An Analysis of Prerequisites for Japan’s Approach to Network Neutrality

Abstract

Despite the large investments made by network operators, due to the much higher pace of growth in the demand for data communication, the phenomenon of traffic congestion can be observed these days. This harms user experience and has resulted in network neutrality concerns being raised in many developed countries. From an economic viewpoint, the network neutrality problem is a combination of a congestion problem caused by limited network capacity and an anti-competitive problem caused by the dominance of major ISPs. In Japan, where asymmetric regulation on the incumbent NTT has successfully maintained competitiveness in the retail ISP market, the Ministry of Internal Affairs and Communications (MIC) sees no immediate need to act against the anticompetitive behaviors of dominant ISPs; as such, it has focused on fighting network congestion and introduced a “coregulation”-like framework (MIC 2007; JAIPA et al. 2010). The validity of this approach is heavily dependent on two prerequisites: (a) effectiveness of asymmetric regulation or degree of competitiveness in the broadband ISP market and (b) sufficient user literacy on network quality. According to MIC (2011), the share of top three ISPs has been decreasing over the last 5 years and Herfindahl-Hirschman Index is only 1,289 as of the end of March 2011, both of which suggest that the market has no immediate anticompetitive threat. In addition, MIC’s guideline for consumer protection stipulates ISPs to make proper disclosure. However, these facts may not be perfect guarantors that the two prerequisites are met. This is what this paper attempts to clarify. First, as for checking the competitiveness of the ISP market, this paper focuses on switching costs, which indicate the degree of competitiveness from the viewpoint of existing users. The author adopted two approaches: one is model based and the other is questionnaire based. In the former, the switching costs were estimated using MIC’s data, relying on a model proposed by Shy (2002). The result shows that smaller ISPs need to offer almost zero, or sometimes negative, prices to penetrate into major players’ turf. Similar conclusions were confirmed by the latter approach, although from only preliminary calculations. From a policymaking perspective, this suggests that there is a good reason to worry about anti-competitive behaviors, such as “unreasonable” traffic management. Second, as for user literacy, web-based questionnaires suggest a serious deficiency in end users’ literacy on broadband quality of service (QoS). This finding implies that the Japanese “coregulation”-like approach is nothing more than an armchair theory since uninformed users cannot make any meaningful contributions to set the packet-shaping standard, and that ISP competition is far from effective. Overall, these findings suggest that the status-quo cannot guarantee the proper functioning of MIC’s network neutrality approach. In order to improve the situation, the author proposes introducing non-price competition in the ISP market. For this purpose, the author first suggests the necessity of an “ISP sommelier,” who can help improve end users’ QoS literacy by making ISP’s disclosure easy to understand; and then evaluates the business possibility of such new intermediaries. Finally, based on an estimate of a conjoint method on the web-questionnaire data, the author quantitatively evaluates how smaller ISPs can offer better QoS to compete effectively with major ones protected by formidable switching costs. References JAIPA, TCA, TSA, JCTA, & MVNO Committee. (2010) Guideline for packet shaping (revised). MIC (2007) “Report on network neutrality.” MIC (2011) “Competition review in the telecommunications business field in FY 2010.” Shy, O. (2002) “A quick-and-easy method for estimating switching costs.” International Journal of Industrial Organization, 20(1), 71-87.