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Evolution of IP Network and Convergence in Japan – Impact of Hard law and Soft law

Evolution of IP Network and Convergence in Japan – Impact of Hard law and Soft law. 2006.06.13 ITS Conference in Beijing Ema Tanaka, Minoru Sugaya, Sayaka Shiotani Research Institute of Telecommunications and Economics (RITE), Keio University, Obirin University. Contents.

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Evolution of IP Network and Convergence in Japan – Impact of Hard law and Soft law

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  1. Evolution of IP Network and Convergencein Japan – Impact of Hard law and Soft law 2006.06.13 ITS Conference in Beijing Ema Tanaka, Minoru Sugaya, Sayaka ShiotaniResearch Institute of Telecommunications and Economics (RITE), Keio University,Obirin University

  2. Contents • Theme and Approach of this study • I. Characteristics of Broadband (BB) Development in Japan - Focusing on Access Technological Shift • II. Impact of Policy and Regulation on BB in Japan - Analysis of Hard Law (Governmental Aspect) • III. Impact of Carriers Strategies on Convergence - Analysis of Soft Law (Carriers’ Aspect) • Conclusion

  3. Theme and Approach of this study • Theme • Extract Characteristics of Broadband Development in Japan • Analyze factors of Broadband Development in Japan • Approach: Analysis of Path Dependency of Network Evolution • Investment Incentives - Impact of Historical Factors • Market competition - Impact of competition in BB Market Both of them reinforce Fiber BB in Japan?

  4. Path Dependency: Evolving Process Two aspects • Historical factors Regulatory Decisions Carriers Strategies • Institutional / Architectural factors Government-Business Relationship Market environment

  5. I. Characteristics of BB Development in Japan 1.BB Access Technology Shift 2.Competitive Environment in BB Market 3. Accessibility and Affordability of BB

  6. 1 BB Access Technology Shift (1) Three characteristics of BB from 1999 to 2006 Growth of DSL almost hit its peak at the end of 2005 DSL BB exceeded Cable modem Access at the end of 2001 FTTH exceeded Cable modem Access at the beginning of 2005 Data Source：Ministry of Internal Affairs and Communications (MIC), Japan.

  7. Cf. Broadband Development in US Including 83,000 of Fiber Broadband Access on June-05. Cable modem Access has always been exceeded DSL Access. Data Source：FCC（2006 April）High-Speed Service for Internet Access, States as of June 30, 2005.

  8. 1. BB Access Technology Shift (2) Comparison of Japan and US from 2000 to 2005 Data Source：MIC, Japan. FCC（2006 April）High-Speed Service for Internet Access, States as of June 30, 2005.

  9. 2.Competitive Environment in BB Market (1) DSL Data Source：MIC, Japan. “WHITE PAPER Information and Communications in Japan, 2005”, etc.

  10. 2.Competitive Environment in BB Market (2) FTTH Data Source：MIC, Japan. “WHITE PAPER Information and Communications in Japan, 2005”, etc.

  11. 2.Competitive Environment in BB Market (3) Number of Cable Internet operators Basically, Cable Network is operated in the unit of municipality and supported locally and nationally. Monopolistic service offering by a carrier in each area. Data Source：MIC, Japan.

  12. 3. Accessibility and Affordability of BB(1) Penetration Rate of BB (Household) • As of December 2005 National Average 44.4% Lowest Penetration Rate: 21.8% (Kagoshima) Highest Penetration Rate: 60.8% (Tokyo) number of prefectures 20.0-29.9% 9 30.0-39.9% 19 40.0-49.9% 17 more than 50% 2 Data Source：MIC, Japan. (2006 May) “Draft of Competition Assessment of Telecommunications Industry in 2005"

  13. 3. Accessibility and Affordability of BB(2) Accessibility – Aiming Universal Access of BB Broadband Network Deployment Status of Each Prefectures (Coverage of Household) FTTH Coverage Other BB Access Coverage No BB Access Data Source：MIC, Japan.

