Managing Structural Changes in Telecommunications

1. ITS 15th Biennial Conference Managing Structural Changes in Telecommunications Hidenori FUKE Kansai University, Japan

2. Discussions • Structural Changes in Telecommunications • Progress of Competition • Diffusion of the Internet & Cellular⇒Decline of POTS • Is Traditional Justification for Regulation (‘Market Failure’) Still Valid ? • Existence of Undertakings with Market Power • Asymmetric Information Between Consumers & Undertakings • Network Externality • Restructuring of Regulatory Policy ITS2004　Ⓒ　H FUKE

3. Outline of Presentation • Privatisation of NTT and Introduction of Competition in 1985 • Competition And Regulatory Policy • Development of Competition and Revision of TBL and NTT Law • Structural Changes in Telecommunications • Revision of Regulatory Framework • Conclusions ITS2004　Ⓒ　H FUKE

4. Privatisation of NTT and Introduction of Competition in 1985 • Total Liberalisation of Telecommunications Market in 1985 • Telecommunications Business Law (TBL) • Nippon Telegraph & Telephone Corporation Law (NTT Law) ITS2004　Ⓒ　H FUKE

5. Competition And Regulatory Policy (1) • Classification of Carriers into Type 1 & Type 2 (Table1) • Unregulated Type 2 Carriers • Excessive Regulation on Type 1 Carriers • Entry • Demand-Supply Coordination • Subdivided Business Areas • Tariff Regulation • Approval of the Minister : Every Type 1 Carriers Regardless of Market Power ITS2004　Ⓒ　H FUKE

6. Table 1 Type 1 & Type 2 Carriers ITS2004　Ⓒ　H FUKE

7. Competition And Regulatory Policy (2) • Lack of Interconnection Rules • Ambivalence between ‘Conduct Regulation’ or ‘Structural Separation’ • Persistent Discussions on NTT Divestiture • Patchwork-like Revisions of TBL ITS2004　Ⓒ　H FUKE

8. Development of Competition and Revision of TBL and NTT Law (1) • Tariff Deregulation (1998) • NTT Local Services • Price Cap • Others • From Approval to Notification • Entry Regulation (1997) • Abolishment of Demand-Supply Coordination Clause • Permission System for Type 1 Carriers Maintained • Interconnection Rules (1997) ITS2004　Ⓒ　H FUKE

9. Development of Competition and Revision of TBL and NTT Law (2) • Reorganisation of NTT Under a Holding Company Structure (1999) • Compromise between ‘Fair Competition’ and ‘Rational Operation of NTT’ • Introduction of Formal Asymmetric Regulation (2001) (Table 2) • Designated Facilities Based on Simple Market Share ITS2004　Ⓒ　H FUKE

10. Table 2Asymmetric Regulation：2001 ITS2004　Ⓒ　H FUKE

11. Structural Changes in Telecommunications • Development of Competition (Figure 1) • Growth of Cellular Market (Figure 2) • Internet Access via Cellular (Figure 3-1) • 3 G Services (Figure 4) • Growth of Internet Use (Figure 3-1) • Broadband Internet Shows Spectacular Growth (Figure 3-2) • Decline of POTS (Figure 5, 6) • Development of Media Convergence (Figure 7) • From Vertical Integration to Layered Structure ITS2004　Ⓒ　H FUKE

12. Figure 1 Share in Carrier Pre-selection (As of March,2004) Source: My-line (Carrier Pre-selection) Carriers Association ITS2004　Ⓒ　H FUKE

13. Figure 2Growth of Cellular Market Source: MPHPT and InfoCom Research, Inc. ITS2004　Ⓒ　H FUKE

14. Figure 3-1Growth of Internet Use Source: MPHPT ITS2004　Ⓒ　H FUKE

15. Figure 3-2Growth of Broadband Source: MPHPT ITS2004　Ⓒ　H FUKE

16. Figure 43G Cellular in Japan Source: Telecommunications Carriers Association ITS2004　Ⓒ　H FUKE

17. Figure 5Revenue from Local Calls ITS2004　Ⓒ　H FUKE

18. Figure 6Revenue from Long-Distance Calls ITS2004　Ⓒ　H FUKE

19. Internet Era POTS Era Data Pro- gramme Voice Voice Pro- gramme Voice Data Moving Picture Content T V C A T V Data Net- work Cel- lu- lar P O T S P O T S IP Network Network Service Physical Network Copper Cable Optical Fibre CA TV Wire- less Telecommuni- cations CATV Broad- casting Figure 7From Vertical Integration to a Layered Structure ITS2004　Ⓒ　H FUKE

