System Design in the Age of Broadband II (Summary)

SHIBUKAWA Shuichi, Research Staff, RIETI

On December 4, 2003, the RIETI Policy Symposium, "System Design in the Age of Broadband II," was held at ARK Academy Hills in Akasaka, Tokyo. Following on from ideas presented at the "System Design in the Age of Broadband I" symposium held in 2001, Internet-related policies concerning wired and wireless issues were actively discussed.

Stanford Law School Professor Lawrence Lessig was again invited and Robert Pepper, Chief of Policy Development for the Federal Communications Commission (FCC), was also asked to participate. Japan was represented in the first session by Shigeki Suzuki, Director of International Economic Affairs Division at the Telecommunications Bureau, Ministry of Public Management, Home Affairs, Posts and Telecommunications (MPHPT), and by Yoshiyuki Takeda, Director of the Radio Department at the Telecommunications Bureau, MPHPT, for the second session. Together with other panelists they focused on evaluating U.S. and Japanese policies on broadband dissemination and implementation over the past few years.

Keynote Speech by Prof. Lawrence Lessig: Governmental Role in Information and Telecommunications

In his keynote speech in the first session, Prof. Lessig argued what position the government should take in its attempt to implement a healthy market environment. He emphasized that the core concept of "rent seeking" can be found not only in the information and telecommunications industry but in a number of fields, such as those involving copyright, as the "two sides of the same coin" that are regulation administration. He pointed to the problem of those with vested interests who hide under regulations and continue to receive profits from rent seeking to the detriment of the user's benefits and at a loss to society at large.

Prof. Lessig praised the penetration of broadband in Japan over the past several years, noting that the reason behind this success was the Japanese government's provision of a platform for competition by implementing appropriate regulatory policies that allowed for open access to the Backbone Network. The FCC's disorganized broadband penetration policy, however, he criticized severely.

In the second session, on Open Spectrum, Prof. Lessig recognized the benefits of the FCC's idea of introducing the concept of ownership of frequencies because ownership realizes optimal frequency. However, he added that this has drawbacks because it makes the vesting of interests easier, when the issue is to try and prevent rent seeking.

Panelist's Opinions: State of Affairs in Japan and the U.S. Over the Past Several Years

Following Prof. Lessig's speech, the panelists expressed their own opinions. Robert Pepper rebutted Prof. Lessig's statement by asserting that broadband is steadily penetrating the U.S., citing rapid development in the competitive environment of broadband, the spread of broadband into homes due to "killer applications" like VoIP (Voice over IP, or IP telephone) and, finally, the progress of radio technology which allowed for inexpensive broadband access in suburban areas.

Shigeki Suzuki followed this by pointing out that the success of broadband in Japan has been mainly due to the Japanese government's policy of regulating infrastructure while liberating contents, thus keeping the regulated and unregulated areas clearly separated.

Prof. Koichiro Hayashi, from the Institute for Media and Communications Research at Keio University and one of the panelists at last year's symposium, responded to Prof. Lessig's keynote speech by arguing that rent seeking is to some extent unavoidable as a result of the environmental differences between Japan and the U.S. as well as the difficulty of discovering rent seeking before it has happened. He also gestured to issues that still remain untouched as regards opening the conduits between the "physical" part of the network and the "contents" part - especially the question of how to regulate the contents industry.

RIETI Consulting Fellow Ichiya Nakamura, also a participant in 2001, suggested that issues such as broadband penetration and legislation to merge telecommunications and broadcasting had already been solved in Japan and expressed his belief that the only remaining concern are NTT's management issues.

Pepper vs. Lessig argument: The Future of Competition Policy for the Internet Era

Following the initial presentations, Mr. Pepper and Prof. Lessig had a heated discussion on how regulatory policies should be defined. In response to Mr. Suzuki's comments on the importance of appropriate IT policy that matches technological progress, Pepper candidly acknowledged that U.S. broadband penetration lags behind that in Japan. However, he concluded that the situation had rapidly improved due to fierce competition among cable providers and the emergence of wireless ISP; that is to say, a competitive environment has developed.

