Means and Ends toward the Broadband Society: Net Neutrality and Over-the-top Players

1

Means and Ends toward the Broadband SocietyNet Neutrality and Over-the-top Players

Toshiya JITSUZUMI, D.Sc.,Kyushu University

T. JITSUZUMI@ITS Regional Comference (LA, USA, Oct. 25-28, 2015)

T. JITSUZUMI@ITS Regional Comference (LA, USA, Oct. 25-28, 2015) 2

Purpose and agenda The purpose and conclusion:

- to reconsider what Prof. Wu suggested in his

famous 2003 paper.

◦ A strict net neutrality principle is not optimal

and should be relaxed to accommodate the

local needs of individual markets and reflect

their developmental stages.

◦ Net neutrality is a means not an end.

Agenda

1. Means and Ends

2. Case of developing nations

3. Case of developed nations

4. Conclusion


What Prof. Wu said in 2003 is….. Network neutrality, as shorthand for a system of belief about innovation policy, is the end, while open access and broadband discrimination are the means (Wu 2003, p.144)


Means and Ends The goal of telecom regulators is to maximize social welfare by means of broadband development.◦ Many governments have been improving their nations’ broadband

environments because broadband is widely believed to be a precondition for economic prosperity and social progress.

Indeed, in the Open Internet Order, the FCC says that ◦ “The open Internet drives the American economy and serves, every

day, as a critical tool for America’s citizens to conduct commerce, communicate, educate, entertain, and engage in the world around them.” (para.1)

Because there are a variety of policy tools to improve broadband environment and depending on the development stage of individual nation, priority among each tool must be adjusted accordingly.

Case of developing nationsT. JITSUZUMI@ITS Regional Comference (LA, USA, Oct. 25-28, 2015) 5

"IMF Developing Countries Map 2014" by BernardoTe - Own work. Licensed under CC BY-SA 3.0 via Commons - https://commons.wikimedia.org/wiki/File:IMF_Developing_Countries_Map_2014.png#/media/File:IMF_Developing_Countries_Map_2014.png


Priority for developing nations’ telecom policy

In the early stage of ICT development, increasing broadband coverage and penetration as well as closing national and transnational digital gaps are the most important telecom policy objectives.

20052006

20072008

20092010

20112012

20132014

20150

10

20

30

40

50

60

70

80

90 Individuals using the Internet

per 100 inhabitants

DevelopedDevelopingWorld

20052006

20072008

20092010

20112012

20132014

20150

10

20

30

40

50

60

70

80

90

100 Mobile BB per 100 inhabitants


20052006

20072008

20092010

20112012

20132014

20150

5

10

15

20

25

30

35 Fixed BB per 100 inhabitants


Source: Created based on the ITU database


The reason behind this divide One main reason for this divide is differences in income levels.

◦ Zhang (2013) showed that GDP per capita has a positive correlation with the speed of Internet diffusion.

◦ Andrés, et al. (2010) empirically discovered that, when considering network effect for the period 1990–2004, “low- and high-income countries clearly in different phases of the process of Internet adoption” (p.335).

◦ As for fixed broadband penetration, using data related to OECD countries, Lin and Wu (2013) found that income, education, and the variety of Internet content can facilitate broadband adoption in the innovator and early adopter stage.

In summary, although ICT development has reduced the cost of Internet and broadband usage every year, for people in developing nations, broadband remains a luxury.

But it is also plausible that Internet adoption, especially broadband adoption, is an essential means for economic development and higher income.


Expectations from the international society "Broadband networks offer perhaps the greatest opportunity we have ever had to make rapid and solid advances in global social and economic development – across all sectors, including healthcare, education, new job opportunities, transportation, agriculture, trade and government services.

In the twenty-first century, broadband networks therefore need to be considered as basic critical infrastructure, like roads, railways, water and power networks.”

Mr. Houlin Zhao, ITU Secretary-General

Source: http://www.itu.int/en/action/broadband/Pages/default.aspx


Some empirical findings using panel data sets Gruber et al. (2014)

◦ This paper found that the overall future benefits in broadband outweigh the investment costs for the European Union as a whole for the highest performance technologies and that same conclusion could hold also for the majority of member states individually. They further extrapolate the returns by country, suggesting a rationale for the governmental support for broadband development.

