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The future of Japanese telecommunications
Telecommunications Policy, Vol. 20, No. 2, pp. 83-88, 1996
Pergamon 030&-5961(95)00056-9
Copyright© 1996 Elsevier ScienceLtd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
Comment
The future of Japanese telecommunications Martin Fransman
A debate is currently raging in Japan about the future of the telecommunications industry. In this commentary, the author gives his persona/ opinion of the development of the Japanese telecommunications sector and the restructuring of N7-1-. In his view, whether NTT is broken up is not the most important issue. Rather it is a question of how to ensure vigorous competition. Dr Martin Fransman is Founder and Director of the Institute for Japanese-European Technology Studies (JETS) and Reader in the Department of Economics at the University of Edinburgh. He may be contacted at the University of Edinburgh, 25 Buccleuch Place, Edinburgh EH8 9LN, Scotland (Tel: +44 131 650 4061 ;fax: +44 131 667 4340; email [email protected]). 1On 28 September 1995 Dr Fransman was one of the speakers at the Financial Times conference in Tokyo, entitled 'The Future Structure of Japan's Telecommunications Market'. Much of the debate centred around the question of the break-up of NTT, whose case was represented by their President, Mr Masashi Kojima; the other speakers were Mr Yoshio Utsumi, from the Ministry of Posts and Telecommunications (MPT); Ms Rachelle Chong, Commissioner of the Federal Communications Commision in the US; and Mr Alastair Macdonald, Deputy Secretary at the Department of Trade and Industry in the UK. 21 have closely analysed these events of 1989/90 in a chapter on the future of NTT in my book, Japan's Computer and Communications Industry Oxford University Press, Oxford (1995).
What issues does this Japanese debate on telecommunications confront, and how does it reflect prior experience in the US? What are the major arguments that have been put forward by the various players, and what are the strengths and weaknesses of these arguments? This brief article is an attempt to summarize some conclusions. The first point to note is the extent to which the debate has become dominated by the question of whether or not NT'I" should be split into several operating units or even completely divested the way A T & T was in 1984.1 This was reminiscent of the situation in 1989/90 when MPT recommended the divestiture of N I T , only to be overruled by a stronger coalition of forces. 2 Many MPT officials had expressed concern regarding both the dominance of NTI" in Japan's telecommunications markets and its political influence. In the view of these officials, NTT was a sort of cuckoo, threatening by its size and strength the other chicks in the nest (the new common carriers--NCCs---the competitors to NTI'). The divestiture of NTI" was seen in 1989/90 by MPT as a way of neutralizing the dominance of NTT while simultaneously enhancing the Ministry's control over the telecommunications industry. From the noises in the wind, it appeared that MPT might be gravi-
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tating towards the same position in 1995/96. Statements made by some of the leaders of the NCCs tended in the same direction. Without the divestiture of NTI', it was argued, the NCCs would not be able to compete on equal terms. To state the argument more rigorously, it was being proposed that the break-up of NTI" was both a necessary and a sufficient condition for the future well-being of Japanese telecommunications. Is this argument valid? Let us try to clarify several points. To begin with, it seemed to me that a break-up of NTT into one longdistance company and one or more companies providing local services (the most common proposition that was being put forward), while one of the options, would not be sufficient to solve the most important problems in Japanese telecommunications without measures introducing strong competition in the country's services markets. Simply put, while NTI" currently monopolizes about 98% of the local market in Japan, there was little reason to believe that dividing NTT into one or more local companies by itself would reduce this monopoly power. Why would three or more former NTI" local companies be any more amenable to encouraging competition than NTT in the past has been? Secondly, while the divestiture
Comment
of A T & T certainly offered one model, in Europe there has been no serious force for the divestiture of BT, Deutsche Telecom, or France Telecom. Indeed, if anything, things have moved in the reverse direction with closer integration between BT and MCI in the one case and Deutsche Telecom and France Telecom in the other. It is also pertinent to note that legislation currently going through the US Congress is likely to eliminate the long/ local-distance distinction by allowing the seven RBOCs---which provide local service--to enter the long-distance market and conversely AT&T and the other long-distance companies to enter the local markets. The most important problem confronting Japanese telecommunications is not whether NTT should be broken up. Rather, the most important question is how effective competition can be guaranteed in Japanese telecommunications markets. Effective competition, it would appear, is both a necessary and a sufficient condition for the satisfactory development of Japanese telecommunications infrastructure and for the evolution of the new services that must emerge in the future. How can effective competition be increased in Japan? This is a key question, particularly in local services where, as mentioned, NTI" monopolizes a 98% market share. The major obstacle to effective competition in basic telecommunications services is the extremely high fixed cost of entry. In contrast, say, to personal computers, where the easy availability of microprocessors, memories and peripherals makes entry relatively easy (though the trick is to enter and be profitable), a new network in telecommunications, whether fixed or mobile, is extremely costly. Although new entrants (such as mobile, CATV and satellite-based entrants) will be important sources of competition in Japanese telecommunications markets in the longer run, high costs limit the number of probable entrants and therefore competiton. The only way of dealing with this problem and increasing the possibility of entry and competition is by establishing suitable procedures allowing for the interconnection of the networks