Prof. Lessig strongly countered by claiming that compared to Japan, where fiber optic dissemination has already begun, the U.S. still lags far behind. Pepper stated that there was full-fledged competition in the U.S., that VoIP's rise as a killer application was diminishing the telephone company's profit structure, and that the same thing would happen in Japan. Prof. Hayashi raised the question that the competitive environment in the U.S. might be superior to that in Japan given the fact that all new telecommunications businesses in Japan have no choice but to rely on NTT facilities.

Discussion proceeded on to the future of regulation, and Prof. Lessig pointed out the danger of the Internet's "End-to-End" principle becoming distorted by small-scale competition. Pepper rejected Prof. Lessig's argument by stating that such a business model would not record a profit in light of the FCC's strict rules on interconnection, and not least the fact that consumers themselves would reject such enclosure (no choice) by providers. However, Pepper did agree on the significance of the End-to-End principle, stating its critical importance in the future.

Prof. Lessig raised doubts over the neutrality of the FCC. He claimed that network architectural neutrality was maintained in Japan because NTT was bureaucratic and faithfully complied with Japanese government orders (regarding co-location); yet in the U.S., political pressure threatened to endanger the FCC's neutrality.

Pepper, citing a talk given by an executive at Verizon - the largest U.S. communication company in the Bell group - stated that enclosure would not make a promising business model and that the network architecture would essentially be maintained.

Universal Service and NTT's Future

The discussion moved on to the situation in Japan, in particular, future management issues at NTT. Mr. Nakamura, formerly with the Ministry of Posts and Telecommunications, felt that NTT's management problems would focus on the employment control issue (one of the reasons that NTT maintains high employment). Although NTT maintains a "universal service" imposed on it by the government, questions on the potential for attributing business to other firms, and if so what obligations may be involved, will come to the forefront of the theme of institutional design.

Mr. Pepper revealed that the reason why the FCC could impose a universal service on AT&T was because in the past AT&T had held an almost virtual monopoly on the market. He also pointed out that in the current fiercely competitive environment it was gradually becoming more difficult to impose this kind of obligation. Pepper presented the idea for maintaining a universal service that is currently under discussion at the FCC. This is a double-sided scheme whereby a direct subsidy, taken from overall profits, is given to those people who cannot maintain a communication network (those on a low income) and a subsidy is set aside for implementing an inexpensive wireless ISP service in underpopulated suburban areas where the costs of building a regular system are high.

Prof. Lessig added to this his belief that universal access to the Internet would become more important than universal service.

Mr. Suzuki stated that the MPHPT was also interested in universal access and was placing a priority on implementation. In agreement with Prof. Lessig, he added that because currently everything - voice and data - can be put on an IP network, one cannot say the service is universal if it only has telephony.

Suzuki also pointed out that in Europe, as regards services in underpopulated areas, one method being used there was a service auction initiated by residents; he expressed an interest in pursuing investigation on the possibility of introducing such a proposal.

Prof. Hayashi, who wrote Universal Service (Chuko Shinsho, 1984), added that the term universal service has "walked on its own" since then and that its original meaning was much more flexible and held that regardless of the means - by telephone or by television - the service should reach all people.

In addition to problems of universal service, when considering NTT's problems, policymakers should be involved in restructuring of the firm. But Mr. Pepper expressed his concern about policymakers being actively involved in industry restructuring and continued by saying that while communication layers were being destroyed by IP network, it was possible to restructure the whole into a so-called "loop-co" company in which local loops are assembled and managed to maintain essential facilities; furthermore, this possibility is large because the investment needed by these companies exists. Adding to the argument on the communication needs of underpopulated areas, there is a "reverse" need to communicate from underpopulated areas to metropolitan areas and so the situation is not that desperate.

