Managing Structural Changes in Telecommunications

Managing Structural Managing Structural Changes in Changes in

TelecommunicationsTelecommunications

ITS 15th Biennial Conference

Hidenori FUKE

Kansai University, Japan

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 2

DiscussionsDiscussions

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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 3

Outline of PresentationOutline of Presentation

Privatisation of NTT and Introduction of Competition in 1985

Competition And Regulatory PolicyDevelopment of Competition and Revision

of TBL and NTT LawStructural Changes in TelecommunicationsRevision of Regulatory FrameworkConclusions

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 4

PrivatisationPrivatisation of NTT and Introduction of NTT and Introduction of Competition in 1985of Competition in 1985

Total Liberalisation of Telecommunications Market in 1985– Telecommunications Business Law (TBL)– Nippon Telegraph & Telephone

Corporation Law (NTT Law)

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 5

Competition And Regulatory Policy Competition And Regulatory Policy (1)(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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 6

Table 1 Type 1 & Type 2 CarriersTable 1 Type 1 & Type 2 Carriers

Type Definition Entry Exit Price/

Service

Type 1 Own Telecommunications Circuit Facilities

Permission Permission

Approval

Type2 Special Lease Telecommunications Circuit Facilities

(Big)

Registration

Notification

(Ex Post)

Notification

(Ex Ante)

General

Lease Telecommunications Circuit Facilities

（ Small ）

Notification Notification

(Ex Post)

No Regulation

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 7

Competition And Regulatory Policy Competition And Regulatory Policy (2)(2)

Lack of Interconnection Rules– Ambivalence between ‘Conduct

Regulation’ or ‘Structural Separation’– Persistent Discussions on NTT Divestiture

Patchwork-like Revisions of TBL

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 8

Development of Competition and Development of Competition and Revision of TBL and NTT Law (1)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)

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 9

Development of Competition and Development of Competition and Revision of TBL and NTT Law (2)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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 10

Table 2Table 2 　　 Asymmetric RegulationAsymmetric Regulation ：：20012001

Dominant Non-Dominant

Fixed Line Mobile

Service Charges Price Cap Notification Notification

Tariff Approval Notification Notification

Interconnection Approval and Publication of Interconnection Tariff

Notification and Publication of Interconnection Tariff

Notification of

Interconnection

Agreement

Fair Competition Fire-Wall

(Prohibition of Holding Concurrent Board Positions)

Order to Remedy Business Operation

Prohibition of the Use of Information other than Interconnection, Prohibition of Undue discrimination （ Order to Suspend or Remedy ）

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 11

Structural Changes in Structural Changes in TelecommunicationsTelecommunications

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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 12

Figure 1 Share in Carrier Figure 1 Share in Carrier Pre-selection Pre-selection (As of March,2004)(As of March,2004)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UnregisterNCCＫＤＤＩNTT(Total)

Unregister 20.0　 19.4　 29.4　 36.9　

NCC 11.3　 14.4　 15.5　 13.8　

ＫＤＤＩ 10.7　 13.3　 14.4　 15.3　

NTT(Total) 57.9　 52.9　 40.6　 34.0　

LocalIntra-

prefecturelong-distance

Inter　prefecurelong-distance International

Source: My-line (Carrier Pre-selection) Carriers Association

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 13

Figure 2Figure 2 　　 Growth of Cellular MarketGrowth of Cellular Market

Source: MPHPT and InfoCom Research, Inc.

010,000

20,00030,00040,000

50,00060,000

70,00080,000

Fiscal　Year

Million　$

010,00020,00030,00040,00050,00060,00070,00080,00090,000100,000

Tousand Fixed- line　(Revenue)

Cellular　(Revenue)Fixed- 　line　(Subscribers)Cellular　(Subscribers)

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 14

Figure 3-1Figure 3-1 　　 Growth of Internet UseGrowth of Internet Use

Source: MPHPT

0.01,000.02,000.03,000.04,000.05,000.06,000.07,000.08,000.0

3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6

2000 2001 2002 2003 2004

Ten　Thousands

Dial-upCATVDSLFTTHCellular

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 15

Figure 3-2Figure 3-2 　　 Growth of BroadbandGrowth of Broadband

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6

2000 2001 2002 2003 2004

Ten　Thousands

CATVDSLFTTH

Source: MPHPT

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 16

Figure 4Figure 4 　　 3G Cellular in Japan3G Cellular in Japan

Source: Telecommunications Carriers Association

0

5,000

10,000

15,000

20,000

Thousand

End　of　Fiscal　Year

DoCoMo(W-CDMA)ＮＴＴ 90　 330　 3,045　 5,272　

au(cdma2000) 0　 360　 13,509　 15,136　

vodafone(W-CDMA) 0　 30　 138　 219　

2001 2002 2003 J ul- 04

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 17

Figure 5Figure 5 　　 Revenue from Local CallsRevenue from Local Calls

0

1,000

2,000

3,000

4,000Million　$

Fiscal　Year

- EastＮＴＴ 3,905 2,701 2,108 1,687

-WestＮＴＴ 3,884 2,701 2,118 1,747

2000 2001 2002 2003

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 18

Figure 6Figure 6 　　 Revenue from Long-Revenue from Long-Distance CallsDistance Calls

