Consumers Are the Ones Who End Up Paying for Sending-Party-Pays Mandates

Policymakers in the US and other nations have begun to consider, and in some cases implement, policies that seek to get edge companies—those who produce and send content to end users over the Internet—to pay a larger share of the cost to build and maintain Internet service providers’ (ISPs’) broadband network infrastructure. While the political appeal of “sending-party-pays” (SPP) proposals is undeniable—especially when many of the payers are US technology firms and the receivers of the cash are domestic telecommunications companies—they actually result in harm to Internet users, do not achieve fair results, and cannot deliver the windfall infrastructure funding they promise. Key takeaways from the analysis of this policy include the following:

• Sending-party-pays policies distort prices in the complex peering and transit services market, resulting in inefficient traffic management.
• The optimal price of peering varies widely and changes rapidly depending on network effects and the price elasticity of demand. Regulating it is likely to raise prices for consumers while driving some out of the market for some online services entirely.
• Broadband infrastructure is not a zero-sum burden because edge companies aren’t just users; they also build delivery networks and cache content to improve performance. And users both create and consume content, which gives Internet services their value.
• South Korea’s experiment with sending-party-network-pays has caused less-efficient traffic flows, higher prices, and lower content quality. It is a cautionary tale for policymakers considering sending-party-pays.
• Proposals in Europe are likely to produce similar results to those in South Korea, which may explain why European regulators have rejected such proposals in the past.
• Expanding universal service fees to edge services is the wrong way to offset the rising costs of U.S. subsidy programs and would raise Internet prices for consumers. Policymakers should instead reduce USF expenditures, especially for rural broadband.

Clearly, fascination with SPP models is spreading internationally. The allure of regulated pricing is a mirage that will give way to consumer harm by distorting the market dynamics that would otherwise coordinate the complex Internet ecosystem.The allure of regulated pricing is a mirage that will give way to consumer harm by distorting the market dynamics that would otherwise coordinate the complex Internet ecosystem.