• Summary
• Controlled Competition Yields Lower Rates, More Options
• Events Conspire To Upset The Apple Cart
• Old And New Versus "New-New"
• The Foreign Element In The Mix
• Japan Follows And Leads Into The Future
• Appendix
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Summary

Japan's telecommunications market has been undergoing steady deregulation and reform since 1984, when Tokyo privatized the government telephone monopoly and permitted domestic companies to enter the field. Until recently, the Ministry of Posts and Telecommunications has maintained an incremental approach to deregulation and reform. MPT's method and policies have been criticized by observers both in Japan and abroad as preventing real competition, keeping innovative firms out of the market and slowing the pace of the industry's development.

The rapid evolution of the Internet — with its potential to revitalize individual firms and the economy as a whole — has highlighted the shortcomings of Japan's telecommunications industry and the inadequacy of MPT's policies. The fast-paced growth of the Internet and the changes it has brought to business and society have forced Japanese firms to scramble to keep up and have pushed MPT to abandon its paternalistic policies and its insistence on gradual reform in favor of a hands-off approach. As it enters the 21st century, Japan's telecommunications industry has strengths as well as weaknesses that will shape its development and its role in the global marketplace.

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Controlled Competition Yields Lower Rates, More Options

Japan's telecommunications industry was transformed on April 1, 1985 when three laws that had been passed the previous year went into effect. Two of the new regulations reorganized the government-owned domestic and international telephone monopolies — Nippon Telegraph and Telephone Public Corp. and Kokusai Denshin Denwa Co., Ltd., respectively — into private companies, although Tokyo retained ownership of almost all shares of the new entities. The third measure, the Telecommunications Business Law, opened the common carrier (Type I) and all other telecommunications services (Type II) markets to private companies.

Tokyo had watched the U.S. breakup of American Telephone & Telegraph Co.'s monopoly on telephone service with a mixture of envy and wariness. While the radical restructuring of the U.S. communications industry fostered competition in terms of calling rates and services, it also caused confusion among customers about total costs and opened the door to some fly-by-night companies. To avoid similar negative outcomes, the Ministry of Posts and Telecommunications kept tight control over which firms were allowed to enter the market and what rates were charged.1

In the domestic long-distance field, for example, MPT approved Type I business licenses for DDI Corp., Teleway Japan Corp. and Japan Telecom Co., Ltd. These three companies — known as the New Common Carriers — began head-to-head competition with NTT in FY 1985. MPT ensured that NTT always charged more than the NCCs for comparable calls and that the NCCs' rates were uniform. In FY 1987, for example, NTT's fee for a three-minute call made over a distance of 340 kilometers (about 550 miles) was ¥400 ($3.64 at ¥110=$1.00) compared with the ¥300 ($2.73) charged by any of the NCCs. This gap was allowed to persist until FY 1998, when rates for all calls over 160 kilometers (about 260 miles) were standardized at ¥90 ($0.82) for a three-minute session.

MPT also injected competition into the overseas calling market in FY 1985 by approving the applications of International Telecom Japan Inc. and International Digital Communications, Inc. Although these firms did not begin offering services until April 1989, KDD sharply cut its rates for both telephone calls and leased lines in the immediate wake of the 1985 reorganization. A three-minute call to the United States, for example, fell to ¥890 ($8.09) by late 1988 from ¥1,530 ($13.91) before deregulation. When ITJ and IDC made their first call connections, they charged ¥680 ($6.18) for this call. As it has in the domestic call market, however, MPT has kept KDD's rates higher than those offered by the new international Type I carriers but also steadily has lowered charges. Today, a five-minute call to the United States costs as little as ¥30 ($0.27) a minute.

MPT allowed new companies to offer services in other segments of the Type I market as well. It opened the door for firms to transmit telephone calls and television broadcasts via privately owned satellites, for example. It allowed companies to construct their own networks and to offer local telephone service on a regional basis. The mobile communications market has exploded, particularly in recent years. Companies jumping into the Internet service provider market are fueling another burst (see Table).

Market Entry History of Japan's Telecommunications Market, FY 1985-FY 1999

The number of Type II companies also has experienced healthy growth since 1985 (see Figure 1). Running the gamut from simple electronic bulletin boards to value-added networks, this market also has been rejuvenated recently by the booming business of providing Internet access.

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Events Conspire To Upset The Apple Cart

A decade after deregulation, MPT still had a steady hand on the wheel. By 1995, the ministry had made some important concessions to further liberalize Japan's telecommunications industry, including significantly easing the process for Type I applications, automatically approving most Type II licenses and allowing foreign firms more opportunities. But, overall, MPT remained in control of the market's destiny and committed to making changes incrementally. The ministry's vision of the industry's future included all the right words: "information society," "high-speed fiber [optic communications lines] to the home," "advanced wireless networks" and so on.

