Seismic Shifts In International Data Markets Demand Broadband Internet Policy Update

The global policy movement to improve connectivity and reduce the digital divide has spawned reports on international data markets and related regulatory policies. These papers present sometimes confusing terminology: usage, transport, peering, and interconnection. Each term has a specific meaning and practice. In addition to a comprehensive review of national networks and practices, policymakers can benefit from summaries of policies and proposed tools. Here are some key findings from the report.

The Rise of a Platform-Parallel, Proprietary, and Unregulated Internet

Germany’s Federal Network Agency commissioned a study (141 pages) on competition in transport and peer-to-peer markets, noting that European regulators had not examined the issue for at least 5 years. The report pointed out that Internet traffic in Europe increased by 25% year-on-year, 80% of which traffic was video, social media and games, and only 5-6 players (such as Netflix, Amazon Prime, YouTube, etc.) accounted for more than half of all traffic. These players have more international backbone capacity than the world’s broadband providers, and have forsaken third-party transmission instead of building their own backbones, submarine cables, and data centers—thus, the transmission business has declined. These platforms have largely avoided price-transparent Internet transactions, instead building custom networks for their exclusive content and maximizing the efficiency and profitability of their services.

The massive development and expansion of backbone and transport infrastructure by these players has permanently changed the overall global architecture of the Internet, the interconnection structure, and the relationship between platforms and broadband providers, creating a competitive disadvantage for operators. The continued growth of Internet traffic continues to shape the dynamics of the Internet’s architecture, with the continued disproportionate growth of video streaming and cloud services having the greatest impact. Despite the many advantages of privately provisioning networks, given the relative market power between mismatched entities, conflicts can arise when parties exchange data. While the architecture of the internet has changed dramatically over the past decade or so, the legal and regulatory framework for traffic has changed little, and the largest platforms remain largely unregulated in these international data marketplaces. The exception is South Korea, which has a unique approach to broadband policy and is recognized as a global leader in broadband.

Internet Use and Termination

For nearly a decade, South Korea has developed a compensation framework for internet usage. The spirit of the policy reflects an acknowledgment of the shared responsibility between broadband providers and content/application providers to ensure the quality of data delivery and user experience. In effect, the policy ensures cost recovery for the installation and maintenance of fiber optics from the content provider to the broadband provider’s core router. This provides dedicated bandwidth for a given content and prevents a degraded network experience for users not accessing that particular content.

Importantly, this practice has nothing to do with terminating end-user traffic. Analysys Mason, the Internet Society, and others seem to confuse network usage (describing the relationship between broadband providers and content/application providers) with the termination regime of “sender-side network pays” (SPNP). In Korea, SPNP is a historical system that only applies to Tier 1 telecom operators if their traffic exchange ratio does not exceed 1:1.8.

While South Korea encourages cost recovery, it is not mandatory, so large corporations in the US game the system. For example, Netflix dismissed cost recovery claims and took a broadband provider to court arguing it was not obligated to pay for broadband network upgrades needed to manage Netflix content, which grew 26-fold overnight. Netflix lost the case and the case is on appeal.

Likewise, Facebook requires South Korean broadband providers to install Facebook servers within their networks for free. Broadband providers are hesitant; after all, servers have a cost and can’t be used for other content, so providing them for free is inefficient and redundant. To fix the problem, Facebook shut down some of those servers and rerouted traffic to other countries and carriers. This degraded the end-user experience, and South Korea’s telecom regulator fined Facebook for what it deemed intentional harm. Facebook took the issue to court and won, but the abuse of power drew the attention of South Korea’s parliament.

Looking ahead, Parliament is considering updating the Telecommunications Business Act to provide for companies to negotiate in good faith over data and pricing transparency requirements. The bill does not authorize fees.

Datasets required for validation

Policymakers have little data on international data markets. While useful information on international data traffic is available on a global scale from Cisco and Sandvine, this information tells us little about the behavior of the participants in the traffic exchange and the microeconomics of individual networks.

Initial efforts are underway to provide more data, notably from Strand Consult, which collects data on streaming video data on rural broadband networks, and documents the strengths and weaknesses of different approaches.Importantly, Congress has considered addressing this issue by funding Affordable Internet through the Reliable Contribution Act or the Fair Contribution Act This would authorize the FCC to conduct the required studies.

In any event, there is no data to suggest that South Korea’s broadband policies have done harm. Instead, the country is known for having the highest penetration rates for fiber-to-the-home (86%) and 5G (47% adoption). The country is considered a pioneer in online innovation and a global force in the development of content for local consumption and export. Additionally, Google and Netflix enjoyed a record year of profits in the country. Equitable cost recovery for broadband seems to go hand in hand with a thriving ecosystem.


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