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THE IMPACT OF NTT PRIVATIZATION ON

JAPAN ' S TELECOMMUNICATIONS
presented by

SHIGEBU OYAMA

has been accepted towards fulfillment
of the requirements for

MASTER'S degree in TELECOMMUNICATION

 

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THE IMPACT OF N'IT PRIVATIZATION
ON J APAN' S TELECOMMUNICATIONS

By

Shigeru Oyama

THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunication

1990

é¢7‘5§53'

ABSTRACT

THE IMPACT OF NTT PRIVATIZATION
ON I APAN' S TELECOMMUNICATIONS

By

Shigeru Oyama

On the first of April, 1985, the Japanese government
proclaimed Telecommunications Business Act and NTT Company Act.
As a result, NTT was privatized and any company was now able to
enter the long monopolized market by NTT.

The purpose of this paper is to examine the NTT privatization
and explore the optimal policy in Japan's telecommunications.

With regard to the methodology to approach the issue, I start
with the historical review. In this section, I describeW how Japan's
telecommunications developed, how the policy transferredfi and what
factors motivated the government to adopt the policy of competition.
Second, I analyze the New Acts and mention what is changing,
emerging and so forth. Third, the impact of the New Acts is studied.
Forth, I mention rthe advantages and disadvantages of the new policy,
comparing with the former concern; Finally, I conclude the optimal

policy in Japan's telecommunications which meets the public

interests.

To my parents and my wife, Satoko

iii

ACKNOWLEDGMENTS

I would like to express special appreciation to Dr. Joe Straubhaar and
Dr. Thomas Muth for their assistance and guidance to complete this
study.

iv

TABLE OF CONTENTS

ACKNOWLEDGMENTS ............................................................................................ iv
Chapter
1. INTRODUCTION ............................................................................................ 1

2. HISTORICAL REVIEW OF JAPAN'S TELECOMMUNICATIONS... 3
3. CRITICAL REVIEW OF NEW ACI‘S ........................................................ 1 1
1. Telecommunications Business Law
A. Type I Telecommunications Business
B. Type 11 Telecommunications Business
11. NTT Company Limited Law
4. IMPACT OF THE REFORMATION ........................................................... 2 5
1. Impact on the Telecommunications Equipment Market
II. Impact on the Government
111. Impact on Information Network System
IV. Impact on the Services
5. AN OPTIMAL POLICY; MONOPOLY OR COMPETITION ................. 4 1

1. Advantages of Competition

II. Disadvantages of Competition
III. Advantages of Monopoly
IV. Disadvantages of Monopoly
6. CONCLUSION .................................................................................................. 5 O

BIBLIOGRAPHY ........................................................................................................ 5 2

vi

Chapter 1

Introduction

The introduction of competition in the telecommunications
industry is an internationally common trend among the most
developed countries in the latest decade. The United States which is
considered to be the most liberalized country in terms of the
telecommunications policy, achieved AT&T divestiture and
deregulation in other service provisions, adopting the market place
approach. In the meantime, the United kingdom, a representative of
the traditional public utility model, privatized the British Telecom
and allowed the new common carrier to enter the market. the
leading countries in the world economics were going toward the
deregulation in telecommunications field. Japan was not exceptional.
W On the first of April, 1985, the Japanese government abolished
the Public Telecommunications Law and the Nippon Telegraph &
Telephone Public Corporation Law that had regulated the
telecommunications industry and proclaimed new acts named "Three
Acts of NTT Reformation", which consists of Telecommunications
Business Act, NTT Company Act and the Omnibus Act. As a result,
NT‘T was privatized and any company was now able to enter the long
monopolized market by NTT. Thus, the government drastically
changed its policy from monopoly to competition. ‘

The purpose of this paper is to examine" the NTT privatization

and explore the optimal policy in Japan's telecommunications. This

2

issue is strongly related to the debate between monopoly or
competition. However, strictly speaking, there is no country which
falls into either a pure competitive model or a monopoly model.
Therefore, discussion has to be made as to what extent the
telecommunication industry should be regulated or what policy could
be adopted.

With regard to the methodology used in approaching the issue,
I will start with the historical review. In this section, I describe how
Japan's telecommunications developed, how the policy transferred,
and what factors motivated the government to adopt the policy of
competition in this arena from the stream of the history. Second, I
analyze the New Acts and mention what is changing, emerging and so
forth. Third, the impact of the New Acts will be studied. Forth, I
mention the advantages and disadvantages of the new policy,
comparing with the former concern. Finally, I will conclude the
optimal policy in Japan's telecommunications which meets the public

interests.

Chapter 2

Historical Review of Japan's Telecommunications

\ Japan's Telecommunications initiated with the formation of the
Ministry of Teishin in 1885. The Ministry had responsibility for
policy making, ownership, operation, research and radio frequency
allocations in telecommunications and postal services.1 In that sense,
Japan's telecommunication was then based on the European PTTs'
philosophy that telecommunications and postal services should be
jointly owned, operated and managed by the government. This policy
had continued until \1949 when the Ministry of Telecommunications
was established to separate telephone services from the postal
services. W

The‘most important reformation in those days was the
separation of telecommunication services from the postal services.
During the occupation by the US after World War II, American
policy gave a strong influence on many aspects of Japanese policy
making and as a result, the government adopted a hybrid model of
policies of the US. and Europe. The Ministry of Telecommunications
was transformed into a public corporation as a operating entity
named Nippon Telegraph and Telephone Public Corporation (NTT) to
be supervised under a new regulatory body, the Ministry of Post and

Telecommunications (MPT).