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of new entrants to that of the dominant carrier. Indeed, it was the proposal to offer new entrants the possibility of interconnecting their networks to NqT's local network at many points that was the crux of the intervention made by Mr Kojima at the Financial Times conference. But what conditions must be met before the interconnection procedures can be said to guarantee effective competition? In theory, several conditions are necessary. To begin with, the possibility of interconnection should be open to all would-be new entrants. Secondly, the procedures that must be followed in order to negotiate and implement interconnection should be explicit, transparent and predictable. Thirdly, the cost of interconnection, the access charge, must be reasonable; that is, the charge must be based on the real costs involved plus an average rate of profit. As far as possible, the access charge should also be predictable. If the second and third conditions are not met, it will be difficult for the would-be new entrant to calculate the returns that are expected to result from entry into the market, and it will be similarly difficult for the providers of capital to assess the returns they are likely to get. Fourthly, in the event of a dispute between the would-be entrant and the incumbent carrier, it is necessary that explicit, transparent and as far as possible predictable procedures exist to settle such disagreements. In order to ensure the justice of these procedures, it is highly desirable that a neutral body be entrusted with the task of arbitration. At the Financial Times conference both Rachelle Chong and Alastair Macdonald expressed that view that, as in their countries, the body entrusted with the task of solving such disputes should have an arm's-length relationship with government. Only in this way can neutrality be protected. In other words, my conclusion is that the most important issue facing Japanese telecommunications is how to ensure vigorous competition and this, in turn, requires appropriate procedures for interconnection. Whether or not NT1~ is broken up, effective competition and satisfactory intercon-
Comment
nection will be necessary for the future health of Japanese telecommunications. Does NTT's offer of interconnection to its local network meet the criteria stipulated above? This is not a question that can be answered at this stage. Rather it is up to the would-be entrants to answer the question, such as the current NCCs and the cable telephony companies, who have and will enter into discussions with NTT over intereonnection. In answering it, however, it is imperative that, if they have complaints, they spell out precisely where in their view the procedures are inadequate. It will then be possible for independent analysts to offer their arguments, on the basis of the evidence, regarding the adequacy of the procedures. Unfortunately, many of the complaints that have been voiced in the Japanese press have not provided sufficient detail on the basis of which to arrive at a judgement. There is evidence, however, that important advances are being made regarding the interconnection question. At the end of October 1995, for example, it was announced that an agreement had been reached between NTT and the long-distance N C C s - DDI, Japan Telecom, and Teleway Japan----over the access charge paid by the latter for use of NTT's local network. It was agreed that, backdated to April 1995, the three-minute access charge paid by the long-distance NCCs would be reduced by approximately 15%. The significance of this agreement becomes clear when it is realized that for the financial year ended in March 1995, the three NCCs paid about 50% of their total revenue to NTT in the form of access charges. As a further concession, NTF simultaneously announced that from April 1996 it would calculate access charges by the second rather than according to the present three-minute unit. In addition, NTT stated that it would remove from the calculation of access charges those costs involved in its provision of services that compete directly with the long-distance NCCs. Examples given included particular R&D costs as well as certain sales promotion expenses involving corporate customers. At the time of writing, NTT is still
involved in interconnection negotiations with some of the emerging new entrants into the local telephone market. These include T/" Net, partly owned by one of the major electric power companies, and Titus, a cable TV company that also intends offering local cable telephony. While it is still too early to be sure about the outcome of these negotiations, there are signs that Nq-T is making a similarly firm commitment to competitive interconnection as it has done with the longdistance NCCs. The emergence of these new entrants raises the broader issue of longer-run competition in the Japanese telecommunications market. In Japan, as in the other industrialized countries, important new sources of competition are emerging that will, whether or not NqT is broken up, increase over time the degree of competition in telecommunications markets, including local services, thus enhancing the dynamism of the whole industry, even though this will take time to have an impact. In the Japanese case the following sources of longer-run competition are important: from fixed network owners, such as TF Net and the networks being developed by the other electric power companies; from cable TV companies that also provide cable telephony, such as Jupiter (60% owned by Sumitomo Corporation and 40% by US cable company TCI), and Titus (owned by Toshiba, Itochu, Time-Warner and US West); and from mobile communications such as cellular services, PHS (personal handyphone services, begun earlier this year in Japan), and, further into the future, satellite services from companies such as Motorola's Iridium consortium. These sources will broaden the kinds of competition that drive the telecommunications industry, so that there will not only be competition between different companies providing the same service, but also competition between different kinds of services providing for the same needs (such as competition between fixed and mobile services), and competition between different technologies. A vision for the future well-being of global
