How net neutrality shenanigans could put the hurt on Netflix

Last week, net neutrality regulations that made it illegal for US ISPs to block online services or charge content providers for access to their networks were struck down in a court ruling.

Netflix is worried, writing in a letter to shareholders yesterday, "In principle, a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide."

Would ISPs really do this? It's too early to know just how they will use their newfound regulatory breathing room. But a report today by the Organisation for Economic Co-operation and Development (OECD) details a couple of incidents from overseas that show how ISPs can make online video deteriorate in quality or simply disappear altogether. If these experiences are indicative of our net neutrality-less future, Netflix has good reason to be worried.

Summarizing the incidents in an accompanying blog post, OECD wrote:

In South Korea, Samsung introduced a VOD-service integrated into its television sets, that made use of the consumer’s broadband connection. For a short period access to this service was blocked by Korea Telecom in a dispute over interconnection. In Norway, NextGenTel, the largest ISP, decided to significantly reduce capacity to the national public broadcaster NRK. The broadcaster had reportedly declined to pay for the additional capacity needed. Capacity was later reinstated.

ISPs raise fear over “traffic explosion”

The report, "Connected Televisions: Convergence and Emerging Business Models," isn't about net neutrality per se, but it provides some interesting details on those incidents. The Korea blocking lasted five days in February 2012 and "affected the Internet access of 24,000 Samsung Electronics 'Smart TV' users."

KT, South Korea's largest ISP, "argued that the fast spread of connected televisions could lead to a 'traffic explosion' and without adequate preparation, including additional investment in networks, this could severely impair services, and KT requested consultation with connected television manufacturers including Samsung Electronics," the report said. "However, Samsung Electronics showed a lukewarm attitude towards KT’s request for consultation by saying that it only manufactures devices and the issues raised by KT are related to content providers, who directly or indirectly provide content for users." KT implemented the aforementioned temporary block after its requests to Samsung went unanswered.

The blockage lasted just five days, in part because of action taken by the Korea Communications Commission (KCC), which had recently issued net neutrality guidelines that called for "transparency, no blocking, and no unreasonable discrimination."

"KCC warned against KT’s blocking of Internet access, citing that it was a violation of the Telecommunications Business Act, in particular, violation of users’ interest and unreasonable discrimination, and independent with KCC’s decision, KT offered non-monetary compensation for damages experienced by customers due to the blocking of their service," the OECD report said. "Following the dispute, it is known that KT and Samsung Electronics have been working closely together to look for mutually beneficial approaches."

The KCC is South Korea's counterpart to the United States' FCC. But since the anti-blocking rules in the FCC's Open Internet Order were just overturned, the FCC might have to rely more on public pressure than regulatory power in the face of an incident like the Korea Telecom/Samsung dispute.

The Norway incident involving NextGenTel and NRK occurred in June 2006. That and several other disputes "tended to indicate that some Internet service providers had begun to throttle traffic-intensive applications such as streaming and p2p file sharing," the OECD report said.

In response, the Norwegian Post and Telecommunications Authority (NPT) began studying net neutrality and issued guidelines in 2009 that "prescribe 1) transparency regarding users' Internet access service and any specialized services, 2) non-blocking; and 3) non-throttling of specific applications and content, except for reasonable traffic management."

Europe as a whole may also be moving toward implementing network neutrality rules, in a parliamentary process explained in this GigaOm article.

What’s next for the US

The National Cable and Telecommunications Association (NCTA) has pledged that its members won't block Internet services, although it doesn't object to charging content providers for different levels of access. That no-blocking pledge doesn't cover the whole broadband industry—AT&T and Verizon are not NCTA members, for example.

While Netflix offered a dire warning about how the US market could evolve now that the FCC's net neutrality rules have been gutted—as a result of Verizon suing to overturn the rules—the company also presented a best-case scenario in its letter to shareholders.

If an ISP demanded payment from Netflix in exchange for not degrading traffic, "we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver," Netflix said. The letter continued:

The most likely case, however, is that ISPs will avoid this consumer-unfriendly path of discrimination. ISPs are generally aware of the broad public support for net neutrality and don’t want to galvanize government action.

Moreover, ISPs have very profitable broadband businesses they want to expand. Consumers purchase higher bandwidth packages mostly for one reason: high-quality streaming video. ISPs appear to recognize this and many of them are working closely with us and other streaming video services to enable the ISPs' subscribers to more consistently get the high-quality streaming video consumers desire.

In the long term, we think Netflix and consumers are best served by strong network neutrality across all networks, including wireless. To the degree that ISPs adhere to a meaningful voluntary code of conduct, less regulation is warranted. To the degree that some aggressive ISPs start impeding specific data flows, more regulation would clearly be needed.

Netflix has been measuring ISP quality for a while to shame weak-performing network providers, and Google just unveiled a new tool for measuring YouTube performance by ISP. Netflix and Google also offer to place video caches in ISP-owned data centers to get their content closer to customers, but many ISPs have refused this equipment.

FCC Chairman Tom Wheeler said after the net neutrality court loss that he'll find a new way to prevent abusive practices by ISPs, but he also said he wants to let two-sided markets evolve and then regulate if anything goes wrong. The FCC has in previous years refused to designate ISPs as "common carriers," which would increase the commission's power to regulate them.

Those two-sided markets are what we may end up with, as ISPs seek payment both from home Internet consumers and the content providers who want to use the Internet to deliver services to home users. "Some believe broadband service is a 'two-sided market' and the potential exists for ISPs to impose charges on content or application providers in addition to end-users," the OECD report said.

Even before the FCC's court loss, Verizon and other ISPs had been accused of limiting online video traffic by refusing to upgrade peering connections with other network providers, a tactic not covered in the FCC's net neutrality laws. AT&T also decided to charge content providers for a faster path to wireless consumers, a tactic allowed by the FCC because the commission's net neutrality regulation gave more leeway to wireless Internet providers than home broadband providers.

ISPs are the gateway between any company seeking to deliver content over the Internet and all of us who use the Internet at home and work. Now that the anti-blocking and anti-discrimination rules imposed upon ISPs are gone entirely, we'll see just how far they'll go to make a buck.