Lawmakers in the US and the South Korea investigate Big Tech’s usage of broadband networks to ensure fair cost recovery

Europe lacks some €300 billion in investment to achieve next generation broadband goals. An accumulation of misguided EU telecom regulation has sent capital to more favorable investment regions, like the United States and South Korea whose policymakers understand that that underlying network technology is itself an innovation platform (like 5G, DOCSIS, fiber optics) which stimulates competition in network facilities and the growth of third-party content and services. The US and South Korea have high broadband investment per capita, perhaps twice the amount of some European countries. Nevertheless a digital divide, though narrowed significantly in recent years, remains in the USA. South Korea wants to maintain its edge as the world’s #1 broadband nation.

Important efforts are in underway in the US Congress to update broadband policy to ensure the financial sustainability of networks and close the digital divide. Following an earlier proceeding this year, the Federal Communications Commission (FCC) submitted a report to Congress on the Future of Universal Service, noting that it needs to initiate a formal proceeding on future support needs of networks. The report reflects that the proceeding included input from a broad set of stakeholders. It observed that increasing traffic in middle mile requires equipment, labor, and energy. Legislative tools are needed to update the contributions methodology, and indeed it is necessarily to assess potential financial contributions by large tech companies. Contributions can be broadened fairly and equitably without harming consumers. The costs of universal service today are borne by end users, whereas Big Tech which benefits handsomely from networks contributes little to nothing to the cost of middle and last mile networks.

Strand Consult´s report Middle Mile Economics: How streaming video entertainment undermines the business model for broadband provides theoretical and empirical background on the problem. It reviews the policy history of how and why certain business models emerged for broadband. Then it details how these policies play out with for real world broadband providers, supported with actual traffic and financial data. The report then provides quantitative projections of the financial impact and shortfall given various scenarios.

The US Senate took a major step in this direction with the bipartisan Funding Affordable Internet with Reliable (FAIR) Contributions Act which would direct FCC to study feasibility of collecting USF contributions from tech companies. A similar bill has been proposed in the House. These bipartisan efforts will likely continue in the next Congress.

South Korea is even further in its development. Already recognized as the world’s leading nation for broadband, the Assembly of South Korea passed the Service Stabilization Act in 2020 recognizing the largest content providers have a responsibility to ensure the quality of their content for delivery. Now the Assembly takes the next steps with a series of proposal to update the Network Free Ride Prevention Act, the world’s most sophisticated effort yet to ensure fair cost recovery from Big Tech for middle and last mile broadband networks.

Google earlier testified in the Assembly, enjoining South Korean YouTubers to advocate on their behalf, with the implicit message of kill this bill or we’ll reduce your payout. It’s hardly the first time that Google and its surrogates have banded together to intimidate policymakers. Google, which today enjoys one of the highest profit margins ever in South Korea, wants to stop the policymaking which ensures that South Korea retains global leadership. 

Here is some background on this important discussion.

South Korea is widely recognized as the world’s leading nation in broadband. It consistently leads in the International Telecommunication Union’s (ITU) scoring for broadband access, use, and skills. Importantly, interconnection and network usage fees have not slowed the rate of adoption of fiber to the home (FTTH) subscriptions in South Korea, which have increased for the last three years and now stand at 86.6 percent of total broadband connections, the highest in the Organization for Economic Cooperation and Development (OECD).  As such, the South Korea Assembly is right to pursue the Network Free Ride Prevention Act to ensure it remains the world premier broadband nation. In fact, the world looks to South Korea for leadership.

Strand Consult has covered developments in South Korea for more than two decades. See our collected coverage.

South Korea’s broadband success is an important topic among policy researchers globally. While South Korea’s success is result of an interplay of factors, it can be summarized by government leadership, fierce facilities-based competition, attractive pricing of devices and subscriptions, and urban density. South Korea is not unique in having industrial policy related to the internet and the conceptualization of broadband networks being an input to the information economy, but it appears that South Korea policymakers were adept at seizing opportunity to implement policy, for example the privatization of state-run telecom companies and broadband policy promulgation during financial crisis.

Consider how South Korea developed a strong domestic content industry in the first place. It enacted enlightened broadband policy to support the investment in ubiquitous, world class networks so developers, creators, and end users could try and experiment with new technologies. It had nothing to do with Google. In fact, many countries have seen their domestic news, advertising and content industry negatively impacted by US content platforms.

However clever and creative these YouTuber´s may be, they are part of sophisticated, coordinated, and transnational effort funded by Google and other US tech giants and major foundations with endowments invested in Big Tech. South Korea’s OpenNet is one such beneficiary.

South Korea clearly has the advantage in rolling out new wireless and wireline broadband quickly. It takes a focused and balanced public policy approach, particularly to endure the onslaught of the loudest, globally coordinated voices, while not forgetting the diverse set of Korean end users who are not paid by US tech interests to have an opinion.

There is nothing old fashioned or passe about paying to use someone else’s property. In fact, Google insists on payment to access its ad engine, cloud services, or app store developer’s platform. It should be no different when a content provider accesses a broadband providers’ network.

