Authors: KYUNG SIN “KS” PARK, MICHAEL NELSON
This is a chapter in a report published by Carnegie Endowment for International Peace on August 17, 2021.
The development of the data economy in Korea could not have succeeded without high penetration of affordable, high-speed broadband networks.1 This spurred innovation by the largest computer, telecom, and consumer electronics companies and by startups and universities. Unfortunately, over the last five years, new telecommunications regulations threaten to decrease competition among network providers and increase the cost of connectivity—particularly for access to non-Korean content and services. These include cloud computing and storage, which as mentioned in earlier chapters, are key parts of any strategy to improve cybersecurity and cyber resilience.
The network infrastructure that enables the internet has expanded so rapidly over the last two decades for two simple reasons: competition and interconnection. Companies running networks have had huge incentives to connect each other’s customers, which has meant that often network providers simply agree to connect their networks for free. In other cases, where a small network provider wants to reach the customers and services on a much larger network, they negotiate a price for interconnection and transit. That is the way the internet has worked almost everywhere—enabling fair and vigorous competition. The result is a global network of networks that connects more than 4 billion customers to each other and to a phenomenal variety of different services and websites.
However, there have been some attempts to “mess with success,” and Korea’s experience is among them. In particular, starting in early 2016, the Korean telecommunications regulator has mandated “network use fees.” These new fees would flip the entire business model of the internet—and were designed to favor the three large telecommunications companies that most Koreans depend upon. Understandably, these companies have lobbied hard for this new scheme, which rather than having individual users and businesses pay to connect to the internet and access the full range of content and services available there, would require providers of services to “pay by the bit” for the traffic generated when their customers download content. The established practice—where users, companies, and individuals alike are not charged for the bits they send or receive but only for maintaining physical access to the network (“Bill and Keep”)—would be replaced with a “Sending Party Network Pays” (SPNP) model.
Although this change is being applied selectively (for example, only among internet service providers, ISPs, for now), it is already having a notable impact on the future of data and internet usage in Korea—increasing the cost of broadband and causing some companies, such as Facebook and Netflix, to suspend or degrade the services they provide to Korean customers rather than pay the new, artificially high charges for interconnection demanded by Korea’s big three ISPs.
Even before the SPNP rule kicked in, the market for mobile broadband in Korea was dominated by three big ISPs, resulting in the second-lowest level of competition in the mobile market (as measured by HHI,2 a standard measure of market concentration) among the large, developed countries (those with a population of more than 20 million).3 These Korean SPNP rules will reduce competition further.
According to TeleGeography, the cost of transit in Seoul is typically eight to ten times that of major European network hubs like London and Frankfurt.4 Elsewhere in Asia, technological improvements in optical fiber network technology and vigorous competition are leading the cost of transit to fall about 20 percent per year.5 That is simply not happening in Korea, in part due to the added costs imposed by these interconnection fees.
Therefore, many Korean content providers cannot handle the higher cost for hosting their content in Korea and have either moved overseas or were outcompeted by foreign content providers because Korean firms cannot provide speed-intensive content, such as 4K video. As a result, Korean consumers are shifting to foreign content providers.
Unfortunately, the Korean government has not learned lessons from other attempts to switch to a SPNP model, particularly in Europe. In 2012, the European Telecommunications Network Operators (ETNO) group suggested that the United Nations’ International Telecommunication Union recommend that national governments adopt the SPNP model. The reaction to this proposition was rapid and unequivocal. The Body of European Regulators for Electronic Communications (BEREC) rejected the whole idea of trying to regulate interconnection costs because “ETNO’s proposed end-to-end SPNP approach to data transmission is totally antagonistic to the decentralized efficient routing approach to data transmission of the Internet. The connection-oriented nature of end-to-end SPNP, with its focus on charging based on the actual volumes or value of the traffic, would represent a dramatic change from the existing charging framework operating on the Internet.”6 Additionally, BEREC stated that “If ‘bill & keep’ were to be replaced by SPNP then the ISP providing access could exploit the physical bottleneck for traffic exchange and derive monopoly profits, requiring regulatory intervention.” Basically, these regulators concluded that the ETNO proposal would threaten the market’s ability to sort out how much each network pays other networks to accept its customers’ traffic. As a result, the ETNO proposal went nowhere.
In Korea, several content companies and smaller network providers are fighting the three big Korean telecoms champions in court—and usually losing.7 Unless this policy is revised, over time it will decrease investment in network infrastructure and slow the digital transformation in Korea.