Koutroumpis (2009)◦ Using the data of 22 OECD during the period of 2002–2007, this paper found a significant causal positive

link especially when a critical mass of infrastructure is present.

Ng et al. (2013)◦ Using the panel data of 10 ASEAN countries from 1998 to 2011, this paper found that broadband

deployment has a positive relationship with economic growth.

Auriol and Fanfalone (2014) ◦ A three-fold increase in mobile broadband penetration in developing regions of the world will attain a B/C

ratio ranging from 14.41 to 21.74. This means that every dollar spent will generate between $14.41 and $21.74 to the society.


Positive feedback loop These findings suggest positive feedback loops: higher broadband penetration will increase the income level of a nation, which in turn facilitates further broadband penetration.

More broadband

Higher income


Different pictures when US data are usedHolt and Jamison (2009)◦ This paper could not conclude the connection between

information and communications technologies and economic growth from the US broadband experience.

Kandilov and Renkow (2010)◦ This paper found no evidence that loans received as part

of the current Broadband Loan Program provided by the USDA have had a measurable positive impact on recipient communities.

Whitacre, Gallardo, and Strover (2014) ◦ This paper suggested that high levels of broadband

boosted rural economy in the US, but broadband availability demonstrate only limited impacts.


There are several means for attaining such a policy goal.1. If the government is sufficiently rich, spending public money in order to deploy broadband to the

people is straightforward.◦ However, because governments in developing nations usually have additional policy concerns that

receive higher priority and because most of those governments lack investment money, traveling such a path is practically impossible.

2. Private players take the initiative.◦ However, relying on private initiatives may result in a suboptimal outcome because broadband

investment has positive externalities and leads to spillover benefits, as suggested by Gruber et al. (2014)

Priority for developing countries is then… Thus, the policy focus in developing countries must be o facilitate broadband usage as quickly as possible with the objective of generating the benefits of broadband through the positive feedback loop.


“Profitable project” vs. “unprofitable but worthwhile project”

Cost borne by a private

firm

Revenue captured by

a private firm


firm

Revenue captured by

a private firm


firm

Unprofitable project Profitable project Unprofitable but socially worthwhile project

Good Projects

Revenue captured by

a private firm

Positive Externality

orSpillover

Bad Projects


Complementary supports for the e-Japan Strategy The e-Japan Strategy released in 2001 successfully expanded broadband availability to 30 million households and fiber-to-the-home availability to 10 million households in less than three years, which is two years ahead of schedule.

2000 Interconnection rules for DSL services (i.e. unbundling, collocation)Subsidy for DSL expansion (1.85billion yen)

2001 Unbundling rules for fibersAmendment of the Telecommunications Business Act to introduce asymmetric regulation, Universal service fundEnlargement and Improvement of the Act on Temporary Measures concerning Telecommunications Infrastructure Improvement• Improvement of the subsidy conditions for rural area development• Expansion of the support coverage to include facilities related to DSL, FWA, and cable

InternetFinancial support for building the local intranet infrastructure

2002 Enactment of the Act on Broadcast on Telecommunications ServicesSubsidy for FTTH expansion (1billion yen)


The problem is money Developing nations, where broadband development is highly needed, usually do not have sufficient financial strength to offer stimulus packages to broadband operators or have other priorities.


Internet.org, an attempt to internalize externality In this circumstance, Internet.org and Google Free Zone should be considered as a private attempt to internalize positive externalities, without requiring spending of less well-off governments.◦ Because OTT firms are the most probable beneficiaries of

spillover benefits of the higher broadband penetration.

However, it is true that this is not a perfect scheme.◦ Most importantly, this scheme does not cover all the OTT

providers, because each of them has a different future business perspective.


But there remain issues around “neutrality”


Internet.org does have a positive side for developing nations But I still think this should be positively evaluated from the viewpoint of facilitating broadband development.◦ In this scheme, OTT providers are helping mobile

broadband operators’ marketing campaign by providing a simpler version of their services free of charge, in the hope of recovering such expenses in the future.

◦ Considering the aforementioned positive feedback loop, the net neutrality principle, which will ban this kind of management maneuvering by network operators, should be deprioritized.

