Japans proposed telecom reform runs into political road blocks

Japan`s proposed telecom reform runs into political road blocks


In the interest of promoting competition, a Japanese government advisory panel recently mapped out a report that recommended splitting Nippon Telegraph & Telephone (NTT) into one long-distance and two regional carriers within fiscal 1998, ending March 1999. If this happens, prominent Japanese researchers fear that the nation might lose its world-level research and development capabilities, especially in fiber optics research.

However, despite the logic of some of the measures outlined in the report, political considerations are expected to delay implementation. In the report, the Telecommunications Council stated that an NTT realignment would benefit consumers through lower telephone charges and revitalize the nation`s flagging telecommunications industry. When a key advisory panel recommends changes, the government usually accepts them. In this case, however, the government is expected to delay a decision or reject the recommendation.

For example, researchers at NTT`s two leading laboratories in Atsugi and Yogosuka are developing fiber-optic subscriber transmission systems, high-speed broadband communications systems, and advanced semiconductor lasers and optoelectronic devices. A split of NTT may also mean a reorganization--and subsequent loss of synergy--of the expertise of those central research laboratories among the regional companies.

Sales and earnings to differ

NTT President Masashi Kojima is also concerned about the breakup and notes that sales and earnings of the two regional telephone companies would differ. Therefore, uniform telephone charges and services nationwide would not be possible.

He also says that once NTT`s research personnel and facilities are scattered among the three offshoots, NTT would lose its research and development capabilities at a time when strong competition exists among telecommunications companies worldwide for technological breakthroughs.

Also complicating reform is that Japan, according to some analysts, may be 10 years behind the United States in telecommunications services and infrastructure. They say deregulation and an NTT breakup leading to full competition are required for Japan to catch up. Traver Kennedy, director of wide area network services for the Aberdeen Group in Boston, points out that "the broadband wars began in the United States within days of the passage of the Telecom Act of 1996 (see page 82)." In the U.S., the major point of agreement is that competition is reality. The result of this consensus may be that the U.S. may pull further ahead of Japan.

In Japan, many members of the three-party ruling coalition fear that a government push for NTT`s breakup would hurt them in any Lower House election that is called this year. The Social Democratic Party, one of the coalition parties, opposes the breakup because the influential Japan Telecommunications Worker`s Union, with a membership of 215,000 workers at NTT and its affiliates, is a bastion of support. "We want the panel`s report scrapped," said a union official.

The report also drew criticism from the influential Communications Industry Association of Japan, which said the analysis of the current telecommunications market and the theoretical support for the split of NTT needed more scrutiny. The association, which includes members NEC Corp., Oki Electric Industry Co. and Hitachi Ltd., among others, wants the report to be reviewed on the grounds that it does not offer an acceptable scenario for Japan`s telecommunications market.

The Telecommunications Council says Japan`s telecommunications sector lags behind that of Western countries. This situation could be a catalyst for future economic growth because of the dominance of NTT. It was a true monopoly until recently. The report also says a breakup would infuse competition into the domestic telecommunications market.

The Council wants the new domestic long-distance telephone company resulting from the NTT breakup to be privatized immediately. It would be on an equal status to DDI Corp. and other long-distance carriers that emerged after the semiprivatization of NTT in 1985. (The government still owns 65.5% of the company.)

The new telecommunications company would compete for business with the other two NTT spin-offs, including a regional company serving the eastern half of the nation and another serving the western half. The three NTT offshoots would be independent in terms of equity ownership to encourage mutual competition; they will also be prohibited from merging again.

Initially, the regional companies would compete with each other indirectly because the government would not allow them to raise their rates unless they improved their efficiency. They would remain under close government control for a certain time to ensure that they were providing adequate services to remote areas where telecommunications providers often lose money.

They would be able to offer telephone and cable-TV services in the others` business regions, while providing services abroad. They would, however, be barred from expanding operations for long-distance and international telecommunications and cable TV for a certain period because of the potential of creating a monopoly. But as competition increases, the companies will be permitted to offer those services.

