RealClear Markets

A Harmful Step for the Internet In Korea

Senior Fellow and Director, Center for the Economics of the Internet
Legal Fellow, Center for the Economics of the Internet
An artist's representation of networked data. (Getty Images)
An artist's representation of networked data. (Getty Images)

Trouble is brewing for Korean Internet users. Government officials are actively considering legislation that would allow local Internet service providers to effectively inflict a tax—so-called “network usage fees”—on “global platforms” in order for their content to reach Korean consumers. This follows litigation by SK Broadband to require similar payments from Netflix, whose content apparently accounts for a large share of Korean broadband use.

President Moon Jae-In has publicly supported the idea of ISPs charging “network usage fees.” But if allowed, these fees would distort economic markets and harm not just foreign companies like Netflix, but ultimately Korean Internet users.

Korean ISPs argue that increased broadband demand by consumers leads to greater demand for broadband networks—networks that the ISPs and others must build. This is reasonable. In an economic sense, those who create costs for a business—whether it be a grocery store, electric utility, plumber, or a broadband provider—should pay for those costs.

But in most instances, the ultimate source of costs for a business are its customers, not its suppliers. American grocery stores stock up on frozen turkeys in November not because of farmers, but because of voracious consumer demand. Stores like Best Buy and Walmart have recently implemented online queue systems for items like the PlayStation 5, incurring costs to meet unyielding customer demand in the face of scarce supply.

So it is with broadband. If a broadband subscriber chooses to connect to Netflix or any number of countless other sites, it is the subscriber making the choice and creating costs for an ISP, not the website.

Broadband use has grown rapidly in recent years, driven particularly by the pandemic causing millions to work, learn, and connect from home. Here in the U.S., ISPs may and do charge subscribers more for using more broadband. If a subscriber’s monthly fees do not cover the costs of delivering her broadband service, this is because of an inefficient fee structure in an unregulated market. American ISPs need not, and do not, look for third parties who create no costs to pay for the broadband demand of subscribers who do create additional costs.

To do otherwise and require third parties to pay for costs that ISPs’ customers create would result in four broad economic harms.

First, subscribers would have no incentive to reduce wasteful broadband usage. Surely many Korean Netflix consumers would be willing to pay the costs of their increased broadband usage. But others, if faced with the reality of having to actually pay the costs of their increased use, would opt instead to decrease their use. Forcing websites like Netflix, rather than ISP customers, to bear these costs would encourage wasteful broadband use and produce substantial economic inefficiencies.

Second, even if Korea’s proposed fees made economic sense, even the most omnipotent government officials could not compel every Internet content provider to pay the required fees. Some content providers are in jurisdictions beyond the reach of the Korean government. Others are engaged in unlawful activities such as piracy or pornography (which is banned in Korea). Still other content comes from non-centralized, peer-to-peer networks like BitTorrent. The net result is that fees would be paid by only a small portion of content providers, further distorting the market. Content providers that remained in Korea would be forced to pay not only for the content they provide but also for content they do not provide.

Third, Netflix and other foreign companies, if forced to pay for subscriber-created costs they do not control, might simply leave the Korean market altogether. Nothing compels them to stay. This certainly would not make Korean consumers better off.

Fourth, and perhaps most importantly, the proposed fees would discourage investment and innovation by local Korean Internet businesses. Markets where those who create costs do not pay for them will not attract either investment or innovation. If the policy objective of the Korean government is to foster local Internet businesses, distorting Internet markets is the wrong approach.

A coalition of international advocacy groups has attacked the Korean government’s proposal for the wrong reasons. The advocates conflate the Korean proposed legislation with “paid prioritization,” a concept that violates at least American notions of “net neutrality.” But “paid prioritization” involves purely voluntary contracts in which content providers pay ISPs to ensure subscribers receive content at faster speeds. Non-prioritized content is not blocked, but rather transmitted at the normal, non-prioritized speeds.

The Korean proposal, by contrast, is not voluntary. And the Korean proposal wouldn’t result in comparatively slower speeds for content providers that did not pay, but instead block said content altogether.

If the Korean government wants to tax Netflix and other online content providers, there are doubtlessly efficient ways to do so. But forcing these firms to pay for consumer choices is not one of them.

While advocacy groups are concerned that Korea’s proposal is paid prioritization, this should be the least of their concerns. While Korea’s proposal is not paid prioritization, it is nevertheless profoundly harmful. Ultimately, it is an ill-advised effort to distort economic markets, whose losers would be not just Korean consumers, but, at least temporarily, entrepreneurs operating in the country. Local and foreign entrepreneurs would ultimately leave and choose to operate in more rational markets like the United States. Korean consumers wouldn’t have that choice.

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