  14. 3. Accessibility and Affordability of BB(3) Price of BB and “bps” • Internet Reports 2005: “The Internet of Things” The Cheapest BB in the World, 0.07US$ of 100kbps(Japan) On March, 2006. • NTT East (FTTH for House:100M) 5885 Yen • NTT East (FTTH for Apartment:100M) 3570 Yen • Usen (FTTH for Apartment:100M) 2980 Yen • NTT East (ADSL:47M) 4032 Yen • SoftBank BB (ADSL:50M) 4206 Yen • KDDI (ADSL:47M) 3969 Yen Data Source：MIC, Japan.

  15. Characteristics of BB DevelopmentSummary: Three Characteristics • Rapid growth of DSL and swift shift to FTTH; in 5 years and 3 years respectively. • Sound Competitive market environment; High Market share of NCC. • Affordability and Accessibility of BB; Consumer’s BB Choice in urban and rural area, Low Price, High speed BB.

  16. Cf. US Experience on BB regulation and a question to answer “US Unbundling Policy Depressed DSL Penetration Because Bell Companies Had Diminished Incentives to Invest in Broadband” “Unbundling of New Facilities is Not Required in US - It should not be required in Japan” (Crandall (2006 April 19) “ Regulation and Competition Policy in the U.S. Telecom Sector: Lessons for Japan”, Presentation in Tokyo ) Did unbundling Policy Diminish Investment in Japan ??

  17. II. Impact of Policy and Regulation on BB in Japan- Analysis of Hard Law 1. FTTH promotion policy(1990’s - 2006) 2. Governmental IT Strategy(2001-2006) 3. Competition Policy and Market Analysis (2001-2006)

  18. 1. FTTH promotion policy (1) BB Promotion Policy and Financial Support Financial and Tax benefits to promote Fiber deployment “Provisional Measures Law for Telecommunications Infrastructure Improvement” (電気通信基盤充実臨時措置法) 1991－2006 (amended in 1995, 2001, 2006). Provision of Reduction of Local taxes, corporation tax etc. to investment on Advanced Network Facilities for cable carriers, Telecommunications carriers and local municipal entities those who build Fiber network, DSL network etc especially for network development in rural area.

  19. 1. FTTH promotion policy (2) Upgrading of Telecom Network to Fiber network

  20. 2. Governmental IT Strategy (1)e-Japan Strategy and Infrastructure building e-Japan Strategy (2001-2004)(Office of Prime Minister) Strategy to Promote affordable and accessible high speed access Internet access to at least 30 million (always-on high speed Internet) and 10 million (access to 30-100Mbps) in 5 Years. In 2004, ADSL Accessible to 380 million household, FTTH 180 million household. Price of ADSL became 1/3.

  21. 2. Governmental IT Strategy (2)u-Japan Strategy and Expanding use of ICT u-Japan Initiative(2004 Decembe)(MIC, Japan) the aim of leading the way as the world's most advanced IT nation through 2010 following the e-Japan Strategy • Development of ubiquitous networks: 100% of the population to connect to high-speed or ultrahigh-speed internet access. • Enhancement of ICT applications: To create a society in which 80% of the population can appreciate the role of ICT in resolving issues. • Preparation of usage environment : To create a society in which 80% of the population feel comfortable with ICT.

  22. 2. Governmental IT Strategy (3)Promotion of ICT use (Office of Prime Minister) IT Policy Package(2005 Feb.) Policy Package to Expand the use of ICT to public services, medical services, and education etc. IT New Reform Strategy(2006 Jun.) Strategy of ICT use for structural reform and of Ubiquitous network development. On May 17, 2006, Cabinet decided to prolong the applied period of “Provisional Measures Law for Telecommunications Infrastructure Improvement” to May 31, 2011.

  23. 3. Competition Policy and Market Analysis (1) Interconnection Rules and Investment Incentive 2000 May, MIC Adoption of Forward Looking Cost for Connection Fee. Unbundling Fee NTT East 158 Yen (120 Yen From 2004 April) NTT West 165 Yen (113 Yen From 2004 April)

  24. 3. Competition Policy and Market Analysis (1) Unbundling Obligation of Fiber network 2001 April. Unbundling Obligation of Fiber network to carriers whose market share is over 50%. 1 Fiber Access Line Fee per month 5074 Yen. (Nationally flat fee ) 2003 December 4, Japan Fair Trade Commission Demanded removal of NTT Fiber price because NTT price (4500 Yen) was lower than 5074 Yen. NTT rejected the demand on 15 December 2003.