Simplified ver. for Internet.org Standard version


Non-neutral mobile broadband in Japan


Case of developed nations"Gdpercapita" by Quandapanda - Own work.. Licensed under CC BY-SA 3.0 via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Gdpercapita.PNG#/media/File:Gdpercapita.PNG


As of Dec. 2014 The U.S. Japan OECD averageFixed BB per 100

DSLCableFiber

SatelliteFixed Wireless

Other

9.617.7

2.80.80.30.2

3.74.7

20.70.00.00.0

13.49.14.80.20.40.2

Mobile BB per 100Standard mobile

Dedicated mobile data

104.0NANA

124.196.028.1

81.3NANA

Source: Created based on the OECD Broadband statistics (http://www.oecd.org/sti/broadband/oecdbroadbandportal.htm)

Issues in these two nations

Source: http://static.guim.co.uk/sys-images/Money/Pix/pictures/2011/9/29/1317296416685/A-snail-on-a-ethernet-cab-006.jpg


A congestion problem with a little twist

Three reasons that market dynamism does not work and traditional transportation economics cannot be applied.

1. Internet backbone is a collective commons supported by many individual operators.

2. Prevalence of best-effort quality may inhibit network investment while causing no damage on ISPs if competition is insufficient.

3. There exists a serious information asymmetry concerning network QoS between ISPs and end users.


Twin problems in the developing nations

Low barriers to entry

High barriers to entry

Demand management

Capacity development

Short-term solution

Long-term solution

How to achieve efficient and fair traffic management in the dynamic condition?

How to calculate the optimal capacity and how to finance it?

Congestion control over the Internet backbone facing the exaflood of network demand

Controlled by vertically integrated network providers

Leverage into the neighboring market

How to discipline the behaviors of SMPs in the communication market?

Is it efficient?How to restrain the anti-competitive behaviors?

Control the monopolistic leverage of SMPs

ISPs

Network operators

UsersContent providers

Application providers

Natural monopoly

Unique business practices


US approach to the twin problems

2015 Open Internet Order

Merger review

Anti-trust law

Duopolistic fixed ISP market


Japanese approach to the twin problems

Self-regulation by ISPs

Interconnection rulesSMP Regulations

NTT Law

Anti-monopoly act

Competitive fixed ISP market


US approach vs. Japanese approach


Reason #1: Development of wireless technology

Fiber range

ADSL range

19921994

19961998

20002002

20042006

20082010

20122014

20161,000

10,000

100,000

1,000,000

10,000,000

100,000,000

1,000,000,000

Maximum download speed (bps)

Mobile PHS

2G 3G 3.5G

3.9G 4GSource: Created using data from NTT Docomo’s website and Wikipedia.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%0

5

10

15

20

25

30

35

40

45

Share of users among respondents

Usag

e tim

e (m

in.) PC

Smartphone

Feature phoneTablet

Internet TV

Source: Created based on MIC data (2014b).

The BB market in Japan will become similar to that in the US.


The BB market in Japan will become similar to that in the US. Reason #2: Fiber wholesale of NTT East/West

Source: http://www.ntt.co.jp/news2014/1405eznv/ndyb140513d_01.html

NTT Docomo announced today that it will begin offering "docomo HikariTM," a superfast optical-fiber broadband service, combined with "docomo Hikari PackTM" bundled discounts with mobile subscribers.

… By integrating ISP, wired and wireless services, Docomo's one-stop service will simplify the subscription process and customer support.

Source: Press release by NTT Docomo (Jan. 29, 2015). https://www.nttdocomo.co.jp/english/info/media_center/pr/2015/0129_00.html

Virtual integration of NTT Docomo and NTT East/West


Fixed vs. Mobile

Dominant network operator in the fixed market

(NTT East, NTT West)

Dominant network operator in the mobile

market(NTT Docomo, KDDI,

Softbank)

In-houseISP function

Independent ISPGroup ISP

Fixed Broadband Mobile Broadband

Independent ISP


Possible outcome: Domination of BB by mobile carriers

Local Loop Unbundling (dark fiber, dry copper, and line-sharing)

Pre “3G and Fiber Wholesale”

