June 6, 2002
Ministry of Public Management,
Home Affairs,
Posts and Telecommunications

Final report from Study Group on New Business Models and Grand Design of the Competitive Environments for the New Information and Communications Era



The Study Group on New Business Models and Grand Design of the Competitive Environments for the New Information and Communications Era recently finished compiling its final report on "How competitive environments in the telecommunications business field should be established in the broadband age." The MPHPT set up the study group (Chairman: HAMADA Junichi, Professor of the Graduate School of the University of Tokyo) in August 2001.

For details refer to the Japanese web site
http://www.soumu.go.jp/menu_news/s-news/daijinkanbou/020606_3.pdf

Please refer questions concerning this press release to:

International Policy Division, International Affairs Department
Telecommunications Bureau
Ministry of Public Management, Home Affairs, Posts and Telecommunications
Tel: (03) 5253-5920 Fax: (03) 5253-5924
feedback_e-telecom@soumu.go.jp



Tentative translation
Study Group on New Business Models and Grand Design of Competitive Environments for the New Information and Communications Era

Final Report


How Competitive Environments in the Telecommunications Business Field Should Be Established in the Broadband Age


(Summary)

Chapter 1       The basic perspective on competition policies in the future

Necessity of competition policies for the broadband age
(1) Considering how competition policies in the telecommunications business field should be in the future, it is necessary to accelerate the stream of broadband and to establish an environment in which fair competition enables a variety of business models to emerge through lively competition. It is especially necessary to examine this in light of the changes in the network and market structures brought about by the move to broadband.

The basic perspective of layer-focused competition policies
(2) Due to the progress in unbundling the functionality of all of the layers (see Figure below) that accompanied the development of broadband communications, business models have emerged such as the "open access" business model that provides services by freely combining what is required for each layer, and as new business models within the higher layers (e.g., the iDC (Internet Data Center) business). It is -necessary to examine the approach for both inter-layer fair competition environments and intra-layer fair competition environments.

Basic view of layer-focused competition policies

an enlarged image(PDF)

Basic approach to establishing rules for competition
(3) In planning how to establish rules for competition, a look at a variety of actions that can foster competition, such as those below, is required in addition to giving priorities to "ensuring the transparency and predictability of the system," "establishment of rules that promote competition" and "ensuring due process."
1) Implementing regular reviews of effective competition
2) Creating close interaction between the dispute resolution process among carriers and establishing the rules for competition
3) Establishing guidelines for competition
4) Creating close interaction between Telecommunications Business Law and the Antimonopoly Act
5) Valuing the importance of user protection

Chapter 2       Inter-layer business models and competitive environments

Assessment of inter-layer business models
(1) One characteristic of inter-layer business models that has been emerging recently is that in addition to the "vertically-integrated single model," there is also now a "joint model." In a "single model," individual carriers develop their own independent businesses, such as mobile communications carriers. In a "joint model," multiple companies join together, with each contributing its business resources to its own particular layer and combining all of the parts in order to form an "open-access" business model. As a result, compared with what has been the case in the past, it is expected to see market competition stimulated by more carrier groups (competition axes) will emerge.

Inter-layer businesses models developed by dominant carriers
(2) Among inter-layer business models developed by dominant carriers
1) For NTT East/NTT West (whose scope of business activities is restricted by the NTT Law to the regional telecommunications business, but who can, with the authorization of the Minister of Public Management, Home Affairs, Posts and Telecommunications under specific conditions, expand its scope of business activities to the upper-level layers across prefectural boundaries), it is necessary to review each case carefully to determine if fair competition requirements are satisfied or not, according to the "Guideline for authorization on NTT East/NTT West expanding their business activities," which was drawn up and publicly announced in December 2001.
Further, from the viewpoint of achieving the smooth distribution of content, the provision of open access to the platform layer where authentication/billing, etc. are performed is an extremely important element, and if NTT East/NTT Wesenter platform layer business, it may also be necessary to examine the necessity, etc. of unbundling of platform-business-related functions (those recognized as indispensable elements for provision of similar services by other carriers).
2) With respect to NTT East/NTT West subsidiaries advancing into higher-level layers, in general, it cannot be said that this is an indiscriminate loss of fair competition, but there are fears that in reality this has the same effect as NTT East/NTT West itself advancing into the higher-level layers. If, after this situation has been adequately examined, it is determined that structural problems are occurring, or that there is a substantial risk of their occurring, with respect to fair competition, it may be necessary to examine whether to take new measures, including enhancing the scope of "specific related companies" (currently limited to telecommunications carriers) within asymmetrical regulations (regulations for dominant carriers) and, with reference to the situation in other countries, whether to introduce the concept of group dominance, if necessary.