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Comment
and national telecommunications industries emerges from these different contending forms of competition, stimulating the creative improvement of both communications infrastructure and a variety of new services. As an outsider, I have long been fascinated by the strict legal demarcation between the provision of international telecommunications services (the domain of KDD--which is 1/25th the size of NTF--and the international NCCs, IDC and ITJ) and the provision of national services (the preserve of NTI" and the national NCCs, DDI, Japan Telecom, and Teleway Japan). What are the implications of this separation? Several points are worth making regarding this demarcation. The first is that it is an anomaly insofar as Japan is the only industrialized country to make such a distinction. Secondly, the demarcation has meant that Japan does not have a major contender in international telecommunications markets such as the rapidly developing global telecoms market, which provides services for large multinational corporations. To date, three major sets of alliances have formed to contend this market: the first dominated by AT&T and several small partners (which include KDD), the second consisting of BT and MCI (the second largest US long-distance carrier), and the third comprising Deutsche Telecom, France Telecom and Sprint (the third largest US long-distance carrier). Clearly, NTT is the only Japanese carrier with the size and resources to become a major player in this market if it so chose. Thirdly, a point that has not been sufficiently stressed in the current debate, the regulatory shackles that have prevented NTF from fully entering the international market have not only denied the company access to potentially lucrative markets, but perhaps even more importantly they have prevented NTF from benefitting from the learning process that occurs when a company competes in dynamic, strongly contested markets. This international learning would benefit both NTT and its customers in Japan's national markets, in long-distance and in local services. Fourthly, from the
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point of view of customers around the world, the addition of another strong competitor in global telecommunications markets would provide further choice and therefore add to the competitive pressure in these markets. (If Japanese markets were both open-to domestic and foreign carriers-and competitive, MPT would not have to be concerned about NTF increasing its dominance through its global activities. In the global markets NTF would be only one amongst several strong rivals.) The fifth point, however, is intended to sound a note of caution. Even if the regulations change in 1996 so that NTF is allowed to provide international services linking Japan, it should not be assumed that NTT will automatically be able effectively to address international markets. Until now, NTT's focus has been entirely domestically oriented. The experience of both AT&T and BT, companies that have embarked on the international road far earlier than NTT, shows how difficult it is and how much time it takes to begin to deal effectively in international markets. Many of those with international responsibilities in NTT have felt the frustrations of a decision-making hierarchy that is primarily domestically focused. If NTF is allowed to operate freely in global markets, the company's leaders will have to make a crucial set of decisions regarding the forms of management and organization that are necessary for an effective contesting of international markets. A possibly significant indicator of things to come emerged on 30 October 1995 when it was announced that NTT would connect its frame relay network to the global network run by the BT and MCI joint venture, Concert (which reportedly has 2000 mainly multinational corporation customers, although the venture is not yet thought to be profitable). Although technically the connection is between NTF and a Japanese company that provides value-added services connected to the Concert network, the company--Network Information Services (NIS)--has as its major shareholder BT and the Japanese trading company, Marubeni. Unclear at the
Comment
time this announcement was made was whether the Ministry of Posts and Telecommunications had been consulted in advance, and if so what its response had been. What is clear, however, is that N T r wishes to be able to offer global services in the future. A further set of issues has been raised by the announcement by A T & T that it would voluntarily break itself up into three separate companies: one offering telecoms services, one dealing in telecoms equipment, and one (the former NCR) providing computing products and services. What are the implications of A T & T ' s announcement for the debate about the future of NTI'? Again, several points are worth stressing. The first point to clarify is that the new A T & T telecoms services company roughly equals, in terms of function, NTT's current position. Like the new A T & T company, NTT does not manufacture telecoms equipment or computers. The refusal of the major Japanese carrier to engage in the production of telecoms equipment has been a consistent feature in the country, going back to the days of the Ministry of Communications (Teishinsho) in the late 19th century. It may therefore be concluded that in terms of function the new A T & T telecoms services company and NTI" are similar. Furthermore, and this is the second point, in terms of revenue the two companies will also be similar, with the A T & T telecoms services company reportedly having a revenue of around $55 billion compared to about $65 billion for NTI" (a figure that is dependent on choice of exchange rate). A third point, however, remains to be clarified in the future, and this is the role that both companies will play in the R&D of telecoms equipment and computer networks, systems and services. Before its announced breakup, A T & T was vertically integrated in that it also produced its own telecoms equipment (in the former Western Electric) and computers (in the former NCR). On the other hand, while never manufacturing telecoms equipment or computers, N T r traditionally has played an important role in research-
