New Courses for New Horses:Alternative Approach for an OTT-based Broadband Ecosystem

Toshiya Jitsuzumi, Dr., Professor, Chuo University

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Background, purpose and agenda

Purpose• To summarize the issues caused by

the increasing dominance of OTTs, and propose a new set of policy.

Agenda1. The current situation2. Issues for policymakers3. Proposal for policymakers4. Conclusion

Background• The rapid development of ICT

has led to the emergence of OTTs.

• Broadband policies have to be adjusted to these new phenomena.• OTTs can improve market

efficiency.• OTT can cause anti-competitive

issues.

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OTT market

textvoice video gameother

content

dumb pipe

platform

After hyper-giants

3 types of OTT services and OTT players

• OTT services• OTT telcos

• OTT CAPs

• OTT platforms• OTT platformers

OTT markettelecom market

voice text video gameother

content

dumb pipe

OTT CAPsOTT

telcosOTT CAPs

platformOTT platformers

OTT telcos

Before hyper-giants

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Economic impact of OTTs

• As the entry barrier into the OTT business is low, the number of OTT players and their economic significance are increasing rapidly.

Source: Created from Fig. 2-2-1-2 in MIC (2016b)

Wearable Service

Wearable Device

Pay Video Streaminge-commerce

Sensor Device

Cloud Service

Fixed Network Facility

Date Center

Pay Music Streaming

Mobile Data Service

Mobile Network Facility

Mobile Voice Service

Tablet PC SmartphoneMobile PCDesktop PC

Upper Layer

Lower Layer

Market Size (in million$)

Annual Grow

th Rate

• As of 2015, the market sizes of many OTTs are smaller than the traditional network operators and device manufacturers, but their annual growth rates are much higher. (MIC, 2016b)

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2. Better performance• OTTs are free from legacy infrastructures and can easily adopt state-of-the-

art technology; thus, can realize higher efficiency and provide more benefits to the consumers.

3. More competition• OTT players can exert a significant competitive pressure on existing

network operators.

CAPs

Platforms

EquipmentDevices

Networkservices

1. Regime change• OTT is taking the

place of traditional telecom players.

Impacts on the broadband ecosystem

2. Better performance• OTTs are free from legacy infrastructures and can easily adopt state-of-the-

art technology; thus, can realize higher efficiency and provide more benefits to the consumers.

3. More competition• OTT players can exert a significant competitive pressure on existing

network operators.

Prior to 1995 1995 - 2005 2005-present

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Related issues

• Public utility regulations• Interconnection rules among operators• Asymmetric regulations on SMPs

• Business domain control on SMPs• Open network

• Network neutrality

• Interconnection rule among ISPs

• Freedom of speech of platforms

• Freedom of speech of creators• Incubation policy for creators

Network operators

OTT platformers

Internet service providers

OTT telcos, OTT CAPs

OTT layer

Network layer

• X-neutralities• Content neutrality• Search engine neutrality

• Competition policy• Level Playing Field Argument

• Cyber security• Digital divide

Industrial policy for OTT players

• Competition policy• Level Playing Field Argument

• Cyber security• Digital divide

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• The success of OTT telcos has led the traditional companies to start calling for a level playing field.

• Traditional “public utility” framework rests upon three conditions:

i. natural monopoly, ii. national minimumiii. network effect

Level Playing Field Argument

• The success of OTT telcos has led the traditional companies to start calling for a level playing field.

• Traditional “public utility” framework rests upon three conditions:

i. natural monopoly, ii. national minimumiii. network effect Regulation for natural

monopoly

Regulation for having network bottleneck and/or

spectrum license

Regulation for having network effect/externality

Price regulation and Entry/exit regulation

Rules for unbundling, interconnection, and/or

standardization

Rules for interconnectionTransparency rule

Regulation for being a national minimum

Universal service obligation, USF

Regulation for being a communication media

Communication secrecy, Neutrality rule

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• The success of OTT telcos has led the traditional companies to start calling for a level playing field.

• Traditional “public utility” framework rests upon three conditions:

i. natural monopoly, ii. national minimumiii. network effect

Level Playing Field Argument

• The success of OTT telcos has led the traditional companies to start calling for a level playing field.

