Netflix Causing Ripple Effects in Digital Content Ecosystem

Netflix has been fueling disputes with regard to network fees, profit distribution and music royalties. 

Netflix is solidifying its position as the largest platform in the paid broadcasting market of South Korea. At the same time, disputes are arising with regard to network fees, profit distribution, music royalties, and so on.

The number of Netflix users in South Korea who pay for the service jumped from 400,000 to two million from 2018 to April this year. In addition, that of non-paying users is approximately seven million.

The Korea Music Copyright Association (KMCA) is calling for local OTT service providers to pay royalties in accordance with their contracts with Netflix, which has paid the association about 2.5 percent of its local sales in royalties since 2018. Local broadcasting operators, however, are saying that the demand makes no sense. The OTT operators have paid 0.56 percent of their sales to the KMCA in accordance with existing rules.

According to the current law, broadcasting operators must pay royalties to the KMCA with regard to the music in their broadcasting content. However, the law does not cover music royalty payment related to OTT services. This is why disputes are rising between the two sides. The OTT service providers recently agreed to form a consultative group for a joint response.

Arguments over network fees between digital content providers and mobile carriers are ongoing as well. Local content providers such as Naver and Kakao have paid mobile carriers tens of billions of won a year in network fees whereas their global counterparts such as Netflix have paid no fees by taking advantage of their market dominance.

Profit distribution with network operators is emerging as another issue. At present, Netflix is in exclusive partnership with LG U+ in South Korea based on a content profit sharing ratio of 8:2 or 9:1. This is much different from those related to local program providers, which are 5:5 or 6:4 in most cases.