ing and developing advanced telecoms equipment and computing systems in its Electrical Communications Laboratories. This has involved collaborative R & D jointly with N'Iq"s suppliers under the so-called Track Three provision. On the other hand, other companies like BT, MCI in the US, and D D I in Japan have decided to leave far more of the R & D task in the areas of telecoms equipment and computers to their suppliers. It remains to be seen whether A T & T telecoms services will move in the same direction after break-up. It is also possible that NTT will move away from its timehonoured role in collaborative R&D in these areas, although this would represent a substantial shift from past practice. This discussion on R&D raises a further important question: what R & D capabilities are necessary for a carrier to be a major global competitor? The changes in A T & T ' s Bell Laboratories - - the foremost industrial research laboratory where key inventions such as the transistor, cellular communications and the Unix operating system were made - - are illuminating in attempting to answer this question. The first major recent change in Bell Labs occurred in the early 1980s when, at the time of A T & T ' s divestiture, R & D staff at the laboratories were moved into the newly formed Bellcore, the new R & D facility for the seven RBOCs, or Baby Bells. The second change occurred in the late 1980s when AT&T's CEO, Bob Allen, segmented A T & T into some 20 business units. In response, Arno Penzias, Vice President for Research at Bell Labs and Nobel Prize winner in 1978, instituted far-reaching changes in the research area of the laboratories, aimed at ensuring greater responsiveness to the needs of the business units. At around the same time, Bell Labs' development staff, though formally remaining part of the laboratories, were more closely integrated into the activities of the business units. As a result of AT&T's voluntary break-up announced in September 1995, Bell Labs is to be further divided with about 8000 of the total 28 000 employees (including both research
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Comment
and development staff) to join a new R&D division in the new AT&T telecoms services company. The remaining 20 000 staff, which is the bulk of the current Bell Laboratories, will become part of the new A T & T telecoms equipment company. How does this compare with NTI~'s position in R&D? Interestingly, NTT has about 8500 R&D staff in total, with the result that both NTT and the new AT&T telecoms services company (NTT's equivalent) will have about the same R&D capability (measured in terms of number of R&D employees, though R&D output is, of course, another matter). Clearly, if NTT and its Electrical Communications Laboratories were to be broken up, each new entity would have a smaller R&D capability. Whether this would be a significant disadvantage from the point of view of global competitiveness, however, is a matter of some debate, since different companies have developed different strategic positions on the importance of in-house R&D for national and global competitiveness. At one extreme lie carriers such as AT&T and NTT that have consistently argued that strong in-house R&D capabilities are necessary (though not sufficient) for competitiveness. At the other extreme are some of the newer carriers such as MCI in the US and D D I in Japan that have made the strategic decision to depend to a greater extent on their suppliers to do the R&D for them. Companies like BT occupy the middle ground, doing R&D (though less than half of what NT'F does, in terms of the proportion of revenue allocated to R&D) but depending significantly on the market for equipment and other inputs. A further complicating factor, however, is that in Japan it has always been accepted, by all the powers-that-be in the telecommunications field, that N I T also has a national responsibility in stimulating the entire national in-
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novation system through its R&D activities. NTF's national obligation in this respect was incorporated into the legislation under which the company was part-privatized in 1985, a commitment that was reiterated in the Japanese government's 1990 ruling on the future of the company. So, what does this discussion imply for the future of Japanese telecommunications? It is clear that Japanese telecommunications is now at the crossroads. By around the middle of 1996 crucial decisions will have to be made that will have a major shaping influence on both the structure and the performance of the telecommunications industry in the country. These decisions, as indicated in the present discussion, go far beyond the question of what to do with NT1~. Most fundamentally, they relate to how to create the dynamic conditions that will lead to a rapid improvement in Japan's telecommunications infrastructure and in the provision of the old and new services that lie at the heart of the evolving information society. My own view is that Japan's decisionmakers will find their own way forward. While the experience of the US and Europe may offer some lessons and suggestions, ultimately it is a Japanese solution that will evolve in Japan. One of the main conclusions of the present discussion, however, is that whatever Japanese solution is chosen, effective competition from sources both within and outside Japan will have to be a key building block. The whole world has a vested interest that Japan 'get it right' in this crucial field. Not only will a dynamic Japanese telecommunications industry provide opportunities for nonJapanese companies, it will also provide new directions and models for others in the world grappling with similar problems. In the end, it is the world's users of telecommunications services who will be the major beneficiaries.