A key problem for NTT`s domestic long-distance rivals and other NTT competitors has been the difficulty of linking up to NTT`s intracity network--on which their services depend--at a reasonable cost. During the past 10 years, NTT has been reluctant to help them. So, the panel suggested that carriers be mandated to interconnect their networks, and that the MPT should establish an expert division to draw up rules on interconnections and monitor observance by carriers.

Prompted by the recommendation of the Telecommunications Council, NTT is going to separate (and publish) its retail budget from its wholesale budget and thus make known its method for calculating connection fees. NTT will meet with the new common carriers--three long-distance carriers--to discuss leasing its circuits. NTT is expected to recommend that the common carriers separate their wholesale and retail accounts.

The panel called for revising the rate-setting regulations for local carriers to introduce competitive incentives to boost efficiency. Long-distance and international carriers should be allowed to set rates simply by reporting them to the government. And the panel urged the government to lift a provision in the Telecommunications Business Law that restricts the entry of new players into telecommunications services as part of its deregulation.

Telecommunications deregulation

The panel`s report also calls for a broad range of telecommunications deregulation. It proposes that the domestic long-distance offshoot of NTT be allowed to enter the international telephone business and other new markets; the most likely overseas markets would be in China and Southeast Asia. Before NTT breaks up, however, the international carrier Kokusai Denshin Denwa (KDD) may be allowed to get into the domestic market to offer long-distance, mobile and other domestic telecommunications services.

Some experts among the Telecommunications Council agree with NTT`s assessment of the disadvantages of the breakup. Although only two pages of the 115-page report are devoted to views of council members who believe that a breakup would undermine the global competitiveness of Japan`s telecommunications industry and its research and development capabilities, the government may seize on the minority opinions and reject the report.

How NTT`s breakup would affect procurement of telecommunications equipment from domestic and international suppliers remains unclear, but it might improve the situation. At present, suppliers collaborate with NTT in developing equipment while competing fiercely with each other in selling the jointly developed equipment to NTT. This competition is not the winner-take-all variety; it involves controlled competition, contingent on reasonable performance as judged and monitored by NTT (see Lightwave, March 1995, page 14).

However, if the government chooses not to split up NTT, it will be a replay of what happened six years ago. In March 1990, the Telecommunications Council proposed NTT`s breakup but decided to freeze the debate until the end of the year. There was opposition from NTT, businesses and the Finance Ministry--a key NTT shareholder--which feared a fall in NTT stock prices. q

Paul Mortensen writes from Australia and Japan.

Japan Telecommunications Reform Highlights

Nippon Telegraph & Telephone (NTT) controls 99% of local telephone calls made within each prefecture of the country. To lower telecommunications rates and promote fair competition, NTT`s monopoly of regional networks, on which all other carriers depend, would have to be eliminated.

Highlights of the report of Japan`s Telecommunications Council include the following recommendations:

Split NTT into one long-distance and two local telecommunications carriers within fiscal 1998, with the regional carriers covering the eastern and western parts of the nation.

Allow the long-distance carrier to immediately provide international and regional telecommunications, as well as cable-TV services, and enter overseas markets.

Assign the carrier to inherit from NTT the stocks of three NTT subsidiaries--NTT Data Communications Systems Corp., NTT Mobile Communications Network Inc. and NTT Personal Communications Network.

Bar the two local carriers from offering long-distance, international and cable-TV services outside their areas.

Permit international telecommunications carrier Kokusai Denshin Denwa (KDD) to enter the domestic market before the breakup of NTT to enhance mutual business access by domestic and international carriers.

Consider easing foreign ownership of the two local carriers in line with progress in regional telecommunications competition. The limit on foreign ownership of KDD should come under review when debate continues.

Deregulate the entry of new players into the telecommunications market and liberalize the use of leased lines within 1996 for domestic services and within 1997 for international services.

Mandate network interconnections by telecommunications carriers to ensure prompt access to NTT`s local networks and other vital facilities under reasonable and nondiscriminatory conditions.

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