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Japan's telecommunications industry
Telecommunications Policy 1994 18 (8) 651-657
Japan’s telecommunications industry Competition and regulatory reform
Shigehiko Naoe
Japanese policy making over the past desadehasbeenfocusedonreformof NTt. This article first reconsiders the orlvatlzation of NTT from the different berspectives of NlT and MPT and elaborates the problems faced In introduclng competition. It discusses the present structure of the telecommurications industry and the regulatory issues which need to be addressed as Japan’s industry begins to make the transltlon to both a competitive market structure and a muttimedla industry. lt argues that reform of NTT alone should not form the basis for future telecommunlcations policy maklng in Japan. Professor Shigehiko Naoe may tacted at the Faculty of Policy Chuo University, 742-l Higashi Hachioji-City, Tokyo, Japan (Tel: 74 4151; fax: +81 426 74 4118).
be conStudies, Nakano, +81 426
The Japanese telecommunications industry is now operating in a competitive market structure in which many kinds of telecommunications entities are active. Competition in the telecommunications industry was introduced in 1985 when NTT, the domestic monopoly, was privatized. This reform, during the Nakasone era, was part of a government reform movement. The underlying principles of this movement were streamlined government and the adoption of competitive market principles. These ideas were largely borrowed from the Reagan administration in the USA and the Thatcher government in the UK. During this period the view that the public sector was inefficient was promoted and gained public support. The need to increase the efficiency of government organizations was the most important public policy. Although there were differences in approach to government corporations in the USA and the UK, both believed more in the market mechanism than in government regulation. Similar ideas became accepted in Japan, especially in regard to the government-owned Japan National Railway (JNR). Its losses had reached more than $100 billion per year and its poor performance in comparison with the private sector provoked continuous complaints from its customers. To solve the JNR problem, the government set up an ad hoc committee for government reform in 1981, thus putting the issue of reform of government corporations on the agenda. NTT believed that its performance was relatively high compared to other government organizations. The ad hoc committee, however, thought differently and proposed that N’TT should be broken up and privatized like JNR. These different views on NTT’s performance were at the centre of what became a highly political debate in the following years. Indeed, this difference in views has affected the policy decisions of the Ministry of Posts and Telecommunications (MPT) over the past decade and is still a major issue today. MPT and NTT have different views of NlT’s privatization in 198.5,
030X-5961/94/080651-07 @ 1994 Butterworth-Heinemann
Ltd
6.51
Japan’s telecommunications industry: S Naoe
which come from their different understandings of NTT’s level of performance. From the government’s point of view, privatization and the introduction of competition were not the goals of their policy but rather were the means to promote more effective telecommunication services for customers. Therefore, on this occasion, the new telecommunications industry law not only introduced competition but also regulated the telecommunications companies who entered the market in competition with NTT and KDD. In other words, it was expected that NIT’s activities would be affected through the market. MPT also made N’IT company law to regulate NTT’s activities, especially because, even though competition was introduced, NIT was still the dominant carrier. Through these laws MPT established the power to control the telecommunications industry, including N’IT, and the capability to make telecommunications policy. Prior to privatization, telecommunications policy was made on NTT’s advice. MPT’s role was limited to formalizing policy and NIT’s budget, which NTT had proposed. NIT’s privatization was therefore also significant in that it has meant that MPT has become a real government organization for telecommunications policy formulation. NIT’s perspective on privatization was very different. Before reform, NIT believed that privatization would mean that it would be freed from government control and that it would become independent. For many years NTT’s top management had wanted to establish a self-supporting management structure, especially since in their view NTT had been directly controlled by the Diet on matters of its management, budget, tariffs and investment. NlT’s trade union had also wanted to be free from such government control, since wages were regulated and the right to strike was prohibited by public corporation law. The trade union thought it could achieve better wages for its members if it could negotiate directly with NIT’s senior management. Most NIT staff believed that its performance was reasonably good, that there was no need to promote greater efficiency and that NTT did not need to be privatized. It was thought that the ad hoc committee’s recommendation on efficiency was a future problem. Thus, from NIT’s perspective, privatization itself was the goal; otherwise reform was not necessary.