Pergamon 030&-5961(95)00056-9
Copyright© 1996 Elsevier ScienceLtd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
Comment
The future of Japanese telecommunications Martin Fransman
A debate is currently raging in Japan about the future of the telecommunications industry. In this commentary, the author gives his persona/ opinion of the development of the Japanese telecommunications sector and the restructuring of N7-1-. In his view, whether NTT is broken up is not the most important issue. Rather it is a question of how to ensure vigorous competition. Dr Martin Fransman is Founder and Director of the Institute for Japanese-European Technology Studies (JETS) and Reader in the Department of Economics at the University of Edinburgh. He may be contacted at the University of Edinburgh, 25 Buccleuch Place, Edinburgh EH8 9LN, Scotland (Tel: +44 131 650 4061 ;fax: +44 131 667 4340; email [email protected]). 1On 28 September 1995 Dr Fransman was one of the speakers at the Financial Times conference in Tokyo, entitled 'The Future Structure of Japan's Telecommunications Market'. Much of the debate centred around the question of the break-up of NTT, whose case was represented by their President, Mr Masashi Kojima; the other speakers were Mr Yoshio Utsumi, from the Ministry of Posts and Telecommunications (MPT); Ms Rachelle Chong, Commissioner of the Federal Communications Commision in the US; and Mr Alastair Macdonald, Deputy Secretary at the Department of Trade and Industry in the UK. 21 have closely analysed these events of 1989/90 in a chapter on the future of NTT in my book, Japan's Computer and Communications Industry Oxford University Press, Oxford (1995).
What issues does this Japanese debate on telecommunications confront, and how does it reflect prior experience in the US? What are the major arguments that have been put forward by the various players, and what are the strengths and weaknesses of these arguments? This brief article is an attempt to summarize some conclusions. The first point to note is the extent to which the debate has become dominated by the question of whether or not NT'I" should be split into several operating units or even completely divested the way A T & T was in 1984.1 This was reminiscent of the situation in 1989/90 when MPT recommended the divestiture of N I T , only to be overruled by a stronger coalition of forces. 2 Many MPT officials had expressed concern regarding both the dominance of NTI" in Japan's telecommunications markets and its political influence. In the view of these officials, NTT was a sort of cuckoo, threatening by its size and strength the other chicks in the nest (the new common carriers--NCCs---the competitors to NTI'). The divestiture of NTI" was seen in 1989/90 by MPT as a way of neutralizing the dominance of NTT while simultaneously enhancing the Ministry's control over the telecommunications industry. From the noises in the wind, it appeared that MPT might be gravi-
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tating towards the same position in 1995/96. Statements made by some of the leaders of the NCCs tended in the same direction. Without the divestiture of NTI', it was argued, the NCCs would not be able to compete on equal terms. To state the argument more rigorously, it was being proposed that the break-up of NTI" was both a necessary and a sufficient condition for the future well-being of Japanese telecommunications. Is this argument valid? Let us try to clarify several points. To begin with, it seemed to me that a break-up of NTT into one longdistance company and one or more companies providing local services (the most common proposition that was being put forward), while one of the options, would not be sufficient to solve the most important problems in Japanese telecommunications without measures introducing strong competition in the country's services markets. Simply put, while NTI" currently monopolizes about 98% of the local market in Japan, there was little reason to believe that dividing NTT into one or more local companies by itself would reduce this monopoly power. Why would three or more former NTI" local companies be any more amenable to encouraging competition than NTT in the past has been? Secondly, while the divestiture
Comment
of A T & T certainly offered one model, in Europe there has been no serious force for the divestiture of BT, Deutsche Telecom, or France Telecom. Indeed, if anything, things have moved in the reverse direction with closer integration between BT and MCI in the one case and Deutsche Telecom and France Telecom in the other. It is also pertinent to note that legislation currently going through the US Congress is likely to eliminate the long/ local-distance distinction by allowing the seven RBOCs---which provide local service--to enter the long-distance market and conversely AT&T and the other long-distance companies to enter the local markets. The most important problem confronting Japanese telecommunications is not whether NTT should be broken up. Rather, the most important question is how effective competition can be guaranteed in Japanese telecommunications markets. Effective competition, it would appear, is both a necessary and a sufficient condition for the satisfactory development of Japanese telecommunications infrastructure and for the evolution of the new services that must emerge in the future. How can effective competition be increased in Japan? This is a key question, particularly in local services where, as mentioned, NTI" monopolizes a 98% market share. The major obstacle to effective competition in basic telecommunications services is the extremely high fixed cost of entry. In contrast, say, to personal computers, where the easy availability of microprocessors, memories and peripherals makes entry relatively easy (though the trick is to enter and be profitable), a new network in telecommunications, whether fixed or mobile, is extremely costly. Although new entrants (such as mobile, CATV and satellite-based entrants) will be important sources of competition in Japanese telecommunications markets in the longer run, high costs limit the number of probable entrants and therefore competiton. The only way of dealing with this problem and increasing the possibility of entry and competition is by establishing suitable procedures allowing for the interconnection of the networks
