Means and Ends toward Broadband: Relaxing Net Neutrality

Means and Ends toward the Broadband Society
Net Neutrality and Over-the-top Players
Toshiya JITSUZUMI, D.Sc.,
Kyushu University
T.JITSUZUMI@ITSRegionalComference(LA, USA,Oct.25-28, 2015) 1

Purpose and agenda
The purpose and conclusion:
- to reconsider what Prof. Wu suggested in his
famous 2003 paper.
◦ A strict net neutrality principle is not optimal
and should be relaxed to accommodate the
local needs of individual markets and reflect
their developmental stages.
◦ Net neutrality is a means not an end.
Agenda
1. Means and Ends
2. Case of developing nations
3. Case of developed nations
4. Conclusion

What Prof. Wu said in 2003 is…..
Network neutrality, as shorthand for a system of belief about
innovation policy, is the end, while open access and
broadband discrimination are the means (Wu 2003, p.144)

Means and Ends
The goal of telecom regulators is to maximize social welfare by means of
broadband development.
◦ Many governments have been improving their nations’ broadband
environments because broadband is widely believed to be a
precondition for economic prosperity and social progress.
Indeed, in the Open Internet Order, the FCC says that
◦ “The open Internet drives the American economy and serves, every
day, as a critical tool for America’s citizens to conduct commerce,
communicate, educate, entertain, and engage in the world around
them.” (para.1)
Because there are a variety of policy tools to improve broadband
environment and depending on the development stage of individual
nation, priority among each tool must be adjusted accordingly.

Case of developing nations
T.JITSUZUMI@ITSRegionalComference(LA,USA,Oct.25-28,2015) 5
"IMFDevelopingCountriesMap2014" byBernardoTe-Ownwork.LicensedunderCCBY-SA3.0viaCommons-
https://commons.wikimedia.org/wiki/File:IMF_Developing_Countries_Map_2014.png#/media/File:IMF_Developing_Countries_Map_2014.png

Priority for developing nations’ telecom policy
In the early stage of ICT development, increasing broadband coverage and penetration as well as
closing national and transnational digital gaps are the most important telecom policy objectives.
0
10
20
30
40
50
60
70
80
90
Individuals using the Internet
per 100 inhabitants
Developed
Developing
World 0
10
20
30
40
50
60
70
80
90
100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Mobile BB per 100 inhabitants
Developed
Developing
World
0
5
10
15
20
25
30
35
Fixed BB per 100 inhabitants
Developed
Developing
World
Source: Created based on the ITU database

The reason behind this divide
One main reason for this divide is differences in income levels.
◦ Zhang (2013) showed that GDP per capita has a positive correlation with the speed of Internet
diffusion.
◦ Andrés, et al. (2010) empirically discovered that, when considering network effect for the period
1990–2004, “low- and high-income countries clearly in different phases of the process of Internet
adoption” (p.335).
◦ As for fixed broadband penetration, using data related to OECD countries, Lin and Wu (2013) found
that income, education, and the variety of Internet content can facilitate broadband adoption in the
innovator and early adopter stage.
In summary, although ICT development has reduced the cost of Internet and broadband
usage every year, for people in developing nations, broadband remains a luxury.
But it is also plausible that Internet adoption, especially broadband adoption, is an
essential means for economic development and higher income.

Expectations from the international society
"Broadband networks offer perhaps the greatest opportunity we
have ever had to make rapid and solid advances in global social
and economic development – across all sectors, including
healthcare, education, new job opportunities, transportation,
agriculture, trade and government services.
In the twenty-first century, broadband networks therefore need to
be considered as basic critical infrastructure, like roads, railways,
water and power networks.”
Mr. Houlin Zhao, ITU Secretary-General
Source: http://www.itu.int/en/action/broadband/Pages/default.aspx

Some empirical findings using panel data sets
Gruber et al. (2014)
◦ This paper found that the overall future benefits in broadband outweigh the investment costs for
the European Union as a whole for the highest performance technologies and that same conclusion
could hold also for the majority of member states individually. They further extrapolate the returns
by country, suggesting a rationale for the governmental support for broadband development.
Koutroumpis (2009)
◦ Using the data of 22 OECD during the period of 2002–2007, this paper found a significant causal
positive link especially when a critical mass of infrastructure is present.
Ng et al. (2013)
◦ Using the panel data of 10 ASEAN countries from 1998 to 2011, this paper found that broadband
deployment has a positive relationship with economic growth.
Auriol and Fanfalone (2014)
◦ A three-fold increase in mobile broadband penetration in developing regions of the world will attain
a B/C ratio ranging from 14.41 to 21.74. This means that every dollar spent will generate between
$14.41 and $21.74 to the society.

