No. 8 — March 1, 1996

Weekly Review

--- by Jon Choy

The saga of telecommunications reform in Japan continues, with the latest effort to break up Nippon Telegraph and Telephone Corp. running into solid political opposition. Domestic debate over the wisdom of putting the former government domestic communications monopoly under the ax has widened — appropriately, some analysts say — into a general debate about how best to increase competition and innovation in telecommunications services. With domestic and foreign firms eager to sell services or hardware in a liberalized Japanese telecommunications market, there is strong pressure on the Ministry of Posts and Telecommunications and the ruling Liberal Democratic Party/Social Democratic Party of Japan/New Sakigake Party coalition to act. The passage of broad telecommunications deregulation legislation in the United States plus fears that Japan is falling behind in advanced telecommunications services already have pushed MPT to announce some potentially important changes.

The subject of NTT's structure was debated as a prelude to the initial opening of Japan's domestic telecommunications market to competition in April 1985. Officials decided at that time to wait five years before revisiting the issue to see how the proposed market shake-up would develop. Even though MPT favored some kind of restructuring, the question again was deferred in 1990 because of fears that such a move would reduce the attractiveness of the NTT shares that Tokyo was offering for public sale.

Over the past year observers have predicted that the third time would be the charm, as it became increasingly clear that NTT's monopoly on local telephone service and its still strong share of the long-distance market were strangling innovation and real competition. The three long-distance common carriers that entered the market subsequent to 1985's deregulation had managed by the end of FY 1994 to grab less than one-third (31.3 percent) of the market, mainly because NTT still monopolizes the local connections through which all long-distance calls must originate and terminate. Payments by the three so-called new common carriers to NTT for handling the local part of their long-distance calls eat up just under half (49.4 percent) of their total revenues. Furthermore, NTT has retained a nearly complete monopoly on local calling, even though on paper the market is open to competitors. In addition to restricting other firms' links to its local network to one connection point per prefecture, NTT has kept competitors out of the local market with its ability to undercut their charges, at least for brief calls. While billing other companies ¥12.57 (12.6 cents at ¥100=$1.00) per call to access its local network, NTT charges only ¥10 (10 cents) for the first three minutes for a local pay telephone call. When NTT recently lowered its local network access charge to ¥10.46 (10.5 cents) per call and agreed to allow competitors to connect at any and all points to its local network (for a negotiated fee), analysts countered that the changes still preserved NTT's basic advantage — its monopoly on local networks — and were just a ploy to take the wind out of the sails of the breakup movement.

Forces in favor of a breakup cite several other arguments to buttress their position:

The Administrative Reform Council recommended last December that NTT be split up but declined to specify how (see JEI Report No. 38B, October 18, 1995). In a February 22 report the Telecommunications Council — MPT's advisory body — described a plan to divide NTT into a long-distance firm and two regional local service companies (see Figure). The new long-distance firm, the advisers said, should be 100 percent privately held and be free to offer international communications services as well as a full range of domestic services, such as cable television. The two regional companies, however, would be limited to local telephone service and remain semiprivate, with MPT remaining the major shareholder. (The government currently owns two-thirds of NTT's stock.) All three firms would be barred from holding each other's stock or from merging back together. The report also suggested that Kokusai Denshin Denwa Co., Ltd., the former international communications monopoly, be allowed to offer whatever domestic services it wants.

In response to this plan NTT president Masashi Kojima has raised the same criticisms made during earlier debates about NTT's structure:

Although MPT was expected to offer to the cabinet February 29 a final report based on the recommendations of the Telecommunications Council, the LDP/SDPJ/NSP coalition apparently already has decided to shelve any breakup plan. Prime Minister Ryutaro Hashimoto was against the 1990 breakup plan when he was finance minister and remains of this mind. (Opposition from major Japanese equipment suppliers to NTT — which have donated generously to the LDP's campaign coffers in the past — also may be on the prime minister's mind.) The MPT minister in the Hashimoto cabinet, Ichiro Hino of the SDPJ, is likely to be at odds with his ministry's recommendation, since his party has ties to the Japan Telecommunications Workers' Union, which staunchly opposes a breakup.