Bureaucrats, however, continued to place a premium on the orderly development of new services and the prevention of such disruptive events as the failure of a major carrier. MPT's approach was similar, in some respects, to the Ministry of Finance's "convoy" system for regulating the domestic banking industry, which kept all members afloat but limited the pace of their passage.

Critics, both at home and abroad, argued that this paternalistic model was holding back the introduction of much-needed new services and forcing Japanese residential and business customers to pay higher telecommunications prices than their counterparts in other advanced, industrialized nations. MPT, however, saw no need to abandon what it considered a successful approach and held off criticism, claiming that desired changes were coming but would arrive more smoothly — if not more quickly — under its guidance.

Japan's prolonged economic slowdown of the 1990s and the Internet phenomenon that was driving changes in the United States combined to roil the waters surrounding MPT's "telecommunications convoy." Changes are apparent in several areas:

• Hard economic times refocused the attention of government and business leaders on improving the nation's competitiveness. Advanced telecommunications — particularly Internet-related services — at prices on a par with the United States and Europe were recognized as important ingredients for an economic revival.
• Japanese companies, weakened by nearly a decade of depressed stock prices and meager growth, became more receptive to merger with or acquisition by a stronger partner.
• Forced to confront the shortcomings of their postwar business practices, the attitudes of Japanese executives and investors on corporate financial matters have moved closer to American and European norms, incorporating such concepts as the priority of shareholder value, complete disclosure of financial information and a nonnationalistic view of global business.
• The strong performance of Internet companies in Japan has emerged as a rare bright spot in the country's economic picture that executives and government officials want to nurture and expand.
• Backed by the soaring prices of their shares, Internet firms are investing in improved communications facilities, which has meant, in some cases, buying another company.

MPT and Japanese telecommunications firms faced growing pressure from corporate and residential customers to step up the pace of innovation and deregulation. The ministry's response came in two steps. The restriction that kept foreign firms from owning a controlling interest in a Japanese Type I carrier was lifted in 1998. And, at the start of July 1999, MPT canceled NTT's monopoly on local telephone service, announcing that it would approve applications for telecommunications business licenses except when national security considerations were raised. These developments opened the door for foreign firms as well as for domestic companies from other industries to plunge into the market.

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Old And New Versus "New-New"

The restructuring of Japanese industry, the evolution of MPT's regulatory attitude and the Internet revolution have changed the telecommunications playing field. NTT and its subsidiaries remain the dominant combatants, but they are facing challenges from a broad spectrum of domestic and foreign companies.

In the wake of the 1985 deregulation, analysts described the Japanese telecommunications market as "old versus new." In other words, it was NTT and KDD against the New Common Carriers and Type II firms. As the Internet revolution has spawned a new crop of communications-related ventures, the paradigm has become "old and new versus new-new," referring to the traditionally voice-oriented firms trying to hold back the onslaught of shinshinden ("new-new" electronic communications companies).

NTT - This "old" company is, according to its executives, in the process of remaking itself into a family of firms capable of competing at the international level. The transformation has been going on for several years, brought about mainly by the creation of such new businesses as international subsidiaries or by the spin off of operations like NTT Mobile Communications Network, Inc. — known in Japan as NTT DoCoMo — and NTT Satellite Communications Inc.

Major changes occurred last July, when local telephone services were divided into two geographically distinct companies (Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp.) a long-distance/international carrier (NTT Communications Corp.) and a holding company which carries the original NTT Corp. moniker (see JEI Report No. 26B, July 9, 1999). This new structure is supposed to encourage greater competition in local and long-distance service, as well as to allow NTT to integrate overseas operations more closely with core businesses.

To critics, however, NTT's market dominance, its monopoly grip on local telephone service and its status as MPT's pet long have been obstacles to the rapid development of Japan's telecommunications industry. The company's new structure, they charge, does little to reduce the NTT Group's domination of wired and wireless service, be it local or long distance. Cross-subsidization among the firms will continue, they add, and the breakup has done nothing to loosen NTT's stranglehold on local service.

A major flash point in the debate has been the fees that NTT charges other carriers for initiating or completing telephone calls through its local network. According to MPT, NTT collects ¥5.81 (5.3 cents) for each call of up to three minutes that goes through its urban networks and ¥11.98 (10.9 cents) when a call of the same duration passes through its rural exchanges. Both domestic and foreign parties claim that NTT's interconnection fees are unreasonably high and constitute a subsidy for the giant firm while penalizing its competitors. Some Type I companies report that as much as 40 percent of their revenues are paid to NTT in fees.

