Market Power and Competition Policy in the Telecommunications Market

Apr. 8, 2013 Director for Policy Planning

Tariff and Telecommunications Access Policy Division Telecommunications Bureau

Ministry of Internal Affairs and Communications

Atsushi UMINO

1

Current Status of the Telecommunications Market In JAPAN

0

20

40

60

80

100

120

140 138.4

53.6

33.5

30.5

Mobile Telephony

Fixed Telephony

Broadband

IP Telephony

(Broadband)

(Fixed Telephony)

(IP Telephony)

2 Telecom Service Subscriptions in Japan

As of End Dec. 2012 (millions)

0

2

4

6

8

10

12

14

16

18

20

22

24

Dec.'00

Mar.'0

1Jun.'01

Sep.'01

Dec.'01

Mar.'0

2Jun.'02

Sep.'02

Dec.'02

Mar.'0

3Jun.'03

Sep.'03

Dec.'03

Mar.'0

4Jun.'04

Sep.'04

Dec.'04

Mar.'0

5Jun.'05

Sep.'05

Dec.'05

Mar.'0

6Jun.'06

Sep.'06

Dec.'06

Mar.'0

7Jun.'07

Sep.'07

Dec.'08

Mar.'0

8Jun.'08

Sep.'08

Dec.'08

Mar.'0

9Jun.'09

Sep.'09

Dec.'09

Mar.'1

0Jun.'10

Sep.'10

Dec.'10

Mar.'1

1Jun.'11

Sep.'11

Dec.'11

Mar.'1

2Jun.'12

Sep.'12

Dec.'12

FTTH 23.6M

BWA 4.7M

CATV 6.0M

ADSL 5.7M

Total:53.6M

LTE 13.6M

3 Broadband Subscriptions in Japan

(millions) As of End Dec. 2012

International Comparison of Broadband Technology 4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Japan US UK France Germany S. Korea

65%

7% 2.7% 1.1% 0.6%

60%

18%

35%

77% 93%

85%

13%

17%

57%

20% 6%

14% 28%

1.1% 0.2%

OthersCATVDSLFTTH

Source: OECD (As of June 2012)

Current Status of Broadband Spread in Japan

Area Coverage Rate

Penetration Rate

Broadband*2

Ultra-High-Speed Broadband*1

ー

86.5％

End of Mar. 2008

99.7 ％

90.1％

（98.8 %）

100％

97.3％

99.9 ％

91.6％

（99.1 %） （99.2 %） （98.3 %）

92.7％

100 ％ （ 99.7%）

*1 FTTH, CATV Internet, FWA, BWA (only services whose downloading speeds are over 30Mbps, other than FTTH) *2 FTTH, DSL, CATV Internet , FWA, Satellite Broadband, BWA, 3.5G Mobile Broadband *3 FTTH, DSL, CATV Internet, FWA, BWA (only Local WiMAX)

Fixed Ultra-High-Speed

Broadband*4

Fixed Broadband*3

0.1 0.7 3.6

14.4

0

5

10

15

20

2010.3 2011.3 2012.3 2012.12

65.2%

(%)

Inside ( ) : only fixed broadband

（ 96.5%）

47.6%

5

End of Mar. 2009

End of Mar. 2010

End of Mar. 2011

End of Mar. 2012

End of Dec.2012

End of Dec.2012

Mobile Ultra-High-Speed

Broadband*5

*4 FTTH, CATV Internet (only services whose downloading speeds are over 30Mbps) *5 3.9G Mobile Broadband, BWA (other than Local WiMAX)

6

Current Status of Telecommunications Policy

¥0

¥5

¥10

¥15

1985 2011

NTT DoCoMo

SoftBank Mobile

NTT \5.1 trillion

KDD \0.2 trillion

KDDI (Fixed)

NTT Com

NTT East

NTT West

SoftBank Telecom

\5.4 trillion

\15.8 trillion

Status of Sales Volume in the Domestic Telecommunications Market (FY2011)

Others

NTT \8.8 trillion

KDDI \3.6 trillion

Softbank \2.5 trillion

KDDI (Mobile)

trillion

trillion

trillion

Growth in Telecom Market 7

NTT (Holding company)

