Paying twice? The persistent proposal that could upend the Internet and increase startup costs.
By Min Jun Jung, Policy Fellow, Engine
Last month, a majority of the European Parliament voted in favor of a resolution contemplating a policy framework that could diminish startup competitiveness and endanger the open Internet. The vote is the latest in a long-running effort by telecom companies to force websites and apps to pay them based on the traffic they generate. That model, sometimes called “sender pays,” is gaining popularity with policymakers throughout the world — including in the U.S. — threatening net neutrality principles and the competitiveness of U.S. startups.
Understanding “sender pays” and why it isn’t compatible with net neutrality.
The Internet is often aptly described as a network of networks, where data is transmitted through an elaborate interconnection of computer networks. Internet service providers (ISPs) manage the infrastructure required to deliver Internet content, including broadband and wireless networks, and the revenue they generate from users supports the maintenance and expansion of this infrastructure. ISPs argue that these revenues are not sufficient to invest in infrastructure upgrades and propose that tech companies — who generate network traffic by sending packets of information across the network to deliver their services to their users — pay network usage fees commensurate with their traffic demands. Asking online content providers who send information over the network like websites and apps to pay based on what they send gives the proposal its shorthand name: “sender pays.”
Sender pays contravenes network neutrality by treating some traffic differently than others: conditioning payment for Internet based on traffic generated and incentivizing ISPs to throttle or prioritize certain Internet traffic (it’s not hard to imagine an ISP slowing service if a site didn’t pay the fees). The free and open Internet that’s supported by net neutrality is critical for startups because it provides them with a level playing field to grow and compete.
What’s going on in Europe and why is it dangerous for startups?
In the EU, there has been a resurgence of interest in “sender pays” principles, with large European ISPs such as Deutsche Telekom, Telefonica, and Orange advocating for the introduction of traffic-based payments. In March, the European Parliament launched a consultation to explore the implementation of network usage fees; however, apart from big telecom companies, all other stakeholders — from startups, to larger tech companies to civil society and academics — have expressed strong opposition to the proposal.
The concept of “sender pays” poses a threat to the Internet ecosystem because of its flawed premises. Firstly, the assumption that Internet platforms “generate” traffic demands is misguided because traffic originates from user requests, not from the platforms themselves. Unlike unsolicited calls from telemarketers, tech platforms send data across ISPs’ networks only when their users have requested it by interacting with their website or service.
Furthermore, the argument put forth by ISPs and some EU policymakers regarding the necessity of these payments for the continued development of Internet infrastructure overlooks the existing contributions and investments made by tech companies to enhance the Internet experience. Large Internet platforms already contribute to optimizing content delivery through substantial investments in content delivery networks (CDNs) and other network infrastructure. And everyone else already pays their ISP for Internet access to do whatever they want online at the speed they’ve paid for.
Therefore, the “sender pays” system does not rectify an issue of tech companies free-riding, but instead unjustifiably allows ISPs to charge an additional fee on top of the service that both the tech company and users already pay for. This double-charging dilemma disproportionately burdens startups, which often have limited financial resources.
Introducing such fees would impose an additional financial cost to startups, potentially diverting funds away from investments critical for growth such as research and development (R&D). Furthermore, as a startup rapidly expands its user base and its Internet traffic increases, associated network usage fees can also increase exponentially, hindering efficient scalability if startups need to bear significant costs to accommodate growing demand. Confronted with the mounting financial burden of network usage fees, startups may be compelled to transfer these costs to users, likely driving many away. And startups that offer free services may face a zugzwang, where they must choose between switching to a paid model or resorting to other revenue-generating strategies like increasing advertisements that could worsen user experience.
As a result of “sender pays” policies, startups are left at a competitive disadvantage to larger tech companies who tend to have more financial resources and negotiating power than startups. By hampering startups from offering competitive pricing or investing in other areas necessary for growth, network usage fees can impede innovation and discourage new players from entering markets. What’s more, poor user experience drives away the customers that startups need to succeed, and would-be startup investors want their resources going toward growth, not overcoming a two-tiered Internet.
South Korea: A cautionary tale.
The implementation of interconnection rules in South Korea, a Macbethean tale of bad policies compounded with even worse policies, offers a warning for countries with similar legislation on their desks. In 2016, South Korea required ISPs to compensate each other for traffic exchanged between them. Consequently, South Korean ISPs passed on these fees to companies utilizing their networks. This led to foreign content providers like Facebook being compelled to reroute their content through overseas nodes, leading to increased latency of Internet transit and diminished content quality for South Korean users.
In 2020, the government doubled down on these policies with the introduction of the “Content Providers’ Traffic Stabilization Law,” which required content providers to take measures to ensure that their services remain stable for Korean users. Unfortunately, these policies created bottlenecks and inefficiencies in South Korea’s Internet ecosystem, yielding immediate adverse results. Latency and costs of Internet transit skyrocketed while content quality plunged. These measures actually reduced network investments by ISPs, all while degrading the Internet experience for Korean users — opposite of their intended effect and a stern warning against replicating a traffic-based fee model.
What it means for the U.S.
The U.S. has looked to import bad ideas in the past, and “sender pays” appears to be one of them. Despite differences in funding models, proposals reflecting the “sender pays” principles seen in South Korea and in Europe have emerged in the U.S.
The Universal Service Fund (USF) is a federal program that collects fees on the sale of telecom services to pay for federal broadband programs, including for low-income households and high-cost, rural areas. However, with the shift from traditional phone services to Internet-based services, the base revenue by which the USF fees have been collected has been declining. In an effort to address this issue, the FAIR Contributions Act, which was reintroduced in March and echoes the grievances of FCC Commissioner Brendan Carr, examines the feasibility of collecting USF contributions from websites and Internet edge providers.
However, this proposal hints at the same faulty premises — that edge providers singlehandedly generate traffic and that they don’t already invest directly and indirectly in network infrastructure maintenance and development — and would yield many of the same detrimental outcomes as the policies implemented in South Korea and proposed in Europe.
The expansion of broadband is crucial for innovation and entrepreneurship, and thankfully the federal government has already invested tens of billions into broadband expansion. Making USF sustainable is necessary, but the impact of creating USF contribution requirements specifically for tech companies based on traffic would parallel the effects of network usage fees witnessed in other countries and create segmentations and bottlenecks in the Internet.
At first glance, the “sender pays” model may appear enticing to policymakers with its promise of better funded Internet infrastructure; however, upon closer examination, its flawed foundations and inimical impacts are unveiled. Clearly the allure of “sender pays” is spreading throughout the world, but policymakers must recognize the dangers of discriminatory network usage fees, which can discourage innovation, stifle competition, and hinder the growth of startups.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