This issue has been an important topic in Japan's negotiations with the United States and Europe, both of which have pressed for sharp reductions in NTT's fee structure. In the latest development, Tokyo has offered to cut the urban connection fee by 6.2 percent to ¥5.45 (5 cents) and the nonurban charge by 51.3 percent to ¥5.84 (5.3 cents). While the Americans and Europeans wanted more, the reductions were accepted as a first step (see JEI Report No. 4B, January 28, 2000).

Proponents of the new organizational structure, however, disagree that NTT is a roadblock. Now that local and long-distance operations are separate, they argue, it is in NTT's best interest to cut interconnection fees. In addition, the movement toward adopting U.S. and international accounting practices and standards (see JEI Report No. 12B, March 26, 1999) will make it much harder to hide cross-subsidization among the NTT units. Since foreigners now can buy NTT shares — although not a controlling block — the subsidiaries will be under pressure to deal with each other at arm's length and to give top priority to their shareholders' considerations rather than the good of the group.

NTT will make make its case with actions as well as words. The firm announced in November 1999 plans to lighten its payroll by 20,000 jobs by the end of March 2003. No layoffs are scheduled, but 4,000 workers will be transferred to subsidiaries. The remaining reductions will be made through attrition and a two-year hiring freeze beginning April 1, 2001 at NTT East and NTT West. The plan also includes closing two-thirds of the group's retail outlets and cutting capital spending by the two local service providers by ¥900 billion ($8.2 billion) over three years starting with FY 2000. The moves, NTT executives claim, will save a total of ¥350 billion ($3.2 billion) in FY 2002, which will give the group room to cut its rates for calls and interconnections.

The NCCs - These new NCCs find themselves between a rock and a hard place. While the ranks of this group have increased by one — KDD, which had more in common with the original NCCs after it was allowed to enter into the domestic services market in July 1999 than it did with NTT — their future is uncertain. Some early NCCs already have disappeared. Satellite Japan Corp. folded in 1993 when it was merged with Japan Communications Satellite Co., Ltd. to form Japan Satellite Systems, Inc. International Telecom Japan was absorbed in October 1997 by Japan Telecom. And Teleway Japan became part of KDD in December 1998. Again mimicking MOF's convoy system for banks, MPT encouraged stronger firms to absorb the weaker ones to ensure that customers would not be left in the lurch.

Faced with a reorganized NTT that now is free to compete in every market segment, the NCCs have accelerated their efforts to form alliances and to find partners. KDD and DDI, for example, plan to cooperate in a number of ways to combat the revamped NTT. DDI plans to merge its regional wireless service providers into a single firm that can compete more effectively against NTT DoCoMo and others.

While such actions may help strengthen their positions, these companies cannot step out of NTT's shadow in the foreseeable future because they are dependent on the giant firm's local telephone networks. Since the NCCs must pay NTT a fee every time a call they carry is initiated or terminated through its local telephone network, competing purely on price is a difficult proposition. Yet the NCCs steadily have expanded their market share under MPT's aegis (see Figure 2). As the ministry moves away from its convoy method of regulation, however, the NCCs are concerned that they will not survive unbridled competition with NTT or with foreign firms.

The New-New Companies - Downsizing by Japanese companies and the Internet frenzy have touched off a wave of entrepreneurial fervor in Japan. Many shinshinden are small in scale and scope and fill niches. Individually, they do not pose a threat to NTT or the NCCs. As a group, however, they can present a significant market presence. As is the case in the United States, for example, many small Japanese Internet service providers compete effectively with huge players like NTT, NEC Corp. and Fujitsu, Ltd.

Several shinshinden, moreover, are backed by deep-pocketed and consumer-wise companies. NTT and the NCCs are watching these firms closely. Sony, for example, has obtained a Type I license for wireless local loop service, which will allow the consumer electronics giant to deliver services to the home without using NTT's local network. Sony plans to build an intelligent home network to deliver Internet access, games and other content, but, clearly, it easily could add voice services to the mix.

The cable television providers are another type of shinshinden. Although the rate of penetration for cable TV remains relatively modest in Japan compared with the United States, the technology's ability to deliver broad-band (high-speed) access to the Internet is beginning to attract the attention of consumers. U.S. cable companies already have started to invest heavily in upgrading their networks to support cable modems, but Japanese firms are just beginning this effort. NTT and other Type I carriers must factor the cable-TV option into their long-term planning.