The 1990 review After the introduction of the new regime MPT’s main task was to establish a more competitive market for new entrants and to improve management performance in NTT. Nobody knew what would happen following the 1985 telecommunications law - most people thought that it was not perfect - so the Diet decided that the law should be reviewed after three years in order to make adjustments in the light of market developments. NIT company law was to be reviewed after five years. Although many companies entered the market in 1985, it was not until 1987 that real competition began with the establishment of three new common carriers (NCCs) in the long-distance telephone service market. Even so, the NCCs faced many problems with interconnection. The industry law said nothing about this issue and therefore N’IT and the NCCs had to start from scratch. The law says only that the Minister can advise and mediate between the carriers if they cannot reach agreement on interconnection. There are no guidelines or rules in the law so the 652
Telecommunications Policy 1994 Volume 18 Number 8
Japan’s telecommunications indurw
S Naoe
NCCs had to negotiate directly with N’IT so that they could begin their services. At first N’IT could not recognize the problems raised by the NCCs with regard to interconnection, because the law said nothing about NIT’s responsibility in this matter. N’IT gradually came to understand, however, that the conditions for interconnection to NIT’s network were essential for competition between NTT and the NCCs. The first interconnection problem concerned the identification number (ID) function of NTT’s local exchanges. Unfortunately, most local exchanges consisted of analog crossbar technology and there were no ID functions for interconnection at that time. N’IT had to arrange additional ID functions for each exchange to which NCCs’ customers wanted to connect. But NIT was unable to do this quickly and some of the NCCs’ customers had to wait several years to get connected. The second issue was the scheme for interconnection charges. NIT did not know where to begin, but under the existing tariff structure it believed that local services were operating at a loss. Moreover, N’IT had promised the public that it would maintain its level of local tariffs for several years after privatization. Thus NTT could not propose an appropriate tariff scheme for interconnection. Finally, MPT set interconnection charges so that NCC customers had to pay both the NCCs’ rates and N’IT’s local end rates. This scheme was both complicated and skewed competition in the new Japanese telecommunications market. The problem was finally overcome only in April 1994 by a new tariff scheme in which NCC customers enjoy an end-to-end rate. In this new scheme the NCCs have to pay an additional fee for local services. A third problem was the point of interconnection (POI) issue. Under the old interconnection tariff scheme, an NCC could offer a lower rate to its customers by using more POIs than other NCCs or NIT, thus reducing the interconnection payments to NTI’. The more POIs, the more the NCCs had to pay for them, but the costs were shared between NTT and the NCCs. Not surprisingly NIT was keen to keep the number of POIs to a minimum. This issue was also addressed by MPT in 1992, with the result that the NCCs aimed to situate one PO1 in each prefecture by 1994. Alongside these problems, MPT was trying to understand the essentials for telecommunications industry policy. That is, MPT saw its main role not as regulating carriers but as promulgating rules for competition in the telecommunications market. With this in mind, MPT tried to reform NIT again in 1990 with the review of the industry law and NIT’s company law. In 1985 the laws were created to protect the customer from monopoly. This time the discussion on N’IT’s reform took place within a perspective of competition rather than monopoly. In this review MPT recommended the break-up of NIT into two companies: local and long distance. But this proposal was not supported by the cabinet, owing to opposing views from N’IT and the Ministry of Finance. The Ministry of Finance was concerned about NlT’s share price. NTT opposed the proposal on two grounds. First, it argued that it was essential that it retain its R&D capability. Second, it argued that the loss of economies of scope was against the national interest. This opposition has meant that the finalization of MPT’s proposal has been postponed until 1995, except for the separation of NIT’s mobile department as a separate subsidiary.
