Recent development of net neutrality conditions in Japan

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Recent Development of Net Neutrality Conditions in JapanImpact of Fiber Wholesale and Long-term Evolution (LTE)

Toshiya JITSUZUMI, D.Sc.,Kyushu University

T. JITSUZUMI@The 26th European Regional ITS (San Lorenzo de El Escorial, Spain, June 24-27, 2015)

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Purpose and agenda Purpose of this study is to

- analyze the net neutrality issue from an

economic perspective,

- summarize the emerging challenges for

Japan’s regulator, MIC, and

- propose a set of policy options.

T. JITSUZUMI@The 26th European Regional ITS (San Lorenzo de El Escorial, Spain, June 24-27, 2015)

Agenda

1. Net neutrality from an economic perspective

2. Japan’s approach so far

3. Impact of fiber wholesale introduction and LTE

4. Required approach

Net neutrality from an economic perspective It is nothing but a congestion problem with a little twist.

T. JITSUZUMI@The 26th European Regional ITS (San Lorenzo de El Escorial, Spain, June 24-27, 2015) 3

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

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


Japan’s approach so far

Interconnection rules

SMP Regulations

NTT Law


Interconnection rule in the TBA Article 32 (Interconnection with Telecommunications Circuit Facilities)

◦ Any telecommunications carrier shall accept a request from another telecommunications carrier to interconnect the telecommunications facilities of the requesting telecommunications carrier with the telecommunications circuit facilities that the requested telecommunications carrier installs, except in the cases listed below:i. Where the interconnection is likely to hinder telecommunications services from being

smoothly providedii. Where the interconnection is likely to unreasonably harm the interests of the requested

telecommunications carrieriii. In addition to the cases listed in the preceding two items, where there are justifiable grounds

specified by an Ordinance of the Ministry of Internal Affairs and Communications


SMP regulations on NTT East/West Telecommunications carriers installing Category I designated telecommunications facilities

Other facilitiesCategory I designated telecommunications facilities

Notification of tariff for designated telecommunications services（ FTTH, dedicated service)

Prohibited activity regulations Regulations regarding carriers with special relations

Authorization of interconnection tariff

Access lines and related telecommunications facilities

Access lines(More than 50% share)

（ Copper cable, optical fiber ）

（ NGN, PSTN, etc. ）

（ Wiring inside apartments, etc. ）

Development of interconnection accounts

Notification of plan for change or addition of

functionNon-regulation

Regulation of lending facilities to other carriers

Service regulations

Non-regulation

(ADSL, etc.)

Prohibition of abuse of information obtained

through interconnection

Prohibition of unfairly advantageous treatment

for specific carriers

Prohibition of undue interference with

equipment manufacturers, etc.

Firewall with specified carriers

Equal treatment in interconnection and

consignation

Price cap regulation for specified telecommunications service(voiceover copper lines, etc.)

Interconnection regulations

Price regulations

Restrictions for corporate behavior

Source ： Created using material provided by the MIC.


NTT LawNTT NTT East/West

Objectives of operation Control NTT East/West to properly secure the telecom service and related R&D

Provide regional telecom services

Scope of business Exhaustively listed in the law.

Expansion of the business domain Must be for the accomplishment of the original scope and needs pre-notification to the minister 　 (until 2011, the approval of the minister was required instead)

Must be for the accomplishment of the original scope, the provision of out-of-bounds service, and the productive use of its resources as long as it does not impair fair competition; it needs pre-notification to the minister (until 2011, the approval of the minister was required instead)

Obligation Universal Service Obligation (USO) and promotion of public welfare

Obligatory shareholding by the government

At least one-third must be owned by the government, and foreign control must be less then one-third.

NTT must own 100%

Appointment of directors and auditors Foreigners cannot be appointed and must be approved by the minister.

Business operating plan Must be pre-approved by the minister, subject to consultation with the Minister of Finance.

Financial report Must be submitted to the minister

Source: Adapted and translated by the author.


Industrial structure of the fixed broadband

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

Service-based

Operator

ISP

Facility-basedOperator(cableco)

ISP

Local Loop Unbundling (dry copper)

The USJapan

Wholesale or Interconnection

NTT-east/west

AccessWholesaler

Independent ISP

Service-based

Operator

Facility-basedOperator

NTT East/West

ISP

PhysicalFacility

BroadbandAccess

ISPRetail

Service

Facility-based Operator

(telco)


Share of the fixed broadband market, almost a decade ago

78.6%

49.1%

29.1%

13.5%

5.8%

3.8%

0% 20% 40% 60% 80% 100%

Estimated market share

NTT group Power company Cables

Other telcos Municipalities Others

BB access line wholesale market

BB access market

BB ISP market

NTT Group

Powercos

Other telcos

Cablecos

Others

Municipalities

Estimated market share in Japan

Source: Created on the basis of MIC (2008), FCC (2008a, 2008b), and Noam (2009)Note 1: ISP shares in the US are based on revenues in 2006 (Noam, 2009), which include satellite Internet; the shares

in other markets are based on the FCC’s line count and include fixed lines only.Note 2: RBOCs stand for Regional Bell Operating Companies, telcos for telecommunications companies, powercos for power

companies, and cablecos for cable companies.