 

lMitsuru Yokoi, "Agencies and Directions of Japanese

Policy." WM" (December 1982) 259

3

4

Besides the influence by American policy, another major reason
for the separation was that the government took a part of
telecommunications revenue to compensate for the deficit of its
general account even though the account of telecommunications
services was independent from the general account. A public
corporation in Japan means an organization that is owned by the
government however, managed by the public. Since the management
and accounting of the corporation are independent from the state,

governmental intervention is not, in principle, permitted.

‘ —--_\

tj Furthermore, in 1953, the overseas services were separated
from the NTT and were to be managed by the Kokusai Denshin
Denwa Co., Ltd. (KDD), which has been a joint-stock company based
on KDD Company Act. Since its establishment, the NTT had a
monopoly on domestic telecommunications operations and the KDD
on international services, protected by the Public
Telecommunications Law. WAt the time when the NTT was established,
Japan's urgent purpose ”Was to recover telecommunication facilities
and spread the telephone networks as soon as possible becauseW they

were almost completely damaged during the Second World War.

Ks .

Aiming at the procurement of the funds for their recovery, the
government, since 1953, forced telephone subscribers to purchase
telephone bonds, which supplied 30 percent of the funds for the
NTT's telephone development programmes.2 And the government
allowed the NTT to monopolize the market and set severe restrictions

on the entry of competitive carriers into the public

 

2Mitsuru Yokoi, "Agencies and Directions of Japanese Policy,"

W (December 1982): 262.

5

telecommunications market. This was done because the government
wanted to ensure the effective utilization of investment funds by
enabling the NTT to install and expand facilities, and provide the
public telecommunications services as a single carrier.

WW As a result, telephone spread at a remarkable pace. By the late
19708, telephone sets penetrated into almost all the households and
consequently, the obligatory purchase of telephone bonds was
abolished in March, 1983.3 W

In the meantime, therWe was an exception to the monopoly by
NTT and KDD in public telecommunications, which is a field of non-
telephone services. This business has been liberalized step by step
since 1971 in contrast to the basic communication service.

Non-telephone services are divided into three categories;
facsimile, data communication, and visual communication.

The first public facsimile service in Japan began in 1930 with
photo-telegram. Demand for this service was small until 1960s. As
economic activities increased and the need for rapid transmission of
large volume of information also increased, the role which facsimile
can play in public Telecommunication became re-evaluated because
facsimile has many advantages over telephone, such as the fact that
any type of figures or other graphics can be sent even when a
receiver was absent. Facsimile service is particularly useful in Japan
because its writing system employs ideographics and other complex
symbols. As a result of the revision of the Public telecommunications

Law in 1971, it became possible to offer facsimile service freely

 

3Tetsuro Tomita, "Japan's Policy on Monopoly and Competition in

Telecommunications," WW (March 1984): 46.

6

throughout the telephone network, so that the number of facsimile
terminal installation increased drastically.

Data communication systems began in 1964 when Japan
National Railways and Japan Air Lines introduced a seat reservation
system. And in 1971, data communications were incorporated into
legal systems by the revision of the Public Telecommunication Law,
which opened the age of data communications.4 This revised law
provided two systems for using data communications circuits:

1. Special Communications circuits leased from NTT
and used exclusively for data communications, and
2. Public Communications circuits established by NTT
on request and used the public telephone or telex
network for data communications.5

In addition, as to leased circuits, there were three major changes in
shared use, third party use and interconnection.

Shared use, i.e. using circuits for other people's messages, of
special communications circuits was permitted with the following
conditions: (1) there would be a certain business relationship
between the sender and receiver, (2) communications would be
completed between computer and terminals solely for the use of data
processing, (3) uses other than data processing would receive
individual permission from the MPT.5

Third party use, i.e. using other people's communications
circuits, was permitted in the case of communications completed

between a computer and terminal. This permitted a data processing

 

41bid., 48.
5Toshio Kosuge, "The Emerging Data Communication Policy in Japan"
Wm Vol..1 N01 (1984): 20

6Public Telecommunications Law, Article 55. No.11.

7

company to service multiple clients on the same circuit but not to
exchange data between any two unrelated clients.7

Interconnection between a special communication circuit and
the public circuits was possible with individual permission of the
MPT.3

After this revision, data communication in Japan made rapid
progress. the number of data communications systems increased
from 300 to 8000 for the next decade.9

New technological innovations stimulated a further review of
the legal regime in this field and the second liberalization was
carried out in 1982. Revised Public Telecommunications Law of 1982
removed most of the restrictions imposed by The 1971 Law on
shared use and third party use of leased circuits. As to shared use,
users those who are closely associated become able to operate a
system including "message switching". Message switching is defined
as a use of a computer which relays information without modifying
its contents.10 Even if they are not "closely associated", they can use
data communication circuits if they perform data processing in the
system and do not relay other peoples information. For third party
use, it is now possible for computer service companies to extend
their data communication circuits to the customer's computers and to

exchange processed information. Moreover, the restrictions on

 

71bid., Article 55, No.13.
81bid., Article 55, No.16.
9Tetsuro Tomita, "Japan's Policy on Monopoly and Competition in

Telecommunications," W (March 1984): 48.
10Mitsuru Yokoi, "Second Liberalization in Japan, "W
£91191.(September 1983): 247.

W
W

8

interconnection between leased data communication circuits and the
public networks was removed and such connection can be made
without any approval from the MPT with the exception that
connections at both ends of the leased circuits to the public networks
are subject to the approval from the government.

After successful establishment of nationwide telephone
network, NTT had two goals which were the elimination of back-log
telephone applications and completion of direct long distance dialing
services. The former objective was attained in 1978 and the latter in
1979.11 Thus, the necessity for intensive utilization of resources,
which is the major reason for monopolization, decreased.