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of new entrants to that of the dominant carrier. Indeed, it was the proposal to offer new entrants the possibility of interconnecting their networks to NqT's local network at many points that was the crux of the intervention made by Mr Kojima at the Financial Times conference. But what conditions must be met before the interconnection procedures can be said to guarantee effective competition? In theory, several conditions are necessary. To begin with, the possibility of interconnection should be open to all would-be new entrants. Secondly, the procedures that must be followed in order to negotiate and implement interconnection should be explicit, transparent and predictable. Thirdly, the cost of interconnection, the access charge, must be reasonable; that is, the charge must be based on the real costs involved plus an average rate of profit. As far as possible, the access charge should also be predictable. If the second and third conditions are not met, it will be difficult for the would-be new entrant to calculate the returns that are expected to result from entry into the market, and it will be similarly difficult for the providers of capital to assess the returns they are likely to get. Fourthly, in the event of a dispute between the would-be entrant and the incumbent carrier, it is necessary that explicit, transparent and as far as possible predictable procedures exist to settle such disagreements. In order to ensure the justice of these procedures, it is highly desirable that a neutral body be entrusted with the task of arbitration. At the Financial Times conference both Rachelle Chong and Alastair Macdonald expressed that view that, as in their countries, the body entrusted with the task of solving such disputes should have an arm's-length relationship with government. Only in this way can neutrality be protected. In other words, my conclusion is that the most important issue facing Japanese telecommunications is how to ensure vigorous competition and this, in turn, requires appropriate procedures for interconnection. Whether or not NT1~ is broken up, effective competition and satisfactory intercon-
Comment
nection will be necessary for the future health of Japanese telecommunications. Does NTT's offer of interconnection to its local network meet the criteria stipulated above? This is not a question that can be answered at this stage. Rather it is up to the would-be entrants to answer the question, such as the current NCCs and the cable telephony companies, who have and will enter into discussions with NTT over intereonnection. In answering it, however, it is imperative that, if they have complaints, they spell out precisely where in their view the procedures are inadequate. It will then be possible for independent analysts to offer their arguments, on the basis of the evidence, regarding the adequacy of the procedures. Unfortunately, many of the complaints that have been voiced in the Japanese press have not provided sufficient detail on the basis of which to arrive at a judgement. There is evidence, however, that important advances are being made regarding the interconnection question. At the end of October 1995, for example, it was announced that an agreement had been reached between NTT and the long-distance N C C s - DDI, Japan Telecom, and Teleway Japan----over the access charge paid by the latter for use of NTT's local network. It was agreed that, backdated to April 1995, the three-minute access charge paid by the long-distance NCCs would be reduced by approximately 15%. The significance of this agreement becomes clear when it is realized that for the financial year ended in March 1995, the three NCCs paid about 50% of their total revenue to NTT in the form of access charges. As a further concession, NTF simultaneously announced that from April 1996 it would calculate access charges by the second rather than according to the present three-minute unit. In addition, NTT stated that it would remove from the calculation of access charges those costs involved in its provision of services that compete directly with the long-distance NCCs. Examples given included particular R&D costs as well as certain sales promotion expenses involving corporate customers. At the time of writing, NTT is still
involved in interconnection negotiations with some of the emerging new entrants into the local telephone market. These include T/" Net, partly owned by one of the major electric power companies, and Titus, a cable TV company that also intends offering local cable telephony. While it is still too early to be sure about the outcome of these negotiations, there are signs that Nq-T is making a similarly firm commitment to competitive interconnection as it has done with the longdistance NCCs. The emergence of these new entrants raises the broader issue of longer-run competition in the Japanese telecommunications market. In Japan, as in the other industrialized countries, important new sources of competition are emerging that will, whether or not NqT is broken up, increase over time the degree of competition in telecommunications markets, including local services, thus enhancing the dynamism of the whole industry, even though this will take time to have an impact. In the Japanese case the following sources of longer-run competition are important: from fixed network owners, such as TF Net and the networks being developed by the other electric power companies; from cable TV companies that also provide cable telephony, such as Jupiter (60% owned by Sumitomo Corporation and 40% by US cable company TCI), and Titus (owned by Toshiba, Itochu, Time-Warner and US West); and from mobile communications such as cellular services, PHS (personal handyphone services, begun earlier this year in Japan), and, further into the future, satellite services from companies such as Motorola's Iridium consortium. These sources will broaden the kinds of competition that drive the telecommunications industry, so that there will not only be competition between different companies providing the same service, but also competition between different kinds of services providing for the same needs (such as competition between fixed and mobile services), and competition between different technologies. A vision for the future well-being of global
