(Bloomberg) -- Netflix Inc. is pushing back against a South Korean Internet provider’s demand that it pay to use their network after hits like “Squid Game” caused a surge in data traffic, saying the move could prevent entertainment firms from working profitably in the country.
SK Broadband Co. is suing Netflix to claim fees for using its network, while the streaming giant is appealing an earlier refusal by a Korean court to confirm it’s not liable for such payments. While the immediate financial impact of a network usage fee on Netflix remains unknown, it’s likely to grow “exponentially” over time, the streaming platform’s Vice President of Public Policy Dean Garfield told Bloomberg in an interview.
SK Broadband estimates Netflix needs to pay 27.2 billion won ($23 million) for using its networks in 2020 alone, local media including the Korea Times reported in June, citing a local court. That would amount to more than 6% of the firm’s revenue in the country last year.
Netflix’s legal battle in South Korea -- which accounts for 15% of the company’s customers in Asia, and roughly the same proportion of its revenue from the region -- highlights the challenges it faces in one of the world’s most coveted streaming markets.
Netflix has spent more than $1 billion developing shows since entering South Korea in 2016. But cost hikes could hurt returns at a time when companies including Walt Disney Co. and Amazon.com Inc. are also stepping up streaming investment in the country.
Network usage fees would create “an unfair, anti-competitive environment” where Internet providers could charge companies whatever they wanted, Garfield said. That could “potentially limit the ability of Korean customers to get exactly what they want if the price becomes so prohibitive that services like us are just unable to afford it,” he said.
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Garfield said he was also worried that Internet providers in other countries could follow suit.
“There is no doubt the risk that network operators will see what happen in Korea and will try to replicate it because it serves their interest,” he said.
If Netflix expects network usage cost to grow exponentially, that means its users will also increase at the same scale -- providing it enough revenue to pay -- a spokesman for SK Broadband said in an emailed response. The spokesman said that while Korean content providers are paying network providers, it’s unfair that Netflix doesn’t as its subscribers and traffic in the country increase.
“Internet network is not for free,” he said. “Not only individuals, but also public institutions, government agencies and universities pay for using the Internet network.”
A Korean court in June dismissed Netflix’s request to confirm it’s not liable for such payments to SK Broadband, a subsidiary of the country’s largest mobile operator SK Telecom Co., according to Yonhap News. Netflix is appealing the decision.
SK Broadband filed a countersuit late last month to obtain payment for bandwidth the streaming platform used over the past three years, TechCrunch reported, in which it said Netflix had generated 24 times more network traffic as of September 2021, from May 2018. The move came weeks after “Squid Game” debuted and became a surprise international sensation.
SK Broadband and some other local network operators have declined to use a free system developed by Netflix which could absorb more than 95% of data traffic, Garfield said, without naming the other providers.
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Through the system, called Open Connect, Netflix would store shows on its own servers, then deployed to Internet operators’ local data centers. The programs would then be transmitted to nearby customers, bypassing remote data transmission.
Open Connect doesn’t change the fact that Netflix has to use providers’ network to reach users, and doesn’t help reduce traffic costs in the section where providers transmit Netflix’s content to users, the SK Broadband spokesman said.
While the Korean court said Netflix pays Internet operators in the U.S., Garfield maintained that the California-based company does not pay any fees for using networks anywhere. In some partnerships, he said, Netflix and network providers share some technology and marketing costs for the system.
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