net neutrality and a competitive ott market

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Net Neutrality and a Competitive OTT MarketToshiya JITSUZUMI, D.Sc.Kyushu [email protected]

T. JITSUZUMI@16th Asia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016)

T. JITSUZUMI@16th Asia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 2

Economics 101: Market vs. government

Maximizing corporate

profits

Maximizing consumers’

welfare

Without governmental intervention

3

Economics 101: Market vs. government


• Perfect/sufficient Information• Inclusiveness: No externality, no public goods• Perfect competition

Preconditions for market dynamism

If these conditions are not met, the market outcome may not be

efficient.

Market failure in efficiency Market failure in fairness

Even if these conditions are met, the market outcome may not be

socially fair.

If the costs of intervention are less than the expected benefits, governmental intervention is economically justifiable and socially desirable.


Some features in OTT/network ecosystem 1/2 Two-sided, multi-sided, market

◦ Network effect

Economies of scale/scope

Conflicts of business models

Carrier

OTT (aggregator)

vs.

OTT(aggregator)

OTT(aggregator)

OTT(creator)

OTT(creator)

OTT(creator)

OTT(creator)

OTT(creator)

OTT(creator)

OTT(creator)

OTT(creator)

Carrier Carrier

Possibility of monopolizing the ecosystem


Some features in OTT/network ecosystem 2/2 “Dog-year-ness” in technology, but it takes years before we can see the true potential.


OTTs have become increasingly important in everyday life …

Befo...

2008

2009

2010

2011

2012

2013

2014

2015

2016

0%

10%

20%

30%

40%

50%

Frequent userOccasional user

Source: Created based on the questionnaire survey conducted by the author in May 2016 (N = 1067).

OTT video in the US OTT voice in Japan

Source: http://go.ooyala.com/rs/447-EQK-225/images/Ooyala-and-Vindicia-MTM-whitepaper.pdf


… but such a situation began only recently

Source: Translated version of http://www.soumu.go.jp/johotsusintokei/whitepaper/ja/h25/image/n1202850.png

legend

Application portal

EC

OTT video aggregator

SNS

Cloud Sourcing

Acquired by AOL

Acquired by GoogleThe US

Japan

Sales ($US)


Viewpoint of industrial policy In order to determine whether to introduce additional regulation on OTT players or not, we have to view the situation from a long-term perspective.

From an economic perspective, two scenarios are possible:

1. Pro-competition scenarioKeep the market as competitive as possible by maintaining a strict level playing field.

2. Pro-OTT scenarioProvide a certain privilege for OTT players at the expense of incumbent giants.

The “zero-price rule,” which prevents eyeball ISPs from charging content providers, can work as a subsidy to OTT players (Chettiar & Holladay, 2010; Chettiar et al., 2010), and so do the FCC’s Open Internet rules.


Focal point of discussion Two areas of possible policy intervention:

1. Border control◦ Who can enter the market, and how?

◦ And further, how can they exit the market?◦ Relationship with neighboring market

2. Rules of engagement◦ Efficiency control◦ Fairness management◦ Consumer protection

Photo: Planning by Julian Kücklich

“Do nothing and let the market work” is a possible option.

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

UsersContent providers

Application providers

Natural monopoly

Unique business practices

Net neutrality = Border control for OTT competition


Source: Adapted from Fig. 1 in Jitsuzumi (2015)

Rules of engagement In order to design an ecosystem, we have to pursue total, not partial, optimization.


• Anti-trust rules• Net security• Transparency and accountability

Industrial Policy for incubating OTT players

Network Operators

Aggregators/Distributers[OTT platforms]

Internet Service Providers

Contents/Applications[OTT creators]

• Rules for ISP interconnection

• Decency rules

• Freedom of Speech

• Business Domain Control

• Public Utility Regulation• Interconnection rules• SMP control

• Rules for Content/Search Neutrality

• Rules for Network Neutrality


Three issues in regulating OTTs1. Level playing field

OTTs, particularly communications-based OTTs, provide the

same services as traditional communications service providers,

and therefore, OTTs should be regulated in the same manner.