Wholesale or Interconnection

Fixed BB

AccessWholesaler

Independent ISP

NTT East/West

PhysicalFacility

BroadbandAccess

ISPRetail

Service

Now

Fixed BBMobile BB

Mobile Operators

ISPMVNO

Service-based

Operator

Facility-basedOperator

ISP ISP

Service-based

Operator


NTT East/West

ISP

Near future

Fixed BB

Mobile BB

Mobile Operators

MVNO


NTT E/W

Service-based

Operator


Share of the Japanese mobile BB market (as of the end of Mar. 14)

mobile phone, grouped

mobile phone

mobile ISP, grouped

mobile ISP

0% 25% 50% 75% 100%

40.2%

42.5%

28.4%

28.1%

31.4%

29.4%

40.2%

40.4%

25.8%

25.8%

2.6%

2.6%

22.9%

22.6%

2.8%

2.9% NTT group

NTT Docomo

KDDI group

KDDI

UQ

Softbank group

Softbank

eAccess

Willcom

Wireless City Planning

Source ： Created based on in MIC （ 2014 ） data

The future market share of the overall ISP market may look like this, if Internet usage becomes 100% mobile-based.


In order to deal with the traffic congestion… The focus of the problem is how to deal with the traffic congestion efficiently and mitigate the sluggishness of the broadband from the viewpoint of maximizing the consumers’ welfare.

The fact: Users do not consume bandwidth.

Enjoying applications and contents smoothly is what they are paying for. In that sense, stress-free connectivity is the most important factor.

Source: http://www.wica.intec.ugent.be/research/quality-of-experience

ISP side User side

Marginal Cost for Investment

Marginal Value of QoE improvementThe conclusion:

Maximizing end users’ utility or QoE is not necessarily equal to maximizing QoS.

Policymaker’s Judgement


Need for a new bottle Thus far, the net neutrality concept has been interpreted as an equal treatment of all packets transmitted over the Internet.

However, a fair treatment of all QoE for users is much more essential.

To ensure appropriate policy-making for telecom regulators in developed countries, a different concept other than “net neutrality” is required, or the concept should be reinterpreted.

Source: http://markmcmillion.com/new-wine-and-old-bottles/

The remaining problem is whether the current market system can find an efficient equilibrium under such a new policy requirement.


How can the market mechanism deal with QoE? Problems in the demand side

◦ Average users lack proper level of ICT literacy and therefore tend to end up with suboptimal broadband setups.

Results by Measurement Firm A

Measurement specification:Location of the server ………….Measurement method ……….Sample size ………….Sampling period/frequency ………….

QoS results:ISP α at Location A

Radio field intensity ………….Average downloading speed ○ ○ MbpsAverage uploading speed ○ ○ MbpsJitter max.○ ○ msPacket loss × × %Average latency □ □ ms

ISP β at Location A……….

Results by Firm B

Results by Firm C

Results by Firm D

QoSmeasurement.com(Website for measurement

comparison）

Easy-to-understand and personalized ISP recommendations are provided for ordinary end users.

ISP sommelier

Disclosed information from ISPsIndependent survey of clients’ Internet usage

Competition among ISP sommeliers

Detailed raw data are directlyprovided for professional users.


How can the market mechanism deal with QoE? Prerequisite of supply side

◦ Keep the market as competitive as possible, and◦ In order to provide appropriate QoS to build sufficiently-

tailored QoE, ISPs should prepare network access diversity as much as possible and provide enough variety of QoS.

◦ Because a naïve net neutrality principle may work against such diversification, which is a prerequisite for QoE maximization, we must relegate net neutrality to the backburner.


Summary◦ Many governments have been improving their nations’ broadband environments since broadband

is widely believed to be a precondition for economic prosperity and social progress.◦ There are a variety of policy tools to improve broadband environment; and depending on the

development stage of individual nation, priority among each tool must be adjusted accordingly.◦ Net neutrality, which (in its most basic form) requires “equal” treatment for all Internet traffic,

should be considered merely a means of improving broadband rather than a stand-alone policy target.

◦ Thus, when this concept is not the most appropriate, it is best left on the backburner.◦ In the early stage, the policy focus must be to deploy broadband

networks as quickly as possible. The net neutrality principle, which may ban some management maneuvering by network operators, is best left on the backburner

◦ In later stage where consumer welfare and investment efficiency matter, a naïve net neutrality principle may work against more competition and thus counter-productive.

Thank you for your attention.