Since then, NTT needed to have a new goal to step forward to a
more advanced information society because communication
technology had been advanced enough for practical use. It should be
time to have another look at the system and the legal arrangement in
telecommunications. Needless to say, a large demand for further
liberalization on data communications promoted the fundamental
change in Japan's telecommunications.

Besides the above mentioned public demand and future

,A‘beneflfit, there were two other factors that facilitated towards

liberalization and deregulation of telecommunicatifls. ‘

One was the US government, which had put fieche pressure on
Japan to deregulate its telecommunications market. NTT's
procurement practices became a target for its trade partners to

criticize for less foreign procurement. As long as NTT remained a

 

11Yasusada Kitahara. Wm (London: Heinemann
Educational Books, 1983), P.15.

9

public entity under government management, it would, according to
GATT rules, be bound to respond to demands for more open
procurement practices. If privatized, however, it would be exempted
from this requirement.12

NTT's performance in operating business is another factor to
make this policy change occur. Because of its monopolistic and
bureaucratic nature, NTT showed financial and operating
performance levels below Bell Operating Company standards.
Especially for revenues and output per employee, NTT fell
considerably below US performance levels. Over the 1982-1984
period, NTT's capital investment to sales ratio was almost double that
of the Bell System and NTT exhibits a much lower level of
profitability than the Bell companies.13

The administrative Reform and Ad Hoc Committee, which aims
at researching and considering the fundamental matters concerning
the reformation of administrative systems and management in Japan,
recommended the reorganization of NTT to be a private company.
The government accepted it and decided to introduce a principle of
competition in the telecommunications market from the first of April,
1985 with proclamation of the new acts.

The government reasoned this policy change as follows:

The basic purpose of Japanese telecommunications policy is to
secure a certain grade of communications services at as low a price

as possible and in the most convenient way. It seems clear that the

 

12Roya Akhavan-Majid, "Telecommunications Policy making in Japan,"
WW (April 1990): 161-
13William H. Davidson, "Japanese Telecommunications Policy,"

W (June 1987): 149-

10

optimal policy so far has been to let the NTT monopolistically offer
telephone services to catch up with unsatisfied demands. The NTT
has accomplished its major tasks of getting rid of the huge back-log
for telephone installations and introducing an automatic dialing
system throughout Japan. As a result, the characteristics which
formed the basis of the Japanese telecommunications monopoly have
changed. For instance, as for technological unification, progress in the
technology of interface between networks has made the coexistence
of networks possible.

On the other hand, the public need for telecommunications has
increased and become diversified, and specific services which meet
the various needs of individual users, as well as the present,
nationwide, unitary, telegraph and telephone service, have been
requested. In addition, the technology and funds of private
enterprises have improved and the conditions under which they may
participate in the telecommunications business have been
developing.

Furthermore, with the advent of satellites and optical fiber
communications and the increase demand for diversified services,
the introduction of a policy of competition is becoming more suitable
to the purpose.14

It is very significant to review the new laws in order to study a

post-monopoly configuration of Japanese telecommunications.

 

14Tetsuro Tomita, "Japan's Policy on Monopoly and Competition in

Telecommunications," WWW (March 1984): 50.

Chapter 3

Critical Review of New Acts

1. Telecommunications Business Law.

The purpose of this law is to ensure the sound development of
telecommunications and to promote the public welfare. This law
consists of several chapters; general provisions, telecommunications
business, use of land, miscellaneous provisions, and penal provisions.
I The new law classified all the telecommunications business as
Type I and Type 11 business. Type I telecommunications business
provides services by establishing telecommunications circuit facilities
such as transmission lines, switching facilities and other facilities
complementary to those. Type II is defined as telecommunications
business in which the carriers offer services without having their
own telecommunications facilities but renting it from a Type I
business provider. Thus, the difference between Type I carrier and

Type II carrier is whether or not a carrier owns a

l
l

telecommunications facilities.
A: Type I Telecommunications Business.
Type I carriers have the attributes as follows:

1. They provide infOrmation infrastructure.

2. Their business is heavily dependent on the facilities.

11

12

In this sense, their business is restricted within the area in which
they own the transmission circuit. Therefore, if a certain Type I
carrier becomes unable to maintain its facility in a certain region, it
would be impossible for people living in that area to receive the
services.

3. Huge investment is needed to construct the circuit.

Due to the attributes above, Type I business applicants have to
obtain permission from the Ministry of Posts and
Telecommunications to start the business.15 "Have to obtain
permission" is interpreted that the market of the type I carrier is not
free entry and it seems this is because the government expects the
service providers to be reliable and stable, therefore, the applicants
must be assessed based on the company's financial standing and
technical capability. Furthermore, in order to prevent excessive
competition and to promote the public welfare, which is the primary
objective of the reformation, it is required to evaluate the new
applicants.

Although an entrant into this market has to be permitted by
the government, it is now noticeable that any company is given a
chance to perform the business which NTT has long monopolized
since its establishment.

The introduction of the policy of competition was adopted due

to the following facts and the political judgements.

 

15Telecommunications Business Law, Section 2, Article 9.

13

First of all, the government thought that competition among
multi-enterprises would bring about the earlier realization of highly
developed information society.

Secondly, the environment has been completely changed,
compared to the era when the government decided to give NTT the
privilege to monopolize the market. The emergence of
communications satellite, optical fiber cable, and other new
technologies does not seem to allow the natural monopoly by the
economy of scale merit to be the best policy.

Thirdly, it became feasible to connect independent
communications network due to the development of the interface
technology.

