Annex Competition Review in the Telecommunications Business Field of FY 2009 January 2010 Ministry of Internal Affairs and Communications Table of Contents Summary of Assessment Results [Part 1] Fixed Point Assessments I. Fixed Telephone Domain Chapter 1 Market Delimitation within Fixed Telephone Domain Chapter 2 Analysis of Major Indices in Fixed Telephone Domain II Mobile Communications Domain Chapter 1 Market Delimitation within Mobile Communications Domain Chapter 2 Analysis of Major Indices in Mobile Communications Domain III Internet Connection Domain Chapter 1 Market Delimitation within the Internet Connection Domain Chapter 2 Analysis of Major Indices in Broadband Market Chapter 3 Analysis of Major Indices in ADSL Sub-Market Chapter 4 Analysis of Major Indices in FTTH Sub-Market Chapter 5 Analysis of Major Indices in Cable Internet Sub-Market Chapter 6 Analysis of Major Indices in ISP Market IV Corporate Network Services Domain Chapter 1 Market Delimitation within Corporate Network Services Domain Chapter 2 Trends with Use of Corporate Network Services Chapter 3 Analysis of Major Indices in WAN Services Market Chapter 4 Analysis of Major Indices in Leased Circuit Services Market [Part 2] Strategic Assessments V. Sequential Analysis of Changes in Consumer Preferences with Telecommunications Services Chapter 1 Purpose of Assessment Chapter 2 Results of Analysis Chapter 3 Conclusion VI. Quantitative Analysis of Economic Impact of Past Competition Policies concerning Dissemination of Mobile and Broadband Services Chapter 1 Purpose of Assessment Chapter 2 Subjects and Methods of Analysis Chapter 3 Analysis of Mobile and Broadband Markets Chapter 4 Matters of Concern Summary of Assessment Results “Competition Review in the Telecommunications Business Field of FY 2009” Summary of Assessment Results and Future Prospects 1. Purpose and Significance The Ministry of Internal Affairs and Communications commenced upon a “Competition Review in the Telecommunications Business Field” (hereinafter referred to as the “Competition Review”) in FY 2003 in assessing/analysing the status with competition in the communications market and for reflection in policy developments. In the Competition Review information was collected from both the demand side and the supply side with consideration given to the “Basic Policies” that include medium-term assessment principles and “Implementation Details”, a “market delimitation” implemented in determining the scope of the markets to be included as subjects of an assessment based on that information, and then the status with competition in the market analyzed in preparing assessment results on those markets, including identifying any business operators with market dominance, etc. In addition, four domains were selected as subjects of a “fixed point assessment”, namely “Fixed telephones”, “mobile communications”, “internet connections”, and “corporate network services”, in an annual fixed point observation that has taken place since FY 2006, with a “strategic assessment” that will be newly created in analysis with attention paid to themes of great political need or concern. The “Competition Review in the Telecommunications Business Field of FY 2009” (hereinafter referred to as the “Competition Review 2009”) featured “quantitative analysis of the economic impact of past competition policies concerning the dissemination of mobile and broadband services” and “sequential analysis of changes in consumer preferences with telecommunications services” as strategic assessments in view of summarizing the efforts of the Competition Review made to date and reflecting them in strategic assessments to be made next fiscal year after taking into consideration that six years has passed since a Competition Review was conducted and that the major themes had already been addressed and a certain amount of data collected, etc. 2. Points of the Report Chapter I through Chapter IV of this report concerns fixed point observation analysis on the subjects of fixed point assessments, namely fixed telephones, mobile communications, internet connections, and corporate network services, and an assessment of market dominance that was conducted in revealing the status with competition in the respective markets. Chapter V through VI summarizes the strategic assessments. The results of the fixed point assessments and strategic assessment of Competition Review 2009 are summarized below. 