Prof. Lessig expressed skepticism over the concept of subsidies and stated that the poverty problem should be handled separately, believing it was not suitable to subsidize the financially disadvantaged in this manner. Mr. Suzuki, however, argued that telecommunications operators are also in business and it was right that they should compete in their particular environment. Considering the fact that telecommunications fees, which had been fixed, were raised during the oil shock, the IP and the telephone can compete and it is the task of policymaking to create a competitive environment.

Audience member Mr. Okazaki from Tokyo University questioned, considering the historical background of universal service, whether NTT should assume the total burden. Prof. Hayashi responded by saying that universal service may be characterized as a slogan needed by certain telecommunications industries to justify its monopoly and policy of unifying telecommunications enterprises. Prof. Lessig and Mr. Pepper supported this opinion by adding that this had historically-speaking been AT&T's slogan and because at the time no interconnectivity rules had been precisely set down nor had a competitive environment been established, instead of allowing a monopoly, the U.S. imposed universal service on all operators. Pepper added that at the terminal level, the monopoly was still in existence and circumstances were backtracking to the beginning of the 20th century when ideas of monopoly and universal service first came under discussion.

Keynote Speech by Yoshiyuki Takeda: A Summary of Current Radio Policy in Japan

Mr. Takeda presented the current frequency liberation strategy in Japan and policies directed at it. According to Takeda, the government is currently developing concrete policies based on a Radio Policy Vision (a recommendation submitted to the Telecommunications Council) and a recommendation by the Study Group on Policy for the Effective Utilization of Spectrum (second recommendation published in September 2003). He explained that the bases of the recommendations were fundamental reform of frequency allocation and improvement of the framework necessary to implement such reformation. He further explained that efficiency of spectrum usage must be investigated in each frequency bandwidth range, and problems such as low efficiency or frequency usage which could be substituted by using alternative means (eg fiber optic), could be solved by implementing a system that pays compensation for "forced removal" (introduction of a financial compensation system). He also commented on a licensing system being considered by the Japanese government for the future which would include the expansion of the free (unlicensed) frequency bandwidth and introduction of the Commons that Prof. Lessig mentioned. He further indicated the Japanese government's intention of improving the spectrum usage fee structure (eg for the radio frequency currently used for analog-analog conversion in digital broadcasting) to correctly reflect current economic value.

Expansion of Frequency Commons and Future of "Command and Control" Regulation Measures

Responding to the keynote speech, Mr. Pepper detailed the U.S. approach to frequency allocation. Published last fall, the FCC's Spectrum Policy Task Force (SPTF) Report indicated that starting 20 years ago conventional Command and Control administrative measures (frequencies - their area, utilization purpose, device specifications, etc - were under very strict supervision) were reviewed and improved resulting in the government introducing an unlicensed bandwidth. In addition, the frequency bandwidth allocation method was changed from a "beauty contest" involving human intervention and easy opportunities for those with vested interests to make an additional profit, to a method with added value through market mechanisms such as PCS auctions that allow for easy movement of the licensee.

Mr. Pepper also identified the emergence of a new wireless technology (implementation of which was recommended in the SPTF Report) that automatically detects and uses multiple frequency bandwidth, which could cause the concept of frequency scarcity to be fundamentally re-examined.

Prof. Lessig believes that Japanese radio policy has made significant progress in such areas as unlicensed bandwidth and implementation of Commons, and insisted that what is important is not whether a market approach is right or wrong, but a market (introducing unlicensed frequency bandwidth) for devices that use frequency efficiently. He expressed his concern that the frequency allocation method envisaged by the MPHPT is a conventional Command and Control-style of "beauty contest" and questioned the government's intentions on how, specifically, it will investigate frequency usage and based on what criteria will it determine efficiency.

In the second session, Peter Pitsch, Director of Communications Policy at Intel Corporation, a company which in recent years has invested large amounts in wireless technology, joined as a panelist. Pitsch stated that in the U.S. 80% of frequencies were controlled using the Command and Control method and pointed out that this was an obstacle to the diffusion of new wireless technologies and services beneficial to users. He then raised the issue of the danger involved in taking frequencies away from existing providers using the same method as the distributing system (ie Command and Control). That is to say, those with vested interests would resist and the problem would become politicized. Pitsch added that the quickest way to solve the problem was to increase the free (unlicensed) bandwidth instead.