  25. 3. Competition Policy and Market Analysis (3) Analysis of HHI on Each BB Market From FY 2003 Regulatory Framework shift ex-ante regulations to ex-post regulations MIC introduced competition assessment To monitor carriers’ market power to control each market. Assessment of Each BB market: DSL, FTTH, Cable in FY 2005 → There are tendency to shift FTTH network and growth of NTT market share in FTTH market.

  26. II. Impact of Policy and Regulation on BB in Japan Summary: Two Aspect of BB policy in Japan Investment • Continuous FTTH investment for Affordable and Accessible IP network by both government and carriers. Competition • Regulatory competitive pressure works in Japan. • Market competitive pressure also works in Japan. • Market competition assessment from FY2003.

  27. III. Impact of Carriers Strategies on Convergence 1. Strategies of Network Providers 2. Strategies of Competitive Carriers 3. Strategies of Cable network operators

  28. 1. Strategies of Network Providers（1）Corporate strategy on Fiber network Development NTT 2002 Nov. “Vision for a New Optical Generation- Broadband leading to the world of resonant communication." 2004 Nov. “NTT Group's Medium-Term Management Strategy ” Plan to shift to fiber NGN subscribers to 30 million by 2010 2005 Nov. “Promoting NTT Group's Medium-Term Management Strategy ” Vision to build Fiber and Wireless seamless network

  29. 1. Strategies of Network Providers（2）Continuous Investment on Fiber Network Cf. NTT West FY 2005 Percentage of Fiber Network in Access Network is 87% Data Source：MIC, Japan.

  30. 1. Strategies of Network Providers（3）Cooperation with Governmental Policy NTT Group's Medium-Term Management Strategy (2004) “help achievement of the e-Japan Strategy and the u-Japan Initiative.“ Harmonized Governmental Policy and Management Strategy

  31. 2. Strategies of Competitive Carriers(1) Use of Unbundled Network - ADSL Fiber Network Access Providers NTT, Electronic Companies vs. Unbundled Network Users Softbank BB, KDDI Service Competition to differentiate ADSL service Softbank BB speeded up of ADSL service 2001 September Start ADSL Service, Downstream 8Mpbs 2002 December Start Downstream 12Mbps + Wi-Fi Service 2003 June Start Downstream 26Mbps ADSL service 2004 July Downstream 45Mbps →50Mbps by software upgrade

  32. 2. Strategies of Competitive Carriers(2) M&A and Strategic Coalition • Softbank BB 2004 May, Acquired Nihon Telecom (with 12,000km Fiber network) • KDDI and TEPCO(Tokyo Electronic Power Company) 2005 Establishment of Broad coalition 2006 Jan. KDDI acquired Powered Com and FTTH Network of TEPCO (127.4 billion yen). As the price of Dark Fiber Network of NTT is fixed, acquisition of access network is indispensable for access price competition against NTT.

  33. 3. Strategies of Cable companies(1) Upgrading to Fiber Network

  34. 3. Strategies of Cable companies(2) MSO (Multiple System Operators) Cable industry in 2002 Total revenue: 506.1 billion yen Recurring profit: 44.2 billion yen Lack of Scalability Development of MSO • Jupiter Telecom: 20 companies • Cable West: 6 companies • Japan Cable net: 14 companies (2006 Feb.) (Deregulation of local carrier requirement in 1993.) Cooperationamong cable companies beyond service area • Shared use of cable facilities etc. (1US$=114 yen)

  35. 3. Strategies of Cable companies(3) Triple Play and Service Competition

  36. Summary of Factors on BB Development Unbundling Policy of Existing network and DSL development Since 2001 Cable BB stumbles because of lack ofscalability because of investment on rural area by small carriers and municipalities Rapid shift to FTTH because of continuousl investment and Carriers’ strategies

  37. Conclusion The Reason of BB Development in Japan • Historical investment by governmental policy and carrier’s strategy on Fiber network brought path dependency → works as inducement of further fiber network investment • Unbundling obligation of DSL introduced competition in BB Market by new entrance of carriers. → works as competitive pressure for both service providers and facilities providers

  38. Path Dependency: Experience in Japan Decision Path Continuous Promotion Network Investment (Future Oriented Decision) Establishment Strategic Policy (Future Oriented Decision) Promotion of Competition with Market Analysis

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