Poster Session at TPRC44 (Sep.30, 2016 @GMU) Note: With minor modifications.

1. TEN YEARS OF JAPAN’S NET NEUTRALITY POLICY
Areview of the past and recommendations for the future
Toshiya Jitsuzumi, D.Sc., Professor, Faculty of Economics, Kyushu University
jitsuzumi@econ.kyushu-u.ac.jp
Summary
Until recently, the Ministry of Internal Affairs and Communications (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 thanks to the Telecommunications Business Act (TBA) and NTT Law, both of which were originally
designed to foster competition mainly in the POTS market. However, as the focus of the broadband usage moves toward bandwidth-rich contents and the mobile
environment, conditions that guaranteed the appropriateness of Japan’s net neutrality approach cannot be met any longer. Fiber wholesale of NTT and zero-rating by
mobile virtual network operators have increasingly upset the market dynamics. As a result, the net neutrality concept is changing right now.
Considering the fact that mobile operators are much less disciplined than fixed-service operators in the current framework, a new approach has to be designed. This
approach must be less structural but more behavioral, and has to include a case-by-case judgment to deal with the ever-changing condition.
In order to minimize the regulatory uncertainty, the MIC has to move fast to come up with a ground rule that accommodates the market requirement. However, the
general literacy of Japanese people who support the rule-making process does not seem to be satisfactory; this has to be the policy focus for Japanese telecom regulators.
Cause and “twin problems” of net neutrality
189209224 259 295 351 398 447 494
574
655
769
835
741 715 693 640 658 666
770
834
905 929
1,0861,051
216241257344390459540629708799
939
1,102
1,2061,235
1,363
1,5161,600
1,730
1,905
2,275
2,584
2,892
3,549
4,582
5,423
0
1,000
2,000
3,000
4,000
5,000
6,000
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Gbps
Estimated total traffic
Upload
Download
CAGR = 16.6%
CAGR = 33.5%
The net neutrality issue is a combination of the
traffic congestion problem, which occurs
because of a limited network capacity at the
Internet backbone, and the possibility of anti-
competitive behaviors by dominant operators.
This situation itself is common and can be
dealt with by traditional transportation
economics if the following three unique
features are not present:
1. Internet backbone is a collective commons
supported by many individual operators.
2. Prevalence of best-effort quality may inhibit
network investment if competition is
insufficient.
3. A serious information asymmetry exists with
respect to network quality of service (QoS)
between ISPs and end users.
In 2007, only fixed broadband was relevant.
New variables that
require special
policy attention in a
less competitive
market
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
Users
Content providers
Application providers
Natural
monopoly
Unique business
practices
0%
25%
50%
75%
0 10 20 30 40 50 60 70 80
Actual Speed/
Advertised Speed
Average Actual Download Speed（Mbps）
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)
Japan (May 2016)
• Interconnection rules: require network operators to interconnect
• SMP regulations: strict control on NTT East and NTT West (NTT East/West)
• NTT Law: NTT East/West are not allowed to have own ISP functions
“Seemingly” competitive ISP market
• Guidelines for Consumer
Protection Rules
• Measurement of mobile QoS
• Anti-DoS/DDoS Guideline
• Packet Shaping Guideline
Co-regulation-like rulemaking
Create Competitive Conditions
The MIC could trust the market to
efficiently control congestion.
In 2016, broadband is mostly mobile.
• Interconnection rules: require network operators to interconnect
• SMP regulations: loose control on mobile giants
• NTT Law: NTT DOCOMO is free to expand its business domain
42.8% 42.6% 42.3% 42.2% 42.2% 42.3% 42.5%
28.0% 28.1% 28.2% 28.2% 28.3% 28.4% 28.6%
29.1% 29.3% 29.5% 29.5% 29.5% 29.2% 28.8%
3469 3462 3455 3452 3451 3455 3459
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0%
20%
40%
60%
80%
100%
Sep. 2013 Dec. 2013 Mar. 2014 Jun. 2014 Sep. 2014 Dec. 2014 Mar. 2015
Share of the mobile data market in Japan
NTT group KDDI group SB group HHI
Facing the increasingly oligopolistic and swiftly changing market, the
MIC cannot and should not continue with the current approach
+
Structural remedy: Increasing competitiveness
1. Introduce more competitors
New MNOs and/or MVNOs
2. Lower switching costs
Mobile number portability, unlock SIMs, data portability
3. Regulate marketing hype
Cap excessive cash rebates
Establish minimum transparency
Behavioral remedy: Restricting SMP players
1. Self-regulation
2. Re-regulation
Tightening regulations on category II facilities
Introduce tariff regulations
3. New rules for net neutrality (including min. QoS)
A new approach has to be designed; however,
considering MIC’s experiences in the Japanese telecom
market since the 1980s, it must be less structural but
more behavioral, and has to include a case-by-case
judgement in order to deal with the ever-changing
condition.
TWO SETS OF POSSIBLE POLICY TOOLS
Concern for the privacy of correspondence
(Article 4, TBA)
• To what extent should the usage of DPI be allowed from
the viewpoint of the privacy of correspondence?
 Is “opt-in” required and is “opt-out” allowed?
Concern for discrimination (Article 6, TBA)
• Can MVNOs offer zero-rating program under the
Japanese definition of “net neutrality”?
 Should MVNOs have the same level of
responsibility as MNOs?
 Can the higher competitiveness of the MVNO
market make a difference?
MIC’s Definition of “neutrality” in 2007
Consumers are entitled to:
1. use IP-based networks flexibly and access the content/application
layer freely.
