Presentation at the 16th Asia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016)

1. Net Neutrality and a Competitive OTT Market
Toshiya JITSUZUMI, D.Sc.
Kyushu University
jitsuzumi@econ.kyushu-u.ac.jp
T. JITSUZUMI@16thAsia PacificTelecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 1

2. Economics 101: Market vs. government
T. JITSUZUMI@16thAsia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 2
Maximizing
corporate
profits
Maximizing
consumers’
welfare
Without governmental intervention

3. Economics 101: Market vs. government
T. JITSUZUMI@16thAsia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 3
• 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.

4. Some features in OTT/network ecosystem 1/2
Two-sided, multi-sided, market
◦ Network effect
Economies of scale/scope
Conflicts of business models
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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

5. Some features in OTT/network ecosystem 2/2
“Dog-year-ness” in technology, but it takes years before we can see the true potential.
T. JITSUZUMI@16thAsia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016)

6. OTTs have become increasingly important in everyday life …
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0%
10%
20%
30%
40%
50%
Frequent user
Occasional 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

7. … but such a situation began only recently
T. JITSUZUMI@16thAsia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 7
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 Google
The US
Japan
Sales ($US)

8. 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 scenario
Keep the market as competitive as possible by maintaining a
strict level playing field.
2. Pro-OTT scenario
Provide a certain privilege for OTT players at the expense of
incumbent giants.
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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.

9. 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
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Photo: Planning by Julian Kücklich

10. 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
Net neutrality = Border control for OTT competition
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Source: Adapted from Fig. 1 in Jitsuzumi (2015)

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

12. Three issues in regulating OTTs
1. 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.
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13. 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
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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.

14. 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)
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15. 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.
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Network
Operators
OTTs
Spillover 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 caution
Safeguard against
anti-competitive
behaviors of
incumbents is a must.
Spillover effects can
work both ways.

16. A moving target
Designing a perfect OTT regulation now is just like
aiming at a moving target from a rocking boat.
T. JITSUZUMI@16thAsia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 16
Something we cannot
predict for sure
New
player
New
business
model
New
technology

17. Bigger digital economy if we have less regulation
This is especially true when technology develops in a dog-year fashion.
T. JITSUZUMI@16thAsia Pacific Telecommunity Policy and Regulatory Forum (Tokyo, Japan, July 12–14, 2016) 17
Image source:
http://www.bitewallpapers.com/3d/3d%20wallpapers/part%2
03/3d-chain-lock-ballheads_freedom-wallpaper.jpg
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
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Number of users in Japan
Fixed voice
Mobile+PHS
LINE
CAGR = 7.2%
CAGR = 29.4%
CAGR = 38,608.8%

18. 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
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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.

19. 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.
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