NTT International Network

IIJ

CWC NTT DoCoMo

NTT Group ・NTT (Holding) ・NTT East ・NTT West ・NTT Communications

・NTT DOCOMO

Major Changes in Japanese Telecommunications Carriers

KDD

Teleway (TWJ)

DDI

IDO

7 Cellulars

TTNet

IDC

J-Phone J-Phone Vodafone

Digital Phone

Vodafone HD

NTT East

NTT West

NTT Communications

Japan Telecom

eAccess

Japan Telecom

DDI Pocket Willcom

DDI Pocket

Vodafone (UK)

Cable and Wireless IDC

BB technology

Japan Telecom IDC

ACCA Networks

eAccess

eMOBILE

Astel Tokyo

Powered.com

UQ Communications UQ Communications

NTT

(Divided/reorganized in July ’92)

(Divided/reorganized in July ’99)

(Merged in Oct. ’99)

（Main shareholder in Sept. ’03)

(Assigned sales in Dec. ’03)

(International phone calls inaugurated in April ’53, relay phone calls inaugurated in July ’87)

(Relay phone calls inaugurated in Sept. ’87)

(Subscribed phone calls inaugurated in May ’88)

(Merged in Dec. ’98)

(Mer

ged

in O

ct. ’

00)

KD

DI (Merged in Oct. ’01)

Buyout by Carlyle, new company established in Oct. ’04

(Merged in Oct. ’05)

Phone companies other than NTT East/West inaugurated in Feb. ’05)

KDDI

3 Tu-ka companies

Yozan (PHS in Aug. ’02)

Powered.com (Merged in April ’03)

(End PHS in June ’06)

(Invest)

(International phone calls inaugurated in Oct. ’89) (Buyout in June ’99)

(Buyout from Ripplewood in July ’04)

(Merged in July ’05)

(Buyout and name change in Feb. ’05)

( Buyout by Ripplewood in Nov. ’03)

(Name change in Oct. ’03)

(Name change in Dec. ’03) (March ’02)

(Invest)

(Invested in Sept. ’99)

(acquired stock in Sept. ’01) (Invest)

ITJ

(International phone calls inaugurated in Oct. ’89)

BT (UK) AT&T (USA)

Japan Telecom (Relay phone calls inaugurated in Sept. ’87)

(Relay phone calls inaugurated in Sept. ’87)

(Merged as one company in July. ’08)

(Merged in April ’99)

(Merged in Oct. ’97)

(Inaugurated ADSL in Jan. ’01)

(Inaugurated ADSL in Sep. ’01)

(Inaugurated PHS in July. ’95)

(Inaugurated Mobile in March. ’07)

(Invest in August ’07)

(Inaugurated ADSL in Oct. ’00)

(Making a subsidiary in August ’08)

(Japan Telecom sold shares of eAccess in Oct ’04)

(Soft-Bank BB built by merging 4 companies in Jan ’03)

Privatized in April’ 85

(Merged in June. ’09)

(Making a subsidiary in June ’10)

au

(Name change in Feb. ’05)

SoftBank Telecom

(Buyout in April ’06, Changing the company

name in Oct ‘06)

SoftBank Mobile

SoftBank BB

(Changing the company name in Oct ‘06)

Softbank Group

Willcom (Invest in Dec.’10)

(Merged in Jan. ’06)

Wireless City Planning

(Merged in Dec. ’10)

(Merged in Mar. ’11)

C&W(UK)

Japan Telecom

Japan Telecom HD

(Equity-method affiliate Jan. ’13)

Okinawa Cellular Okinawa Cellular

KDDI Group

8

Market Share of NTT Group Companies

Fixed Telephony IP Telephony Mobile

Telephony Broadband

As of End Dec. 2012

NTT East/West

77% NTT East/West NTT Com

58% NTT DoCoMo

44%

ADSL NTT East/West

34%

NTT East/West

73%

FTTH

9

Changes in Fixed Broadband Share by Operator

38.6 41.0

30.4 31.9

6.6 11.0

10.8 8.9 6.2 2.2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007.3 2012.12

