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 Universityjitsuzumi@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

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

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

Gbp

s

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

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

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

+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