2. Free-rider problem

OTTs are free riding on operators’ networks and should be

subject to “cost-sharing” obligations in which OTT providers

would pay operators for the use of their networks.

3. Build-out problem (or “free-rider problem 2.0”)

OTT providers have a negative economic impact on operators,

which hampers network build-out and investment.


What is the level playing field? Foundations for telecom regulations are three-fold:

1. Natural monopoly, scarcity of resources◦ In order to attain the second-best outcome, ROR had

become the norm among regulators.◦ Deregulation is a fruit of technological development in

the used-to-be-a-natural-monopoly area.

2. Consumer protection◦ In order to mitigate information asymmetry,

transparency and accountability are required.◦ Burden for dispute settlement must be minimized, too.

3. Societal fairness (and dealing with spillover benefit)◦ Universal service◦ Subsidies for the disadvantaged

Reasons not to apply to OTT players

Reasons to apply to OTT players

This dose not necessarily mean we have to apply to OTT players.


Opinions of European mobile operators (Jul. 7, 2016)

“All players in the digital value chain should operate on a level playing

field, with equivalent and proportionate privacy requirements to

innovate in data-driven markets. There is no justification for imposing

stricter obligations on Electronic Communications providers than on

other providers of digital services. Converging digital services

need converged regulation that is light-touch, future proof and

that facilitates a European single market for services.

Regulation should define principles to protect consumer rights

and competition, focusing on outcomes (e.g. service

characteristics) rather than on means (e.g. how operators

evolve and manage their networks).” (p.5)


Issues in free-riding When there exists a significant level of externality or spillover effect, it might be optimal to introduce some remedial tools in order to compensate contributing parties and penalize free-riders.

◦ Pigouvian-tax/subsidy, congestion fee, or universal service levy, etc.

But again, from the viewpoint of efficiency, it is better to try the market solution first.

Network Operators

OTTsSpillover benefit by upgrading net capacity

Spillover benefit by upgrading

contents quality

These spillover benefits can explain

the popularity of zero-rating

The “zero-price rule” prohibits compensating the network operators’

efforts

a few words of cautionSafeguard against

anti-competitive behaviors of incumbents is a must.

Spillover effects can work both ways.


A moving target Designing a perfect OTT regulation now is just like aiming at a moving target from a rocking boat.

Something we cannot predict for sure

New player

New business

model

New technology


Bigger digital economy if we have less regulation This is especially true when technology develops in a dog-year fashion.

Image source: http://www.bitewallpapers.com/3d/3d%20wallpapers/part%203/3d-chain-lock-ballheads_freedom-wallpaper.jpg

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000 Number of users in Japan

Fixed voiceMobile+PHSLINE

CAGR = 7.2%

CAGR = 29.4%

CAGR = 38,608.8%


Conclusions To develop a healthy ecosystem, considering the possibility of governmental failure and the unpredictability of technological development, it is important to utilize market dynamism as much as possible.

When it becomes apparent that market dynamism cannot work well, we should start thinking about the possibility of regulatory intervention.

The purpose is not to substitute the market mechanism, but to complement it. Policy tools include:

◦ Net neutrality “rule” for the border control◦ Transparency and accountability for the rules of

engagement◦ Alternative Dispute Resolution for consumer

protection

We have to monitor the OTT market development continuously.

The existence of market failure has to be empirically tested, and so do the expected benefits/cost of interventions.

Since it is important to avoid rough-and-ready decisions; therefore, in the meantime, we should rely on case-by-case judgement.


References Chettiar, I.M. & Holladay, J.S. (2010). Free to invest: The economic benefits of preserving net neutrality. Report No.4, Institute for Policy Integrity, New York University School of Law. (http://www.policyintegrity.org/documents/Free_to_Invest.pdf)

Chettiar, I.M., Holladay, J.S., & Rosenberg, J. (2010). The value of open: An update on net neutrality. Policy Brief No.9, Institute for Policy Integrity, New York University School of Law. (http://policyintegrity.org/files/publications/TheValueofOpen.pdf)

Jitsuzumi, T. (2015). Network neutrality and QoS Transparency: An economic perspective. IEICE Transactions on Communications (Japanese Edition), J98-B(10), pp.1030-1037.