Telecommunications Policy 1994 Volume 18 Number 8
653
Japan’s telecommunications industry: S Naoe
Present structure of the industry The industry law separated telecommunications companies into two types of carrier. Type 1 carriers provide services using their own networks, and Type 2 carriers serve customers by leasing network facilities from Type 1 carriers. MPT regulates the activities of Type 1 carriers through licensing, tariffs, service conditions, investment activities and so on through the Telecommunications Industry Law. Type 2 carriers are further separated into two categories, special and other. In comparison with Type 1 carriers, Type 2 carriers are practically free from regulation. There are about 90 Type 1 carriers including the two traditional, still dominant carriers, NIT and KDD. There are over 1000 Type 2 carriers, less than 50 of which are classified as special. The largest Type 1 carrier is NTT, which only provides local and domestic long-distance services in Japan. Other carriers serve specialized markets, such as international or domestic long distance, local, mobile, satellite and so on. Thus the NCCs are relatively small in comparison with NTI’. The sales volume of N’IT is currently more than 20 times that of the largest NCC. This industrial structure means that the main competition is between the NCCs and NIT and not among the NCCs themselves. NCCs have entered all telecommunications markets including local services, even though NIT still holds a virtual monopoly. Thus N’IT’s local networks are still a bottleneck for most of the NCCs’ activities because they are mainly operating in the long-distance and mobile markets. The most aggressive competition is taking place in international and domestic long-distance telephone markets, mobile and paging services. Local services are not so competitive and most NC&’ activities depend on NIT’s local networks. The major problem of competition between the NCCs and NTT still lies in the issue of interconnection, mainly because NIT has yet to establish its open network doctrine (OND) for its local networks. NIT retains about a 60% share of all domestic service markets. However, most NCCs have established a viable position. The NCCs’ share of markets is gradually increasing and NIT’s share is decreasing in all markets. In particular, NTT’s share of the long-distance market, its most profitable, has been falling rapidly. With the tariff changes in 1990, N’IT’s profit has fallen dramatically. In order to retain its market share, NTT lowered its telephone tariffs to try and match the NCCs. But the NCCs still have a small advantage in terms of tariffs. NTI has therefore responded by introducing several option calling plans (OCP) attempting to maximize the advantage of its networks. The NCCs are unable to match NTI’s OCP quickly because they depend on NIT’s local networks. The effects of competition have been a lowering of tariffs and reduction of NTI”s profits. N’IT is therefore being forced to reduce the cost of its services. As a result NIT has reduced its total number of staff from 320 000 to 220 000 since 1985. It is expected that staff numbers will reduce to 200 000 by 1997. NIT frequently complains about MPT’s rate regulation policy, especially for local services since local services are making huge losses. According to NTT’s strategy, the rebalancing of tariffs between local and long distance is the most important telecommunications policy issue. 654
Telecommunications Policy 1994 Volume 18 Number 8
Japan’s telecommunications industry:
S Naoe
Regulatory framework In addition to the Telecommunications Industry Law for Type 1 carriers, NTT and KDD are each regulated by company laws. NTT has a responsibility to provide universal service throughout Japan and is prohibited from serving international markets. Conversely, the other traditional carrier, KDD, is barred from providing domestic services. Other Type 1 carriers, NCCs, are only regulated by the industry law and they may operate in any market. Occasionally NCCs provide services in several specialized markets, which are separated into international, domestic, local, mobile and satellite for each NCC. The Japanese telecommunications industry therefore consists of a dominant comprehensive carrier and many small specialized carriers. The industry law regulates the telecommunications companies in two main ways - licensing, and regulation of tariff and service features. In terms of the public interest, the basic idea is to protect the consumer from monopolistic behaviour of private companies, ie to avoid inappropriate monopolistic surplus and irrational price discrimination of services. The law is that simple, but the telecommunications business is comprehensive. Therefore the application of the law also has to be comprehensive. This gap between the structure of the law and the social requirements of the law gives a wide scope to MF’T’s administrators. Their interpretation of the law has become of fundamental importance in the actual administration of the telecommunications industry. Unfortunately the present industry law has been less effective in promoting competition among carriers, mainly because the law was made to regulate monopoly before the introduction of competition. Consequently, there are no rules for a competitive telecommunications market. At the time of privatization in 1985, MPT’s administrators expected that companies would automatically compete with each other and create the market rules themselves. The law states simply that anyone may enter the telecommunications market as a Type 1 carrier provided they have an appropriate and viable business plan, and are approved from the point of view of the balance of the supply and demand of services. That is, the law created a competitive market but the rules of competition were not written into the law. Most of the problems in Japan’s telecommunications industry today arise from this.