43.6%

36.7%

36.3%

53.9%

53.9%

44.2%

0% 20% 40% 60% 80% 100%

Estimated market share

RBOC Cables Others

Estimated market share in the US

RBOCs Cablecos

Others


Market share as of March 2014

19%

8%

1%

9%

8%1%11%

2%

9%

7%

7%

4%

6%

2%2%

6%NTTcommunicationsNTT pulalaother NTTKDDIJ:comother KDDISoftbankBBother SBBiglobeniftySonetk-opticompowercocablecoTOKAI communicationsother

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


Japan’s approach so far

Interconnection rules

SMP Regulations

NTT Law

• Guidelines for Consumer Protection Rules for the TBA

• Measurement of mobile QoS

• Anti-DoS/DDoS Guideline

• Packet Shaping Guideline

Co-regulation?

Create Competitive Conditions


Impact of fiber wholesale introduction and LTE

https://farm4.staticflickr.com/3216/2883679931_c4f46b3ca4_o.jpg


Fiber range

ADSL range

Technological developments in mobile broadband

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

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 WiMax

2G 3G 3.5G

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


Users are increasingly relying on mobile broadband.

According to a questionnaire survey conducted by the MIC’s research institute, IICP, not only has the user share of mobile broadband become larger than that of fixed broadband, but its usage time is now longer.

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 respondentsUs

age

time

(min

.) PC

Smartphone

Feature phoneTablet

Internet TV

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


SMP rules on mobile BB cover wider but are less strict. Telecommunications carriers installing Category I designated telecommunication facilities

Other facilitiesCategory I designated telecommunications facilities

Notification of tariff for designated telecommunications services（ FTTH, dedicated service)

Prohibited activity regulations Regulations regarding carriers having special relations

Authorization of interconnection tariff



（ Copper cable, optical fiber ）

（ NGN, PSTN, etc. ）

（ Wiring inside apartments, etc. ）

Development of interconnection accounts

Notification of plan for change or addition of

functionNon-regulation


Service regulations

Non-regulation

(ADSL, etc.)







Firewall with specified carriers

Equal treatment in interconnection and

consignation

Price cap regulation for specified telecommunications service(voiceover copper lines, etc.)


Price regulations


NTT East

NTT West

Source ： Created using the material provided by the MIC


SMP rules on mobile BB cover wider but are less strict. Telecommunications carriers installing Category II designated telecommunications facilities

Other facilitiesCategory II designated telecommunications facilities

Prohibited activity regulations

Notification of interconnection tariff



（ Some servers, etc. ）

Development of interconnection accountsNon-regulation


Non-regulation








Price regulations


Applied as necessary when 25% of shares on a revenue basis is

exceeded

NTT Docomo

KDDI

Softbank

NTT Docomo

Source ： Created using the material provided by the MIC


No business domain control on NTT Docomo KDDI and Softbank are pure private companies.

NTT Docomo is one of the major members of the NTT group and 59.27% of its shares is owned by NTT holding company; however, it is free to expand its business domain.

◦ NTT Docomo provides Internet access services on its own.


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 ISP

Group ISP

Fixed Broadband Mobile Broadband

Independent ISP


Fiber wholesale by NTT East/West

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

NTT DOCOMO, INC. 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


Competing Softbank has started similar services.

Source: http://upload.wikimedia.org/wikipedia/commons/c/c1/Masayoshi_Son_(boss_of_Softbank)_and_Nobi_Hayashi_(Digital_Advisor).jpg


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


ISP ISP

Service-based

Operator


NTT East/West

ISP

Near future

Fixed BB

Mobile BB

Mobile Operators

MVNO


NTT E/W

Service-based

Operator


Expected share of the Japanese ISP market: fixed BB

As of Mar'14

With fiber wholesale(estimated)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

27.9%

38.0%

17.9%

17.9%

12.6%

12.6%

6.4%

4.8%

26.8%

20.3%

2.1%

1.6%

6.3%

4.8%

NTT group KDDI group Softbank group powerco ISPvender ISP cable ISP other

Assumptions for the estimation:• Following JAIPA’s assumption, 4

million users start using NTT Docomo’s ISPs.

• Before the introduction of fiber wholesale, these users had used ISPs that were not related with mobile operators.


Share of the Japanese mobile BB market

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

(as of the end of Mar. 14)

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.


Summary of the market changeUntil very recently, owing to the competitiveness in the fixed broadband ISP market that had been maintained by the TBA and the NTT Law, the MIC did not have imminent needs to introduce special rules for network neutrality.

Japanese broadband users have enjoyed the competition in the ISP market thanks to the SMP regulations, including the business domain rules on NTT East/West, as well as interconnection requirements of the TBA.