Positive feedback loop
These findings suggest positive feedback loops: higher broadband penetration will increase the income
level of a nation, which in turn facilitates further broadband penetration.
More
broadband
Higher
income

Different pictures when US data are used
Holt and Jamison (2009)
◦ This paper could not conclude the connection between
information and communications technologies and
economic growth from the US broadband experience.
Kandilov and Renkow (2010)
◦ This paper found no evidence that loans received as part
of the current Broadband Loan Program provided by the
USDA have had a measurable positive impact on
recipient communities.
Whitacre, Gallardo, and Strover (2014)
◦ This paper suggested that high levels of broadband
boosted rural economy in the US, but broadband
availability demonstrate only limited impacts.

There are several means for attaining such a policy goal.
1. If the government is sufficiently rich, spending public money in order to deploy broadband to the
people is straightforward.
◦ However, because governments in developing nations usually have additional policy concerns that
receive higher priority and because most of those governments lack investment money, traveling such a
path is practically impossible.
2. Private players take the initiative.
◦ However, relying on private initiatives may result in a suboptimal outcome because broadband
investment has positive externalities and leads to spillover benefits, as suggested by Gruber et al. (2014)
Priority for developing countries is then…
Thus, the policy focus in developing countries
must be o facilitate broadband usage as
quickly as possible with the objective of
generating the benefits of broadband through
the positive feedback loop.

“Profitable project” vs. “unprofitable but worthwhile project”
Cost borne
by a private
firm
Revenue
captured by
a private
firm
Cost borne
by a private
firm
Revenue
captured by
a private
firm
Cost borne
by a private
firm
Unprofitable project Profitable project Unprofitable but socially worthwhile project
Good Projects
Revenue
captured by
a private
firm
Positive
Externality
or
Spillover
Bad Projects

Complementary supports for the e-Japan Strategy
The e-Japan Strategy released in 2001 successfully expanded broadband availability to 30 million
households and fiber-to-the-home availability to 10 million households in less than three years, which
is two years ahead of schedule.
2000 Interconnection rules for DSL services (i.e. unbundling, collocation)
Subsidy for DSL expansion (1.85billion yen)
2001 Unbundling rules for fibers
Amendment of the Telecommunications Business Act to introduce asymmetric regulation,
Universal service fund
Enlargement and Improvement of the Act on Temporary Measures concerning
Telecommunications Infrastructure Improvement
• Improvement of the subsidy conditions for rural area development
• Expansion of the support coverage to include facilities related to DSL, FWA, and cable
Internet
Financial support for building the local intranet infrastructure
2002 Enactment of the Act on Broadcast on Telecommunications Services
Subsidy for FTTH expansion (1billion yen)

The problem is money
Developing nations, where broadband development is highly needed, usually do not have sufficient
financial strength to offer stimulus packages to broadband operators or have other priorities.

Internet.org, an attempt to internalize externality
In this circumstance, Internet.org and Google Free Zone
should be considered as a private attempt to internalize
positive externalities, without requiring spending of less well-
off governments.
◦ Because OTT firms are the most probable beneficiaries of
spillover benefits of the higher broadband penetration.
However, it is true that this is not a perfect scheme.
◦ Most importantly, this scheme does not cover all the OTT
providers, because each of them has a different future
business perspective.

But there remain issues around “neutrality”

Internet.org does have a positive side for developing nations
But I still think this should be positively evaluated from
the viewpoint of facilitating broadband development.
◦ In this scheme, OTT providers are helping mobile
broadband operators’ marketing campaign by providing
a simpler version of their services free of charge, in the
hope of recovering such expenses in the future.
◦ Considering the aforementioned positive feedback loop,
the net neutrality principle, which will ban this kind of
management maneuvering by network operators,
should be deprioritized.
Simplified ver. for Internet.org Standard version

Non-neutral mobile broadband in Japan

T.JITSUZUMI@ITSRegionalComference(LA,USA,Oct.25-28,2015) 20
Case of developed nations
"Gdpercapita"byQuandapanda-Ownwork..LicensedunderCC
BY-SA3.0viaWikimediaCommons-
https://commons.wikimedia.org/wiki/File:Gdpercapita.PNG#/me
dia/File:Gdpercapita.PNG