An interpretation of Japanese telecommunications
policy
Japan’s telecommunications industry is still in transition from a monopolistic to a competitive market structure. Furthermore, the telecommunications industry is facing a historic change, similar perhaps to the changes that occurred at the end of the last century when the telephone replaced the telegraph. That is, it is expected that the convergence of technologies will transform the telecommunications industry into a multimedia industry. MPT therefore has to deal with structural change in both the market and the industry itself. This means that telecommunications policy has to be coordinated to overcome today’s problems and promote competition and also develop the information infrastructure of the future. Japan’s telecommunications policies for the telecommunications industry currently seem to be concentrated on the question of N’IT reform in 1995. For example, plans for a national information infrastructure Telecommunications Policy 1994 Volume 18 Number 8
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Japan’s telecommunications
industry: S Naoe
(NII), announced to the public by MPT in May 1994, were conceived with the future role of NlT uppermost. Likewise, the issue of the Personal Handy Phone System (PHS) is seen mainly in relation to N’IT’s reform. The review of rate regulation policy and the problem of rate rebalancing proposed by N’IT are concerned with NIT’s position in the local market. The issue of OND for the development of competitive market conditions is mainly an issue of NIT’s structure. Even the deregulation issue of interconnection between dedicated lines and the public network, which is prohibited today by the law attachment decision in 1985, is discussed in the same manner. NTT’s reform is also shaping discussions on NlT’s virtual private network (VPN) service plan. When MPT begins the review of NIT’s reform next year it will also review the NCCs’ market segmentation by services as part of the same process. There are many alternative telecommunications policies with regard to the review of N’IT’s organization. MPT will keep these as policy alternatives without having reached any final decision by the time of the review. No doubt MPT will find many more telecommunications policy issue connected with NIT’s review in the near future. NIT announced at the beginning of 1994 its intention to serve multimedia markets in the future. This vision is part of its business strategy with regard to the future telecommunications market. However, it is also part of its strategy to try and avoid reform of its organizational structure by MPT’s review. For the past decade MPT and N’IT have fought each other on the question of reform, and NTT and the NCCs have fought each other in the marketplace. From NIT’s point of view, therefore, MPT and the NCCs look alike. That is the reason why MPT has been accused of supporting the NCCs more than NTT in terms of regulation. NTT has still not understood that the purpose of MPT’s telecommunications policy is to encourage the provision of more effective services to the customer, not to support the NCCs. Competition and NIT’s reform are the means to the end but, unfortunately, in the application of policy today the means has become the end. There may well be other more important issues concerning the supply of more effective telecommunication services if we start from the point of view of customers, for example. Company viability, more competitive markets, the reform of N’IT and so on, may not be so important to customers.
The need for harmonization The telecommunications industry today is a global business. Many large telecommunications companies both compete with each other and try to form alliances too. Each country has its own regulatory scheme. Telecommunications companies therefore compete with each other in different competitive conditions. The International Telecommunication Union (ITU) has played a role in the past as a coordinator of technical and administrative matters of the international activities of telecommunications entities. To avoid conflicts between these entities in future, the role of the ITU is insufficient. It is certain that it will become increasingly important to overcome the conflicts between large international telecommunications operators.
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Policy 1994 Volume 18 Number 8
Japan’s telecommunications industry: S Naoe
In particular, competition today involves not only telecommunications operators but also telecommunications equipment manufacturers, computer software companies and others. Communications technology is changing rapidly, and this is forcing regulatory frameworks to change in response. But currently the regulatory rule-making processes of the ITU are not capable of regulating competition. In order to establish an effective regulatory framework for the international competitive market we need a new concept for the telecommunications industry and new ideas for regulation. For this to come about the harmonization of different countries’ telecommunications policies will become more important. In this regard the Japanese experience may be a helpful example. To harmonize telecommunications policies, two aspects are of particular importance: the first is industrial policy, and the second is universal service policy. In term of industrial policy the establishment of rules for competition is the most important issue to be resolved between different countries. Telecommunications companies have to compete with each other while interconnecting their networks. There are some kinds of rules, such as ONP, OND, ONA, for global interconnection, but they are not harmonized internationally today. With regard to universal service, we have no common concept of universal service and who should provide it. This is also an important issue in relation to future telecommunications infrastructure development. In Japan, Type 1 carriers compete with each other but only NTT can operate in the total market for telecommunication services. NCCs cannot do this. This means that they have to play by different market rules and they do not have an equal base with NTT. For interconnection there are no effective rules such as ONP or ONA among Type 1 carriers. OND will set the rules for interconnection between N’lT and Type 2 carriers, but not for Type 1. In order to deal with these problems, the role of government in the development of future telecommunications infrastructure will become critical in all developed countries in the very near future. In order to solve these problems, the harmonization of telecommunications policies between countries will take on increasing importance.
