The global political movement to improve connectivity and bridge the digital divide has spawned reports on international data markets and related regulatory policies. The documents present a sometimes confusing terminology: usage, transit, peering and interconnection. Each term has a specific meaning and practice. Policymakers could benefit from a summary of proposed policies and instruments, as well as an in-depth review of their country’s networks and practices. Here are some key findings from the reports.
The rise of a parallel, proprietary, unregulated platform Internet
The German Federal Network Agency commissioned a study on competition in transit and peering markets (141 pages), noting that the issue has not been investigated by European regulators for at least 5 years. The report notes that internet traffic in Europe is growing by 25% year on year, that 80% of this traffic is video, social media and gaming, and that only 5-6 gamers (e.g. platforms Netflix, Amazon Prime, YouTube etc.) account for more than half of all traffic. These players have greater international backbone capacity than the world’s broadband providers and have abandoned third-party transit instead of building their own backbones, undersea cables and data centers. As a result, the transit business has declined. Platforms largely eschew internet exchanges where pricing is transparent, instead building networks tailored to their proprietary content and maximizing the efficiency and profitability of their services.
The massive development and expansion of the backbone and delivery infrastructures by these players has permanently changed the overall global architecture of the Internet, the structure of the interconnection and the relationship between platforms and broadband providers, creating competitive disadvantages for operators. The sustained growth of Internet traffic continues to shape the dynamics of Internet architecture, with the continued disproportionate growth of video streaming and cloud services having the greatest impact. Despite the many benefits of private provision of networks, conflicts can emerge when parties exchange data, given the relative market power between mismatched entities. While the architecture of the Internet has changed dramatically over the last decade or so, the legal and regulatory framework for traffic flows has changed little, and the largest platforms are essentially unregulated in these international data marketplaces. 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 network usage compensation framework in place for nearly a decade. The ethos of the policy reflects the recognition of the shared responsibility between broadband providers and content/application providers to ensure the quality of data delivery and user experience. In practice, the policy guarantees the cost recovery of fiber installation and maintenance from the content provider to the broadband provider’s core router. This provides dedicated bandwidth for the given content and protects against degradation of the network experience for users who are not accessing that particular content.
Importantly, this practice has nothing to do with stopping traffic to end users. It appears that Analysys Mason, the Internet Society and others confuse network usage (which describes the relationship between broadband providers and content/application providers) with the “sender network pays” (SPNP) termination regime. In South Korea, SPNP is a historical regime that only applies between tier 1 telecom operators if their traffic exchange rate does not exceed 1:1.8.
While cost recovery is encouraged in South Korea, it is not mandated, and thus the big US players are playing games with the regime. For example, Netflix has rejected cost recovery claims and is taking a broadband provider to court, saying it has no obligation to pay for broadband network upgrades needed to handle Netflix content which increased by 26 times almost overnight. Netflix lost and the case is under appeal.
Similarly, Facebook has asked South Korean broadband providers to install Facebook servers within their networks for free. Broadband providers balked; after all, servers have a cost and cannot be repurposed for other content, and therefore are inefficient and redundant when hosted 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 what it considered willful damage. Facebook took the matter to court and won, but the abuse caught the attention of the Korean Assembly.
Moving forward, the Assembly considers updating the Telecommunications Business Act to require companies to engage in good-faith negotiation with data and price transparency requirements. The bill has no tariff mandates.
Datasets required for verification
Policy makers have little data on international data markets. While useful information about international data traffic is available at an aggregated and global level from Cisco and Sandvine, they tell us little about the behavior of actors within a traffic exchange and the microeconomics of individual networks.
Preliminary efforts to provide more data are underway, notably by Strand Consult, which collects data on streaming video on rural broadband networks and documents the pros and cons of different methodological approaches. Importantly, Congress has considered addressing this issue through the Funding Affordable Internet with Reliable Contributions Act or the FAIR Contributions Act which would authorize the FCC to conduct the necessary study.
In any case, there is no data showing harm from South Korea’s broadband policy. On the contrary, the country is celebrated for the highest penetration rates of optical fiber in the home (86%) and 5G (47 % adoption). The country is regarded as a prime mover in web innovation and a global force in developing content for local consumption and export. In addition, Google and Netflix enjoyed a year of record profits in the country. Fair recovery of broadband costs seems to go hand in hand with a thriving ecosystem.