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Netflix and SK Broadband Battle Over Who Pays in South Korea

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Netflix and SK Broadband Battle Over Who Pays in South Korea

Netflix’s success has led to huge spike in internet traffic in South Korea – and a dispute over who should shoulder that burden.

Netflix and SK Broadband Battle Over Who Pays in South Korea
Credit: Depositphotos

The synergy between the streaming giant Netflix and Korean content creators has been a win-win for both sides in recent years. With Netflix’s global platform providing streaming service to 190 countries, Korean TV series and films became more readily accessible to audiences far beyond its core Asian market. In return, Korean content and hit Netflix Korean Original series such as “Kingdom,” “Sweet Home,” and “Crash Landing on You,” have attracted millions of viewers and a tidy profit for Netflix. In South Korea alone, the number of paid users has skyrocketed from about 80,000 users in 2016 to 3.8 million as of the end of 2020. Netflix is now the most used streaming platform in South Korea, with reported sales of $356 million (416 billion Korean won) and operating profits of $7.54 million.

Seeing the success and potential in the Korean market, Netflix established a private limited company, Netflix Entertainment Korea, last year to focus on content creation, acquisition, and investment in the market. Earlier this year, Netflix also announced its plans to invest $500 million for studio production including original films in South Korea.

However, with the rise of popularity also came complications: Specifically, the question of who should pay for the increased traffic from Netflix’s success.

The South Korean Ministry of Science and ICT’s data indicates Netflix streaming occupied about 4.8 percent of South Korea’s total internet traffic in the fourth quarter of 2020. According to SK Broadband Co. (SKB), the recent surge of Netflix users in South Korea has placed a structural and financial burden on the internet company, and SKB argues that Netflix should compensate for it accordingly. The result has entangled Netflix in a legal battle with one of South Korea’s internet service providers over network usage fees.

Netflix, on the other hand, emphasizes the principle of net neutrality, which asserts that ISPs should not discriminate against any specific content providers (CPs) or require payments for using their network. Consumers pay the ISPs for the internet service; therefore, the CPs, such as Netflix, are not responsible for the additional network usage fee.

Netflix currently has agreements with other ISPs in South Korea – KT Telecom, LGU+, and D Live – where the ISPs either have an exclusive content partnership with Netflix or Netflix alleviates the internet traffic crunch by providing cache servers called Netflix Open Connect rather than providing direct monetary compensation to them. Netflix has offered to ease the traffic by building its own cache servers, similar to its arrangements with other Korean ISPs, but SKB rejected the offer and insists on monetary compensation.

Both sides, however, have failed to reach an agreement and the issue escalated to the Korean Communication Commission and then a lawsuit in April 2020. In late June 2021, Seoul Central District Court dismissed Netflix’s claim and ruled that SKB has the authority to ask for compensation for this case and it should be negotiated between two private companies. Although this ruling could be seen as a victory for SKB, it does not actually provide any groundwork for what the compensation would look like and leaves it up to two companies to negotiate their own terms.

Netflix in response has appealed the court’s ruling, stating that the verdict denies the roles that a content provider and an internet service provider each have, and it is shifting the responsibility of the ISP to the CP, therefore undermining the internet ecosystem.

The dispute between the ISPs and CPs is not unique to South Korea. It is taking place in other countries, including the United States. However, South Korea is an interesting case because this is the country’s first lawsuit between a South Korean ISP and overseas CP, where both domestic and international platforms are competing against each other in a growing and crowded over-the-top (OTT) market. Netflix vs. SKB will set an important precedent for other streaming services domestically and potentially globally. South Korean domestic CPs such as Naver and Kakao have been paying the ISPs millions of dollars even though their share in the market is far less compared to Google and Netflix.

With global CPs, there has not been a clear legal guideline in place and companies have settled their disputes through bilateral negotiations either by providing extra cache servers to ease bandwidth burden on the internet provider or by signing an exclusive contract with them rather than providing monetary compensation.

In response to the ongoing debate, the South Korean Ministry of Science and ICT is expected to announce its guidelines on network usage and net neutrality in September. Last December, the ministry passed the revised Telecommunications Business Act, informally dubbed the Netflix Law, as an attempt to urge foreign platform operators like Netflix and YouTube to share costs in securing stable internet services. However, there were concerns over vague and ambiguous language in the ordinance and how it will be enforced. Although the ministry officially states the government has no intention of interfering with the ongoing Netflix case, and that the network usage fee should be determined voluntarily by the industry, guidelines would signal the Korean government’s stance on the issue.

Other global streaming platforms, including Disney+, Apple TV+, and HBO Max, are looking to launch their service in South Korea this year and they will be watching Netflix’s case closely as it could impact their own services. Highly anticipated Disney+ has already delayed its launch date and considering using third-party content delivery networks (CDNs) to avoid legal disputes with Korean ISPs altogether.

SKB is likely to file a counter lawsuit against Netflix’s action and these series of lawsuits are likely to stay for the long haul. How these court cases playout will be an important factor for the streaming platform industry and Netflix’s business relations in South Korea. Even if Netflix and SKB settle on an agreement, the exact terms and conditions would also have butterfly effects on the industry moving forward for both domestic and global CPs and even for consumers in terms of cost and quality of streaming services.