Seismic Shifts In International Data Markets Demand Broadband Internet Policy Update

The global political movement to improve connectivity and close the digital divide has generated reports on international markets for data and related regulatory policies. The papers sometimes contain confusing terminology: usage, transit, peering and interconnection. Each term has a specific meaning and practice. Policy makers could benefit from a summary of policies and proposed instruments – in addition to a thorough review of their own country’s networks and practices. Here are some key takeaways from the reports.

The rise of a parallel, proprietary and unregulated internet through platforms

The Federal Network Agency commissioned a study on competition in transit and peering markets (141 pages) and found that the issue had not been investigated by European regulators for at least 5 years. The report finds that Internet traffic in Europe is growing by 25 percent year on year, that 80 percent of this traffic uses videos, social media and games, and that only 5-6 players (e.g. Netflix, Amazon Prime, YouTube etc.) account for more than half of all traffic. These players have more international backbone capacity than the world’s broadband providers and have ditched third-party transit rather than building their own backbones, undersea cables and data centers. As a result, the transit business has declined. Platforms largely avoid internet exchanges with transparent pricing, instead building bespoke networks for their proprietary content and maximizing the efficiency and profitability of their services.

The massive construction and expansion of backbone and delivery infrastructures by these players has permanently changed the global overall architecture of the Internet, the connection structure and the relationship between platforms and broadband providers and created competitive disadvantages for the operators. Continued growth in internet traffic continues to shape the dynamics of internet architecture, with continued disproportionate growth in video streaming and cloud services having the greatest impact. Notwithstanding the many advantages of privately deploying networks, given the relative market power between the disagreeing companies, conflicts can arise when parties exchange data. While internet architecture has changed drastically over the past decade, the legal and regulatory framework governing traffic flows has changed little, and the largest platforms in these international data markets are essentially unregulated. The exception is South Korea, with its unique approach to broadband policy and recognized global leadership in broadband.

Network Usage vs. Termination

South Korea has had a framework for charging network usage for almost a decade. The policy ethos reflects the recognition of shared responsibility between broadband providers and content/application providers to ensure quality of data delivery and user experience. In practice, the policy ensures cost recovery of fiber installation and maintenance from the content provider to the broadband provider’s core router. This provides dedicated bandwidth for the content at hand and protects against network experience degradation for users who are not accessing that specific content.

Importantly, this practice has nothing to do with terminating traffic to end users. It appears that Analysys Mason, Internet Society and others are confusing network usage (which describes the relationship between broadband providers and content/application providers) with the Sending Party Network Pays (SPNP) termination regime. In South Korea, SPNP is a historical regime applicable only between Tier 1 telecom operators if their traffic change ratio does not exceed 1:1.8.

While cost recovery is encouraged in South Korea, it is not mandatory and hence major US players are playing against the regime. For example, Netflix rejected claims for reimbursement and took a broadband provider to court, arguing that it was not required to pay for the broadband network upgrades needed to manage Netflix content streaming overnight around 26 would have increased fold. Netflix lost, and the case is on appeal.

Similarly, Facebook asked South Korean broadband providers to install Facebook servers on their networks for free. Broadband providers balked; Finally, the servers have costs and cannot be repurposed for other content and are therefore inefficient and redundant if they are housed for free. To force the issue, Facebook shut down some of these servers and redirected traffic to other countries and operators. This degraded the end-user experience, and the Korean telecom regulator fined Facebook for willful harm. Facebook took the matter to court and won, but the abuse caught the attention of the Korean assembly.

Going forward, the Assembly is considering updating the Telecommunications Business Act to specify that businesses negotiate in good faith with data and pricing transparency requirements. The bill does not contain any fee mandates.

Records needed for verification

Politicians have little data on international data markets. While useful information on international traffic is available at an aggregated, global level from Cisco and Sandvine, it tells us little about the behavior of the actors within a traffic exchange and the microeconomics of individual networks.

Preliminary 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 pros and cons of different methodological approaches. Importantly, Congress considered addressing this through the Funding Affordable Internet with Reliable Contributions Act, or the FAIR Contributions Act which would authorize the FCC to conduct the required study.

In any case, there is no data showing damage from South Korea’s broadband policy. On the contrary, the country is celebrated for having the highest penetration rates for fiber to the home (86 percent) and 5G (47 percent adoption). The country is seen as a pioneer in network innovation and a global force in developing content for local consumption and export. Additionally, Google and Netflix enjoyed a year of record earnings in the country. It seems that fair cost recovery for broadband goes hand in hand with a thriving ecosystem.