ＦＴＴＨ

36.8 39.6

19.9 16.2

18.1 18.1

13.7 23.2

7.8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007.3 2012.12

ＡＤＳＬ ＦＴＴＨ＋ＡＤＳＬ＋ＣＡＴＶ

23.4 30.0

19.7 24.2

2.2

7.3 19.9

6.5 7.3 3.8

27.5 28.2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007.3 2012.12

NTT East

NTT West

KDDI

Power Co. subsidiaries

UCOM

Others

NTT East

NTT West

SoftBank

eAccess

Others

NTT East

NTT West

SoftBank

KDDI

eAccess

Others

10

ACCA

Competition in the Broadband Market

Metal access

Fiber access

NTT East & West 99.8%

Others 0.2%

NTT East & West 77.3%

Others 22.7%

Facility-based competition Service-based competition

ADSL

FTTH

NTT East & West 34.3%

Softbank 39.6%

e-Access 23.2%

Others 2.9%

NTT East & West 72.9%

Power Co. subsidiaries

8.9% KDDI 11.1%

UCOM 2.2%

Others 5.0%

As of the end of Dec. 2012 As of the end of Mar. 2012

11

52.2 49.7 48.7 48.2 47.1 45.3 44.1

27.7 28.3 27.5 27.4 26.8 26.4 26.6

15.6 17.3 18.4 18.8 20.6 21.8 22.6

4.5 4.7 5.3 5.6 5.6 6.5 6.7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007.3 2008.3 2009.3 2010.3 2011.3 2012.3 2012.12

NTT DoCoMo KDDI SoftBank Mobile Others

12 Changes in Mobile and PHS Service Share by Operator

13

Development of Competition Policy

Changes in Competition Policy in Telecommunications Market • Introduction of the principle of competition Enactment of Telecommunications Business Act, privatization of NTT Public

Corporation

• Introduction of asymmetric regulation Institutionalization of interconnection rules for fixed telecommunications services • Deregulation of market entry Abolition of supply & demand adjustment and across-the-board foreign investment

restriction • Deregulation of retail rate regulation Abolition of authorization system • Reorganization of NTT

• Expansion of asymmetric regulation Institutionalization of interconnection rules for mobile telecommunications services

Introduction of rules for prohibition of anti-competitive activities • Establishment of the universal service system

• Deregulation of market entry Abolition of permission system • Deregulation of retail rate regulation Abolition of general retail rate/tariff regulation • Reinforcement of consumer protection rules Accountability of important terms and

conditions

1997 ~

From Monopoly To Competition

Development of Fair Competition

Rule

From Ex-ante Regulation

To Ex-post Regulation

• Response to shift to mobile Introduction of accounting separation • Ensuring equivalence between NTT East & West and competitors Functional separation of NTT East & West

Response to Changes of

Market Environment

14

1985 ~

2001 ~

2004 ~

2010 ~

1985~ 1990~ 2000~ Entry

Exit

User

Charge

Consumer

Protection

Interconnection

Asymmetric Regulation (Fixed)

Asymmetric Regulation (Mobile)

Universal

Service

‘04～ Registration/Notification

‘99～ Authorization of reference interconnection offers, Unbundling

‘85～ Permission/Notification ‘04～ Notification

‘98～ Notification

‘98～ Price cap regulation (ex. fixed phone provided by ＮＴＴ E&W)

‘04～ Basically, no regulation

‘04～ Accountability of important terms and conditions

‘99～ Obligation of acceptance of request for interconnection

‘99～ Accounting separation

‘01～ Notification of reference interconnection offers

‘06～ Start of operation

‘01～ Prohibition of anti-competitive activities

‘85～ Permission/Registration/Notification

‘10～ Accounting separation

‘11～ Functional separation

‘85～ Authorization （partly, Notification）

15 Changes in regulations on Telecommunications Business

Current Framework of “Asymmetric Regulation”

Fixed Telecommunications Market Mobile Telecommunications Market

Operators that have over 50 % share of all access lines

Operators that have over 10 % share of all terminals

Interconnection Authorization of reference offers Accounting separation Unbundling etc.

Interconnection Notification of reference offers Accounting separation etc.

Retail rate（partly）

Notification of tariffs Price cap regulation etc.