• Traditional “public utility” framework rests upon three conditions:

i. natural monopoly, ii. national minimumiii. network effect

Regulation for having network effect/externality

Rules for interconnectionTransparency rule

Regulation for being a communication media

Communication secrecy, Neutrality rule

Regulation for being a content application

provider

Freedom of speech, decency rule

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Related issues

• Public utility regulations• Interconnection rules among operators• Asymmetric regulations on SMPs

• Business domain control on SMPs• Open network

• Network neutrality

• Interconnection rule among ISPs

• Freedom of speech of platforms

• Freedom of speech of creators• Incubation policy for creators

Network operators

OTT platformers

Internet service providers

OTT telcos, OTT CAPs

OTT layer

Network layer

• X-neutralities• Content neutrality• Search engine neutrality

• Competition policy• Level Playing Field Argument

• Cyber security• Digital divide

Industrial policy for OTT players

• Network neutrality

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Net neutrality is an interface problem

• “How to guarantee the openness or neutrality for the usage of underlying facilities” has become a critical policy issue in the world of data-hungry content/application.• This issue has two facets:

1. how to control the congestion and finance the network investment

2. how to regulate the anti-competitive potential of the network operators

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Issues in the OTT platformer layer (1/2)

1. Several neutrality concerns in their business practices• Various neutralities (Easley et al., forthcoming)

• Net neutrality• Search neutrality• Operating system neutrality• App store neutrality• Ad block neutrality…etc.

2. Data-driven monopoly• Several policymakers have recently expressed some concerns.

“e2e neutral” services

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Issues in the OTT platformer layer (2/2)

3. Difficulty in disciplining the multisided business model• Multisidedness enables

platformers to cover the cost of a given service by users of different services.

Traditional price control is useless.The traditional regulatory framework implicitly assumes that the cost of a service has to be recovered directly from its users.

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• powerful influence to transform the whole ecosystem, etc.

• Since OTTs face very few obstacles to relocate and move away in search of a better policy environment, it is important to maintain regulatory parity.

Risk of regulatory shopping

• Industrial policies should reflect the OTTs’ unique characteristics:• a lack of huge network ownerships• weak financial resiliency• powerful influence to transform

the whole ecosystem, etc.

• Since OTTs face very few obstacles to relocate and move away in search of a better policy environment, it is important to maintain regulatory parity.

Source: http://www.yourdictionary.com/images/definitions/lg/12171.parity.jpg

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As a “wait-and-see” approach is not possible, policymakers must act now.

But as we cannot prepare everything on an ex-ante basis, policymakers should be unobtrusive.

1. Since all issues are interrelated, policymakers need to adopt a holistic approach, cooperating with other stakeholders.

2. Theoretical analysis is still scarce in the field, except analysis relating to net neutrality.

3. The business model and underlying technology of OTTs are rapidly changing.

Concerns in policy development

1. Since all issues are interrelated, policymakers need to adopt a holistic approach, cooperating with other stakeholders.

2. Theoretical analysis is still scarce in the field, except analysis relating to net neutrality.

3. The business model and underlying technology of OTTs are rapidly changing.

As a “wait-and-see” approach is not possible, policymakers must act now.

But as we cannot prepare everything on an ex-ante basis, policymakers should be unobtrusive.

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Therefore,

• The first priority then should be not to jeopardize the smooth development of the broadband ecosystem and accept the cost of failure within a reasonable range.

• It is also important to minimize the possibility of “government failure” due to the paucity of related data and information asymmetry.

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Concept design of OTT policy framework

OTT-based

broadband

ecosystem

SMP regulation only

on giant players

Level playing field rule

as long as there is

economic substance

This is where

policymakers

should focus

Input through co-regulation

Consumers

Retail

market

• Transparency requirement

• Consumer educationAnti-trust safeguard

Due to the Moore’s Law, the supply-side

situation changes too fast for the

policymakers to follow; thus leave the

ecosystem to the market dynamism unless

anticompetitive harm becomes clear.

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No one-size-fits-all solution

• Due to the lack of sufficient policy experience and academic literature in this field, a case-by-case approach should be followed.• For example, it is not appropriate to design a uniform policy for the

zero-rating issue.

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Conclusion

Emerging OTT-based

ecosystem

• Moore’s law• Ubiquitous broadband network

Policy challenge

• Establish a level-playing field• Interface problem (i.e. X-neutrality)• Prevent anti-competitive behaviors• Maintain international parity

New Courses for New Horses

• Ex-ante basis• Focuses primarily on the consumer side• A case-by-case approach• Co-regulation feature to prevent information asymmetry• A fact-driven approach

OTT-based broadband ecosystem

SMP regulation only on giant players

Level playing field rule as long as there is

economic substance

This is where policymakers should focus

Input through co-regulation

Consumers

Retail market

Transparency requirementConsumer educationAnti-trust safeguard