1 2.1. Points of Fixed Point Assessments (1) Market concentration and share Figure 1 shows the Herfindahl-Hirschman Index (HHI) 1 that indicates the market concentration and share of the NTT Group in major markets within the four domains which are the subjects of the fixed point assessments. The national level HHI was calculated by adding up the shares of the multiple business operators when necessary, including regarding NTT East and West as one company. [Figure 1 Market concentration and share of NTT Group in major markets within four domains subject to fixed point assessment] Review results of FY 2009 Major delimited markets Domain Market concentration (including sub-markets) Share of NTT Group (HHI) Fixed telephones (NTT subscriber telephones, direct access telephones, CATV 6,951 ↓ 82.9% ↓ telephones, 0ABJ-IP telephones) Fixed telephones Local 2,433 ↓ Local 75.3% → In-prefecture In-prefecture 2,301 ↓ 73.5% → Relay telephones long distance long distance Out-of-prefecture 3,574 ↓ Out-of-prefecture 72.5% → International 2,870 ↓ International 66.4% ↑ 050-IP telephones 3,168 → 35.1% ↑ Mobile Mobile phones/PHS 3,461 → 48.2% → communications Broadband 3,048 ↑ 52.7% ↑ ADSL 3,263 ↑ 34.8% → Internet FTTH 5,836 ↑ 74.4% → connections Cable internet 1,483 ↑ -- ISP 1,557 → 31.9% → Corporate WAN services 2,173 → 67.5% ↓ network services Leased circuit services 8,354 → 94.6% → (Note 1) In calculating the “market concentration (HHI)” at the national level NTT East and West were regarded as one company while other companies of the NTT Group were regarded as different companies (SoftBank Group, J:COM Group, JCN Group, and electrical power-related business operators of broadband/ISP, J:COM Group and JCN Group with CATV internet, and electrical power-related business operators of FTTH were regarded as one company, respectively). With the “share of NTT Group” the share of 050-IP telephones is that of NTT Communications while the share of ADSL/FTTH is that of NTT East and West. The figures for fixed telephones, mobile communications, internet connections, and WAN services are as of March 2010 and the figures for leased circuit services as of March 2009. 1 HHI (Herfindahl-Hirschman Index) is an index used to measure market dominance that is calculated by adding the square of the share of each business operator in the market. HHI totals the squares of each individual market share, and hence changes in the share of business operators with large shares have a greater impact. Conversely the impact of changes in the share of business operators with a small share is limited. A characteristic of HHI is that a lack of information on small-scale business operators does not significantly affect the effectiveness of the index. 2 (Note 2) The arrows (↓, ↑, →) in the table indicate ups and downs from the “Competition Review 2008” by100 or more for HHI and 1 point or more for the share. HHI values vary from 0 (perfect competition) to 10,000 (perfect dominance), with values close to 10,000 indicating a higher market concentration. With evaluations made using the index an HHI of less than 1,000 is deemed acceptable for mergers by the EU Directorate General for Competition. In addition, the US Department of Justice and Federal Trade Commission set the standard of regarding a post-merger HHI of [1] less than 1,000 as no concentration, [2] between 1,000 to 1,800 as a medium concentration, and [3] over 1,800 a high concentration. However, the “Guidelines on Application of the Antimonopoly Act Concerning Review of Business Combinations” (revised in January 2010) published by the Japan Fair Trade Commission provides for post-merger shares being less than 10% or an HHI of 2,500 or less (and a share of 25% or less) as “usually not considered substantial enough to restrain competition” and an HHI of 2,500 (and a market share of 35% or less) as “the possibility of being a restraint to competition is usually considered low”2. An HHI or market share of no more than a certain level merely indicates the possibility of a restraint on competition being low and that of a certain level or higher does not necessarily mean it is a restraint to competition. It should be determined on a case-by-case basis with consideration also given to the advantage of scale, etc. Using these values as reference reveals the majority of the communications market to be oligopolistic. With the fixed telephone, 050-IP telephone, mobile communication, ADSL, FTTH, and leased circuit service markets the HHI exceeds 3,000 and the concentration considered extremely high. The FTTH market growing and at the same time the concentration being on an upward trend is particularly characteristic. The share of the NTT Group exceeds 50% in every market, excluding 050-IP telephones3, mobile communications, ADSL, and ISP. In addition, the share of the NTT Group tends to be high in many of the markets with a high market concentration. (2) Existence and exercising of market dominance Figure 2 shows the results of assessing market dominance from two points of view, the existence of market dominance and the exercising of market dominance in major