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TEN YEARS OF JAPAN’S NET NEUTRALITY POLICYA review of the past and recommendations for the futureToshiya Jitsuzumi, D.Sc., Professor, Faculty of Economics, Kyushu [email protected]
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
189 209 224 259 295 351 398 447 494 574
655 769 835
741 715 693 640 658 666 770 834 905 929
1,086 1,051
216 241 257 344 390 459 540 629 708 799 939 1,102 1,206 1,235
1,363 1,516 1,600
1,730 1,905
2,275 2,584
2,892
3,549
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5,423
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Estimated total traffic
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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
UsersContent 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
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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
+Zero-rating of MVNOs
Structural remedy: Increasing competitiveness1. Introduce more competitors
New MNOs and/or MVNOs2. Lower switching costs
Mobile number portability, unlock SIMs, data portability3. Regulate marketing hype
Cap excessive cash rebatesEstablish minimum transparency
Behavioral remedy: Restricting SMP players4. Self-regulation5. Re-regulation
Tightening regulations on category II facilitiesIntroduce tariff regulations
6. 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 enhancements2. 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
In M
illio
n
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”
AccessWholesaler
IndependentISP
NTT East/West
PhysicalFacility
BroadbandAccess
ISPRetail
ServiceService-based
Operator
Facility-basedOperator
ISP
NTT communications
19.0%
NTT plala7.4%
other NTT0.6%
KDDI8.5%
J:COM 8.3%
other KDDI2.1%
SoftbankBB10.9%
Softbank telecom
1.2%other SB
0.2%
Biglobe9.4%
nifty6.3%
Sonet6.7%
other vendor2.7%
powerco6.3%
cableco2.4%
other8.2%
Subscriber share
Near future
VerticallyIntegrated
Mobile Operator
MVNO
Facility-basedOperator
NTT E/W
Service-based
Operator
However, if switching costs are taken into consideration,
we may have a different conclusion (Jitsuzumi, 2014)
All figure sources and references are available from the author.
Paper is available at the SSRN:
Findings based on a questionnaire survey conducted in May 2016
1. When one is a male2. When one has an IT-related job3. If one is a specialist4. If one is a blogger5. If one has created digital contents/apps6. If one has used an image hosting service7. If one has used a bulletin board system8. If one is a twitter user9. 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 term20.5%
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
Special thanks to Dr. E. Tanaka
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 DPIwith “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
Highswitching
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