Model analysis on the economic impact of paid peering: Implications of the Netflix vs. SK broadband dispute

In April 2020, Netflix, Inc. and its Korean subsidiary Netflix Services Korea Ltd. filed a lawsuit against SK Broadband, Inc., seeking confirmation that there were no obligations to bear network costs. On June 25, 2021, the Seoul Central District Court rejected Netflix’s argument and acknowledged the existence of an obligation to negotiate fees. Netflix subsequently appealed the decision on November 5, 2021. However, on September 18, 2023, SK Broadband and parent SK Telecom suddenly announced in a joint statement with Netflix that they had agreed to establish a strategic partnership to end all disputes. This study provides an overview of the case, discusses the related concepts, and analyzes the meaning of the case outcome in terms of efficient resource allocation within the broadband ecosystem. A model analysis revealed that, with the freedom of price setting, the effect of introducing paid peering is neutral with respect to resource allocation; however, when that freedom is impaired, for example by price regulations or net neutrality obligations, the introduction of paid peering not only generates benefits for the introducing players and their customers but it also results in damage to overall social welfare. In addition, this study shows that paid peering can be used as a means of internalizing externalities when the external economies of network/content investment are considered. These arguments are expected to make a theoretical contribution to the debate on shifting the economic burden of network infrastructure to over-the-top players, and help the telecom regulator to better design universal broadband scheme.