Last of all expansion of the market creates the surplus demand for
other common carn'ers than NTT.

Article 10 prescribes the criteria to grant permission as follows.
1) Telecommunications service to be provided by a
Telecommunications carrier shall be appropriate in the light of the
demand in the service territory.16
II) The introduction of the telecommunications business shall not
result in a significant excess of telecommunications circuit facilities
used for such business in all or in any part of the territory or route

to be covered by the telecommunications carrier.l7

 

16Telecommunications Business Law, Section 2, Article 10.
17Ibid.

14

III) The applicant shall have an adequate financial basis and
technical capability to properly perform his or her
telecommunications business.18

IV) The plan of the telecommunications business shall be reliable
and feasible.19

V) In addition, the introduction of the telecommunications business
shall be appropriate for the sound development of
telecommunications in general.20

As we can see from the above, the reliability and stability of
the business and the balance between demand and supply are key
factors to obtain permission from the government. The second
criterion seems to be a strategy in which an excessive investment for
telecommunications circuit facilities does not result in a raising of the
tariff. Because it is predicted that the demands to the
telecommunications services increase rapidly it would be very
difficult to determine an optimal supply to satisfy such demands.
Therefore, since the government's judgement heavily affects the
decision making, there is a fear that intervention by the government
is inevitable in this business area.

The fifth criterion is a very abstract expression and is also
regarded to have the same problem I mentioned above. What is the
sound development should be mentioned clearly.

Article 11 mentions the items of disqualification for the

permission as below.

 

181bid.
19Ibid.
201b1d.

15

i) Any person who has been sentenced to a fine or
any sever penalty in accordance with the provisions of
this law, the Wire Telecommunications or Radio Law, if a
period of two years has not yet elapsed since the day on
which the sentence was fulfilled or exempted from
execution.

ii) Any person whose permission was revoked in
accordance with the provisions of Article 19 paragraph
(1), if a period of two years has not yet elapsed since the
day of the revocation.

iii) Any juridical person or association any of whose
officers falls under any of preceding two items.

iv) Any person who (3833 not have Japanese nationality.
v) Any foreign government or its representative.

vi) Any foreign juridical person or association.

vii) Any juridical person who is represented by any
person or body set forth in the preceding three items, or
one-third of whose total voting rights is exceeded by the
aggregate of voting rights directly held by such persons
or bodies and voting rights calculated in accordance with
the provisions of the applicable ordinance of the Ministry
of Posts and Telecommunications, which is indirectly
controlled by such person or bodies through any other

juridical person or association.21

 

21Telecommunications Business Law, Section 2, Article 11.

16

The provisions from iv) to iiv) are written about the exclusion
of foreign capital in Type I telecommunications business. In this
business area this exclusionism is significant for the following
reasons. First, the government should have enough control on the
information infrastructure spread all over Japan in the case of
disaster or intrusion by a foreign country. Secondly, the government
should secure the essential information for the national secrecy.
Lastly, the government has to begin with fostering the domestic
common carriers for the sound development of Japan's

telecommunications.

B. Type 11 Telecommunications Business.

Type II telecommunications carriers do not own the circuit but
rent it from Type I carriers to provide diversified services such as
telephone, telex, facsimile and Value Added Network Service (VAN).
VAN service is especially expected to be a main service in Type 11
business. The VAN system offers several services; protocol
conversion, mail box function, multi-point distribution function,
media conversion and code conversion in order to meet the rapidly
increasing inter-corporations' communication needs.

Article 21: (1) says that Type II telecommunications business
shall be classified into General Type 11 business and Special Type II
business.22 Special Type 11 business is defined as a business which

provides for the use of communications of many and unspecified

 

22Telecommunications Business Saw, Section 2, Article 21. (1).

17

persons' telecommunications facilities. These facilities exceed in scale
the standards stipulated, in terms of the capacity for accommodating
telecommunications lines, in the applicable cabinet ordinance, or
Type II telecommunications business which provides
telecommunications facilities designed for communications between
Japan and foreign points for the use of communications of others.23

Therefore, a Special Type II carrier provides either nationwide
network or international network which consists of more than 5000
lines offering transmissions speeds in excess of 1200 bits per second.

Meanwhile, General Type II telecommunications business is
defined as any business other than Special Type II
telecommunications business.24 In this sense, it should be a
relatively small network in which the companies being related in
their business are connected each other, such as manufacturers and
the retailers, the parent companies and their subsidiaries, and so
forth.

In order for the General Type II carriers to start the business,
it is necessary to submit a notification to the Minister of Posts and
Telecommunications.25 To submit a notification means that the
Minister of Post and Telecommunications may not reject any of such
notifications, so that the General Type 11 market is free entry. This
decision is made due to the characteristics of the General Type II

carriers as follows.

 

231bid.(3).
24Ibid.. (2)
251bid., Article 22 (1)

18

1. Their business activities are so limited that they have very small
affect on the public interest.

2. Since it is expected that a large number of carriers enter the
market and provide diversified services so as to meet the needs of
various types of business group, it is very difficult to set standards to
examine the applicants.

In the meantime, as to the Special Type II telecommunications
business, the applicants have to register to start the service.

The reason why the government adopted the registration
system instead of notification is due to the nature of Special Type II
business. First of all, because the service providers establish a
nationwide network, their business gives a relatively big influence
on the public. Secondly, the transmission facilities are open to
unspecified users, so that the carriers have to secure the secrecy of
the communication and the functional stability of the facilities.
Therefore, the entrants to the market should be examined carefully.

