By Harold Feld and Nicholas Garcia
January 17, 2024
The Federal Communications Commission is, at long last, undertaking a proceeding to restore net neutrality rules for broadband internet service. Net neutrality is the principle that the company that connects you to the internet does not get to control what you do on the internet. This battle to protect a free and open internet has been going on for a long time, and in the midst of the most recent FCC proceeding about it we are also being treated to an example from overseas of why those rules are so important.
Recently, Twitch—the popular interactive livestreaming website—announced that because of the cost of “termination fees” it would shut down its service in South Korea at the end of February 2024. These fees are due to what are called “sending party network pays” rules, and are a prime example of the risk consumers face in the U.S. should internet service providers begin charging termination fees and access charges. Net neutrality rules would prevent these kinds of fees, and South Korea is a demonstration that there is a real hunger among broadband providers to conduct this kind of shakedown—even if it means driving some services away entirely. As the announcement from Dan Clancy, Twitch’s CEO, explained:
Ultimately, the cost to operate Twitch in Korea is prohibitively expensive and we have spent significant effort working to reduce these costs so that we could find a way for the Twitch business to remain in Korea. First, we experimented with a peer-to-peer model for source quality. Then, we adjusted source quality to a maximum of 720p. While we have lowered costs from these efforts, our network fees in Korea are still 10 times more expensive than in most other countries. Twitch has been operating in Korea at a significant loss, and unfortunately there is no pathway forward for our business to run more sustainably in that country.
South Korea provides an important natural experiment in what happens when you permit broadband providers to charge content providers like Twitch for access.
So what exactly happened here? In South Korea, ISPs persuaded the telecom regulator to adopt “sending party network pays” rules. Under this regime, networks charge fees to receive (”terminate”) traffic. Large content providers, such as video distributors like Netflix, have asymmetric traffic flows: they send a lot more traffic than they receive. Particularly in South Korea, where traffic from these services originates outside the country, the South Korean ISPs anticipated significant windfalls from charging to terminate traffic to their customers—largely from foreign companies.
What happened instead provided an object lesson in the danger of allowing ISPs to charge access fees. Large content providers promptly began trying to game the system by breaking up content among multiple networks to avoid large asymmetric transfers from one network to another. As a result, South Koreans generally saw a degradation in performance when the law went into effect. For several years, the South Korean Parliament has tried to fashion new laws to force content providers to ensure quality of service and pay higher fees – without notable success. Meanwhile, local content providers that cannot break up their content have experienced a dramatic rise in the cost of content production and delivery, which they have passed on to the Korean people. While the largest providers such as Netflix have been able to negotiate settlements with South Korea’s three broadband providers to reduce costs, other providers have not, including Twitch.
If even a competitor as well financed as Twitch (now owned by Amazon) is driven out of the market, certainly no smaller provider will survive. Unless, of course, the ISP gatekeeper chooses to cut a deal. But even then, Twitch makes investment decisions based on profitability. The question is not whether Amazon could “afford” to pay the fees in some abstract sense. Markets do not work that way. Businesses make decisions based on whether they see sufficient value from offering the service. When Twitch saw no pathway to profitability, it did the logical thing and exited the market. This is not to say, of course, that every company will exit. Netflix, whose business depends entirely on reaching end users, was sufficiently motivated and sufficiently popular with subscribers to be able to negotiate a better deal with South Korea’s ISPs.
This situation—ISPs acting as gatekeepers, picking and choosing which content providers will reach their customers without regard to their customer’s preferences—is precisely the worst case scenario predicted by net neutrality advocates in the U.S., and by the FCC itself under Chairman Tom Wheeler in the original Open Internet Order, that the FCC under later Chairman Ajit Pai claimed would never happen. But, as we can plainly see from Twitch’s demise in South Korea, ISPs are hungry for these kinds of arrangements—and the incentives are only increased for large American ISPs like Comcast that are also huge media companies, with their own content that they’d like to promote.
That’s one big reason why the ongoing proceeding reclassifying broadband internet service under Title II of the Communications Act is so important. Title II classification is what will enable net neutrality rules. Title II means recognizing that in our digital society reliable, high-speed broadband internet is an essential service, like water or electricity, and that there should be net neutrality rules in place—just like the rules that made the telephone system so reliable—to make sure everyone is able to communicate through the internet on a level playing field. If that’s important to you, you can get involved right now; the FCC is still accepting comments from the public about the proposed net neutrality rules, and you can add your voice to call for a free and open internet.
