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‘Net neutrality’ and ‘retransmission fees’: two parallel debates at the intersection of content and networks

Content-carrier negotiations in the Internet and pay-TV markets seem to be moving in opposite directions.

Pay TVsIn recent months, two traditionally separate debates in the Internet and broadcasting industries have begun to intersect: net neutrality and retransmission fees. In both, content providers and network operators face each other in negotiations about what content gets carried to consumers, and under what commercial terms – with potentially large stakes on both sides. In both, commercial and public interests get mixed in heated debates. So far, negotiations in the two cases have gone in opposite ways. Whether this will continue being the case is a key question not only for industry but also for regulators, policymakers and investors.

The net neutrality debate has been traditionally mostly about Internet access providers' (IAPs) traffic management practices. However, developments in recent months have put the spotlight on the commercial relationships between IAPs and online content and application providers (CAPs) such as Hulu, Google and Netflix. It is common to treat commercial questions as falling outside the scope of the discussion about net neutrality, but, labels aside, it is clear that the two issues are related and that both are here to stay. Most prominently, Netflix in the USA has recently entered into contracts with IAPs to ensure that its users can access its content unimpeded by network congestion. However, Netflix has also asked regulators to limit the IAPs' ability to demand these fees, which it sees as an abuse of their relationship with consumers (who, in its view, have already paid for Internet access). In response, IAPs argue that such payments are needed if the burden of investing in networks is to be shared fairly among stakeholders, and that Netflix's complaints amount to an attempt to shift costs. Similar debates have been going on in Europe, where Netflix's CEO recently told a roomful of telecoms executives that "we shouldn't have to pay for your network if you don't have to pay for our content".

The second debate is about retransmission fees. These are payments that pay-TV operators make to broadcasters for the right to carry TV channels that are also available free to air (FTA). In the USA, where such fees are a matter of negotiations between the parties, payments have increased during the past decade from being relatively insignificant to being an important part of broadcasters' revenue. Looking at this from across the Atlantic, European broadcasters, who generally receive little or no fees (and, in some cases, pay fees themselves) have called for regulatory changes that would allow them to stop operators from carrying their channels if terms are not agreed. This would enable high-stakes carriage negotiations in which USA-style 'blackouts' (periods in which a channel is not carried by an operator) would be a possibility if talks break down. The UK's government has recently announced a review into this, and several other European governments are also discussing the issue.

The two debates have important similarities. They are both simultaneously 'debates' about who should be entitled to what, as well as commercial negotiations involving leverage and distribution of value. The commercial dynamics are strikingly similar, driven mainly by consumers' ability (or inability) to switch providers if their operator fails to carry a given content provider, and their ability to continue accessing the content through alternative means. In both cases, commercial and consumer interests are intertwined with concerns (which may or may not be justified) about access to content, plurality and free expression. Furthermore, regulators have so far been notoriously reluctant to get involved in the commercial aspects of both debates, partly because it is difficult to decide what a 'fair' arrangement would look like, and perhaps partly because traditional approaches based on market dominance may not be wholly adequate here (economic concepts related to two-sided networks and competitive bottlenecks are more relevant but less tested in regulatory practice).

Despite the similarities between the two cases, the outcomes have so far been strikingly different: in the Internet case, we are beginning to see payments by content providers in favour of operators, whereas substantial and ever-growing sums are flowing in the opposite direction in the pay-TV market. The different outcomes may well be related to fundamental economic and/or technical differences between the two contexts. For example, in the Internet case, it is sometimes possible to link changes in IAPs' costs to specific CAPs, but this is less straightforward for pay-TV (but then, incremental costs may be accompanied by incremental revenue, so no obvious conclusions should be inferred from this).

Whatever its explanation, this difference in commercial arrangements is beginning to draw attention. Earlier this year, legal scholar Tim Wu (who coined the term 'net neutrality') argued that large online players "could decide to turn around and demand that [IAPs] pay them for the right to access their sites". A few months later, US cable operator Time Warner Cable argued as much in a regulatory filing, claiming that in future "some content owners might well seek payment from broadband Internet access providers as a condition of delivering their content – paralleling the business model that already exists on [pay-TV] platforms".

To be clear, so far online players have only argued against 'paid peering' practices whereby they are required to pay IAPs, and at least publicly have not argued for payments to be made to them (some have added that demanding payments from IAPs would run counter to their business model). However, the Internet is a fast-moving space, and new players with new business models may emerge in a few years' time. The key question is not what today's players would do, but what the (current or future) economic and regulatory conditions will allow. This calls for careful comparison of the underlying economics in the two cases.

So far, these issues remain largely unexplored and, barring regulations that ensure otherwise, nothing can be ruled out. In the meantime, the uncertainty introduces risks for investors across the value chain, difficult negotiations for all the parties, and a long debate ahead.