Prohibiting anti-competitive activities

【Prohibited activities】 Abuse of information gained through

interconnection Discriminatory treatment among operators Unjust intervention with manufacturers or

others

Operators specifically designated whose revenue shares are over 25%

Others

NTT East, NTT West NTT DoCoMo, KDDI, Softbank Mobile

Prohibiting anti-competitive activities 【Prohibited activities】

Abuse of information gained through interconnection

Discriminatory treatment among operators Unjust intervention with manufacturers or others Concurrent executive posts in specific operators

etc.

N/A

N/A

N/A

N/A

N/A

16

“Category 1 designated facilities” Rule “Category 2 designated facilities” Rule

N/A

N/A

N/A

Others

NTT DoCoMo

Criteria for Designation of “Dominant Carriers” in Mobile Market

(3) Basically, a criterion of (1) or (2) shall be considered, but the suitability of designation shall be comprehensively judged by service area, considering the following factors:

Size of business (capital, revenue, employment number), influence in market, brand power, substitutability between supply and demand, price elasticity, predominance in the selling or distribution of services/handsets or others, joint dominance etc.

● This operator shall be designated, only in the case where it is specifically presumed to have market power after considering a level of share and each factor stated at (3)

(2) When some operators have over 25% but not more than 40% market share

(1) Over 40% market share throughout period of time

Over 25 % revenue share

A The largest share

B Other than above

17

Over 10 % terminal share

● This operator shall be presumed to have market power and be designated, unless special circumstances are acknowledged, after considering each factor stated at (3).

● This operator shall be designated, only in the case where it is specifically presumed to have market power through the fact that the difference of share to the operator with the largest share is small and after considering the level of said share.

Framework of Regulations on NTT Group

NTT

NTT East

NTT Communications

NTT Data

NTT DoCoMo

NTT West

Holding company

Local telecommunications business in eastern Japan

Long distance/international telecommunications business, and ISP

System integration business

Mobile telecommunications business

100%

100%

100%

54%

63%

Foreign investment restriction (below 1/3) Governmental possession of over 1/3 of all stocks

Regulation on special companies

1. Regulations regarding interconnection [Main regulations] Authorization/notification and publication of

reference interconnection offers Accounting separation

2. Prohibiting anti-competitive activities [Main prohibited activities] Abuse of information obtained through

interconnection Discriminatory treatment among operators Unjust intervention in other companies (including

content providers, manufacturers and sales companies)

3. Functional separation (only NTT East/West) Separation of the “facility department” and the

“sales department”

Regulation on dominant carriers

NTT Act

Telecomm

unications B

usiness Act

Responsibility to provide universal services Line-of-business restrictions

18

Local telecommunications business in western Japan

Facility department

Sales department

Monitoring department

MIC

Annual report

(If necessary) - On-site Inspection - Administrative order

Supervision for effective functional separation

Chief information manager on

interconnection

• The MIC has assured a certain level of equal access to the bottleneck facilities of NTT East & West through such measures as accounting separation and access/interconnection rules.

• For further assurance of equal access, the firewall between the facility department and the sales department was strengthened by such means as (1) establishing an exclusive facility department, (2) appointing a chief information manager on interconnection in the facility department, and (3) establishing a monitoring department on interconnection affairs.

NTT East/West

“Functional Separation” of NTT East & West 19

Came into effect in November 2011

Review of Operators Subject to Mobile Regulations

(1) Curtailment of the disparity of negotiating power

(2) Development of MVNO entry

All the major 3 operators should be subject to the designation.

“10% share” should be the threshold, in reference to the competition law.

The threshold was reduced from “25% share” to “10% share”.

44.1%

26.6%

22.6%

6.7% NTT DoCoMo

KDDI

Softbank Mobile

Others

(Reference) Share(*) of mobile phone and PHS

(Dec. 2012)

(*) shares in the number of mobile phone terminals

• The MIC amended the ministerial ordinance in June 2012. By way of this amendment, the threshold of the designation concerning the “Category II designated telecommunications facilities” rule, which imposes regulations for fairness and transparency of interconnection charges, etc. on specific mobile operators, has been reduced from “ over 25% terminal share” to “over 10% terminal share”.

