When South Korea passed a law in May holding content providers accountable for bad service quality, it raised Net Neutrality red flags. In the months before the legislation, Facebook had pulled caches out of the ISP SK Broadband, switching to slower international servers. Around the same time, Netflix sued the ISP. The reason? SK was demanding large content providers money for peering with them. This is a rare occurrence in most of the developed world: ISPs are generally entrusted with giving users access to data with the money they are paid by their customers to do so, regardless of what that content is, or who accounts for how much traffic.

Net Neutrality principles, on which the internet is built, are designed to protect content providers from such strong-arming tactics by ISPs; charging termination fees to content providers on top of charging customers for connectivity can lead to outcomes that hurt small and growing players. South Korea’s case is particularly interesting because their current situation has been years in the making, even as the country holds the distinction of having among the fastest internet speeds in the world. In an online discussion held by Mozilla, a Korean law professor and co-founder of Open Net Korea KS Park described the factors that led to ISPs being able to coerce content providers into making payments to them at the cost of Net Neutrality principles.

How it all started

In 2016, South Korea implemented a Sending Party Network Pays model, Park said. Under this model, ISPs would have to pay each other for traffic originating from them. For instance, if SK Broadband is peered with YouTube, and Korea Telecom is not, and if a KT user’s YouTube traffic is delivered to them via SK Broadband, then it is the first ISP that would have to foot the bill.

“Local ISPs that usually purchase bandwidth from higher tier ISPs can save on transit costs by hosting cache servers of popular content,” Park said. “But now that also becomes burdensome, because if you host Facebook or Netflix, then a lot of people belonging to other ISPs will draw data traffic from your network, and you will have to pay the SPNP settlement.” This fee was eventually amended to ensure that ISPs would only have to make payments if outgoing traffic was 1.8 times or more than incoming traffic. Park argued that even this ratio was too low, as small ISPs with peering relationships to large content providers would have no way to match larger players’ traffic demand. The outcome was that ISPs started demanding large content providers to pay the bill. 

Korean tech companies have coughed up millions of dollars in settlement fees, but even big internet firms who can afford to do so have spoken out against the system. Naver, a Korean tech giant that accounts for the majority of the country’s web search market, joined Google and Facebook to argue that the unusual cost requirement has made “South Korea the only country in the world where network costs rise”.

Facebook versus Korea

Facebook had peering relationships with major Korean ISPs until 2016, when Korea started requiring ISPs to pay for outgoing traffic. When that change kicked in and it became clear that Facebook might have to pay ISPs, the company rerouted traffic to Korea through Hong Kong. The country’s communications regulator then did something unusual: it fined Facebook for users experiencing slow speeds. Facebook appealed the fine, and a Seoul court ruled in the company’s favour.

2016 was also the year Netflix launched in Korea. The company uses local caches embedded directly in ISPs’ networks to deliver traffic, and does so for even small ISPs, as long as they meet a certain threshold of traffic. But SK Broadband demanded that Netflix pay network usage fees on top of installing those caches. The streaming service sued the telco, and that case is pending — Netflix told us that it would continue negotiations even as it made its case in court.

But the outcome of that battle is complicated by a law that Korean lawmakers passed this year, which would hold content providers like Facebook and Netflix liable for a dip in their service quality. On top of potentially handing SK Broadband a win in court, this law, which will kick in on December 10, hands ISPs a powerful bargaining chip in demands that content providers foot their network settlement fees.

Digging in on bad policy

Instead of ending interconnection fees that harmed ISPs as well as content providers, South Korea has doubled down by further entrenching the system with this so-called network stabilisation law. This has led to a distorted market and high prices. While fixed-line broadband is cheap in the country due to aggressive competition for residential subscribers and low costs to set those connections up, wireless costs have been very high. Park said that among countries with a population of more than 20 million, Korea has the worst HHI, an indicator of the competitiveness of an industry. “On top of this very anti-competitive market, SPNP rule lowered competition even more. That’s how it resulted in these high internet access fees,” Park said.