While the Hashimoto cabinet plans to do nothing about breaking up NTT, the telecommunications giant is far from being off the hook. Some analysts, interest groups and academics have been trying to switch the focus of the debate to a more productive one: promoting competition through deregulation. This idea is buttressed by developments in the United States and Great Britain. The latter country's Cable & Wireless PLC recently released a report in which it contrasted the British case, where C&W was allowed to continue to operate as a whole while the market was opened to competition, with the U.S. case, where American Telephone & Telegraph Inc. was split up; C&W concluded that, whether or not the domestic telephone monopoly is dismembered, the result has not overly affected the development of communications. What did make a difference is whether deregulation allowed competition. This thesis was underscored February 8 when President Clinton signed into law a sweeping deregulation of the previously "deregulated" American communications industry. The bill tore down most barriers that have prevented a firm that offers one form of communications from entering another market. Almost immediately local telephone, long-distance telephone, cable television and wireless communications firms were making announcements that they would enter one another's fields.

Perhaps anticipating that its NTT breakup plans might not come to fruition, MPT announced January 23 a package of deregulation measures that could begin transforming Japan's market structure without a major overhaul of laws. Besides eliminating the need to obtain ministry approval for several types of business activities, the changes will make it easier for new firms to enter the market and for firms to conduct business in more than one market simultaneously (see Table). The structure of Japan's telecommunications market clearly is in for another round of changes. Although things are not developing as MPT had planned, many observers argue that the market is moving in the right direction (or at least moving). The debate over NTT's structure is far from finished, despite MPT's desire to offer a final solution. As baseball legend Yogi Berra would say, when it comes to NTT: it ain't over 'til it's over.

Highlights of the January 23 Telecommunications Deregulation Measures

I. Deregulation of Telecommunications Business

1. Revision of regulations on market entry. MPT will study deleting the "excess investment" provision of the Telecommunications Business Law. [This could allow new communications firms to set up shop without MPT's approval.]

2. Clarification of the absence of regulations on telecommunications carriers by service classification. [This would allow existing and new firms to enter any communications field they desire; firms in different fields also could merge or form joint ventures that span more than one market.]

3. Deregulation of Type I telecommunications business rates. MPT will adopt the prior-notification system by the end of March 1997 with regard to mobile communications and paging services. [This would make it easier for wireless service providers to change their fees.]

4. Revision of the framework on interconnection. MPT will establish by the end of 1996 basic rules for connections to NTT's networks to ensure the transparency of contract terms and fees and to promote all forms of connections with NTT's local networks. This includes the obligation to interconnect, to establish clear procedures for calculating connection fees, to set clear technical standards for interconnection, to set ground rules for physically accommodating interconnection equipment, to secure telephone number portability if a subscriber changes carriers, and to allow customers to select a priority carrier [so that awkward four-digit prefix codes that direct a call to a particular carrier become unnecessary].

5. Swift implementation of interconnection of private leased circuits with public switched networks at both ends. [This would force NTT to allow private leased circuits to hook directly into its local networks.]

6. Swift and complete liberalization of the use of international private leased circuits.

7. Flexible application of the Entrustment of Business Activities regulation. MPT will relax the requirements for business trustees. [This would permit, for example, a Type I carrier to designate as its local means of delivering services a cable television firm, a local government with a fiber-optic network or a power company with its own communications network.]

8. Revision of the criteria for Type II telecommunications carriers. [MPT wants to allow more firms termed Special Type II to become General Type II, which are subject to less regulation.]

9. Deregulation of the authorization of international agreements between telecommunications carriers. MPT will limit agreements needing its approval to international telephone and ISDN services.

10. Deregulation regarding foreign ownership. MPT will study relaxing its limits on foreign ownership of telecommunications firms, including NTT and KDD.

11. Future Status of NTT Law and KDD Law. MPT will study amending these laws in line with recommendations by the Telecommunications Council.


II. Future Status of NTT and KDD

MPT will make its final recommendations by the end of March 1996 in line with recommendations by the Telecommunications Council.


III. Deregulation Regarding Broadcasting

1. Introduction of digital multichannel satellite broadcasting. MPT is consulting with the Radio Regulatory Council about extensively easing regulations in this area. It hopes to have final recommendations by the end of March 1996.

2. Introduction of a system of standard tariffs for pay television services. MPT will conduct a study by the end of March 1997 on a system of standardized tariffs and fees.

3. Expansion of frequency bands allocated to international satellite broadcasting. MPT will complete a study on this subject by March 1997.

4. Promotion of the integrated use of terrestrial television data multiplex broadcasting and teletext. By the spring of 1996 MPT will simplify licensing procedures for this line of business, which allows data to be broadcast simultaneously with television and teletext services.

Source: Ministry of Posts and Telecommunications

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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