2. connect to IP-based networks freely through terminals that comply
with technical standards provided by laws and regulations and these
terminals may connect to each other flexibly.
3. use the communication layer and the platform layer free from
discrimination at a reasonable price.
Basic viewpoints that ensure net neutrality:
1. fairness in network cost sharing of network enhancements
2. fairness in network use when market power exists on a specified layer
0.27
1.32
2.35
3.48
4.69
74.8%
56.8%
61.1%
66.4% 70.1%
0.0%
20.0%
40.0%
60.0%
80.0%
0.0
1.0
2.0
3.0
4.0
5.0
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
InMillion
Sales of fiber wholesale of NTT East and West
docomo Hikari SoftBank Hikari others Share of mobile operators
We have to face
a much less
competitive
market.
In order to minimize the regulatory uncertainty
that is inevitable in a case-by-case approach, the
MIC has to move fast to come up with a ground
rule that accommodates the market requirement.
Whether the ground rule can be drafted in a
timely fashion depends on how ordinary users
perceive network neutrality in their daily lives.
31.5% 30.3% 29.8% 28.8% 28.0% 27.1%
8.4% 9.8% 8.5% 9.8%
17.9% 19.0%
13.4% 12.7% 12.4% 12.4%
12.7% 12.4%
26.4% 25.4%
24.8% 24.9%
24.6% 24.6%
5.1% 5.4%
5.7% 5.9%
6.2% 6.3%
9.8% 9.5% 12.1% 9.8%
2.3% 2.4%
5.4% 6.9% 6.6% 8.4% 8.3% 8.2%
1527 1441 1398 1361 1491 1476
0
2,000
4,000
6,000
8,000
10,000
0%
20%
40%
60%
80%
100%
Mar. 2010 Mar. 2011 Mar. 2012 Mar. 2013 Mar. 2014 Mar. 2015
Share of the fixed ISP market in Japan
NTT group KDDI group SB group vender powerco cableTV other HHI
Net Neutrality 1.0
Pre “3G and Fiber Wholesale”
Access
Wholesaler
Independent
ISP
NTT East/West
Physical
Facility
Broadband
Access
ISP
Retail
Service
Service
-based
Operator
Facility-based
Operator
ISP
NTT
communications
19.0%
NTT plala
7.4%
other NTT
0.6%
KDDI
8.5%
J:COM 8.3%
other KDDI
2.1%
SoftbankBB
10.9%
Softbank
telecom
1.2%
other SB
0.2%
Biglobe
9.4%
nifty
6.3%
Sonet
6.7%
other vendor
2.7%
powerco
6.3%
cableco
2.4%
other
8.2%
Subscriber share
Near future
Vertically
Integrated
Mobile Operator
MVNO
Facility-based
Operator
NTT E/W
Service
-based
Operator
However, if switching costs
are taken into consideration,
we may have a different
conclusion (Jitsuzumi, 2014)
Paper is available at the SSRN:
Findings based on a questionnaire survey conducted in May 2016
1. When one is a male
2. When one has an IT-related job
3. If one is a specialist
4. If one is a blogger
5. If one has created digital contents/apps
6. If one has used an image hosting service
7. If one has used a bulletin board system
8. If one is a twitter user
9. If one earns a higher income
They are more likely to be
interested in and understand net
neutrality.
 Web-based survey for pre-registered monitors
 Survey period: May 26, 2016 – May 30, 2016
 N=1067
It can be assumed that only 5.5% of
the respondents feel the existence of
the net neutrality problem in Japan.
According to the logit estimation,
Know the
concept
very well
7.3%
Only know
the term
20.5%
Have not
heard of it
72.2%
DO YOU KNOW WHAT NET
NEUTRALITY MEANS?
46.2%
9.1%
32.1%
22.4%
16.7%
19.2%
2.6%
0.9% 48.4%
Know the concept very well
Only know the term
DO YOU THINK NET NEUTRALITY IS WELL
SECURED IN JAPAN?
NN is
secured
NN is
partially
secured
and no
problems
arise
NN is
partially
secured
but
problems
arise
NN is
damaged
and
problems
arise
Do not
know
Target for educating
“net neutrality”
 What does “neutral network” mean
in the broadband ecosystem?
 Who should be responsible?
 What level is required?
 How to guarantee the optimal
balance between fairness and
efficiency?
 What conditions are required to
guarantee governmental
intervention?
 How to measure the
competitiveness in the market?
 Role of ex-ante regulation?
 Role of ex-post remedy?
Net Neutrality 2.0
Demand management as
a short-term solution Capacity development
as a long-term solution
Manage the congestion
How to coordinate the use of DPI
with “the privacy of
correspondence”?
How to guarantee that the use of DPI
does not harm the “freedom of
expression”?
Protect the interest of end users
Leverage into the
neighboring market
Is it efficient?
How to restrain the anti-competitive
behaviors?
How to discipline the behaviors of
SMPs in the BIAS market?
Control the monopolistic leverage of SMP
Users
OTT player
(Content/application
provider)
Fixed Mobile
ISP
Unique
business
practices
Monetize the eyeballs
by the access control
(e.g., zero-rating)
Where is the limit of zero-rating practice?
How will it affect the OTT development?
Impact on copyright?
Use of Deep Packet Inspection
High
switching
cost
Help the development of new innovations
Can all this setting maintain the vibrant
nature of the broadband ecosystem?
Vertically
Integrated
Network
Operator
High
barriers
to entry
Issues related to “zero-rating”
Some of these
MVNOs are
content/application
providers; thus may
have reasons to be
anti-competitive.
Related to end-user protection
Related to healthy OTT development