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Comment
and national telecommunications industries emerges from these different contending forms of competition, stimulating the creative improvement of both communications infrastructure and a variety of new services. As an outsider, I have long been fascinated by the strict legal demarcation between the provision of international telecommunications services (the domain of KDD--which is 1/25th the size of NTF--and the international NCCs, IDC and ITJ) and the provision of national services (the preserve of NTI" and the national NCCs, DDI, Japan Telecom, and Teleway Japan). What are the implications of this separation? Several points are worth making regarding this demarcation. The first is that it is an anomaly insofar as Japan is the only industrialized country to make such a distinction. Secondly, the demarcation has meant that Japan does not have a major contender in international telecommunications markets such as the rapidly developing global telecoms market, which provides services for large multinational corporations. To date, three major sets of alliances have formed to contend this market: the first dominated by AT&T and several small partners (which include KDD), the second consisting of BT and MCI (the second largest US long-distance carrier), and the third comprising Deutsche Telecom, France Telecom and Sprint (the third largest US long-distance carrier). Clearly, NTT is the only Japanese carrier with the size and resources to become a major player in this market if it so chose. Thirdly, a point that has not been sufficiently stressed in the current debate, the regulatory shackles that have prevented NTF from fully entering the international market have not only denied the company access to potentially lucrative markets, but perhaps even more importantly they have prevented NTF from benefitting from the learning process that occurs when a company competes in dynamic, strongly contested markets. This international learning would benefit both NTT and its customers in Japan's national markets, in long-distance and in local services. Fourthly, from the
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point of view of customers around the world, the addition of another strong competitor in global telecommunications markets would provide further choice and therefore add to the competitive pressure in these markets. (If Japanese markets were both open-to domestic and foreign carriers-and competitive, MPT would not have to be concerned about NTF increasing its dominance through its global activities. In the global markets NTF would be only one amongst several strong rivals.) The fifth point, however, is intended to sound a note of caution. Even if the regulations change in 1996 so that NTF is allowed to provide international services linking Japan, it should not be assumed that NTT will automatically be able effectively to address international markets. Until now, NTT's focus has been entirely domestically oriented. The experience of both AT&T and BT, companies that have embarked on the international road far earlier than NTT, shows how difficult it is and how much time it takes to begin to deal effectively in international markets. Many of those with international responsibilities in NTT have felt the frustrations of a decision-making hierarchy that is primarily domestically focused. If NTF is allowed to operate freely in global markets, the company's leaders will have to make a crucial set of decisions regarding the forms of management and organization that are necessary for an effective contesting of international markets. A possibly significant indicator of things to come emerged on 30 October 1995 when it was announced that NTT would connect its frame relay network to the global network run by the BT and MCI joint venture, Concert (which reportedly has 2000 mainly multinational corporation customers, although the venture is not yet thought to be profitable). Although technically the connection is between NTF and a Japanese company that provides value-added services connected to the Concert network, the company--Network Information Services (NIS)--has as its major shareholder BT and the Japanese trading company, Marubeni. Unclear at the
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time this announcement was made was whether the Ministry of Posts and Telecommunications had been consulted in advance, and if so what its response had been. What is clear, however, is that N T r wishes to be able to offer global services in the future. A further set of issues has been raised by the announcement by A T & T that it would voluntarily break itself up into three separate companies: one offering telecoms services, one dealing in telecoms equipment, and one (the former NCR) providing computing products and services. What are the implications of A T & T ' s announcement for the debate about the future of NTI'? Again, several points are worth stressing. The first point to clarify is that the new A T & T telecoms services company roughly equals, in terms of function, NTT's current position. Like the new A T & T company, NTT does not manufacture telecoms equipment or computers. The refusal of the major Japanese carrier to engage in the production of telecoms equipment has been a consistent feature in the country, going back to the days of the Ministry of Communications (Teishinsho) in the late 19th century. It may therefore be concluded that in terms of function the new A T & T telecoms services company and NTI" are similar. Furthermore, and this is the second point, in terms of revenue the two companies will also be similar, with the A T & T telecoms services company reportedly having a revenue of around $55 billion compared to about $65 billion for NTI" (a figure that is dependent on choice of exchange rate). A third point, however, remains to be clarified in the future, and this is the role that both companies will play in the R&D of telecoms equipment and computer networks, systems and services. Before its announced breakup, A T & T was vertically integrated in that it also produced its own telecoms equipment (in the former Western Electric) and computers (in the former NCR). On the other hand, while never manufacturing telecoms equipment or computers, N T r traditionally has played an important role in research-
