17 Apr 2014

"Net neutrality": are developments in the US and Europe a sign of things to come for Australia?

by Geoff Hoffman, Linda Evans, Hugh Brolsma

Solutions are likely to be complex, and certainly not the clarion call of pure net neutrality so often heard.

"Net neutrality" has not received significant public attention in Australia despite the telecommunications and media industries undergoing major regulatory and technological change and the issue being highly contentious both in the United States and Europe.

In the US, the Federal Communications Commission (FCC) has tried unsuccessfully to impose pro-net neutrality rules, while in Europe such rules recently took a further step to becoming law following a favourable vote by the European Parliament.

We expect to see the issue of net neutrality rise in prominence in Australia as the NBN is reformulated and Internet service providers (ISPs) seek to use content as a means to differentiate their product offerings.

What is "net neutrality"?

Net neutrality refers to the principle that all network traffic should be treated equally. This means that network service providers (NSPs) and ISPs should not differentiate between (or otherwise discriminate against) different types of Internet traffic. A non-neutral Internet has many implications, particularly where NSPs and/or ISPs have an interest in the content that travels (or does not travel) across their networks.

What regulations does Australia currently have?

Australia does not currently have specific net neutrality laws.

What is the policy issue?

For proponents of net neutrality it is an essential premise of the "end to end principle" which underlies modern network design. It is argued that without net neutrality, important innovations of the past may not have occurred (or not in the way that they did) and innovations of the future may be prohibited or hampered. Net neutrality's supporters also argue that differentiation of data amounts to censorship of content and that NSPs/ISPs should invest more in networks to open up more bandwidth, rather than simply managing existing bandwidth.

On the other hand, it is argued that NSPs/ISPs need to manage their networks more efficiently given the increasing amounts of data being transferred over them. Two factors are particularly important:

  • Some applications such as video and/or voice based services are more time-sensitive than others, such as email and, therefore, giving priority to time-sensitive services is likely to maximise the value of networks overall.
  • The place of NSPs and ISPs in the value chain, and their direct relationship with consumers, is under threat from "over-the-top" service providers, undermining the ability of the networks to recover sufficient revenue to fund network enhancements.

It is also argued that end users should determine the priority of data traffic by selecting from the available services which allow them to send and receive their desired types of data and also that incentives for NSPs/ISPs to develop networks or develop innovative products will be diminished if they are forced to operate neutral (or "dumb") networks. Finally, concerns are raised that if NSPs/ISPs are not able to maximise financial returns from their networks, this will constrain further investment in those networks.

Why is net neutrality such a big deal?

By being able to differentiate between traffic, NSPs and ISPs are able to segment their product offerings and therefore charge relatively higher or lower prices. This may mean that where consistency of data flow is particularly important (such as for commercial video conferencing) a service provider may offer a high standard of service, but charge relatively more for it.

However, it also means that NSPs/ISPs can discriminate between types and sources of content and charge higher prices to facilitate the transfer of such content (or otherwise degrade performance relative to other content or even block it).

What is seemingly a simple concept is not necessarily straight forward when it is considered in the context of real-world commercial arrangements.

The recent high-profile deal between Netflix and Comcast is an example. Under this arrangement, Netflix (a strong proponent of net-neutrality and source of >30% of downstream Internet traffic in the US) will pay Comcast to facilitate a more direct connection between Netflix and Comcast, delivering Netflix content to Comcast customers quickly and more reliably.

While the details of the Netflix/Comcast arrangement have not been disclosed, a joint announcement stated that "Netflix receives no preferential network treatment" under the agreement (market analysis suggesting that this is a transit issue). However, many see this as a sign of the times that content providers and, ultimately consumers, will be required to pay more to transfer certain types of content over the Internet.

What's happening overseas?

In the US, the FCC released the "Open Internet Order" in December 2010 which sought to impose transparency, no blocking and non-discrimination rules on ISPs. However, in January 2014, the Court of Appeals for the District of Columbia (on a challenge by major telecommunications company, Verizon) ruled that the FCC had exceeded its authority as far as the no blocking and no unreasonable discrimination rules were concerned (Verizon v Federal Communications Commission, No. 11-1355 (D.C. Cir, 2014)).

The ruling was based on the finding that ISPs are not classified as "common carriers" (which are subject to blocking and discrimination rules) but rather "information services". The FCC announced that it would take various steps to "ensure that the Internet remains a platform for innovation, economic growth, and free expression" following this judgment.

More recently, on 3 April 2014, the European Parliament voted to approve legislation supporting net neutrality in the face of strong opposition by telecommunications companies. Although this legislation must also be approved by the Council of the European Union, it indicates a desire by regulators and legislatures on both sides of the Atlantic to facilitate (and require) net neutrality.

Where to from here?

It remains to be seen whether NSPs and/or ISPs will take steps to treat certain traffic of their customers differently for competitive reasons and/or whether the Australian regulators or the government will seek to take steps to ensure that this does not occur.

In 2013, in response to a report that Telstra was trialling new ways to manage its broadband network, the ACCC has stated that it would be concerned if ISPs were controlling traffic on their networks to influence their own content over other content. However, the Convergence Review took the view that the ACCC's powers are "too narrow to address […] network neutrality issues that inhibit competition" and recommended that they "be reviewed once the NBN is implemented".

In Australia, costs of network usage are commonly determined by volume of data traffic, meaning that NSPs and ISPs are able to constrain usage through prices (or otherwise revenues rise as usage rises). Even most early stage NBN plans are subject to data limits. By contrast, broadband plans in the US are usually unlimited as to data traffic.

However, as Internet bandwidth continues to improve and the Internet develops as a very significant (if not the principal) medium for consuming media content, ISPs are increasingly looking to content as a means of differentiating their service offerings. Equally, if distribution bandwidth is constrained, content owners will naturally look to ways to ensure that their revenue from Internet distribution is not handicapped. In this context, the NSPs, ISPs and content owners have an incentive to de-neutralise networks.

One possible solution to these tensions may be to recognise two different types of service discrimination.

On the one hand, there is discrimination that recognises the different needs and/or value of different content, but is neutral as to the source of the content or its relationship with the NSP or ISP. Discrimination here can unlock value in networks and improve the performance of networks to users and raises no competition concerns; in fact, it is arguably pro-competitive.

On the other hand, there is discrimination which seeks to favour particular, perhaps related, content or content sources at the expense of others. This is potentially anti-competitive, especially where monopoly networks (or networks with market power) are involved.

With net neutrality being such a controversial issue in major overseas jurisdictions and given current industry developments in Australia, we expect that it is only a matter of time before this issue comes to the fore here. The issue and its implications are complex and there is tension between different objectives of promoting competition and maximising value in network services. Solutions are, therefore, also likely to be complex, and certainly not the clarion call of pure net neutrality so often heard.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.