Five Companies Including Naver and Kakao Subject to 'Netflix Law'...Concerns Over Effectiveness and Reverse Discrimination (Comprehensive)

Imposing Network Quality Maintenance Obligations on Operators with Over 1 Million Users and More Than 1% Traffic... Strengthening Prior Consultations with Telecom Companies

[Asia Economy Reporter Seulgina Cho] The so-called 'Netflix Free-Riding Prevention Act (Amendment to the Telecommunications Business Act),' which imposes obligations on global content providers (CPs) such as Netflix and YouTube (Google) that generate massive traffic but do not properly pay network usage fees in Korea, will now also include domestic companies like Naver and Kakao.

Going forward, these companies must take technical measures to provide stable services and consult with telecom operators in advance when traffic surges. However, concerns have been raised that this regulation could become a reverse discrimination that only hinders domestic companies, which already pay network fees, amid doubts about its effectiveness on foreign companies.

The Ministry of Science and ICT announced on the 8th that it will publicly notify the enforcement decree of the amended Telecommunications Business Act, including these details, on the 9th.

This enforcement decree stipulates ▲applicability criteria and ▲necessary measures according to the newly established Article 22-7 of the Telecommunications Business Act, which requires value-added telecommunications service providers to take necessary actions to ensure stable service provision. The Ministry plans to collect stakeholders' opinions until October 19th ahead of the December 10th enforcement.

◆Details of the Enforcement Decree... Targets Google, Netflix, Facebook, Kakao, Naver

Specifically, value-added telecommunications service providers with an average daily user count of over 1 million and accounting for more than 1% of domestic total traffic over the last three months of the previous year will be subject to the law.

Currently, five companies?Google, Netflix, Facebook, Kakao, and Naver?fall under this scope. Both user count and traffic volume criteria must be met (and condition) for the obligation to secure service stability, excluding small startups initially feared to be affected.

A Ministry of Science and ICT official explained, "About 50 companies have over 1 million average daily users, and 8 companies exceed 1% of domestic traffic. To limit to those who genuinely need to secure service stability, applying an 'and' condition rather than 'or' results in a total of 5 companies meeting both criteria."

However, since traffic from September to November will be applied at the law's enforcement, the number of companies could increase beyond five. The list of target companies will be announced annually.

Initially, the industry and experts proposed various standards ranging from 0.35% (16 companies) to 5% (2 companies) of average daily traffic, but the research team finalized 1% considering user impact and domestic internet resources. An average daily traffic of 1% equals 1.7 petabytes, roughly the scale of 35,000 people simultaneously watching HD videos all day.

The enforcement decree includes provisions requiring companies to ▲multiplex servers, ▲secure essential server capacity, and ▲optimize content transmission volume to ensure users receive stable services regardless of their environment.

It also requires target CPs to consult with related operators, including telecommunications carriers, when necessary. For example, in cases like the traffic route change dispute between Facebook and the Korea Communications Commission, companies must notify contracted telecom operators in advance if there are reasons that could significantly affect service stability. This is interpreted as a measure to prevent traffic concentration on some CPs from overloading the entire communication network.

Additionally, the decree mandates the establishment of internal guidelines for maintaining service stability and requires submission of related implementation status data by the end of January each year. The five target companies must also secure online and ARS channels to handle user requests and provide contact information for service stability consultations such as in case of failures.

Violators will face corrective actions under the law, including fines of 20 million KRW.

◆Effectiveness on Foreign Companies? Concerns Over Reverse Discrimination Against Domestic Firms

However, questions about effectiveness continue, mainly because applying the law to foreign companies without domestic offices is challenging. The Ministry of Science and ICT stated that Article 27 includes provisions for representatives of global companies and that they have met with foreign companies like Google, Netflix, and Facebook at least four times to convey concerns.

Regarding concerns that this measure could escalate trade friction with the U.S., the Ministry maintains that there is no violation of the Korea-U.S. Free Trade Agreement (FTA). A Ministry official said, "Since the law's passage, foreign parties, especially in the U.S., have continuously raised issues. An FTA team member participated in the research group to carefully review trade issues. We did not mandate server expansion or localization. This enforcement decree is not targeted at specific companies."

However, domestic debates over reverse discrimination against Korean companies have reignited. Even after the Netflix Free-Riding Prevention Act, which imposes network stability obligations on all CPs, passed in the last plenary session of the 20th National Assembly, criticisms arose that it is unfair to domestic CPs who already pay network fees.

While foreign CPs like Netflix argue they have no reason to pay network fees when domestic ISPs charge users, it is known that Naver and Kakao paid approximately 73.4 billion KRW and 30 billion KRW respectively to telecom companies as network fees in 2016. Ultimately, the law amendment movement triggered by foreign companies may end up hindering domestic companies.

An industry insider lamented, "With doubts about whether Google and Netflix will actually pay network fees, only the burden on domestic CPs will increase."

In response, a Ministry of Science and ICT official said, "We find it hard to agree with the claim of reverse discrimination and will consult with businesses during the legislative notification period." The official also emphasized that there will be no changes to the amounts CPs currently pay to ISPs.

◆Will It Affect Facebook-KCC and Netflix-SKB Legal Battles?

Attention is also focused on whether the detailed provisions of the enforcement decree, released on this day, will impact the second round of legal disputes between Facebook and the Korea Communications Commission (KCC), which involved allegations of intentional speed throttling. However, the Ministry expects that these regulations will be difficult to directly cite in the second trial scheduled this week.

In March 2018, Facebook arbitrarily changed connection routes with SK Telecom, SK Broadband, and LG Uplus, causing user connection delays and receiving a fine from the KCC. Facebook appealed this decision by filing a lawsuit in May of the same year, and the first trial court ruled in favor of Facebook. The KCC immediately appealed.

In both the first and second trials, a key issue is whether Facebook's actions constitute a prohibited act under the Telecommunications Business Act, specifically "acts that significantly harm users' interests" and "usage restrictions." The court is also examining whether Facebook's route changes were for "justifiable reasons." The critical point is whether the court will recognize global CPs' obligations to maintain network quality and hold them accountable.

Another global CP, Netflix, is also engaged in a similar lawsuit. Netflix filed a civil lawsuit claiming non-existence of debt, arguing it has no obligation to pay network usage fees to SK Broadband.

This content was produced with the assistance of AI translation services.