ing and developing advanced telecoms equipment and computing systems in its Electrical Communications Laboratories. This has involved collaborative R & D jointly with N'Iq"s suppliers under the so-called Track Three provision. On the other hand, other companies like BT, MCI in the US, and D D I in Japan have decided to leave far more of the R & D task in the areas of telecoms equipment and computers to their suppliers. It remains to be seen whether A T & T telecoms services will move in the same direction after break-up. It is also possible that NTT will move away from its timehonoured role in collaborative R&D in these areas, although this would represent a substantial shift from past practice. This discussion on R&D raises a further important question: what R & D capabilities are necessary for a carrier to be a major global competitor? The changes in A T & T ' s Bell Laboratories - - the foremost industrial research laboratory where key inventions such as the transistor, cellular communications and the Unix operating system were made - - are illuminating in attempting to answer this question. The first major recent change in Bell Labs occurred in the early 1980s when, at the time of A T & T ' s divestiture, R & D staff at the laboratories were moved into the newly formed Bellcore, the new R & D facility for the seven RBOCs, or Baby Bells. The second change occurred in the late 1980s when AT&T's CEO, Bob Allen, segmented A T & T into some 20 business units. In response, Arno Penzias, Vice President for Research at Bell Labs and Nobel Prize winner in 1978, instituted far-reaching changes in the research area of the laboratories, aimed at ensuring greater responsiveness to the needs of the business units. At around the same time, Bell Labs' development staff, though formally remaining part of the laboratories, were more closely integrated into the activities of the business units. As a result of AT&T's voluntary break-up announced in September 1995, Bell Labs is to be further divided with about 8000 of the total 28 000 employees (including both research
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and development staff) to join a new R&D division in the new AT&T telecoms services company. The remaining 20 000 staff, which is the bulk of the current Bell Laboratories, will become part of the new A T & T telecoms equipment company. How does this compare with NTI~'s position in R&D? Interestingly, NTT has about 8500 R&D staff in total, with the result that both NTT and the new AT&T telecoms services company (NTT's equivalent) will have about the same R&D capability (measured in terms of number of R&D employees, though R&D output is, of course, another matter). Clearly, if NTT and its Electrical Communications Laboratories were to be broken up, each new entity would have a smaller R&D capability. Whether this would be a significant disadvantage from the point of view of global competitiveness, however, is a matter of some debate, since different companies have developed different strategic positions on the importance of in-house R&D for national and global competitiveness. At one extreme lie carriers such as AT&T and NTT that have consistently argued that strong in-house R&D capabilities are necessary (though not sufficient) for competitiveness. At the other extreme are some of the newer carriers such as MCI in the US and D D I in Japan that have made the strategic decision to depend to a greater extent on their suppliers to do the R&D for them. Companies like BT occupy the middle ground, doing R&D (though less than half of what NT'F does, in terms of the proportion of revenue allocated to R&D) but depending significantly on the market for equipment and other inputs. A further complicating factor, however, is that in Japan it has always been accepted, by all the powers-that-be in the telecommunications field, that N I T also has a national responsibility in stimulating the entire national in-
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novation system through its R&D activities. NTF's national obligation in this respect was incorporated into the legislation under which the company was part-privatized in 1985, a commitment that was reiterated in the Japanese government's 1990 ruling on the future of the company. So, what does this discussion imply for the future of Japanese telecommunications? It is clear that Japanese telecommunications is now at the crossroads. By around the middle of 1996 crucial decisions will have to be made that will have a major shaping influence on both the structure and the performance of the telecommunications industry in the country. These decisions, as indicated in the present discussion, go far beyond the question of what to do with NT1~. Most fundamentally, they relate to how to create the dynamic conditions that will lead to a rapid improvement in Japan's telecommunications infrastructure and in the provision of the old and new services that lie at the heart of the evolving information society. My own view is that Japan's decisionmakers will find their own way forward. While the experience of the US and Europe may offer some lessons and suggestions, ultimately it is a Japanese solution that will evolve in Japan. One of the main conclusions of the present discussion, however, is that whatever Japanese solution is chosen, effective competition from sources both within and outside Japan will have to be a key building block. The whole world has a vested interest that Japan 'get it right' in this crucial field. Not only will a dynamic Japanese telecommunications industry provide opportunities for nonJapanese companies, it will also provide new directions and models for others in the world grappling with similar problems. In the end, it is the world's users of telecommunications services who will be the major beneficiaries.