim to maximize profits, with user benefits positioned as secondary concerns. The ISP offers broadband network access, premises technology, account management, customer service, and dedicated infrastructure, while CPs rely on ISPs to deliver their content to consumers.

Many studies explore whether CPs—particularly large traffic generators (LTGs)—should contribute financially to broadband infrastructure. European Commission reports define LTGs as platforms with over 100 million users globally, annual European revenues exceeding EUR 10 billion, and generating at least 5% of total network capacity. Similar frameworks apply to South Korea, where Google, Netflix, and Meta account for nearly 40% of total traffic.

In a comparative analysis, Jitsuzumi provides a Cournot model with a two-stage value chain and monopolistic operators. The model finds that (i) paid peering is neutral when pricing constraints are absent and externalities are negligible, (ii) paid peering benefits ISPs when pricing is constrained, and (iii) paid peering can enhance social welfare depending on specific market conditions.

Opponents of network usage fees argue they could increase costs for consumers or deter investment. However, empirical evidence suggests otherwise. The Korean content industry has expanded despite usage fees. South Korea’s broadband access market generated approximately USD $22.7 billion in 2022, while the content market exceeded USD $120 billion in 2021. Furthermore, Google and Netflix reported record profits in South Korea during the period in which usage fees were implemented.

Conclusion

Contrary to claims of harm, Korea remains a global leader in broadband performance and content exports. Korean CPs have paid network fees for years without issue, while foreign CPs have resisted similar agreements despite generating significant traffic.

Network usage fees prevent market failures by ensuring cost-sharing among broadband stakeholders. Without these fees, ISPs would be forced to raise consumer prices, disproportionately impacting users who do not access data-heavy platforms like Netflix and YouTube. Arguments against network usage fees appear self-serving, as many opposing firms already charge for network access within their own ecosystems.

Future research should examine the economic impact of usage fees in other countries and explore regulatory mechanisms to balance CP and ISP market power. Given ongoing digital transformation, transparent negotiations and cost-sharing mechanisms will be crucial for sustaining global broadband infrastructure.