• As a result of this amendment, Softbank Mobile has become subject to said designation, in addition to NTT DoCoMo and KDDI.

20

Disparity of negotiating power in interconnection among 3 operators (NTT DoCoMo, KDDI, and Softbank Mobile) has decreased as their market shares close.

While more MVNO entries are desirable, even MNOs with a small market share can have stronger negotiating power vis-à-vis MVNOs.

21

Competition Evaluation

Outline of “Competition Evaluation” ‘The amendment to the Telecommunications Act’ in 2003, has converted the regulatory framework

from ex-ante regulation to ex-post regulation. The MIC has introduced the “Competition Evaluation” as a means to comprehend rapidly changing

market trends accurately. Results of the evaluation are used as fundamental data for policy making.

22

Scope of analysis and evaluation in the “Competition Evaluation in FY２０１１”

Field Market Notes

Voice Fixed Fixed phone (including 0ABJ-IP phone)

Relay phone ･Not evaluated

050-IP phone

Mobile Cell phone, PHS

Data Mobile Cell phone, PHS, BWA, LTE

Fixed Broadband as a whole

FTTH

ADSL ･Not evaluated ･Comprehend relationships to FTTH in “broadband as a whole”

CATV internet

Narrowband (including ISDN) ･Out of scope

ISP ISP

Wholesale WAN

Leased line

Main topics of the results of “Competition Evaluation in FY2011” (1) 23

NTT DoCoMo’s position of possibly exercising market power might have a tendency to subside gradually, partly in light of the recent trend of its share decrease (even at a high level), the average rates of a monthly increase in the numbers of subscribers, and the status of number portability.

There might be little possibility for NTT DoCoMo to exercise its market power individually or collectively, partly in light of the status of campaign development of retail rates or others, the potential pressure of MVNOs and the status of each operator’s service including those in cooperation with OTT players/handset makers or others.

There is no indication that a certain mobile operator forms its market power through cooperation with OTT players/handset makers at this time, judging partly from circumstances where no specific operators might enclose their own customers through cooperation with OTT players/handset makers or other means.

Mobile market

Through “Competition Evaluation”, the MIC found as follows:

24

NTT East in eastern Japan and NTT West in western Japan have positions of possibly exercising their market power individually, partly in light of the shares by operator, the degree of market concentration, and concern about leverage from the fixed phone market.

There might be little possibility for NTT East & West to exercise their market power in reality under the regulation on “Category 1 designated telecommunications facilities,” partly in light of the fact that rates of increase in numbers of FTTH subscribers have a tendency of slowing,.

NTT East & West and other operators with large shares would have possible positions to exercise their market power collectively, judging only from shares by operator. However, there might be little real possibility of this considering the current status of competition in the fixed broadband market.

Fixed broadband market

Main topics of the results of “Competition Evaluation in FY2011” (2)

25

FTTH Market

In eastern Japan, NTT East might be in the position of possibly exercising its market power individually. However, there might be little real possibility under the regulation in “Category 1 designated telecommunications facilities,” in light of the fact that the rates of increase in the numbers of FTTH subscribers have a tendency of slowing, analysis of wholesale transactions, and the status of recent service-based competition.

In western Japan, NTT West might be in the position of possibly exercising its market power individually, which is degrading when compared to NTT East. In addition, as well as eastern Japan, there might be little real possibility under the regulation on “Category 1 designated telecommunications facilities,” in light of analysis of wholesale transactions, and the status of recent service-based competition.

Main topics of the results of “Competition Evaluation in FY2011” (3)

Implementation Plan of “Competition Evaluation in FY2012” 26

New subjects for analysis

Analysis of competitive conditions from the viewpoint of new entrants (MVNOs)

Trends of the spread of collaborated services, such as collaboration of smartphone and FTTH, and influence thereof on competitive conditions

Partial change of market definition

Reinforcement of analysis and evaluation of demand-side data

Defining “Mobile ultra-high-speed broadband”(LTE/BWA) as a partial market of “Data”(mobile), in accordance with rapid changes in the telecommunications market structure

Adding “Quality of services” and “Costs of changing services” to analytical indicators, besides “Rate,” which is already in use

The result of the evaluation is to be published around summer of 2013