See Strand Consult’s report about the litigation brought by Netflix against a SOUTH KOREA broadband provider claiming that it had no obligation to pay or negotiate for access to South Korea’s networks.

South Korea leads globally in broadband rollout and adoption, which can be attributed to South Korea superior policy, greater urban density, rules requiring the wiring of buildings, and the public sector use of broadband. South Korea’s broadband success has also been attributed in part to diffusion theory, a social process in which families, friends and affiliates encourage technology adoption, for example the role of online gaming as a killer app. In the last two decades, South Korea has remained at the forefront of next generation networks and technology adoption, including the first rollout of 5G wireless networks.

The South Korea broadband success story reflects a blend of policy (industrial planning and market freedom), geodemographics, complementary industries, and culture. It built upon the country’s post-World-War II efforts to modernize from an agrarian society to an industrial powerhouse in a generation. Already a world leader in appliances, electronics, chemicals, pharmaceuticals, and other industrial inputs, South Korea executed an ambitious plan to connect the country with broadband beginning in 1994 with the Korean Information Infrastructure project. A partnership between Korea Telcom and the government connected 80 urban centers, government institutions, and a national backbone, followed by buildout to 144 regions with additional private providers joining the effort. In parallel, internet cafes emerged and “internet literacy” education to help spur home adoption with a key application of online banking. In 1999, the government implemented Cyber Korea 21, to accelerate IT development.

More than half the population was online by 2002, and by 2006, started rollout of 100 Mbps service, catalyzing multimedia development. Korean developers did more than copy US platforms; they innovated their own versions of email, ecommerce, virtual worlds, gaming, and social networks. Kakao (messaging, ride sharing, media etc.) and Naver (search, maps, content etc.) are two significant platforms. The “Korean Wave” or K-wave reflects the country’s unique and leading cultural economy which exports pop culture consumer goods and services, entertainment, music (K-pop songs like “Gangnam Style”), movies, and video (K-dramas).

However impressive the ubiquity of fiber to the home in South Korea, the country has been a leader in wireless broadband. The mobile operators started WCDMA service in December 2003, providing voice, video, and high-speed data service at 2Mbps using mobile handsets.

South Korea capitalized on its geodemographics which favor broadband deployment. Fixed lined service is more economical when so many live in skyscrapers. More largely, few barriers were imposed to enter the broadband market, initially with DSL.

Unlike many products for which when quality improves, price increases; broadband has behaved in the opposite. The price of broadband has fallen in the past 20 years while the speed, throughput, and technology has improved. Given heavy competition among technologies, broadband providers are unable to raise prices to cover incremental costs.

See Strand Consult’s report Netflix v. SK Broadband. The David and Goliath Battle for Broadband Fair Cost Recovery in SOUTH KOREA.

Many nations seek inspiration from South Korea to explore how they can resolve their own broadband challenges. Google has grown large and dominant in part because it has de facto free or discounted use of other’s networks. Indeed US and Japan now explore that Google and other Big Tech firms pay into the Universal Service Fund or be accessed an ad tax to recover the money needed to build and maintain networks. South Korea is by far the most advanced to implement a system that works.

Many nations grapple with this very issue. The recent ITU Global Connectivity Report for 2022 describes connectivity challenges which are real for developed and emerging countries alike. It observes the critical role of middle-mile connectivity and the to the urgent need to close the gap of funding, particularly with universal service. ITU recommends that both the base of contributors and the scope of investment to support deployment and adoption need to be broadened. Several options are available to broaden the base of contributors: include identifying new contributors like digital companies, such as those with an e-commerce or other online focus, along with other companies deriving benefits from broadband, multilateral development banks, corporate social responsibility funds, and philanthropic donors. Further contributions could include digital taxes and other regulatory levies.

With the pandemic, broadband is essential. Now many countries believe that the technology companies must do more for social responsibility, even contribute financially to universal service funds. Telecoms operators are bound by a public service duty to provide emergency service access, at their own expense, so by the same logic surely the content providers should contribute something towards the cost of the end users’ infrastructure. Big Tech advocates for a policy in which they pay zero of the middle and last mile cost of broadband while consumers pay 100 percent. This is unheard of in any other industry.

If Google and other video entertainment streamers do not pay, broadband providers must either raise costs on end users, or forego network investment, maintenance, and upgrades. Importantly, payments act as signals to content providers to invest in video compression and other technologies which improve the technological quality of data and make its delivery more efficient.

Ensuring next generation broadband networks is a shared responsibility. European policy unwittingly rewards Big Tech with end user subsidies and eliminates incentives for broadband network investment. It should be no surprise the EU falls further behind on the rollout of next generation networks.

To find out more about Middle Mile Economics: How streaming video entertainment undermines the business model for broadband and review the table of contents, contact Strand Consult

For more information see Strand Consult’s report The moment of truth – a portrait of the fight for hard net neutrality regulation by Save The Internet and other internet activists, and review the table of contents contact Strand Consult.