0

2,000

4,000

6,000

8,000Million　$

Fiscal　Year

- EastＮＴＴ 832 678 581 514

-WestＮＴＴ 842 707 602 521

CommunicationsＮＴＴ 6,183 4,690 4,015 3,731

2000 2001 2002 2003

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 19

Figure 7Figure 7 　　 From Vertical Integration From Vertical Integration to a Layered Structureto a Layered Structure

Internet Era

IP Network

CopperCable

OpticalFibre

CATV

Wire-less

DataMovingPicture

POTS Era

Content

NetworkService

PhysicalNetwork

Data Voice

DataNet-work

Cel-lu-lar

Voice

POTS

Telecommuni-cations

CATV

TV

Pro-gramme

Pro-gramme

CATVBroad-casting

Voice

POTS

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 20

Revision of Regulatory Framework (1)Revision of Regulatory Framework (1) -Relaxation of Entry Regulation- -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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 21

Revision of Regulatory Framework (2)Revision of Regulatory Framework (2)

-Total Deregulation of Tariff- -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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 22

Table 3Table 3 　　 Tariff and Other Terms & ConditionsTariff and Other Terms & Conditions ：： 20032003

・ 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

Basic Services (Universal Services)


・ Ministerial order to change (As above)



Oth-ers

・ No regulation ・ *Others

・ No regulation ・ *Category Designated ⅡFacilities

Spe-cific Ser-

vices

Desig-

nated

Servi-ces

Cate-goryⅠDesig-

nated Facil-

ities


・ Ministerial order to change (As above)

・ Price cap



・ No regulation *

　 -Obligation to explain conditions of service

　 -prompt handling of claims

Others

・ Prior notification/publication

・ Ministerial order to

change (Same as

General)

CategoryⅡDesignated Facilities

Others

Spe-cific

Ser-vices

・ Prior notification/publication


change (Same as

General)

・ Approval by MPHP

・ Price cap (Charges)

Catego-

ryⅠDesig-

nated Facil-

ities

・ Prior notification /publication


change in following

cases

-Lack of proper and

clear basis for charge

-Unfair discrimination

-Lack of special treatment in

case of emergency

GeneralTypeⅠ

TypeⅡ

・ No regulationGeneral

・ Prior notification/publicationSpecial

Old

*Carriers with rights of way have obligation of service

New

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 23

Revision of Regulatory Framework (3)Revision of Regulatory Framework (3)-Asymmetric Regulation--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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 24

Table 4Table 4 　　 Cellular Subscribers Cellular Subscribers as of March,2004as of March,2004

Subscribers Share(%)NTTDoComo 45,926,700 56.3KDDI 16,958,800 20.8TUKA 3,631,800 4.5Vodafone 15,002,400 18.4Total 81,519,700


Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 25

Figure 8 Monthly Net Increase in Cellular Figure 8 Monthly Net Increase in Cellular Subscribers Subscribers


-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,0004 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7

2002 2003 2004

NTTDoComoKDDIVodafone

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 26

Revision of Regulatory Framework (4)Revision of Regulatory Framework (4)-Unbundling Obligation-Unbundling Obligation

Unbundling Obligation UnchangedChallenges

– To Reflect Market Evaluation• FTTH (Table 5)

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 27

Table 5 FTTH Share (March, 2003)Table 5 FTTH Share (March, 2003)

Share(%)NTT-E 36.4NTT-W 28.9U'sCommunications 18.1K-opti.com 10.1Others 6.5Source:　MPHPT[2004]

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 28

Revision of Regulatory Framework (5)Revision of Regulatory Framework (5)-Development of the Internet--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

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 29

ConclusionsConclusions

‘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)

Sept. 5, 2004 ITS2004　　 H　FUKEⒸ 30

Figure 9 Layered Market Structure Figure 9 Layered Market Structure in the Broadband Internetin the Broadband Internet

Content

NetworkService

PhysicalNetwork

NTT

Local

ISPs

NTTCom

Softbank

Jupiter(Cable)

NHK(Broad-Casting)

NTTDoCoMo

U’sCom

(FTTH)

ContentProvid-

ers

ContentProvid-

ers

Managing Structural Changes in Telecommunications

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