ubiquitous fiber network in Japan

Homes in Japan are rapidly being connected to optical fiber communications networks. Japan’s incumbent communications company, NTT, had 6.08 million subscribers to its fiber network at the end of March, 2007. That figure indicates an increase of 2.66 million subscribers from March, 2006.[1] NTT’s share of fiber network subscribers in Sept., 2006, was 66%.[2] If that share held constant through March, 2007, total fiber network subscribers in Japan at the end of March, 2007, was 9.2 million.

NTT’s plans suggest that all homes in Japan will be connected to fiber networks by 2010. NTT East already has fiber reaching at least 75% of homes in its service area.[3] NTT as a whole seeks to have 30 million fiber network subscribers by 2010.[4] Japan has about 50 million households in total. NTT’s plans are thus consistent with, in 2010, it having a 60% share of fiber network subscribers and all households in Japan being connected to fiber networks.

Having ubiquitous fiber networks in Japan in 2010 is consistent with the goals the Japanese Telecommunications Council set in a 1994 report. That report declared a target date of 2010 for “nationwide upgrading of fiber-optic networks”:

in response to growing demand, the full-scale development and final expansion of network infrastructure should be promoted toward accomplishment by the year 2010. Fiber-optic cables should be installed at least on feeder lines, up to the distribution points, to promote the creation of a situation where infrastructure can be readily utilized at each stage.[5]

The associated network diagram shows optical network units attached to each house and business.

NTT has invested heavily in its fiber network while being subject to comprehensive unbundling regulations. NTT is required to unbundle copper loops and to allow line sharing (competitive DSL service over the primary copper loop NTT uses to provide plain old telephone service (POTS)). NTT is also required to unbundle fiber loops and interoffice fiber.[6]

Prices for unbundled elements seem to favor copper unbundling much more than fiber unbundling. The per month prices for sharing an unbundled cooper loop and for an unbundled fiber loop are about JPY120 and JPY5,100, respectively. At USD1=JPY117, the dollar equivalents are $1.03 and $43.59 per month, respectively.[7] NTT’s market share for DSL subscribers is 39%, compared to 66% for fiber subscribers.[8] Given that the NTT unbundled copper loop charge is much lower than the NTT unbundled fiber loop charge, it makes sense for competitors such as Softbank (Yahoo! Broadband) to focus on providing DSL service over NTT copper. Moreover, given the low copper loop rates, it’s not surprising that competitors use NTT copper loops rather than installing their own copper facilities.

NTT asserts that regulated unbundled fiber prices are much lower than NTT’s costs of providing those facilities, but relevant data are difficult to interpret. Unbundling can imply a wide variety of charges in addition to monthly loop recurring charges. Ties between charges for using unbundled elements and other charges, such as universal service charges and POTS charges, can be highly relevant for evaluating unbundling economics. With respect to just unbundled loop costs, Takashi Ebhihara, a senior NTT executive, recently stated that NTT’s costs for fiber loops were $200 per month, but with increased volume have fallen to $100 per month.[9] Because of economies of scope in laying fiber, costs per subscriber depend strongly on the share of eligible subscribers who actually subscribe. That may be part of the explanation for NTT’s reported falling cost.

Even $100 per month costs for fiber loops is high. Verizon reported that its total capital expenditure in 2006 per home passed for its fiber network expansion was about $900, with about an additional $900 per home connected.[10] Fiber is an asset with a long life, and Japanese interest rates are nearly zero. At cost of $100 per month over just five years at zero interest, the present value of the cost is $6000. Moreover, NTT sells FTTH and FTTB at JPY6,700 and JPY3,950 per month (equiv. $57 and $34 per month), respectively.[11] These prices, which are much lower than the quoted loop costs, make sense only if NTT is aggressively seeking to acquire fiber subscribers and expects its fiber network costs to fall significantly in the future.

The two most important factors accounting for the expansion of fiber networks in Japan are probably very low monetary interest rates and institutional policy commitment to provide ubiquitous fiber network. Since the mid-1990s, the Japanese central bank discount rate has been below 1%. In contrast, U.S. Federal Reserve discount rate has been above 5% for most of that period. Cheap access to capital encourages major capital investments.

A ubiquitous fiber network has been a broad policy goal for both the Japanese government and NTT. The 1994 Telecommunications Council Report clearly expresses the importance the Japanese government associated with communications network investments. With respect to unbundled element prices and costs, Ebihara observers, “It’s a huge issue. It’s very difficult.” (watch above video from time 38:20 to 42:10) At the same time, Ebihara clearly believes that investment in fiber networks has general importance for all citizens and for NTT’s future. In a poignant conclusion to his presentation, Ebihara stated that he thinks NTT should both continue to lobby the government for higher unbundled fiber prices and continue to invest in fiber (watch video 1:24:40 to 1:32).

Update: Ernst-Olav Ruhle of Juconomy clarified that the rate for an unbundled copper loop cited above is the rate for line-sharing. The current rates for full unbundling for NTT East and NTT West copper loops are JPY 1,311 and JPY 1,393 per month respectively. The current rates for line-sharing for NTT East and NTT West copper loops are JPY 93 and JPY 101, respectively. Note that DSL providers such as Softbank (Yahoo Broadband!) provide voice service via VoIP, e.g. BB Phone. Hence they have no reason to purchase a full unbundled loop other than to avoid technical coordination problems with NTT.

Notes:

[1] See “NTT broadband fiber optics outshine ADSL,” Asahi Shimbun, 04/04/2007. In Korea at the end of Feb. 2007, the Korean incumbent, KT, had 1.69 million fiber optic subscribers, Hanaro, 930,000 thousand, and LG Powercomm, 590,000, giving a total of 3.3 million FTTH subscribers in Korea. KT recently announced plans to bring fiber to every Korean household by 2010. The U.S., in contrast, had an estimated 1.3 million FTTH subscribers in Mar. 2007. Verizon, a leading investor in fiber communications networks in the U.S., had only 687,000 U.S. FiOS (fiber Internet data service) customers at the end of 2006. See p. 16 of Verizon’s 4th quarter 2006 earnings presentation. For a review of that data, see Nyquist Capital.

[2] Japanese Ministry of Internal Affairs and Communications (MIC), Dec. 2006, as described on p. 12 of Takashi Ebihara, “The Japanese Broadband Miracle,” presentation at the Information Technology & Innovation Foundation, Apr. 4, 2007.

[3] Ebihara, p. 11, citing NTT East data as of Mar., 2006.

[4] See Asahi article.

[5] From unofficial and tentative translation of Reform toward the Intellectually Creative Society of the 21st Century, Report, May 31, 1994, Goals for the Installation of Network Infrastructure. I’m grateful to Frank A. Coluccio for pointing out this report.

[6] Ebihara, p. 21.

[7] See Ema Tanaka, Minoru Sugaya, Sayaka Shiotani, Evolution of IP Network and Convergencein Japan – Impact of Hard law and Soft Law, presentation at ITS Conference in Beijing, 2006.06.13, slides 23-4 of powerpoint presentation. Ebihara, about 38:20 to 41:00, states that unbundled fiber loops cost about $50.

[8] Ebihara, p. 12.

[9] Ebihara presentation video above; watch from time 38:20 to 42:10.

[10] See Verizon Communications’ FiOS Briefing Session, Sept. 27, 2006, pp. 24-5.

[11] Ebihara, p. 10.