Inter-layer businesses models developed by mobile communications carriers
(3) In the mobile Internet field, each group is working on measures that will open their networks, such as "opening gateways for ISPs (Internet Service Providers)," "ensuring the transparency of procedures for adopting content on their official portal sites" and "ensuring the equal-footing basis in selection of portal sites by users," and it is necessary to continue to carefully watch how they handle these issues from now on.

(4) As for ensuring the transparency of procedures for adopting content on their official portal sites, a proposed idea by one group to enhance authentication and billing services to unofficial sites as well is highly evaluated. Thus, further proceedings for specific discussions on it at other groups and for preparation of a new specific proposal is expected. Further, under the situation of opening gateways for ISPs is in progress, ensuring the equal-footing basis in selection of portal sites by users will become a more important issue than ever before. It is expected that telecommunications carriers discuss and manage this positively.

(5) In the mobile communications field, in light of the fact that telecommunications carriers are in an overwhelmingly superior position compared to content providers, etc., it is effective to make "prohibited practices constituting problems under the Telecommunications Business Law," pertaining to transactions between mobile communications carriers and content providers, to the extent necessary, more specific, upon the review (within CY2002) of the "Guidelines for Promotion of Competition in the Telecommunications Business Field" (competition guidelines) formulated and publicly announced in November 2001.

Chapter 3       How competitive environments should be established within each layer

How competitive environments should be established within the network layer
(1) To stimulate competition in local telecommunications markets through the diversification of subscriber local loops, it shall be necessary to promote further the following items set forth in the interim report:
1) Diversification of wireless access networks (creating high-speed Internet access environments using wireless LANs in locations expected to be "hot spots," such as airports and train stations, etc.)
2) Diversification of fixed access networks (smoothing the achievement of a broadband environment in apartment buildings, achieving high-speed telecommunications services through the use of existing metallic lines (for example, VDSL (Very high-bit-rate Digital Subscriber Line)), etc.)
3) Immediate achievement of the resale of public switched networks (now under consideration at the council composed of telecommunications carriers, etc.; to be compiled in the draft final report of the Telecommunications Council in June 2002)
4) Promotion of smoother exercise of rights-of-way (MPHPT reviewed the "Guideline for Use of Utility Poles, Ducts, Conduits, Etc. in the Telecommunications Field" in April 2002; the progress in use of facilities will be deliberated every April and be reviewed based on the results.)
5) Periodical review of access network bottlenecks (related to "effective competition review" in Chapter 4)
6) Achievement of more diverse and lower fees and services

(2) As for diversifying trunk line networks, it shall be necessary to promote further the following items set forth in the interim report:
1) Cultivate wholesale markets based on the emergence of bandwidth trading/intermediation businesses
2) Promote less costly backbone lines (measures for simplifying licensing procedures pertaining to specialized carriers only in providing wholesale telecommunications services were already taken; meanwhile, establishing local Internet-eXchanges (IXs) integrated with data centers, etc. is to be proceeded.)
3) Make effective use of fiber-optic networks owned by those other than telecommunications carriers (with respect to the formulation of the "Standard Procedures for Providing Fiber-Optic Networks to Telecommunications Carriers (tentative name)" targeted to local governments, etc. set forth in the interim report, shall be formulated and released publicly by MPHPT within FY2002)

(3) As for the network resale markets, for example, in the mobile communications market where the number of licensed carriers is limited due to availability of frequencies, from the perspective of stimulating markets through the introduction of MVNOs (Mobile Virtual Network Operators) with a variety of business models, in order to make MVNO-related administration more transparent and foreseeable, the preparation and official announcement of "Guidelines for Becoming an MVNO (tentative name)" was stated in the interim report (based on the interim report, MPHPT will prepare the "Guideline Concerning Application of the Telecommunications Business Law and the Radio Law Pertaining to MVNO" by around May 2002). As for MNOs (Mobile Network Operators), the existing mobile telecommunications carriers, it is not appropriate to impose on MNOs obligation to resell services to MVNOs, at least at the present time, taking into consideration fears that motivation to invest in telecommunications facilities by MNOs will decline.