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The Foreign Element In The Mix

Foreign communications firms once primarily were interested in Japan as a market for hardware, as evidenced by the long-standing agreement between the United States and Japan covering NTT's procurement policies. While Washington remains committed to improving foreign access to the giant company's buying system, Tokyo's liberalization of investment and licensing regulations in the communications industry has expanded the scope of foreign activity immensely (see Appendix).

Within the past year, foreign companies have shaken up the Japanese telecommunications market with some startling moves:

• AT&T Corp. and British Telecom Plc joined forces to purchase a 30 percent stake in Japan Telecom, the country's second-largest international common carrier. Concluded on a friendly basis, the deal will allow the American and British firms to market their global communications services through Japan Telecom and access to its domestic network at favorable rates.
• Cable & Wireless Plc outbid NTT for control of International Digital Communications, one of Japan's overseas-oriented NCCs. The success of the British firm's hostile offer was stunning not only because it marked the first time that a foreign firm had taken ownership of a Type I carrier, but also because it overrode the established business ties between IDC and NTT (see JEI Report No. 24B, June 25, 1999).
• Vodafone AirTouch Plc took a major stake in the nine regional Digital Tu-Ka Group mobile phone companies, becoming the second-largest shareholder behind Japan Telecom. To no one's surprise, Vodafone now is cooperating with Japan Telecom's backers — AT&T and British Telecom — to compete with NTT DoCoMo.
• Livedoor Group, Inc. has broken the cyberspace price-barrier in Japan by offering free Internet access to Tokyo residents. While common in Europe and gaining popularity in the United States, schemes that provide Internet access in exchange for exposure to Internet advertisements or participation in marketing surveys have not been tried in Japan. The San Francisco company hopes to sign up as many as 1 million subscribers by the end of this year, an ambitious goal given that Japan's largest ISP, NEC's NIFTY-Serve, has attracted only about 2.7 million customers after several years of effort.
• Several U.S. cable TV firms are linking up with Japanese counterparts both to improve the content delivered to Japanese homes and to begin the costly process of upgrading systems to deliver broad-band Internet access. Thanks to changes in Japanese CATV regulations, observers expect the industry to begin a process of consolidation that will position cable operators to challenge telephone-based communications providers.

Attracted by its great potential for Internet-related growth, overseas firms are rushing into the Japanese market. Foreign ISPs, Web portal operators, Internet software providers, content developers and others are finding a ready market for their wares and services. With a helping hand from overseas, Japan's Internet industry is taking off.

More generally, the ongoing realignment of the global telecommunications industry is influencing the evolution of the Japanese market. The AT&T/British Telecom/Japan Telecom deal is an obvious manifestation of this phenomenon, but the rapid development of international supercarriers is forcing Japanese communications companies to reexamine their own business strategies. Becoming part of an international telecommunications alliance is a serious option for Japan's NCCs, one that instantly would provide them with the global reach and the technology resources to match NTT.

Japanese telecommunications companies are not satisfying themselves with just their home market. The People's Republic of China, in particular, is attracting a lot of attention. The NTT group, for example, has joint ventures with the Shanghai Posts and Telecommunications Administration and the Beijing Telecommunications Administration, a subsidiary in Hong Kong and a brand new stake in HKNet Co., a Hong Kong ISP. KDD also has an arm in Hong Kong and a joint venture with the Shanghai PTA. Japan Telecom has an office in Beijing and Shanghai and a deal to lay lines with China's Ministry of Railways.

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Japan Follows And Leads Into The Future

Japan's telecommunications market is fragmenting as it moves forward. Some fields lag behind the U.S. and European counterparts, while others are at the cutting edge.

Many large companies are attempting to become vertically integrated, one-stop shops for the full spectrum of communications services. NTT typifies this approach in its efforts to offer voice, data, local, long-distance, international and Internet services in one package. This trend mirrors the changes taking place in the global telecommunications market.

However, not every firm can or should be a one-stop shop. Cable & Wireless, for example, is turning away from this model and remaking itself into a corporate data transmission/Internet specialist. Analysts have praised the company's new direction, saying that unloading its stakes in the Digital Tu-Ka Group and the recent sale of its Hong Kong subsidiary yielded both value to shareholders and cash to invest in its new focus. Some Japanese NCCs also might benefit from zeroing in on a specific set of lucrative services rather than attempting to be all things to all people.