Mr. Yoshihiro Tanaka, founder and president of FuuUn & Rivals, Ltd., countered Mr. Takeda by questioning whether (1) the policymaking process has been completely transparent and the Japanese public clearly understands it, and (2) because of this, the Radio Policy Vision and the recommendation by the Study Group on Policy for the Effective Utilization of Spectrum were no more than a list of subjects that had been long under review and the issues - such as how the licensing system should change in response to new wireless technology - were still not clear. He expressed his concern that current frequency liberation strategy will come to differ greatly between Japan and the U.S. in the next few years.

The symposium moderator, RIETI Senior Fellow Nobuo Ikeda, summarized the discussion so far, and asked Mr. Pepper how the FCC would in the future deal with the conventional Command and Control-style of administration employed thus far. Mr. Pepper responded that, of course, the Command and Control method would in some part remain but most of it would be replaced with other measures; and he surprised the audience by saying there would be a reduction of 20%.

Prof. Lessig suggested that as a substitute method it would be promising to see the expansion of free (unlicensed) bandwidth (however, technology criteria exists) and stated that the emergence of new wireless technology such as Ultra Wideband (UWB) that can co-exist with currently-used formats would have an impact. Pepper, agreeing with Lessig, added that the use of empty TV channels (guard band) allowed significant bandwidth to be reused and that the SPTF had also picked up on this as "Smart Radio." According to Pepper, this is a critical technology that will open up the road to wireless ISP.

Compared to the U.S., where a number of innovative ideas like this have emerged, what is the situation in Japan? Mr. Takeda was interested in hearing opinions on the evaluation criteria for frequency usage that Prof. Lessig illustrated. He indicated that in a Command and Control-style administrative operation some parts would remain but avoided specifying which. He noted that the Radio Policy Vision and the Study Group on Policy for the Effective Utilization of Spectrum would hold discussions after the SPTF has been closely reviewed and he asked for patience before making any judgments and the results are known. Responding to a question from Mr. Ikeda regarding the implementation of frequency auctions, Takeda did not deny the possibility but indicated that he did not positively evaluate such moves, referring to the failure of the 3G auction in Europe.

In response to Mr. Takeda's comments, Mr. Pepper cited a successful example of an auction in the U.S., which was cautiously devised, taking into account the European failure, and he was confident that this method provided optimal frequency allocation. He also pointed out that in Europe the licensing and the auction were closely tied to one another and the service range limit was reached. Wireless technology and service were not separable and the name X-Generation was meaningless. Pepper stated that third generation service could be provided by using the frequency license for first generation cell phones. He also indicated that the any provider who auctions off frequencies would be more appreciative of the frequencies and would actively make investment to start the service as soon as possible. He emphasized that an auction is one of the most powerful ways to promote efficient frequency use.

Mr. Takeda stated that the reason why the Japanese government does not yet employ an auction system (or so he assumes) is that the government believes a 4.9-5.0Ghz bandwidth is more cost effective in driving out providers than by paying them off with compensation.

Emergence of New Wireless Technology and Conversion to a Flexible Licensing System

Mr. Pitsch introduced the new overlay/underlay (UWB) wireless technology. Underlay is a telecommunications technology that uses very low power so that it does not affect the users of other frequencies. Overlay is a communication technology that detects and uses empty radio frequency bandwidth, such as the TV guard band. Technological innovation in this field has made significant progress and, according to Intel's research in San Francisco, unlicensed devices should provide a good quality of service when using the overlay technology. Prof. Lessig pointed out that when a corporation decides to move to UWB technology, interconnectivity with existing technology would have external financial/economical meaning and thus UWB technology would not disseminate so easily. He continued by saying that he highly recognizes the possibilities inherent in UWB and it would be a key to the success of overlay/underlay.