As of Dec. 2014 The U.S. Japan OECD average
Fixed BB per 100
DSL
Cable
Fiber
Satellite
Fixed Wireless
Other
9.6
17.7
2.8
0.8
0.3
0.2
3.7
4.7
20.7
0.0
0.0
0.0
13.4
9.1
4.8
0.2
0.4
0.2
Mobile BB per 100
Standard mobile
Dedicated mobile data
104.0
NA
NA
124.1
96.0
28.1
81.3
NA
NA
Source: Created based on the OECD Broadband statistics (http://www.oecd.org/sti/broadband/oecdbroadbandportal.htm)
Issues in these two nations
Source: http://static.guim.co.uk/sys-images/Money/Pix/pictures/2011/9/29/1317296416685/A-snail-on-a-ethernet-cab-006.jpg

A congestion problem with a little twist
Three reasons that market dynamism does not
work and traditional transportation economics
cannot be applied.
1. Internet backbone is a collective commons
supported by many individual operators.
2. Prevalence of best-effort quality may inhibit
network investment while causing no damage
on ISPs if competition is insufficient.
3. There exists a serious information asymmetry
concerning network QoS between ISPs and end
users.

Twin problems in the developing nations
Low barriers
to entry
High barriers
to entry
Demand management
Capacity development
Short-term solution
Long-term solution
How to achieve efficient and fair traffic
management in the dynamic condition?
How to calculate the optimal
capacity and how to finance it?
Congestion control over the Internet backbone
facing the exaflood of network demand
Controlled by vertically
integrated network providers
Leverage into the
neighboring market
How to discipline the behaviors of
SMPs in the communication market?
Is it efficient?
How to restrain the anti-competitive
behaviors?
Control the monopolistic leverage of SMPs
ISPs
Network operators
Users
Content providers
Application providers
Natural
monopoly
Unique business
practices

US approach to the twin problems
2015 Open Internet Order
Merger review
Anti-trust law
Duopolistic fixed ISP market

Japanese approach to the twin problems
Self-regulation by ISPs
Interconnection rules
SMP Regulations
NTT Law
Anti-monopoly act
Competitive fixed ISP market

US approach vs. Japanese approach

Reason #1: Development of wireless technology
Fiber range
ADSL range
1,000
10,000
100,000
1,000,000
10,000,000
100,000,000
1,000,000,000
Maximum download speed (bps)
Mobile PHS
2G 3G 3.5G 3.9G 4G
Source: Created using
data from NTT Docomo’s
website and Wikipedia.
0
5
10
15
20
25
30
35
40
45
0% 10% 20% 30% 40% 50%
Usagetime(min.)
Share of users among respondents
PC
Smartphone
Feature phone
Tablet
Internet TV
Source: Created based on MIC data (2014b).
The BB market in Japan will become similar to that in the US.

The BB market in Japan will become similar to that in the US.
Reason #2: Fiber wholesale of NTT East/West
Source: http://www.ntt.co.jp/news2014/1405eznv/ndyb140513d_01.html
NTT Docomo announced today that it will begin
offering "docomo HikariTM," a superfast optical-fiber
broadband service, combined with "docomo Hikari
PackTM" bundled discounts with mobile subscribers.
… By integrating ISP, wired and wireless services,
Docomo's one-stop service will simplify the
subscription process and customer support.
Source: Press release by NTT Docomo (Jan. 29, 2015).
https://www.nttdocomo.co.jp/english/info/media_center/pr/
2015/0129_00.html
Virtual integration
of NTT Docomo and NTT East/West

Fixed vs. Mobile
Dominant network operator in
the fixed market
(NTT East, NTT West)
Dominant network
operator in the mobile
market
(NTT Docomo, KDDI,
Softbank)
In-house
ISP function
Independent
ISP
Group ISP
Fixed Broadband Mobile Broadband
Independent
ISP

Possible outcome: Domination of BB by mobile carriers
Local Loop Unbundling
(dark fiber, dry copper, and line-sharing)
Pre “3G and Fiber Wholesale”
Wholesale or Interconnection
Fixed BB
Access
Wholesaler
Independent
ISP
NTT East/West
Physical
Facility
Broadband
Access
ISP
Retail
Service
Now
Fixed BBMobile BB
Mobile Operators
ISP
MVNO
Service
-based
Operator
Facility-based
Operator
ISP ISP
Service
-based
Operator
Facility-based
Operator
NTT East/West
ISP
Near future
Fixed BB
Mobile BB
Mobile Operators
MVNO
Facility-based
Operator
NTT E/W
Service
-based
Operator

