1

Evolution of IP Network and Convergencein Japan

– Impact of Hard law and Soft law

2006.06.13ITS 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

0

2

4

6

8

10

12

14

16

1999

.3

1999

.6

1999

.9

1999

.12

2000

.3

2000

.6

2000

.9

2000

.12

2001

.3

2001

.6

2001

.9

2001

.12

2002

.3

2002

.6

2002

.9

2002

.12

2003

.3

2003

.6

2003

.9

2003

.12

2004

.3

2004

.6

2004

.9

2004

.12

2005

.3

2005

.6

2005

.9

2005

.12

2006

.3

mill

ion

DSL FTTH Cable(including dial- up)

DSL BB exceeded Cable modem Access

at the end of 2001

FTTH exceeded Cable modem Access at the

beginning of 2005

Growth of DSL almost hit its peak at the end of 2005

Data Source ： Ministry of Internal Affairs and Communications (MIC), Japan.

7

Cf. Broadband Development in US

13

57

11

1415

2

5

9

14

19

21

23

J une- 00 J une- 01 J une- 02 J une- 03 J une- 04 December-04

J une- 05

Sub

scrib

ers

(millio

n)

ADSL SDSL Fiber etc.、 、 Cable Modem

Data Source ： FCC （ 2006 April ） High-Speed Service for Internet Access, States as of June 30, 2005.

Cable modem Access has always been

exceeded DSL Access.

Including 83,000 of Fiber Broadband Access on June-05.

8

1. BB Access Technology Shift (2) Comparison of Japan and US from 2000 to 2005

BB subscribers on J une-00

0

0.5

1

1.5

2

2.5

Sub

scrib

ers

(milli

on)

ADSL SDSL Fiber etc.、 、 Cable Modem

ADSL SDSL、 、Fiber etc.

884087 1235

Cable Modem 2215259 329000

US J apan

BB subscribers on J une-05

0

5

10

15

20

25

Sub

scrib

ers

(milli

on)

ADSL SDSL etc.、 Cable Modem Fiber

ADSL SDSL、etc.

14492151 14082268

Cable Modem 23499498 3061881Fiber 86000 3410440

US J apan

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

DSL Market Share (subscribers) in J apan

38.9 45.5 40.9 36.5 37.4 36.4 37.1 39.0

61.1 54.5 59.1 63.5 62.6 63.6 62.9 61.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001.3 2002.3 2002.9 2003.3 2003.9 2004.3 2004.9 2005.9

East/ West ＮＴＴ NCC(New Common Carriers

Data Source ： MIC, Japan. “WHITE PAPER Information and Communications in Japan, 2005”, etc.

10

2. 　 Competitive Environment in BB Market (2) FTTH

FTTH Market Share (subscribers)

37.2 47.3 57.7 57.9 59.8 59.2

62.8 52.7 42.3 42.1 40.2 40.8

0%

20%

40%

60%

80%

100%

2002.9 2003.3 2003.9 2004.3 2004.9 2005.9

East/ West ＮＴＴ NCC(New Common Carriers*

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

Data Source ： MIC, Japan.

84

188

247277

305

352383

0

50

100

150

200

250

300

350

400

450

1999.12 2000.12 2001.12 2002.12 2003.12 2004.12 2005.12

cam

pani

es

Basically, Cable Network is operated in the unit of municipality and supported locally and nationally. Monopolistic service offering by a carrier in each area.

12

3. Accessibility and Affordability of BB(1) Penetration Rate of BB (Household)

Data Source ： MIC, Japan. (2006 May) “Draft of Competition Assessment of Telecommunications Industry in 2005"

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

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

I. 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.

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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

160,709175,776191,871212,969

236,945

298,340 290,153292,673

241,639

291,493

395,690

492,312

288,252

243,997253,890

220,189

51,92072,955107,139

153,897186,097

619,528

10%13%

16%19%

27%

36%

43%

59%

72%

80%84%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

km

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Backbone Fiber Network km（ ） Access Fiber Network (km)Percentage of Fiber in Access 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 serv

ices, medical services, and education etc.

IT New Reform Strategy(2006 Jun.) Strategy of ICT use for structural reform and of Ubiquit

ous network development. On May 17, 2006, Cabinet decided to prolong the appli

ed period of “Provisional Measures Law for Telecommunications Infrastructure Improvement”

to May 31, 2011.

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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 CommissionDemanded 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 shiftex-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

NTT2002 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

Investment on Fiber Network and Percentage of FiberAccess Network of NTT East

334.2377.8 399.1 422.2 410

86125 143

175 190

76%

81%

84%86%

88%

050

100150200250300350400450

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006(plan)

billion

Yen

70%

75%

80%

85%

90%

Total Investment on FacilitiesInvestment on Fiber Access NetworkPercentage of Fiber Network in Access 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 Companiesvs.

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

96110

128146

156165

1727 34 41 46 50

17.7%

24.2%26.7% 28.0% 29.2% 30.1%

02040

6080

100120

140160180

1999 2000 2001 2002 2003 2004

(100

0km

)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Backbone Network km（ ） Fiber Backbone Network km（ ）Percentage of Fiber in Backbone

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.)

Cooperation among 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

Carrier Telephone(per 3 minute)

Internet Multi-Channel Video

Delivery

Bundled Fee

KDDI 8.4 Yen 100Mbps ○ 9765 Yen (House)7297 Yen (Apartment)

SoftbankBB

7.99 Yen 100Mbps ○ 7087 Yen (House)4766 Yen (Apartment)

NTT East 8.3 Yen 100Mbps ○ 9849 Yen

J-Com 7.77 Yen 30Mbpes ○ 10815 Yen

36

Summary of Factors on BB Development

0

2

4

6

8

10

12

14

16

1999

.3

1999

.6

1999

.9

1999

.12

2000

.3

2000

.6

2000

.9

2000

.12

2001

.3

2001

.6

2001

.9

2001

.12

2002

.3

2002

.6

2002

.9

2002

.12

2003

.3

2003

.6

2003

.9

2003

.12

2004

.3

2004

.6

2004

.9

2004

.12

2005

.3

2005

.6

2005

.9

2005

.12

2006

.3

mill

ion

DSL FTTH Cable(including dial- up)

Unbundling Policy of Existing network and

DSL developmentSince 2001

Cable BB stumbles because of lack of scalability because of investment on

rural area by small carriers and

municipalities

Rapid shift to FTTH because of continuousl investment and Carriers’ st

rategies

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