20. Revision of Regulatory Framework (1) -Relaxation of Entry Regulation- • Categorisation into Type 1 & Type 2 Abolished • Big Carriers: Registration • Small Carriers: Notification • Rights of Way Awarded to Carriers with Authorisation by Ministry • Challenges • Actual Application of the New System • Not Responded to Change in Market Structure (From Vertical Integration to Layered Structure ITS2004　Ⓒ　H FUKE

21. Revision of Regulatory Framework (2) -Total Deregulation of Tariff- • Total Deregulation of Tariff (Table 3) • Universal Services: Prior Notification and Publication of Tariff, Service Obligation • NTT Local Services: Price Cap • Others: Totally Deregulated • Individual Negotiation Permitted • Ex Post Disputes Handling • Challenges • Not Based on Market Definition and Evaluation of Market Power • Asymmetry in information Ignored ITS2004　Ⓒ　H FUKE

22. Old New TypeⅠ General ・Prior notification /publication ・Ministerial order to change in following cases -Lack of proper and clear basis for charge -Unfair discrimination -Lack of special treatment in case of emergency Basic Services (Universal Services) ・Prior notification /publication of tariff ・Ministerial order to change in following cases -Lack of proper and clear basis for charges -Lack of clear specification of responsibilities of carriers and users -Restriction of ways of line usage -Unfair discrimination -Lack of special treatment in case of emergency -Unfair competition ・Accounting separation ・Service obligation Catego- ryⅠ Desig- nated Facil- ities Spe-cific Ser-vices ・Approval by MPHP ・Price cap (Charges) Cate-goryⅠ Desig- nated Facil- ities Desig- nated Servi-ces Spe-cific Ser- vices ・Prior notification /publication of tariff ・ Ministerial order to change (As above) ・Price cap ・Accounting separation ・Service obligation Others ・Prior notification/publication ・Ministerial order to change (Same as General) CategoryⅡ Designated Facilities ・Prior notification/publication ・Ministerial order to change (Same as General) Oth-ers ・Prior notification /publication of tariff ・Ministerial order to change (As above) ・Accounting separation ・Service obligation TypeⅡ Special ・Prior notification/publication General ・No regulation Others ・No regulation ・* Category ⅡDesignated Facilities ・No regulation ・* *Carriers with rights of way have obligation of service Others ・ No regulation * -Obligation to explain conditions of service -prompt handling of claims Table 3Tariff and Other Terms & Conditions：2003 ITS2004　Ⓒ　H FUKE

23. Revision of Regulatory Framework (3)-Asymmetric Regulation- • Asymmetric Regulation of 2001 maintained • Challenges • Not Reflected the Progress of Competition and Changes in Industry Structure • POTS (Figure 1) • Cellular (Table 4, Figure 3, Figure 8) • The Internet ITS2004　Ⓒ　H FUKE

24. Table 4Cellular Subscribers as of March,2004 Source: Telecommunications Carriers Association ITS2004　Ⓒ　H FUKE

25. Figure 8 Monthly Net Increase in Cellular Subscribers Source: Telecommunications Carriers Association ITS2004　Ⓒ　H FUKE

26. Revision of Regulatory Framework (4)-Unbundling Obligation • Unbundling Obligation Unchanged • Challenges • To Reflect Market Evaluation • FTTH (Table 5) ITS2004　Ⓒ　H FUKE

27. Table 5 FTTH Share (March, 2003) ITS2004　Ⓒ　H FUKE

28. Revision of Regulatory Framework (5)-Development of the Internet- • Restriction on NTT Local Companies’ Business Area (Intra-Prefecture Services) Maintained • Regulatory Framework Based on Media Maintained • Challenges • To Respond to Market Conditions • To Accommodate the Change to Layered Structure ITS2004　Ⓒ　H FUKE

29. Conclusions • ‘Market Failure’ Due to the Existence of Carriers with SMP Become Limited • Market Structure Be Analyzed in the Light of Structural Changes • ‘Market Failure’ Due to Asymmetry in Information Still Important • Proposals • To Establish Technological Neutrality in Physical Layer Network Competition • To Accommodate Changes in Network Service Layer from Public Utility to Commodity • Consistency in Content Layer Regulation • Inter-Layer View Point in Market Evaluation (Figure 9) ITS2004　Ⓒ　H FUKE

30. Content ISPs Content Provid- ers Softbank U’s Com (FTTH) Content Provid- ers Jupiter (Cable) NHK (Broad- Casting) NTT DoCoMo Network Service NTTCom NTT Local Physical Network Figure 9 Layered Market Structure in the Broadband Internet ITS2004　Ⓒ　H FUKE