Another thing observed is that there is no refusal provisions
for aliens to start the Special Type 11 business. The reasons for it are
as follows:

1. The US government pressured the Japanese government to solve
the problem of imbalanced trade between both countries.

2. The MPT thought no protection for the domestic carriers from
foreign enterprises should contribute to the sound development of
the Special Type II industry and also adoption of the principle of
impartiality between foreign and domestic suppliers and of the
principle of fairness contributes to sound development of friendly

trade relations with all countries in the field of telecommunications.

19

However, in terms of the sound development of the Special
Type II business, the protectionism would be the better policy
because Japan has considerable delay in this field. In the U.S.,
Tymnet, Telenet, etc. have provided enhanced services since early
19708.26 Moreover, ATT and IBM became legally able to enter this
business in 1982. Nevertheless, Japanese companies have just started
VAN services on the experimental basis since 1982. Thus, it seems
most Japanese carriers will not be capable to compete with American
firms with the exception of NTT. The government should have
fostered domestic carriers first and afterward opened up the market

to the foreign companies.

11. NTT Company Limited Law.

Nippon Telegraph and Telephone Public Corporation became a
private company with execution of this Law. The Law prescribes that
the purpose of NTT is to operate domestic telecommunications
business.27 NTT's business activity is restricted only in the territory
of Japan in spite of the fact that the Telecommunications Business
Law prescribes that new common carriers may operate both
domestic and international telephone business. WThere seems to be
two reasons for this restriction. One is that Kokusai Denshin Denwa
Co., Ltd. (KDD) has successfully operated the international services,

therefore, NTT's entry into the overseas business could bring about

 

26Study Group of Telecommunications Issues. W
W (Tokyo: MIA 1984) 58
27NTT Company Law, Article 1, (1).

20

excessive competition. The other reason is due to the fact that NTT is
already a huge powerful company, so the concentration of power into
a single entity should be avoided. .

Section 2 in the Article 1 definesWNTT's business fields, which

are divided into three categories as follows:

T‘\

1. Domestic telecommunications business, original

business purpose,

2. Business activities incidental to above, and

3. business activities necessary to achieve the purpose of

the company.

The first business field is the main business of NTT, which is to
provide nationwide telephone and telegraph services fairly to
anyone. The second field is the business that would be able to
contribute to facilitating the original business purpose or that could
effectively utilize the technologies or know-hows of
telecommunications business, for instance, a weather forecast
service, a time information service, telecommunications equipment
sales, etc. fall into this category.

The third field is a business which seems to fall in neither the
first category nor the second one. For example, an international
cooperation activity is in this field. It is mandatory for NTT to be
authorized by the Minister of Posts and Telecommunications to enter
this type of business and in this respect, MPT has a control over NTT.

Before the enactment of the new law, NTT purchased the
terminal equipments from the private electronic companies called

NTT family; NEC, Fujitsu, Oki, Hitachi, etc. and sold them in the

21

domestic market. The electronic firms were not allowed to sell those
merchandise to the customers unless the first telephone set was
supplied to them by NTT. The new law removed this restriction, and
the customers are now able to purchase terminal equipments from
any company, including foreign suppliers.

Although Section 2 reads that it is theoretically possible for
NTT to manufacture telecommunications equipment, the government
decided to restrain NTT from having manufacturing division for the
time being due to its strong influence on the terminal equipment
industry.

The former law, NTT Public Corporation Act, imposed severe
restrictions on NTT's investment activities into any new business.
However, the new law does not mention such restraints. Now NTT
acquires a chance to commence a new business.

On the other hand, according to Article 2, NTT has the following
obligations to secure the public welfare.

1. NTT has to consider the maintenance of its proper and efficient
management.

2. NTT has to contribute to securing nationwide telephone services
throughout Japan at appropriate conditions.

3. NTT has to contribute to the creative advancement and
development of telecommunications through promoting the basic
research and development activities, and disclosure of their results.

However, except the number 3, all the obligations of NTT stated
above are removed only in the market where the competitors also

operate the business, because in the area where the carriers other

22

than NTT could provide the stable service, it is not fair if the
obligations are imposed only on NT‘T.

Article 4. Sec. 2 mentions that the government shall always
hold one-third or more of the total number of the outstanding shares
of the company.

The government plans to sell one half of the stocks of NTT to
the private sector within five years and eventually sell up to two-
third of its total shares. The Commercial Code of Japan prescribes
that a person who owns one-Third or more of the stocks in a firm is
authorized to reject important decisions such as modification of the
articles of incorporation, the appointment of executive officers and
auditors and so forth. Consequently, holding more than one-third of
total shares enables the government to have an indirect control on
NTT.

The government, MPT is authorized to administer and control
NTT by the following provisions:

1. NTT shall obtain authorization from the Minister

of Posts and Telecommunications in order to issue new

shares and convertible debentures(Article 4.(3))

2. Appointment or dismissal of executive officers or

auditors of the Company shall be authorized by the

government.(Article 9).

3. Any changes in the articles of incorporation, disposal of

profits, or merger and dissolution of the Company shall

be authorized by the Minister of Posts and

Telecommunications.(Article 10.)

23

4. The Company shall formulate its business program for
each business year and shall obtain authorization from
the MPT (Article 11).

5. The Company shall submit to the MPT its balance
sheet, profit and loss account and business report for
each year (Article 12).

6. The Company shall obtain authorization from the
government in order to transfer or mortgage its
telecommunications circuits or other important facilities

(Article 13).

As we can see above , NTT is imposed more restrictions than
new common carriers, however, the company acquired a certain
degree of autonomy to run his business compared to its former
organization, i.e., a public corporation.

Several Supplementary Provisions are included in this law and
it seems that they are important to ensure the future configuration
of Japan's telecommunications.