Telecommunications Policy 1594 Volume I8 Number 8
657
Japan’s telecommunications industry Competition and regulatory reform
Shigehiko Naoe
Japanese policy making over the past desadehasbeenfocusedonreformof NTt. This article first reconsiders the orlvatlzation of NTT from the different berspectives of NlT and MPT and elaborates the problems faced In introduclng competition. It discusses the present structure of the telecommurications industry and the regulatory issues which need to be addressed as Japan’s industry begins to make the transltlon to both a competitive market structure and a muttimedla industry. lt argues that reform of NTT alone should not form the basis for future telecommunlcations policy maklng in Japan. Professor Shigehiko Naoe may tacted at the Faculty of Policy Chuo University, 742-l Higashi Hachioji-City, Tokyo, Japan (Tel: 74 4151; fax: +81 426 74 4118).
be conStudies, Nakano, +81 426
The Japanese telecommunications industry is now operating in a competitive market structure in which many kinds of telecommunications entities are active. Competition in the telecommunications industry was introduced in 1985 when NTT, the domestic monopoly, was privatized. This reform, during the Nakasone era, was part of a government reform movement. The underlying principles of this movement were streamlined government and the adoption of competitive market principles. These ideas were largely borrowed from the Reagan administration in the USA and the Thatcher government in the UK. During this period the view that the public sector was inefficient was promoted and gained public support. The need to increase the efficiency of government organizations was the most important public policy. Although there were differences in approach to government corporations in the USA and the UK, both believed more in the market mechanism than in government regulation. Similar ideas became accepted in Japan, especially in regard to the government-owned Japan National Railway (JNR). Its losses had reached more than $100 billion per year and its poor performance in comparison with the private sector provoked continuous complaints from its customers. To solve the JNR problem, the government set up an ad hoc committee for government reform in 1981, thus putting the issue of reform of government corporations on the agenda. NTT believed that its performance was relatively high compared to other government organizations. The ad hoc committee, however, thought differently and proposed that N’TT should be broken up and privatized like JNR. These different views on NTT’s performance were at the centre of what became a highly political debate in the following years. Indeed, this difference in views has affected the policy decisions of the Ministry of Posts and Telecommunications (MPT) over the past decade and is still a major issue today. MPT and NTT have different views of NlT’s privatization in 198.5,
030X-5961/94/080651-07 @ 1994 Butterworth-Heinemann
Ltd
6.51
Japan’s telecommunications industry: S Naoe
which come from their different understandings of NTT’s level of performance. From the government’s point of view, privatization and the introduction of competition were not the goals of their policy but rather were the means to promote more effective telecommunication services for customers. Therefore, on this occasion, the new telecommunications industry law not only introduced competition but also regulated the telecommunications companies who entered the market in competition with NTT and KDD. In other words, it was expected that NIT’s activities would be affected through the market. MPT also made N’IT company law to regulate NTT’s activities, especially because, even though competition was introduced, NIT was still the dominant carrier. Through these laws MPT established the power to control the telecommunications industry, including N’IT, and the capability to make telecommunications policy. Prior to privatization, telecommunications policy was made on NTT’s advice. MPT’s role was limited to formalizing policy and NIT’s budget, which NTT had proposed. NIT’s privatization was therefore also significant in that it has meant that MPT has become a real government organization for telecommunications policy formulation. NIT’s perspective on privatization was very different. Before reform, NIT believed that privatization would mean that it would be freed from government control and that it would become independent. For many years NTT’s top management had wanted to establish a self-supporting management structure, especially since in their view NTT had been directly controlled by the Diet on matters of its management, budget, tariffs and investment. NlT’s trade union had also wanted to be free from such government control, since wages were regulated and the right to strike was prohibited by public corporation law. The trade union thought it could achieve better wages for its members if it could negotiate directly with NIT’s senior management. Most NIT staff believed that its performance was reasonably good, that there was no need to promote greater efficiency and that NTT did not need to be privatized. It was thought that the ad hoc committee’s recommendation on efficiency was a future problem. Thus, from NIT’s perspective, privatization itself was the goal; otherwise reform was not necessary.