How competitive environments should be established within the platform and other layers
(4) As a way of establishing an environment conducive to smooth content delivery, it is appropriate for standardization organizations to begin examination quickly to reach a conclusion concerning self-regulation (self-authentication) standards for a best effort model of Internet service quality (for example, deciding on a standard network model, setting objective benchmark values or fixed range values, and presenting users with classes of service quality) was set forth in the interim report (based on the interim report, MPHPT will carry out the research and development such as a transmission speed estimator for DSL services, necessary for quality evaluation, while continuing domestic studies on standardization of the quality assessment by taking into account study trends on the quality of IP networks, etc. at ITU.).

How competitive environments should be established within the terminal layer
(5) In the mobile communications field, a vertical integration business model has been adopted whereby terminal sales and telecommunications services (users' choice of telecommunications carriers) are bundled (integrated), prices for terminal equipment are set lower than costs, and losses from terminal equipment are recovered from telecommunications charges.

(6) However, along with the introduction of next-generation cellular phones (3G), new capabilities are coming into view, such as releasing locks on UIM (User Identity Module) cards, which makes it possible to unbundle terminal sales and telecommunications services, using these same cards as new electronic authentication cards, as well as the realization of number portability in the mobile communications field. To examine these in an integrated manner, the interim report proposed that it is appropriate to organize a group where manufacturers, telecommunications carriers, and administrative authorities can consult with each other (based on the interim report, during FY2002, MPHPT will organize a study group including telecommunications carriers, terminal vendors, etc. to discuss issues such as specific methods, practical measures and their cost estimation with introduction, etc. related to the realization of mobile phone number portability and releasing locks on UIM cards).

Chapter 4       How competitive environments should be established to meet widespread introduction of IP

Basic approach
(1) It is predicted that IP-based services business markets will grow quickly due to the widespread introduction of IP along with dissemination of broadband networks. Accordingly, it is necessary to study the impact of the widespread introduction of IP on the network structures and market structures, and influences of these changes on the establishment of the competitive environments.

Change of the network structure from the circuit switched network to the IP-based network
(2) With respect to changes in the network structure, it is appropriate to classify those changes into access networks and trunk line/backbone networks:
1) As for access networks, it is considered that demands for more convenient IP-based integrated services will increase according to the shift from existing asymmetric (downstream only) broadband networks to symmetric (downstream and upstream) broadband networks due to diffusion of P2P (peer-to-peer) communications, online storage services, distributed computing (grid computing), digital collaboration environments, etc. In this case, as for general users, a large portion of them may still use circuit switched network-base services until technical problems associated with IP telephony services (eg., communication between different protocols) are solved. Thus, regardless of an acceleration of IP technology introduction, circuit switched networks and IP-based networks will continue to coexist for a while. On the other hand, as for corporate users, introduction of full- IP services will be accelerated in both trunk line and access networks.
2) As for trunk line/backbone networks, IP will be introduced widely due to the network construction of IP-VPNs and wide-area Ethernet, etc. In this case, a hierarchical structure may still remain as a network structure.