Share of the Japanese mobile BB market
(as of the end of Mar. 14)
40.2%
42.5%
40.2%
40.4%
28.4%
28.1%
25.8%
25.8%
2.6%
2.6%
31.4%
29.4%
22.9%
22.6%
2.8%
2.9%
0% 25% 50% 75% 100%
mobile phone, grouped
mobile phone
mobile ISP, grouped
mobile ISP
NTT group
NTT Docomo
KDDI group
KDDI
UQ
Softbank group
Softbank
eAccess
Willcom
Wireless City Planning
Source：Created based on in MIC （2014） data
The future market share of
the overall ISP market may
look like this, if Internet
usage becomes 100%
mobile-based.

In order to deal with the traffic congestion…
The focus of the problem is how to deal with the traffic congestion efficiently and mitigate the
sluggishness of the broadband from the viewpoint of maximizing the consumers’ welfare.
The fact:
Users do not consume bandwidth.
Enjoying applications and contents smoothly is what
they are paying for. In that sense, stress-free
connectivity is the most important factor.
Source: http://www.wica.intec.ugent.be/research/quality-of-experience
ISP side User side
Marginal Cost
for Investment
Marginal Value
of QoE
improvement
The conclusion:
Maximizing end users’
utility or QoE is not
necessarily equal to
maximizing QoS.
Policymaker’s Judgement

Need for a new bottle
Thus far, the net neutrality concept has been
interpreted as an equal treatment of all packets
transmitted over the Internet.
However, a fair treatment of all QoE for users is much
more essential.
To ensure appropriate policy-making for telecom
regulators in developed countries, a different concept
other than “net neutrality” is required, or the concept
should be reinterpreted.
Source: http://markmcmillion.com/new-wine-and-old-bottles/
The remaining problem is whether the current market system can find an
efficient equilibrium under such a new policy requirement.

How can the market mechanism deal with QoE?
Problems in the demand side
◦ Average users lack proper level of ICT literacy and therefore tend to end up with suboptimal
broadband setups.
Results by Measurement Firm A
Measurement specification:
Location of the server ………….
Measurement method ……….
Sample size ………….
Sampling period/frequency ………….
QoS results:
ISP α at Location A
Radio field intensity ………….
Average downloading speed ○○Mbps
Average uploading speed ○○Mbps
Jitter max.○○ms
Packet loss ××%
Average latency □□ms
ISP β at Location A
……….
Results by Firm B
Results by Firm C
Results by Firm D
QoSmeasurement.com
(Website for measurement
comparison）
Easy-to-understand
and personalized ISP
recommendations are
provided for ordinary
end users.
ISP sommelier
Disclosed information from ISPs
Independent survey of clients’ Internet usage
Competition among ISP sommeliers
Detailed raw data are directly
provided for professional users.

How can the market mechanism deal with QoE?
Prerequisite of supply side
◦ Keep the market as competitive as possible, and
◦ In order to provide appropriate QoS to build sufficiently-
tailored QoE, ISPs should prepare network access
diversity as much as possible and provide enough variety
of QoS.
◦ Because a naïve net neutrality principle may work against
such diversification, which is a prerequisite for QoE
maximization, we must relegate net neutrality to the
backburner.

Summary
◦ Many governments have been improving their nations’ broadband environments since broadband
is widely believed to be a precondition for economic prosperity and social progress.
◦ There are a variety of policy tools to improve broadband environment; and depending on the
development stage of individual nation, priority among each tool must be adjusted accordingly.
◦ Net neutrality, which (in its most basic form) requires “equal” treatment for all Internet traffic,
should be considered merely a means of improving broadband rather than a stand-alone policy
target.
◦ Thus, when this concept is not the most appropriate, it is best
left on the backburner.
◦ In the early stage, the policy focus must be to deploy broadband
networks as quickly as possible. The net neutrality principle, which
may ban some management maneuvering by network operators, is
best left on the backburner
◦ In later stage where consumer welfare and investment efficiency
matter, a naïve net neutrality principle may work against more
competition and thus counter-productive.

Means and Ends toward Broadband: Relaxing Net Neutrality

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