Hiroya Izumi Director of International Economic Affairs Division,

1. Driving Fiber to the home Hiroya Izumi Director of International Economic Affairs Division, Ministry of Internal Affairs and Communication, Japan *The Opinions included in the slides or explained in the presentation do not necessarily reflect those of the MIC.

2. Today’s Topics • Current Situation of Telecommunications Market in Japan • Brief History of Broadband Market, especially of FTTH Service • Future Regulatory Perspective １

3. Changes in the Number of Telecommunication Service Users (Unit: Million) 97M 58M 23M ２

4. Current Voice Traffic Movements From IP Phone From PHS From Mobile From Fixed • Fixed-line traffic volume has been declining by around 15% a year after the peaking in FY2000. • Voice traffic is shifting from PSTN to mobile ＆　VoIP. 【Number of communications】 【Communication time】 (bn times) (bn hours) 160 8.0 140 7.0 120 6.0 5.0 100 4.0 80 3.0 60 From IP Phone 2.0 40 From PHS From Mobile 1.0 From Fixed 20 0.0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 ３ Source：Ministry of Internal Affairs and Communications

5. Brief History of the Broadband Market, especially of FTTH Service • Phase 1 (1994-2000) Target set for optical fiber deployment by the Gov. and steady investment by NTT • Phase 2 (2000-2004) Introduction of unbundling rules led to intensified competition in the ADSL market • Phase 3 (2004-) Introduction of a low-price double play（Voice & BB) FTTH service created significant demand for FTTH services ４

6. Real deployment Prior deployment Maturity Phase 1 (1994-2000)Target setting for optical fiber deployment by the Gov. and steady investment by NTT • “Optical fiber networks should be established throughout Japan by 2010”- Information Communication Infrastructure Deployment Program (MPT, 1994)- Basic Guidelines for an Advanced Information and Telecommunications Society (Cabinet Office, 1995) • Financial support (Tax, Funds, Loans etc) ５

7. NTT’s Investment in Fiber Local loops Optising local loops (till feeder points) About 88% (as planned for 2006) Feeder Point: A point nearby a subscriber's house, at which feeder cables (large-capacity coaxial or optical cables from a central office) connect to subscriber local loop distribution cables. (FY) ６

8. Phase 2 (1999-2004)Introduction of unbundling rules led to intensified competition in the ADSL market • -2000 : ADSL service became technologically feasible • 2000-2001 : Unbundling rules introduced • Sep. 2001 : Yahoo BB! began low-price ADSL service(2,280yen/month) →strong expectation for rules regarding line-sharing and inter- exchange optical-fiber unbundling 【Copper】 Line-sharing97 yen/lineDry-copper 1,334 yen/line 【Optical fiber】 Interoffice fiber 1.917 yen/meter Local loop (single star) 5,192 yen/line* latest authorized price of NTT East ７

9. Current ICT Status in Japan: Broadband Monthly increase (average) in the number of subscribers Growth of Broadband Subscribers Appx. 24 million FTTH Appx.26% （6.31 million） DSL Appx.60％ （14.49 million） CATVAppx.14％（3.41 million） Yahoo BB! Yahoo BB! ８

10. Phase 3 (2004-) Introduction of a low-price double play（Voice & BB) FTTH service created significant demand for FTTH services • In 2004, K-Opti.com, a subsidiary of an electric power company, introduced a low-price double play（BB & Voice) FTTH service (100Mbps, 5,200yen/month), which was less expensive than “Yahoo! BB(ADSL, 12Mbps)+NTT West (Voice)”(5,547yen/month). • This triggered the installation of fiber optic to homes. NTT followed that price strategy and this accelerated the installation of FTTH. • Low level fiber local loop access charge (dark fiber unbundling) helped other competitors to enter this competition. ９

11. Current ICT Status in Japan: Broadband Monthly increase (average) in the number of subscribers Growth of Broadband Subscribers Appx. 24 million FTTH Appx.26% （6.31 million） DSL Appx.60％ （14.49 million） CATVAppx.14％（3.41 million） Yahoo BB! K-Opti.com Yahoo BB! K-Opti.com １０