But unfortunately, the situation is getting worse (and messier) not better. Rather than reversing course, in May 2020, Korea’s National Assembly approved the Content Providers’ Traffic Stabilization Law, which goes beyond the SPNP rules adopted by the country’s telecommunications regulator. This new law not only set interconnection charges for network providers (and further favored the three large Korean telecommunications companies) but also required large content providers to shoulder the responsibility of ensuring reliable access to their content, which had been the responsibility of ISPs everywhere else.8 In addition, in December 2020, assembly member Jun Hye-sook of the Minjoo Party proposed an amendment to the Telecommunication Business Act (bill no. 2106370) to prohibit “acts to unduly impose unreasonable or discriminatory conditions or restrictions in agreements for the use or provision of telecommunication networks.” The bill’s provisions, if adopted, could extend and entrench the SPNP model even further.
Korea has been considered a model country with a high internet penetration rate and dense fiber network penetration, but these new laws could make it more difficult for Koreans to fully enjoy the global services they access today, including not just video services but also content distribution networks, cloud services, and cybersecurity tools that make the internet faster, more reliable, and more secure. The new laws will also hold back new Korean telecoms startups trying to compete with the established network providers. Worse, the laws are creating a dangerous precedent that other countries might seek to emulate, slowing internet development and harming consumers there, too. (An attempt in Indonesia was recently nipped in the bud.9) This is why more than a dozen civil society organizations have called on the government of Korea to repeal the new Content Providers’ Traffic Stabilization Law and the SPNP rule. They include Open Net Korea (in South Korea), Access Now, European Digital Rights (EDRi), Article 19, and other groups from Brazil to Norway to Mexico.10
1 This summary includes excerpts from blog posts on Open Net Korea by KS Park, including “The World’s Only Attempt to Legislate ‘Network Use Fees’ Will Further Damage Consumers – the Illusion of Charging ‘Delivery Fees’ on the Internet Will Disincentivize Investment in Network Expansion,” May 17, 2021, http://old.opennetkorea.org/en/wp/3265; and “South Korea’s Network Infrastructure May Be State of the Art, but the Country’s ‘Pay to Play’ Regime for Delivering Traffic Is an Unprecedented Threat to the Free and Open Internet,” September 17, 2020, http://old.opennetkorea.org/en/wp/3122.
2 The Herfindahl–Hirschman Index, which measures market concentration, is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers.
3 Ofcom, “The International Communications Market 2017: Telecoms and Networks,” December 2017, https://www.ofcom.org.uk/__data/assets/pdf_file/0026/108908/icmr-2017-telecoms-networks.pdf.
4 See the TeleGeography’s annual bandwidth pricing review from 2021, especially slide 17, available here: https://blog.telegeography.com/2021-global-pricing-trends-in-20-minutes.
6 Body of European Regulators and Electronics Communications, “BEREC’s Comments on the ETNO Proposal for ITU/WCIT or Similar Initiatives Along These Lines,” November 14, 2012, https://berec.europa.eu/eng/document_register/subject_matter/berec/others/1076-berecs-comments-on-the-etno-proposal-for-ituwcit-or-similar-initiatives-along-these-lines.
7 For example, Chambers and Partners, “Korean Court Ruling Over a Network Usage Fee Dispute Between Netflix and SK Broadband,” July 4, 2021, https://chambers.com/articles/korean-court-ruling-over-a-network-usage-fee-dispute-between-netflix-and-sk-broadband; Ben Munson, “Netflix Handed Loss in South Korea Network Usage Fee Court Case,” FierceVideo, June 29, 2021, https://www.fiercevideo.com/regulatory/netflix-handed-loss-south-korea-network-usage-fee-court-case.
8 Yonhap, “Netflix Pressed to Share Network Costs in S. Korea,” Korea Herald, May 21, 2020, http://www.koreaherald.com/view.php?ud=20200521000754.
9 Safenet, “[Joint-Statement] Civil Society Demand That Net Neutrality Be Protected in Interconnection Rules,” February 15, 2021, https://safenet.or.id/2021/02/joint-statement-civil-society-demand-that-net-neutrality-be-protected-in-interconnection-rules/.
10 Open Net Korea et al, “Open Letter to South Korea’s ICT Minister: Ensure Net Neutrality,” Access Now, September 16, 2020, https://www.accessnow.org/open-letter-south-korea-net-neutrality/.