According to the Provision 2, the government will review the
nature of NTT within five years and take necessary measures based
on the conclusion of the review. It is possible to predict that a
principle of competition may not work well because NTT should be
too powerful for new entrants to compete with. The first five years
of competition can be regarded as an experimental period. Thus, it is
indispensable to add this provision.

In the case that the principle of competition does not work

well, and NTT remains a dominant power, forming a natural

24

monopoly, then what alternative should be taken ? One possible
solution for this is a divestiture of NTT‘. In July, 1982, the
Administrative Reforms Ad Hoc Committee proposed a plan to
reorganize NTT into a central body and several regional operating
companies. This plan was not adopted due to the strong opposition of
NTT's managerial sector and its employees but it is still being

considered by the government.

Chapter 4

Impact of the Reformation

1. Impact on the Telecommunications Equipment Market.

Since the time of NTT privatization, telephone terminal market,
which value is approximately 1 trillion yen was opened to the
private companies.

NT'I‘ has procured various materials and equipments from more
than 200 companies which forms a group called "Den-Den family".
Approximately 40 percent of NTT's total purchase amount are
procured from 4 companies: NEC, Fujitsu, Oki and Hitachi, which are
called "A Maker".28 Members of NTT Family are changing. Those
companies who can not comply to NTT's demands to digitize its
facilities are losing their shares in NTT market and those who can are
newly entering and expanding their shares in this market. Most of
the 200 companies are spun out and big names such as Matsushita,
Mitsubishi, Toshiba, etc. are becoming core entities in addition to the
"A Maker".

NTT has never had a manufacturing division. NTT cooperated
with a few large electronic companies to research and develop
innovative telecommunications facilities and let those firms

manufacture the equipments for NTT. This cooperation resulted in a

 

23Teruyuki Inoue, m (Tokyo: Ohtsuki Shoten, 1990), 105.

25

26

tacit agreement between NTT and those firms in NTT's procurement
of the telecommunications equipments, and in the formation of the
NTT family.

Because the new carriers are supposed to construct the
telecommunications system to start the business, the liberalization in
telecommunications business will promote the expansion of the
demand in the equipment industry, and the open policy of NTT's
equipment purchase will promote the innovative power among the
domestic manufacturers and also competitive power to the foreign
suppliers.

However, under the public corporation system, we would not
be able to expect rapid technological progress. This is one of the
reasons for the introduction of the policy of competition in Japan's
telecommunications.

From the user's point of view, it is desirable to purchase
inexpensive and diversified terminal equipment because such
competition will satisfy the need of users. In 1984, before
liberalization, there were 488 approved terminal devices, with
applications made by 71 companies. After liberalization took effect in
1985, those figures leaped to 852 and 144, respectively.29 NEC,
Fujitsu, and Oki have heavily relied on NTT, which normally accounts
for 20 to 30 percent of total sales.30 Therefore, the sales of these

companies will be influenced by the liberalization.

 

29Yusai Okuyama, "Development of Telecommunications Competition and

its PIGSpccts in Japan"l:{r4LEra_Qf_Iclmzmmnmcaunns_1n_lmn (January
1987). 3.

3°Mitsuru Yokoi, "Agencies and Directions of Japanese Policy,"

W91 (December 1982): 260

27

The computer industry is especially expected to become more
vital. It seems that the Type II carriers perform primarily VAN
business in which the computer system should be an essential
facility. Two groups dominate the market; the domestic group such as
NEC, Fujitsu, Hitachi and Toshiba, and the American group such as
IBM Japan, Unisys, NCR and DEC. Regardless, whether they are
domestic or foreign, all suppliers have been competing in the fertile
market where the annual growth rate was at an average of 25
percent in the recent decade.31 Introduction of competition into the
telecommunications business will create a surplus demand and

accelerate the growth rate of computer industry.

11. Impact on the Government: Inter-bureaucratic conflict.

Any structural change frequently brings about the issue of who
is going to benefit from it. The agency which has the most influence
on the information process and distribution will take the initiative in
economic policy making in the highly advanced information society
which Japan is aiming at. In the legislative process of the new laws,
the ministries relevant to the reformation had severe conflict. The
conflict between the Ministry of Posts and Telecommunications
(MPT) and the Ministry of International Trade and Industry (MITI)
stemmed from the problem of who held supervision over the Value
Added Network (VAN) service in which computer technologies play

an important role in the telecommunications network. Since MITI is

 

31Meheroo Jussawalla, "The Race for Telecommunications Technology,"

W (September 1987): 304

28

responsible for the development of computer technologies, it said the
VAN is an extension of the computer oriented information processing
system, therefore, MITI should be the prime agency for supervision
and policy making in VAN business. MITI insisted on perfect
deregulation over VAN services.

On the other hand, MPT held a different opinion. The ministry
mentioned that the VAN is an enhanced telecommunications service
which uses leased circuits, therefore, MPT should regulate this field.
For example, a permission system to start business and some
restrictions on foreign capitals to enter the market.

Both Ministries reached a compromise, adopting a notification
system in General Type 11 business and no regulation on the entry of
aliens. Moreover, the government added the provision to the
Telecommunications Business Law which says that the government
shall, within three years from the date of the enforcement of this
law, review the situation under which this law is executed, and shall
take necessary measures based upon the condition of the review.32

Thus, the integration of computer and telecommunications
technologies raised a new issue of who is a regulator and whether

the current administrative system is appropriate.