Park said he was concerned that other countries might follow Korea’s example in charging termination fees. “The founding fathers of the internet said that if networks were exchanging money for passing data through the neighbour, the transactional cost would be too much and bog down the internet as a project,” Park said. “Even a single individual can communicate with billions of people directly without getting the approval of any gatekeepers to the same extent as governments and big companies. That is the liberalising power of the internet,” Park said. He argued that charging termination fees could amount to a restriction of speech and the mass dissemination of information, something Open Net has warned about on its website (in Korean). 

Why Korea implemented SPNP

All this raises the question of why South Korea implemented a practice that hurts the market like this. Park said that in a legislative document explaining the 2016 move, Korean legislators said that the aim was to “reduce competition between ISPs”.

I was so surprised to find that phrase,” Park said. “I think what they meant was that competition among ISPs for residential internet access was so intense that the government thought that ISPs are spending too much money on marketing and advertising. Maybe the idea was to lower that competition. So they somehow felt that if they implement SPNP, they will lower competition. It’s not well thought out, because SPNP rule lowers competition, it didn’t do so for eyeballs, but ended up lowering competition for hosting.”

What about internet exchanges?

India is no stranger to networks wrangling about who pays their bills. In fact, the National Internet Exchange of India, which was envisioned in 2003 as a meeting point for all ISPs, had a rule that was one of the reasons ISPs didn’t rely on it significantly. That rule, known as the “x-y charge”, required members to pay the exchange for deficits in incoming versus outgoing traffic, which flies in the face of the principles that Park mentioned. But the Indian internet got around this either by peering directly with ISPs or by relying on a crop of private exchanges.

Park said this didn’t happen in South Korea because there were only three large internet exchanges in the country, all either owned or controlled by the large Korean telecom operators. “I think there’s something going on that we don’t know behind the scenes, where ISPs are using their gatekeeping power to basically ostracise any effort to create neutral IX,” Park said. “Yes, there is a small neutral IX but the big players are not joining there. They’re not peering there. Which makes it very ineffective for reaching a huge section of the Korean population.”

Should we subsidise ISPs?

When asked about Korean telcos having falling revenue and profit margins, Park said that was not a problem. “Around the world, ISPs’ margins are supposed to stagnate. That is the nature of the internet,” he argued. “More and more computers and networks will voluntarily connect with one other without needing a third party mediator like ISPs. There’ll be more and more peering. So the price of the internet access fee is supposed to go down.”

“But then again, do we need to subsidise ISPs? I majored in physics in college, there is no cost or expense in sending data from one point to another,” Park said. Just as a slice of light bouncing off a mirror doesn’t cost anything, data, as long as it is transmitted as electromagnetic waves, doesn’t cost anything. ISPs have made enough money just by charging access fees. The marginal cost of providing that service is close to zero.” 

I know that this argument for a public subsidy for ISPs resulted in 20 states in the US having a law banning municipal broadband, and there’s a civil society movement trying to undo that law,” Park pointed out. “On how ISPs can survive, they will survive. As long as killer content arrives, people will buy more expensive 5G phones, 6G phones, they will buy internet access at high prices, and that’s what ISPs should live off of.”

Net Neutrality in South Korea

Aside from termination fees, South Korean ISPs indulge in another practice that violates Net Neutrality: zero-rating. In 2017, SK Telecom partnered with the popular app Pokémon GO to exempt its usage from data caps. The telco also zero-rates its e-commerce platform 11ST, The Korea Bizwire reported. While South Korea claims to support Net Neutrality, its 2011 guidelines on the subject are not binding, and researchers found in 2013 that over the years regulators in the country have resolved Net Neutrality conflicts were resolved by encouraging private deals that had little industry-wide policy repercussions.

The regulator’s actions, researchers Douglas Sicker and Boonyeon Kim wrote, “[appear] to favor exerting pressure to push private agreements between the individual entities at odds, rather than issue a rule that would extend to all entities in such future circumstances. And these agreements tend to have concessions from both parties, not just the net neutrality violator.” That culture seems to be continuing — even as Facebook appealed the fine it was slapped with by regulators for rerouting its traffic, it privately agreed to pay termination fees in 2019.