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Return of Net Neutrality: Discussion of European Net Neutrality Proposal Relevant for U.S. Broadband Market

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There is an interesting recent discussion in Europe about net neutrality that has relevance to the U.S. broadband market. The European Commission that oversees telecom and broadband has started taking comments on a proposal to force content generators like Netflix to pay fees to ISPs for using the Internet. I’ve seen this same idea circulating here from time to time, and in fact, this was one of the issues that convinced the FCC first to implement net neutrality.

Netflix generates less than 10% of the broadband traffic in Europe, and European ISPs think that Netflix should pay a substantial fee for using the Internet network. Europe looks a lot like the U.S., and Netflix, Meta, Amazon, Google, Apple, and Microsoft generate most of the traffic there. Online video accounts for 65 percent of all traffic on the web. Netflix argues that the amount of video on the web will continue to climb and that any fees charged to video providers will eventually be applied to a wider range of content providers.

It’s an interesting topic that can be considered from different perspectives. First, companies like Netflix already spend a lot of money to use the network today. Just like in the U.S., Netflix has built or purchased transport to allow local peering. Netflix claims to be providing 18,000 local servers around the world in 175 countries to move its video signals closer to ISP networks. This relieves a lot of volume on the web core and also improves the quality of Netflix content. The same is true for other content providers, and in the U.S., there are a lot of local peering points that Google, Meta, and others have created.

Netflix makes the point that the big ISPs in Europe are already profitable, and the ISPs would simply pocket any new revenue stream. They are highly skeptical that any benefit to ISPs from charging Netflix would be passed on to Netflix customers through lower broadband prices.

When net neutrality was discussed in the U.S., there was a good argument made by content providers that subscribers are already paying for end-to-end use of the Internet in the monthly fees paid to ISPs. Charging the content providers for using the Internet would amount to billing twice for the same traffic. Since the original net neutrality discussion here, U.S. broadband prices charged by cable companies have increased significantly, making it even more true that customers are supporting the Internet.

Another way to think about the issue is that video is the service that drives a lot of households to buy broadband. Without Netflix and other online video content providers, there would not be nearly as many broadband users, and ISPs would not have such a large market share. There is a truism in the industry that says you shouldn’t build a broadband network solely to provide entertainment to customers, but there is no denying that there are a lot of homes that wouldn’t buy broadband if it wasn’t for video and social media. Not everybody works from home or has students that need broadband for schoolwork.

There are several reasons why I am highlighting this European issue. Topics that become issues in Europe invariably are raised as issues here, and vice versa. If American ISPs see that European ISPs have been able to extract payments from Netflix, our ISPs will immediately start making the same demands here.

The other interesting aspect of this particular argument is that it’s something that we already solved once in the past when the FCC passed net neutrality rules. But the Ajit Pai FCC tossed out those rules, so it was inevitable that net neutrality topics would eventually come to life here again.

The net neutrality issue is one of the most interesting topics from a regulatory perspective. Even after Ajit Pai tossed out the net neutrality rules, American ISPs didn’t change their behavior. There are two possible reasons for this. I think ISPs have tried to keep a cap on behavior that would induce regulators to try to put net neutrality back in place again. It seems that perhaps the mere threat of reintroducing net neutrality has kept ISPs in check. However, I find it likely that ISPS are now feeling braver after having squashed the proposed fifth FCC Commissioner.

The other reason is that California put its own version of net neutrality rules in place. This has slowly made its way through the courts and is now in effect. ISPs might not be willing to take on California because to do so might invite many other states to pass a different version of the same rules. As much as ISPs hate the idea of federal regulations, their biggest fear is a hodgepodge of different regulations in states around the country.

By Doug Dawson, President at CCG Consulting

Dawson has worked in the telecom industry since 1978 and has both a consulting and operational background. He and CCG specialize in helping clients launch new broadband markets, develop new products, and finance new ventures.

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