Naver and Kakao Also Held Accountable for Network Quality... Controversial 'Netflix Law' Enforcement Decree Released (Comprehensive Report 2)

Promulgation of Enforcement Decree for Amendment to the Telecommunications Business Act
Condition of 1 Million Users + 1% Traffic... Currently Applies to 5 Companies

[Asia Economy reporters Seulgina Jo and Aeri Boo] Domestic operators such as Naver and Kakao have also been included as subjects of the so-called 'Netflix Free Riding Prevention Act (Amendment to the Telecommunications Business Act),' which imposes obligations on global content providers (CPs) like Netflix and YouTube (Google) that generate massive traffic but fail to properly pay network usage fees in Korea, to maintain the quality of domestic telecommunications networks. Going forward, these operators will be required to take technical measures to provide stable services and must consult with telecom companies in advance when traffic surges occur.

However, concerns have been raised that the regulation may become a form of reverse discrimination that only hinders domestic operators, amid ongoing debates about its effectiveness against overseas operators. The Korea Internet Corporations Association, which includes Naver and Kakao, immediately called for a full review.

On the 9th, the Ministry of Science and ICT announced on the 8th that it would publicly notify the enforcement decree of the amended Telecommunications Business Act, which includes these provisions. The decree mainly stipulates that value-added telecommunications service providers meeting criteria set by presidential decree?such as number of users and traffic?must bear obligations to secure service stability and maintain network quality, pursuant to the newly established Article 22-7 of the Telecommunications Business Act. The Ministry plans to collect stakeholders' opinions by October 19 ahead of the December 10 enforcement date.

◆Reviewing the Enforcement Decree... Targets Include 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 a three-month period at the end of the previous year will be subject to the law.

Currently, five companies?Google, Netflix, Facebook, Kakao, and Naver?fall under this scope. As a result of the law amendment triggered by the Netflix free riding controversy, Naver and Kakao, which have paid hundreds of billions of won in network fees domestically, have also been added to the list. However, the obligation to secure service stability applies only if both user count and traffic volume criteria are met simultaneously (and condition), excluding small startups that were initially a concern.

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 the obligation to those who genuinely need to secure service stability, we applied an 'and' condition rather than 'or,' resulting in a total of 5 companies meeting both criteria."

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

Initially, industry and experts proposed various standards ranging from 0.35% (16 companies) to 5% (2 companies) of average daily traffic, but the research team finally decided on 1%, considering user impact and domestic internet resource influence. The 1% traffic threshold refers to actual traffic communicated domestically. An average daily traffic of 1% equals 1.7 petabytes, which corresponds to about 35,000 people simultaneously watching HD videos all day. The Ministry official added, "Google, ranked first domestically, accounts for 23.5% of average daily traffic, with the rest in single digits."

The enforcement decree includes provisions requiring operators to provide stable services regardless of user environment by ▲multiplexing servers, ▲securing essential server capacity, and ▲optimizing content transmission volume.

The decree also requires subject 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, which escalated to litigation, operators must notify contracted telecom companies in advance if there are reasons that significantly affect service stability. This is interpreted as a measure to prevent traffic concentration on some CPs from overloading the entire telecommunications network.

Additionally, the decree mandates that operators establish their own guidelines to maintain service stability and submit related implementation status data annually by the end of January. The five subject 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.

Violating operators will face corrective actions under the law, including fines of 20 million won.

◆Will It Be Effective Against Overseas Operators?... Concerns Over Reverse Discrimination Against Domestic Companies

However, debates over effectiveness continue. It is difficult to apply the law to overseas operators without domestic offices. The Ministry of Science and ICT stated that Article 27 includes provisions for representatives of global operators and that it has met with overseas operators such as Google, Netflix, and Facebook at least four times to convey concerns. If overseas operators violate the law, administrative orders will be enforced through designated domestic representatives.

Regarding concerns that this measure could escalate trade friction with the United States, the Ministry maintains that there is no violation of the Korea-US Free Trade Agreement (FTA). A Ministry official said, "Since the law's passage, the US and others 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."

After the decree's release, controversy over reverse discrimination against domestic operators has reignited. Even immediately after the so-called Netflix Free Riding Prevention Act passed the last plenary session of the 20th National Assembly, concerns were raised about fairness with domestic value-added telecommunications service providers who already pay network fees. Naver and Kakao reportedly paid about 73.4 billion won and 30 billion won respectively to telecom companies as network fees in 2016. Ultimately, the law amendment triggered by overseas operators may end up hindering domestic operators.

The Korea Internet Corporations Association issued a statement on the same day, calling for a full review of the enforcement decree, citing ambiguous standards and unfairness. The association criticized the government's criteria for applying the decree to value-added telecommunications service providers with over 1 million average daily users and accounting for more than 1% of domestic total traffic, stating, "There is no clear basis for how the 1% traffic standard was determined. It is questionable who measures the traffic, by what criteria, and how, and the accuracy of the data cannot be guaranteed."

There are also forecasts that the enforcement decree will force network usage fee contracts, ultimately increasing consumer burdens. The association argued, "In some cases, value-added telecommunications service providers may be forced to contract with virtually all major telecommunications carriers, which could increase their network costs."

In response, a Ministry of Science and ICT official said, "We find it difficult to agree with claims of reverse discrimination. This is for the stable use of services by domestic users. We will consult with operators during the legislative notification period." The official also emphasized that there will be no changes to the amounts paid by value-added telecommunications service providers to telecommunications carriers.

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

The detailed provisions of the enforcement decree released on the day are also attracting attention for their potential impact on the second round of the legal dispute between Facebook and the Korea Communications Commission (KCC), which was embroiled in controversy over intentional speed throttling. However, the Ministry of Science and ICT expects that the provisions will be difficult to be directly cited 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 was fined by the KCC. Facebook filed 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 prohibited acts under the Telecommunications Business Act, such as "acts that significantly harm user 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 the obligation of global CPs to maintain network quality and hold them accountable.

A Ministry official referred to the KCC's first trial loss, saying, "The ruling mentioned the absence of legislative precedent regarding traffic route changes. This amendment to the enforcement decree aims to address such legislative gaps."

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.