The 1990 review After the introduction of the new regime MPT’s main task was to establish a more competitive market for new entrants and to improve management performance in NTT. Nobody knew what would happen following the 1985 telecommunications law - most people thought that it was not perfect - so the Diet decided that the law should be reviewed after three years in order to make adjustments in the light of market developments. NIT company law was to be reviewed after five years. Although many companies entered the market in 1985, it was not until 1987 that real competition began with the establishment of three new common carriers (NCCs) in the long-distance telephone service market. Even so, the NCCs faced many problems with interconnection. The industry law said nothing about this issue and therefore N’IT and the NCCs had to start from scratch. The law says only that the Minister can advise and mediate between the carriers if they cannot reach agreement on interconnection. There are no guidelines or rules in the law so the 652
Telecommunications Policy 1994 Volume 18 Number 8
Japan’s telecommunications indurw
S Naoe
NCCs had to negotiate directly with N’IT so that they could begin their services. At first N’IT could not recognize the problems raised by the NCCs with regard to interconnection, because the law said nothing about NIT’s responsibility in this matter. N’IT gradually came to understand, however, that the conditions for interconnection to NIT’s network were essential for competition between NTT and the NCCs. The first interconnection problem concerned the identification number (ID) function of NTT’s local exchanges. Unfortunately, most local exchanges consisted of analog crossbar technology and there were no ID functions for interconnection at that time. N’IT had to arrange additional ID functions for each exchange to which NCCs’ customers wanted to connect. But NIT was unable to do this quickly and some of the NCCs’ customers had to wait several years to get connected. The second issue was the scheme for interconnection charges. NIT did not know where to begin, but under the existing tariff structure it believed that local services were operating at a loss. Moreover, N’IT had promised the public that it would maintain its level of local tariffs for several years after privatization. Thus NTT could not propose an appropriate tariff scheme for interconnection. Finally, MPT set interconnection charges so that NCC customers had to pay both the NCCs’ rates and N’IT’s local end rates. This scheme was both complicated and skewed competition in the new Japanese telecommunications market. The problem was finally overcome only in April 1994 by a new tariff scheme in which NCC customers enjoy an end-to-end rate. In this new scheme the NCCs have to pay an additional fee for local services. A third problem was the point of interconnection (POI) issue. Under the old interconnection tariff scheme, an NCC could offer a lower rate to its customers by using more POIs than other NCCs or NIT, thus reducing the interconnection payments to NTI’. The more POIs, the more the NCCs had to pay for them, but the costs were shared between NTT and the NCCs. Not surprisingly NIT was keen to keep the number of POIs to a minimum. This issue was also addressed by MPT in 1992, with the result that the NCCs aimed to situate one PO1 in each prefecture by 1994. Alongside these problems, MPT was trying to understand the essentials for telecommunications industry policy. That is, MPT saw its main role not as regulating carriers but as promulgating rules for competition in the telecommunications market. With this in mind, MPT tried to reform NIT again in 1990 with the review of the industry law and NIT’s company law. In 1985 the laws were created to protect the customer from monopoly. This time the discussion on N’IT’s reform took place within a perspective of competition rather than monopoly. In this review MPT recommended the break-up of NIT into two companies: local and long distance. But this proposal was not supported by the cabinet, owing to opposing views from N’IT and the Ministry of Finance. The Ministry of Finance was concerned about NlT’s share price. NTT opposed the proposal on two grounds. First, it argued that it was essential that it retain its R&D capability. Second, it argued that the loss of economies of scope was against the national interest. This opposition has meant that the finalization of MPT’s proposal has been postponed until 1995, except for the separation of NIT’s mobile department as a separate subsidiary.