111. Impact on Information Network System (INS)

Information Network System (INS) is a same type of system

that is internationally known as Integrated Services Digital Network

 

32Telecommunications Business Law, Supplementary Provision, Article

29

(ISDN). It is anticipated that the privatization of NTT will have a
great influence on the (INS) project and implementation of its
services will be accelerated, because INS is the most powerful
weapon for NTT to cope with the age in the low economic growth and
to compete with the new carriers by differentiating its services from
others.

The concept of INS was originated and announced by NTT in
1981. INS is simply described as a nationwide communication
network system which will provide a wide range of innovative
services, including simultaneous voice and data transmission,
videotex, two-way cable television, image transfer, databases and a
variety of advanced telephone features such as voice storage and

retrieval, call recording and screening, and so forth.

.. xxx

Now Japan has 5 types of communication networks: telegraph
network, telephone and facsimile network, telex network, DDX
(Packet) network and videotex network. In most of the cases, each
type of service has been offered through its own individual network. ‘
This is because configurations and types of information are different
among the networks and individual networks have been more
economical and easier to operate. However, it is now technically
possible to handle various types of information economically in a
single form as a digital signal. From this technological development,
the concept of sharing switches and transmission lines for the
purpose of handling various kinds of information has developed. This
concept brings about the INS project.

Dr. Kitahara, former vice president of NTT, has stated that in

order for INS to develop, it is necessary to digitize the

30

telecommunications network, and to provide all kinds of
communications services efficiently and economically. This includes
such services as facsimile, data communications and visual
communications. It is also essential to establish a comprehensive
system based on the integration of computers and digitized
telecommunications networks to provide for the transmission,
storage, and processing of information.

Kitahara reasons the necessity of digitization for the

telecommunications network as follows:

1. Information suitable for digital transmission is now on
the increase.

2. Digital transmission can be performed with high
efficiency, and is more economical than analogue
transmission.

3. Signals can be standardized in pulses.

4. Digital signals allow efficient storage, conversion and
processing of information.

5. Distortion and noise phenomena are no longer related
to distance.33

In INS, communication networks suitable for each service are
designed to integrate the services into one digital network, and to
utilize optical fiber cable systems, satellite communication systems
and digital exchange systems.

INS are summarized as follows.

INS will:

 

33Yasusada Kitahara, Wm (London: Heinemann
Educational Books, 1983), p.11.

31

1. make it possible to provide every kind of service
economically through a single communications network.
2. allow users access to the network with any terminal at
any time through terminal-connecting equipment.

3. make possible communication between different kinds
of equipment providing the same service, and
interservice communications, e.g., between telex and
facsimile, through a combination of communications
processing and transmission functions.

4. provide users with access to all information available,
primarily from those in the information industry such as
data base service suppliers.

5. make available inexpensive leased circuits and
network services such as CATV.

6. provide telemetering and telecontroll services, and

7. enable the establishment of a new rational tariff
structure based on the volume of transmitted
information, which should lead to international
agreement of issues concerning interconnection and tariff
structures.34

There are several implications due to the characteristics of INS
as described above. First of all, integrated communications such as
the combination of voice, video and facsimile will help people create
more comfortable and convenient lifestyles. Secondly, because INS
services will work to solve the problem of distances and
accompanying information disparities, they will help to promote the
spread of corporate activities throughout local economies and
develop the local areas. Thirdly, investment in the terminal
equipments which are compatible to receive INS services will largely
expand domestic demands and make national economy more active.

Total investment in ISDN terminal development and network

 

34Ibid., pp. 69-71.

32

digitization is expected to top 1120 trillion ($140 billion).35 Lastly,
ISDN services will facilitate the transborder data flow via wide
variety of communications media and as a result, communication
gaps between countries could be eliminated and mutual
understanding should be further promoted.

There are several important issues to be considered regarding
INS. NTT's philosophy is to provide less expensive and more
convenient services to its customers. In order to offer inexpensive
services, Dr. Kitahara pointed out that the following issues have to be
taken into account:
1. How to continue reducing service charges to customers with timely
introduction of rapidly advancing state-of-the art technology.
2. How service differentials based on distance can be reduced as
state-of-the art technology that will minimize the impact of rates on
distance is introduced.“5

To achieve it objective of reducing service charges, NTT is
introducing a bit-based tariff structure in which charges are based
on the quantity of information sent and received. However, there is a
question, which is how NTT should deal with the tariff of
international communication ? Standardizing the tariff structure of
all countries will be impossible.

Meanwhile, a comprehensive network where people can gain

access to various services such as telephone, telegraph, data

 

35The Telecommunications Association, "Final Report by ISDN Terminal

Development Council." WW (March 1988):

3.
35Yasusada Kitahara, Wm (London: Heinemann
Educational Books, 1983), p.64.

33

communication, facsimile, etc. could be the most convenient way for
the people to receive diversified services, therefore, putting
independent networks into one comprehensive network is very
beneficial. But if some parts of the network are severely damaged by
unexpected incidents such as natural disasters or trespass by foreign
countries, how will the communication system be maintained ?
Would it be possible to find an alternative ?

Another issue I would like to mention is whether INS is
compatible with people's educational standards. In other words, is
INS easy enough to use for the public ? Because INS aims at being
utilized economically and conveniently by users, ease of use of this
system is one of the most important factors.

When NTT was a public corporation owned by the government,
INS was regarded as a national project. NT‘T has been reorganized to
be a private company, therefore, INS is said to be NTT's business
plan. The question is whether or no such a huge scale project can be
accomplished by one private company under competitive situation. It
is certain that government support is indispensable to realize such a
plan. With this regard, it makes NT‘T more difficult to be independent
from the government.