Mr. Pitsch was in agreement with Prof. Lessig's comments and further elaborated on them in saying that, as a governmental issue, policymakers must allow for meaningful trials of these technologies to be carried out, because it is important to pursue the possibilities of overlay/underlay technology in expanding unlicensed bandwidth.

Mr. Pepper pointed out that the FCC's intention was to use market forces to establish a new frequency licensing system that would enable providers to use more frequencies with more efficiency, through the incentive of making it easier for a provider to sell their frequency on to another provider who sees greater use in it. Pepper added that by using an auction system the flexibility of licenses could be increased which would in turn allow providers to enter new markets, or permit the organization of licensees so that frequency blocks could be restructured. He pointed out that an auction is not for making profit but for giving more opportunities for providers to enter new markets.

Prof. Lessig added that the U.S. Department of Defense may object to UWB diffusion but assumed it will carry on its missions under that kind of radio environment, so UWB is a welcome technology since it is hard to see radio being used in it.

Mr. Pepper stated that the FCC developed its recommendations based on the permitted interference range (Interference Temperature) which is the key to underlay. In terms of coordination with the Department of Defense, he stated that UWB originally came from the Department of Defense and the reason why Dr. Kolotzy of the Defense Advanced Research Projects Agency (DARPA) was a member of SPTF was because he was familiar with the direction in which the technology was moving.

Audience member Izumi Aizu of Asia Network Research marked the differences between the backgrounds of the information and telecommunications policies in Japan and the U.S., and raised the point that it would be difficult to adopt such a U.S.-style system in Japan as it is. In response, Pepper said that while he recognized the differences between Japan and the U.S., the FCC took a flexible stance towards frequency licensing and emphasized the advantage of this by explaining that if one provider tried and failed then another provider wanting to establish a service using the same frequency could make a request to the FCC to obtain a new license for it. He cited one example in which the cell phone company NexTel inherited a frequency bandwidth used for industrial purposes.

Mr. Pitsch agreed with Mr. Pepper, stating that if market forces enabled a flexible frequency allocation system and if that system works, then the frequency increases in value. He pointed out that flexibility meant that limited use of a particular frequency costs more; therefore there is a large incentive to avoid higher costs by efficiently implementing a new profitable service.

Hiroshi Mano of Route, Inc., pointed out the technical instability of UWB and that if interference occurred in the radio wave then bandwidth would "die," venturing that it was dangerous to think of UWB as an "all mighty" technology. In response, Prof. Lessig stated that present unlicensed bandwidth was not unregulated, and because there are definite technological standards that have been defined, the U.S. did not permit such lax discipline. He added that while UWB was not yet technologically certified, in its current state there was a theoretical reason to believe it is the best wireless system and he said he could promote it with confidence. He added that UWB could not be used for TV broadcasting, but it was suitable for getting around broadcasting frequencies and insisted that it should be implemented from the view of using frequency effectively.

Conclusion

Noteworthy of this symposium was that the U.S., despite lagging behind in implementing broadband, in-depth discussion revealed that the country has innovative policies for wired and wireless technology. The most impressive example was the comment by Mr. Pepper in the second session that Command and Control-style of administering frequency allocation would be reduced to about 20%. In addition, interesting policies such as auctions and the expansion of unlicensed frequency were also presented.

Japanese policymakers' comments were more original than before, yet the significance of these opinions and viewpoints in the overall information and telecommunications arena were not at the same level of understanding as those of Mr. Pepper and Prof. Lessig.

Information and telecommunications policy is closely linked to the market. Government regulation also has a significant market impact. Therefore, any movement by policymakers receives strong attention. Compared to a few years ago, the direction of information and telecommunications policy is now closer to the situation we conceptualized at the 2001 symposium. In the future, there should be open and clear discussions utilizing public wisdom. We hope that Japanese information and telecommunications policy increases in strength, ensuring further market growth.