12. Regulatory Perspective • Unbundling of Optical fiber • Review of competition rules for the NGN era １１

13. Share of NTT East and West • As of March 2006, NTT’s share of subscriber lines (Metal + Optical fiber) was 93.8%, while its share of subscriber lines (Optical fiber) was 78.6% (cf. NTT’s share of FTTH service: 62.6%). • In all prefectures, NTT’s share of subscriber lines (Metal + Optical fiber) was above 50%, which makes NTT subject to asymmetric regulations. • However, the share of NTT’s subscribers (Optical fiber) was below 50% due to intense competition with such competitors, as electric power companies, in some western prefectures (Nara, Shiga). Optical fiber Metal + Optical fiber cf. FTTH service １２

14. Regulations on “Designated Facilities (Fixed)” Subject Telecommunication facilities (fixed) designated as essential facilities →Access lines and related telecommunications facilities Criterion Access lines with more than 50% of share (designated on a prefecture basis) →NTT East & West are subject to the regulations in all prefectures Regulations １３

15. Forward-looking Cost Method • This method uses average charges based on the predicted cost and demand for the next several years. • The cost price and the access charge should balance out during the said period. • This method is especially desirable for new IP networks because it allows NTT to collect full investment on optical fiber. At the same time, we can suppress the level of charges despite, at the beginning, the cost per line being very high due to less demand. Fiber local loop access charge  Access charges were approved in August 2001 for 7 years from 2001 to 2007. [AC: \5,074 /month] Cost per line Access Charge Balanced 2001 2002 2003 2004 2005 2006 2007 １４

16. Foreseen changes in the early 2010’s • 2010 is the last targeted year of “New IT Reform Strategy” （adopted in January 2006 by the IT Strategy Headquarters of the government） and u-Japan policies (released in December 2004).→ The Government’s target is for broadband-zero areas to be eliminated in FY2010. • Next generation network based on IP will be developed by each carriers (IP based networks will become the standard rather than the exception.).→ NTT（in the NTT Mid-Term Management Strategy) projects that the number of subscribers to FTTH service will be approximately 30 million in 2010. • In the early 2010s, the convergence and/or alliance of telecommunications and broadcasting services is likely to be well advanced １５

17. New Competition Promotion Program 2010 Comprehensive Review of Competition Rules to Address the Transition to IP Based Networks (Comprehensively implemented by early 2010s) Review of Designated Telecommunications Facilities System 1.Promotion of Facility Competition Review of Calculation Method for Interconnection Charges of NTT East and West 2.Review of Interconnection Policies Review of Calculation Method for Calculating Interconnection Charge of PSTN (concluded in 2007) 3.Review of Universal Service System 4.Review of Tariff Policies Review of Calculation Method for Interconnection Charges for Fiber Optic Networks (dealt with after the submittal of an application by NTT East and West) 5.Other Main Policies Calculation method for interconnection charges in relation to next-generation networks １６

18. Development of Comprehensive Broadband Policies Transition to IP-Based Networks (Mainly Broadband Networks) • Full Transition from PSTN to IP-Base Networks (☞ Coming of the “Everything over IP” Era) • Verification of Business Models (☞ Advent of Vertical Integration Business Model) • Transition to IP Based Networks makes the Concept of “Distance” Thin (☞ Necessity of Correcting Gap) Direction of Implementing Policies • Utilization of Information & Communications Network as “the Basis Supporting the Social Economic System” • Realization of Organic Cooperation between Networks and Contents/Applications • Arrangement of the Environment “to Implement Results of Rapid Technology Innovation in the Markets” Development of Broadband Policies Balanced Development of Infrastructure Improvement of Environment to Promote Competition Promotion of Consumer Protection Innovation of New Industries International Contribution The world’s fastest achievement of the IT revolution in FY2010 １７

19. Thank you!