Telecommunications Policy 1994 Volume 18 Number 8
653
Japan’s telecommunications industry: S Naoe
Present structure of the industry The industry law separated telecommunications companies into two types of carrier. Type 1 carriers provide services using their own networks, and Type 2 carriers serve customers by leasing network facilities from Type 1 carriers. MPT regulates the activities of Type 1 carriers through licensing, tariffs, service conditions, investment activities and so on through the Telecommunications Industry Law. Type 2 carriers are further separated into two categories, special and other. In comparison with Type 1 carriers, Type 2 carriers are practically free from regulation. There are about 90 Type 1 carriers including the two traditional, still dominant carriers, NIT and KDD. There are over 1000 Type 2 carriers, less than 50 of which are classified as special. The largest Type 1 carrier is NTT, which only provides local and domestic long-distance services in Japan. Other carriers serve specialized markets, such as international or domestic long distance, local, mobile, satellite and so on. Thus the NCCs are relatively small in comparison with NTI’. The sales volume of N’IT is currently more than 20 times that of the largest NCC. This industrial structure means that the main competition is between the NCCs and NIT and not among the NCCs themselves. NCCs have entered all telecommunications markets including local services, even though NIT still holds a virtual monopoly. Thus N’IT’s local networks are still a bottleneck for most of the NCCs’ activities because they are mainly operating in the long-distance and mobile markets. The most aggressive competition is taking place in international and domestic long-distance telephone markets, mobile and paging services. Local services are not so competitive and most NC&’ activities depend on NIT’s local networks. The major problem of competition between the NCCs and NTT still lies in the issue of interconnection, mainly because NIT has yet to establish its open network doctrine (OND) for its local networks. NIT retains about a 60% share of all domestic service markets. However, most NCCs have established a viable position. The NCCs’ share of markets is gradually increasing and NIT’s share is decreasing in all markets. In particular, NTT’s share of the long-distance market, its most profitable, has been falling rapidly. With the tariff changes in 1990, N’IT’s profit has fallen dramatically. In order to retain its market share, NTT lowered its telephone tariffs to try and match the NCCs. But the NCCs still have a small advantage in terms of tariffs. NTI has therefore responded by introducing several option calling plans (OCP) attempting to maximize the advantage of its networks. The NCCs are unable to match NTI’s OCP quickly because they depend on NIT’s local networks. The effects of competition have been a lowering of tariffs and reduction of NTI”s profits. N’IT is therefore being forced to reduce the cost of its services. As a result NIT has reduced its total number of staff from 320 000 to 220 000 since 1985. It is expected that staff numbers will reduce to 200 000 by 1997. NIT frequently complains about MPT’s rate regulation policy, especially for local services since local services are making huge losses. According to NTT’s strategy, the rebalancing of tariffs between local and long distance is the most important telecommunications policy issue. 654
Telecommunications Policy 1994 Volume 18 Number 8
Japan’s telecommunications industry:
S Naoe
Regulatory framework In addition to the Telecommunications Industry Law for Type 1 carriers, NTT and KDD are each regulated by company laws. NTT has a responsibility to provide universal service throughout Japan and is prohibited from serving international markets. Conversely, the other traditional carrier, KDD, is barred from providing domestic services. Other Type 1 carriers, NCCs, are only regulated by the industry law and they may operate in any market. Occasionally NCCs provide services in several specialized markets, which are separated into international, domestic, local, mobile and satellite for each NCC. The Japanese telecommunications industry therefore consists of a dominant comprehensive carrier and many small specialized carriers. The industry law regulates the telecommunications companies in two main ways - licensing, and regulation of tariff and service features. In terms of the public interest, the basic idea is to protect the consumer from monopolistic behaviour of private companies, ie to avoid inappropriate monopolistic surplus and irrational price discrimination of services. The law is that simple, but the telecommunications business is comprehensive. Therefore the application of the law also has to be comprehensive. This gap between the structure of the law and the social requirements of the law gives a wide scope to MF’T’s administrators. Their interpretation of the law has become of fundamental importance in the actual administration of the telecommunications industry. Unfortunately the present industry law has been less effective in promoting competition among carriers, mainly because the law was made to regulate monopoly before the introduction of competition. Consequently, there are no rules for a competitive telecommunications market. At the time of privatization in 1985, MPT’s administrators expected that companies would automatically compete with each other and create the market rules themselves. The law states simply that anyone may enter the telecommunications market as a Type 1 carrier provided they have an appropriate and viable business plan, and are approved from the point of view of the balance of the supply and demand of services. That is, the law created a competitive market but the rules of competition were not written into the law. Most of the problems in Japan’s telecommunications industry today arise from this.