Change of the market structure due to progress of IP-based network construction
(3) Due to progress of IP network construction:
1) Firstly, integrated services will be diffused, such as introduction of services integrating voice, images and data, and the realization of a ubiquitous environment, etc. through seamless services regardless of fixed or mobile telecommunications.
2) Secondly, many new business models will be introduced to the markets based on new telecommunications features such as flat-rate tariffs by transmission capacity or transmission speed along with an expansion of web services (market expansion of B2B and B2E (employee)) due to the diffusion of P2P or machine-to-machine communications.
3) Thirdly, competition among telecommunications carriers will come into a new stage. That is, new entries into the market will become easier due to the progress of IP introduction. With regard to facilities-based existing telecommunications carriers, their investments will be concentrated on IP-related facilities rather than circuit switched facilities. Taking into account the decrease in profitability derived from the progress of IP introduction, it is strategically crucial for existing telecommunications carriers to facilitate the effective expansion of the scope of business from the conventional services to the vertical integration business model including upper-level layers and the solution business. Under such circumstances, it is vital to study necessary policy supports such as tax incentives and public loan programs in order to encourage the introduction of IP.

How competitive environments should be established to meet the progress of IP network construction.
(4) The progress of IP introduction will bring about acceleration of widespread use of integrated services, facilitation of market entries into the telecommunications business, emergence of new business models, etc. It may bring about changes to profit structures and business models of existing telecommunications carriers, thereby it may cause drastic changes of telecommunications market structures. Therefore, in the case of study on how competitive environments should be established, it is essential to discuss frameworks to meet such circumstances by taking into account the prediction of a substantially matured stage of IP introduction.

(5) With respect to the pro-competitive policy for meeting the widespread use of IP in the telecommunications business field, it is crucial and effective to promote the competition in both infrastructures and services. To this end, it is essential to study them based on three basic approaches ensuring: i) neutrality in the competition; ii) technical neutrality; and iii) access to the broadband without regional omnipresence. Specifically , the following matters shall be studied:
1) Firstly, with respect to the revision of regulatory levels of the applicable regulations by market, it shall be necessary to examine the possibility of market substitution, the current status of competition for infrastructure and service markets as well as the inter-market relationship between these (related to the recognition of market dominance), in addition to the impact of the vertical integration business model through periodical implementation of effective competition reviews. For this purpose, through the establishment of another study group, it is appropriate to positively work on the development of analytical methods and to conduct effective competition review targeting the Internet access market, etc. on a trial basis within FY2002.
2) Secondly, it is vital to flexibly review functions subjected to opening (unbundling) up of the platform layer owned by dominant telecommunications carriers in particular under the circumstance of ongoing IP introduction.
3) Thirdly, it is essential to discuss the revision of the service classification in connection with the revision of business classification in the telecommunications business, desirable tariff regulation systems, technical standards, etc., with the advent of integrated services handling voice, data and images.
4) Fourthly, where there are matters to be added to the Rules for Interconnection, it is necessary to take a prompt action, since the expansion of interconnection forms such as transit and peering, transition to multi-stage interconnection forms, the increased ratio of flat-rate access charges, etc. are envisaged to take place in the progress of IP introduction.
5) Moreover, it is essential to discuss the revision of technical standards to meet the progress of IP introduction (required to implement comprehensive review of technical standards, etc.), ensuring universal services (study on a concept of introduction of "the universal access" in the future), ensuring international consistency pertaining to regulatory frameworks for competition, etc.

Chapter 5       Themes in the future

(1) With respect to the desirable pro-competitive policies for broadband networks in the telecommunications field, this final report studied the issues based on the following three points of views:
1) The viewpoint that it is necessary to study a variety of new business models and to establish competitive environments enabling these business models to develop without any restriction.
2) The viewpoint that it is vital to promote establishment of environments for the fair competition for both inter-layer business models and various business models in each layer by setting the layers as a basis of deliberations.
3) The viewpoint, including mid-term perspectives, that it is essential to continuously review competition rules, along with widespread deployment of broadband IP-based platforms, in response to changes in network and market structures.

(2) In addition to efforts for steadily promoting the "new pro-competitive policy menu for the broadband age" proposed in the interim report, it is requested that integrated and comprehensive IP policy be studied by organizing and examining various aspects of the wide-ranging IP-related policies including i) forecasting future trends in the network structure to meet the widespread introduction of IP, ii) forecasting trends in IP-related technologies and services, iii) promoting R&D to meet these technological trends and user supports to meet these service trends, and iv) offering public supports for the smooth dissemination of IP.