"Free Shipping?" Netflix Sweeping Money in Korea, Legal Battle Over Network Usage Fees

[Asia Economy Reporter Seulgina Cho] The legal battle between SK Broadband and Netflix over 'network usage fees' is intensifying. In the third hearing scheduled for the end of this month, a technician will attend as a witness, marking the start of a full-scale debate on technical terms such as 'connection' and 'transmission.'

Particularly, attention is drawn to whether this could become an opportunity for domestic Internet Service Providers (ISPs) to receive fair compensation from global Content Providers (CPs) who generate massive traffic but avoid network quality maintenance obligations and network usage fees, effectively 'free-riding' on domestic telecommunications networks.

◆ SKB-Netflix Ahead of 3rd Hearing... 'Parallel Lines' Over Network Usage Fees

According to industry sources on the 25th, the third hearing of the lawsuit filed by Netflix against SK Broadband to confirm non-existence of debt will be held at 3 p.m. on the 30th at the Seoul Central District Court. The third hearing will include the attendance of expert witnesses such as technicians and a technical presentation (PT). The technical PT was requested by Netflix, while the expert witness examination was requested by SK Broadband.

The legal dispute between the two companies escalated when SK Broadband applied to the Korea Communications Commission (KCC) for mediation over network usage fee conflicts with Netflix in November 2019, but Netflix filed a lawsuit before the mediation results were announced. This sparked controversy as a telecommunications operator with domestic sales in the hundreds of billions of won bypassed the regulatory authority's mediation.

In the first hearing last October, the two sides clashed over the concepts of 'network usage fees' and 'network neutrality.' Netflix argued that under the 'basic principles of the internet,' the obligation to transmit video content data lies with the ISP, i.e., SK Broadband. In contrast, SK Broadband criticized Netflix for 'free-riding' by using the platform operator's network to gain economic benefits without paying fees.

SK Broadband also rebutted Netflix's claim that 'forcing transmission fees violates network neutrality,' stating that network neutrality is a principle prohibiting discrimination based on content type and is unrelated to network usage fees.

During the second hearing in January, detailed definitions of network usage fees were debated intensely. Netflix argued that 'connection' and 'transmission' are different concepts. Unlike connection, transmission is 'free,' so Netflix has no obligation to pay transmission fees, i.e., network usage fees. Netflix drew a line by stating that its obligation is to make content available for use.

In response, SK Broadband countered that the claim that transmission is free contradicts the interconnection standards for telecommunications facilities, which calculate connection fees differently based on traffic volume. They also pointed out that Netflix uses SK Broadband's network to provide content to users.

The court decided that the third hearing will include expert witnesses such as technicians and a technical PT. The key issue will be the definition of technical terms like connection and transmission, and whether the court will determine that Netflix content is transmitted to domestic users using domestic telecom networks. SK Broadband is expected to refute Netflix's previous claims from the second hearing that 'transmission is free' and 'Netflix's obligation ends at content provision.'

◆ Why the Controversy Over Netflix's 'Free-Riding' on Networks... Overseas CPs Pay Network Usage Fees

If the court rules that global CPs must pay network usage fees, the negotiation dynamics with domestic ISPs are expected to change significantly. Since the implementation of the so-called 'Netflix Law (Amendment to the Telecommunications Business Act Enforcement Decree)' on December 10 last year, attention is focused on whether it will alter the course of the lawsuit. Recently, the U.S. Federal Court of Appeals in Washington DC also ruled that CPs like Netflix must properly pay network usage fees to ISPs.

The controversy over global CPs like Netflix 'free-riding' on networks is not new. Currently, global CPs such as Netflix and YouTube account for over 70% of domestic traffic. Although they earn huge profits based on domestic infrastructure, they do not pay network usage fees. This contrasts with domestic CPs like Naver and Kakao, which pay hundreds of millions of won annually in network usage fees and contribute to service stability.

In the second hearing, Netflix responded to criticism that it pays network usage fees in other countries by stating, "There are cases where transmission fees have been paid, but these are based on agreements between parties," and "There is no basis for mandatory payment of transmission fees." However, it has been confirmed that Netflix signed contracts to pay network usage fees with major U.S. ISPs such as Comcast, Verizon, and AT&T around 2014 when traffic congestion worsened. It is also known to pay network usage fees to France's Orange.

Netflix's indifferent attitude toward frequent outages and connection failures has also been frequently criticized. In May and June last year alone, Netflix experienced two outages totaling about 4 hours and 30 minutes but did not issue any apology notices or compensation plans.

Meanwhile, Netflix, which has been criticized for tax avoidance, free-riding on networks, and neglecting job creation, recorded sales exceeding 400 billion won domestically last year. According to the audit report previously released by Netflix Services Korea, last year's sales were 415.45 billion won, and operating profit was 8.82 billion won. This represents increases of 123.5% and 295.5%, respectively, compared to the previous year's sales and operating profit.

Despite high profits, Netflix's corporate tax expense last year was only 2.18 billion won. This is a significant difference compared to Hangul and Computer, a domestic IT company with 400 billion won in sales last year, which paid 15.8 billion won in corporate tax.

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