However, now that the situation has started to change, the MIC must start examining its future policy options.

The evolution of mobile technology, accompanied with the introduction of fiber wholesale by NTT East/West, is changing the dynamism in the broadband ISP market and making the market increasingly oligopolistic.


Japan’s BB ecosystem becomes very similar to that of the US?

PhysicalFacility

BroadbandAccess

ISPRetail

Service

Service-based

Operator

ISP

Facility-basedOperator(cableco)

ISP

The US

Mobile


(telco)

Japan, Now

Fixed BBMobile BB

Mobile Operators

ISPMVNO ISP

Service-based

Operator


NTT East/West

ISP

Fixed BBMobile

BB


Options for Japanese telecom policymakersStructural remedy: Increasing competitiveness

1. Introduce more competitorsA) Mobile network operators

B) Mobile virtual network operators

2. Lower switching costsA) Mobile number portability

B) Unlock SIMs

C) E-mail address portability

D) Personal data portability

3. Regulate marketing hypeA) Put a cap on excessive cash rebates

B) Set a minimum transparency

Behavioral remedy: Restricting SMP players

1. Self-regulationA) Guideline for packet shaping

B) Guidelines for QoS measurement

2. Re-regulationA) Tightening of regulations on category II facilities

B) Introduce tariff regulations

3. New network neutrality rulesA) Set the minimum QoS

B) Introduce higher transparency

C) Set the bright-line rules while leaving much room for case-by-case discretion


Track record of some structural remedies is poor. MVNOs may not contribute to competition in the mobile market

◦ As of the end of 2014, the MVNO subscription was 25.52 million, 16.5% of the total mobile market.

◦ 65% of them came mainly from sharing spectrum resources among the group operators; thus does not contribute to increasing competition among MNOs.

◦ SIM-based MVNOs are for the second-tiers.

MNP did not significantly change the competitive structure.

◦ Since the MNP introduction in Oct. 2006, Softbank has become a big winner, and NTT Docomo is a constant loser. However, the ranges of market share changes have remained almost the same.

Unlocking SIMs and regulating marketing hype have not yet worked very well.Source ： Created based on the data in

http://www.soumu.go.jp/menu_news/s-news/01kiban04_02000088.html; http://www.soumu.go.jp/menu_news/s-news/01kiban02_02000151.html


Guidelines for Consumer Protection Rules for the TBA Article 26 (Accountability of Terms and Conditions for the Service Provision)

When any telecommunications carrier or any person who engages in acting as an intermediary, agency or agent for concluding a contract for the provision of telecommunications services of a telecommunications carrier (hereinafter referred to as "telecommunications carrier, etc.") intends to conclude a contract, or to act as an intermediary, agency or agent for concluding a contract, with a person …, they shall, …, explain to the person an outline of the charges and other terms and conditions for the provision of the telecommunications services.

In 2009, the MIC revised the Guidelines and started to require ISPs to notify subscribers of the details of their packet shaping practices.


The Japanese fixed broadband is not as great as it looks.

0 5 10 15 20 25 30 35 40 45 500%

25%

50%

75%

Average Actual Download Speed （ Mbps ）

Actual Speed/Advertised Speed

USA (2009)

UK (May 2010)

Australia (2008 Q4 ）

Ireland (2008)

Note: Due to the inconsistency between individual nation’s estimates, this graph is for reference only.Source: Created on the basis of Akamai, Epitiro, FCC, and the author.

Japan (Mar. 2014)

Japan (Mar. 2013)

Japan (Mar.-Apr. 2012)

Japan (Jan. 2011)

Japan (Nov. 2009)

Japan (Apr. 2015)


Behavioral remedies seem more promising. Since increasing competitive pressure through cultivating competing operators takes time, the MIC should rely more on disciplining the behaviors of the existing mobile operators.

1. Self-regulation◦ Easy to implement but lack of formal authority, thus lack of legal certainty.

2. Re-regulationRegulation on broadband tariff◦ Strengthen SMP rules on the Category II designated telecommunications facilities

3. New network neutrality rules◦ Set the minimum QoS◦ Set the bright-line rules while leaving much room for case-by-case discretion

EU-like approach

FCC-like approach• Introduce higher transparency• Terms and conditions, network management• Actual QoS

Considering their intrusive nature, behavioral remedies may harm overall efficiency.


Summary◦ Till the recent past, the MIC could let the market dynamism deal with the net neutrality issue

without introducing any special rules, because the Japanese broadband market was very competitive.

◦ However, technological developments in mobile broadband have made the broadband access market far more oligopolistic than it used to be. The recently introduced fiber wholesale by NTT East/West may accelerate this trend.

◦ Since the mobile network operators are much less disciplined in the current Japanese telecom framework, the MIC cannot sit back and do nothing.

◦ In order to deal with this situation, the MIC must increase competitive pressure in the market, complemented by behavioral remedies on dominant players.