Voice communications remains the major market in terms of volume of calls and sales value, a factor that underpins a key complaint against NTT and MPT's current control over call rates. A local call in Japan usually costs ¥10 (9.1 cents) a minute. While this charge may be reasonable for phone conversations, it becomes prohibitive for surfing the Internet. NTT and MPT do not want to cut this fee because they fear that increased Internet traffic would clog circuits intended for voice communications and would put a big dent in revenues. Instead, NTT is offering a special flat fee for Internet access using a dedicated connection to a high-speed Integrated Services Digital Network. However, only about 7 percent of NTT's residential customers subscribe to ISDN, which has a basic price tag of ¥2,830 ($25.73) a month.

NTT East and NTT West are considering a broader package that would give unlimited Internet access via ordinary telephone lines to households for ¥8,000 ($72.73) a month. While this plan would be an improvement over the current system of time-based charges and over the pair's previously proposed ¥10,000 ($90.90) monthly fee, it still is expensive compared with similar services available in the United States and in Europe. It also compares poorly with an unlimited-use plan proposed jointly by Softbank Corp., Tokyo Electric Power Co., Ltd. and the Japanese subsidiary of Microsoft Corp. that is scheduled for launch this summer.

A July 1999 rules change by MPT has opened up another broad-band option for residential customers. By lifting the requirement that access to residential phone lines must be made through NTT's switches, MPT opened the way for service providers to co-locate their own equipment in NTT stations to provide links to digital subscriber lines. Mitsui & Co., Ltd. has formed a consortium of 17 ISPs to take advantage of the new freedom and hopes to offer asynchronous DSL to Japanese customers for as little as ¥5,000 ($45.45) a month. KDD and Tokyo Metallic Communications Inc. have a similar plan for the Tokyo area.

These proposals, however, still depend on NTT's local network, which means that they will have to negotiate a connection fee with the giant competitor. While these groups argue that connections should be free since NTT already charges subscribers a monthly circuit-usage fee, they expect to pay as much as ¥1,000 ($9.09) a month. Their greatest concern is that a higher charge would make their business plans nonviable.

While plans and policies for wire-based services still are evolving, Japan is poised to jump into the global lead in the area of third-generation wireless services. To the surprise of most observers, Japan's mobile phone market took off like a rocket, thanks mainly to MPT's 1994 decisions to allow consumers to own their own handsets and to take a hands-off approach to licensing and fee setting. This plus the introduction of the microcellular personal handyphone system and wireless Internet access has sparked tremendous growth in the number of mobile users. Total subscriptions already had topped 50 million by the end of 1999 and are projected to rise as high as 80 million by the end of FY 2010. MPT reports that mobile phone contracts soon will outnumber fixed subscribers.

The hottest gadget in Japan is the iMode mobile phone connected to NTT DoCoMo's wireless Internet access. Unlike traditional dial-up Internet connections, iMode is always on. Internet content providers — with plenty of help from foreign firms — are rushing to adapt their information for display on the small screens of handheld phones. Moreover, iMode units are priced about the same as standard mobile phones and users are charged a flat Internet access fee of ¥300 ($2.73) a month plus a charge — usually only several hundred yen — for any information they download. NTT DoCoMo expects the service, which was launched in February 1999, to boast a customer base of 4.5 million by the end of March, a 50 percent increase in just three months.

Japanese wireless service providers, however, have an even better package in store. As early as 2001 they plan to deploy a third-generation wireless technology called IMT-2000. This new system will raise the data transmission speed from the current limit of 19.2 kilobits per second to 384 kilobits per second — fast enough to support video transmissions — and eventually to 2 megabits per second. IMT-2000, a product of cooperation between Japanese and European companies, could become the de facto global standard because it will be adopted by its developers and includes the leading U.S. third-generation wireless technology. European firms and American companies, such as Vodafone AirTouch and Microsoft, are flocking to the Japanese wireless market, striking deals to develop hardware, software and content that will take full advantage of IMT-2000's capabilities.

Japan's telecommunications industry still must clear some major bumps in the road. NTT's interconnection fees, for example, have been lowered but nonetheless are considered high by Americans and Europeans. The subject even could become a case before the World Trade Organization. Another issue concerns telephone charges for Internet access. The magic of the marketplace appears to be easing this problem, thanks to aggressive competition from foreign firms and shinshinden. With MPT using a much lighter hand to regulate the market and with the door open to foreign participation, Japan's telecommunications industry appears ready to play its role in ensuring the long-term growth potential of the Japanese economy.

Andrew Hayashi and Kanako Yamada provided research assistance.

1aa For a review of events and developments in the first decade after deregulation, see Jon Choy, "A Decade Of Deregulation And Counting: Japan's Telecommunications Market," JEI Report No. 28A, July 28, 1995. Return to Text