An interpretation of Japanese telecommunications
policy
Japan’s telecommunications industry is still in transition from a monopolistic to a competitive market structure. Furthermore, the telecommunications industry is facing a historic change, similar perhaps to the changes that occurred at the end of the last century when the telephone replaced the telegraph. That is, it is expected that the convergence of technologies will transform the telecommunications industry into a multimedia industry. MPT therefore has to deal with structural change in both the market and the industry itself. This means that telecommunications policy has to be coordinated to overcome today’s problems and promote competition and also develop the information infrastructure of the future. Japan’s telecommunications policies for the telecommunications industry currently seem to be concentrated on the question of N’IT reform in 1995. For example, plans for a national information infrastructure Telecommunications Policy 1994 Volume 18 Number 8
655
Japan’s telecommunications
industry: S Naoe
(NII), announced to the public by MPT in May 1994, were conceived with the future role of NlT uppermost. Likewise, the issue of the Personal Handy Phone System (PHS) is seen mainly in relation to N’IT’s reform. The review of rate regulation policy and the problem of rate rebalancing proposed by N’IT are concerned with NIT’s position in the local market. The issue of OND for the development of competitive market conditions is mainly an issue of NIT’s structure. Even the deregulation issue of interconnection between dedicated lines and the public network, which is prohibited today by the law attachment decision in 1985, is discussed in the same manner. NTT’s reform is also shaping discussions on NlT’s virtual private network (VPN) service plan. When MPT begins the review of NIT’s reform next year it will also review the NCCs’ market segmentation by services as part of the same process. There are many alternative telecommunications policies with regard to the review of N’IT’s organization. MPT will keep these as policy alternatives without having reached any final decision by the time of the review. No doubt MPT will find many more telecommunications policy issue connected with NIT’s review in the near future. NIT announced at the beginning of 1994 its intention to serve multimedia markets in the future. This vision is part of its business strategy with regard to the future telecommunications market. However, it is also part of its strategy to try and avoid reform of its organizational structure by MPT’s review. For the past decade MPT and N’IT have fought each other on the question of reform, and NTT and the NCCs have fought each other in the marketplace. From NIT’s point of view, therefore, MPT and the NCCs look alike. That is the reason why MPT has been accused of supporting the NCCs more than NTT in terms of regulation. NTT has still not understood that the purpose of MPT’s telecommunications policy is to encourage the provision of more effective services to the customer, not to support the NCCs. Competition and NIT’s reform are the means to the end but, unfortunately, in the application of policy today the means has become the end. There may well be other more important issues concerning the supply of more effective telecommunication services if we start from the point of view of customers, for example. Company viability, more competitive markets, the reform of N’IT and so on, may not be so important to customers.
The need for harmonization The telecommunications industry today is a global business. Many large telecommunications companies both compete with each other and try to form alliances too. Each country has its own regulatory scheme. Telecommunications companies therefore compete with each other in different competitive conditions. The International Telecommunication Union (ITU) has played a role in the past as a coordinator of technical and administrative matters of the international activities of telecommunications entities. To avoid conflicts between these entities in future, the role of the ITU is insufficient. It is certain that it will become increasingly important to overcome the conflicts between large international telecommunications operators.
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In particular, competition today involves not only telecommunications operators but also telecommunications equipment manufacturers, computer software companies and others. Communications technology is changing rapidly, and this is forcing regulatory frameworks to change in response. But currently the regulatory rule-making processes of the ITU are not capable of regulating competition. In order to establish an effective regulatory framework for the international competitive market we need a new concept for the telecommunications industry and new ideas for regulation. For this to come about the harmonization of different countries’ telecommunications policies will become more important. In this regard the Japanese experience may be a helpful example. To harmonize telecommunications policies, two aspects are of particular importance: the first is industrial policy, and the second is universal service policy. In term of industrial policy the establishment of rules for competition is the most important issue to be resolved between different countries. Telecommunications companies have to compete with each other while interconnecting their networks. There are some kinds of rules, such as ONP, OND, ONA, for global interconnection, but they are not harmonized internationally today. With regard to universal service, we have no common concept of universal service and who should provide it. This is also an important issue in relation to future telecommunications infrastructure development. In Japan, Type 1 carriers compete with each other but only NTT can operate in the total market for telecommunication services. NCCs cannot do this. This means that they have to play by different market rules and they do not have an equal base with NTT. For interconnection there are no effective rules such as ONP or ONA among Type 1 carriers. OND will set the rules for interconnection between N’lT and Type 2 carriers, but not for Type 1. In order to deal with these problems, the role of government in the development of future telecommunications infrastructure will become critical in all developed countries in the very near future. In order to solve these problems, the harmonization of telecommunications policies between countries will take on increasing importance.
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