Because INS provides users with diversified services, their
communications protocols become more complex so that it will
become more difficult to assure mutual compatibility between the
network and terminals, or between terminals. Consequently,
universal standards are essential to guarantee the mutual

compatibility. This is especially true in the circumstances that

34

multiple number of carriers individually operate their own networks
and they need to be connected each other.

NTT started a basic rate access service called INS NET 64 which
provides two 64 kbps B channels and one 16 kbps D channels onto a
single subscriber loop and later, initiated a primary rate access
service with 23 B channels and one D channel, which is called INS
NET 1500. These services were introduced in April, 1988 and in June,
1989 respectively. Primary applications of those services at this
stage are GIV facsimile (Digital Fax), high speed electronic mail, video
conferencing, etc. The projected penetration rate for INS services by
the year 2000 is 70 % in business environment and over 10 % in all
households.” In order for INS services to diffuse nationwide, ISDN
terminals will play a key role. They will have to have the capabilities
to handle a wide range of attractive service offerings and at the same

time, the availability of low—cost terminals will be an essential factor.

IV. Impact on the Service.

The reformation is functioning so as to provide the customers
with diversified services at lower cost.

Tariff reduction will be seen especially in the long distance call.
NTT has used a strategy of setting the long distance telephone fare at
a relatively high rate causing the local call fare to fall below the

break-even point. According to the research by B.M.Michell, Japan

 

37The Telecommunications Association, "Final Report by ISDN Terminal

Develovmcnt Council " Wm (March 1988):
5.

35

has the most expensive long distance rate and the lowest local rate
among the developed countries. Therefore, the potential entrants in
the basic service have the opportunity of depriving the customers of
NTT's long distance service. As a result NTT will have to reduce the
tariff in that area.

Since the enactment of Telecommunications Business Law, we
could observe several new entrants providing services in Type I
telecommunications market. As of December 1989, the number of
new entrants reached 56 companies in every type of Type I
business.38 Those new common carriers called NCC are divided into
five categories.

The first category is a long distance carrier. Earlier than any
other segmented group, three organizations in this category obtained
permission to start a long distant telephone service between Tokyo
and Osaka, which is the most profitable areas.

Among these entrants, Daini-Denden Inc. (DDI) initiated very
smooth preparation. It consists of Kyosera, the main stack holder
occupying 30 percent of the shares, Sony, Secom Security Service,
Ushio Electric Company and other two hundreds companies. The
company started offering private line services in October, 1986 using
the microwave radio system along the Tokyo-Nagoya-Osaka corridor
and in September, 1987, commenced public switched telephone

service.

 

38Telecommunications Bureau, Ministry of Posts and
Telecommunications, "Current Status and Future Subjects of Telecom Business

in Japan."N.cw_Era__QLIelsmmmnnl§atinns__1n_lanan (January 1990): 2

36

Japan National Railway established the subsidiary named Japan
Telecom and entered the Type I telecommunications market by
installing an optical pathway along the Tokaido Bullet Train Route,
and started private line services in August, '86 and a long distance
telephone service in September, 'SLWJapan Telecom has the following
advantages to undertake the business.

First of all it is unnecessary to acquire the land to install the
cable because the company has already owned the land to have
constructed railway. Secondly, JNR has the largest private
telecommunications circuit owner, so it has the know-how on the
common carrier business.

As we can see the new common carriers in the US and Britain,
the railroad companies have an advantage in starting the
telecommunication business compared to the other enterprises in the
different industries. Consequently, the Japan Telecom is expected to
be able to compete with NTT in densely populated areas.

Moreover, Teleway Japan is planning to establish all the optical
fiber network along the highway linking big cities. This corporation
also has an advantage of land. The total length of Japan's road is
computed to be 1,200,000 km. If Japan Telecom constructs the circuit
on its property, the size of the network will become almost
equivalent to that of NTT, 1,800,000 km. The company, which is a
joint venture sponsored by the Ministry of Construction, Japan
Highway Public Corp, Toyota, Mitsui, Sumitomo and others initiated
leased line services using optical fiber cable along the Tomei and
Meishin Highways in November, '86. Its public switched telephone

service started in September, '87.

37

The second category is regional telephone carriers, which
consist of Tokyo Telecommunications Network Co., Inc. (TTNet) and
Lake City Cablevision.

T'I‘Net, a subsidiary of Tokyo Electric Power started a leased
line service in Nov. '86 and basic service in May, '88 within Tokyo
area.

Lake City Cablevision, originally a cable system operator which
has approximately 50000 cable subscribers in Lake Suwa area.39 The
company entered local Type I market with basic telephone service
and video transmission service.

The third category is satellite carriers, and Japan
Communications Satellite Co. (JC-SAT) and Space Communication
Corp. (SCC) fall in this group.

JC-SAT was established by C. Itoh, Mitsui & Co. and Hughes, and
started a leased line service in April, '89. using Hughes-made
satellites to cover most of the territory of Japan.

On the other hand, SCC invested by Mitsubishi group launched
two satellite manufactured by Ford Co. and commenced private line
services in July, '89.

The forth category is mobile communication carriers.

Tokyo Telemessage is one of the service providers in this
category to offer pocket bell paging service. The company started the
services in October, '87. Nihon Ido Tsushin (IDO) initiated automobile
telephone service in December, '88 using cellular transmission

system.

 

39Tadakazu Shida, Winn (Tokyo: Nihon Keizai Shimbun-
sha, 1989), p.182.

38

The last category is international carriers.

International Telecommunications Japan (ITJ) was established
by major trading firms; Mitsui, Mitsubishi, Sumitomo, etc., as core
companies, and started overseas tie line service in April, '89 and
basic telephone service in October of the year. Meanwhile,
International Digital Communication (IDC), a joint venture by C. Itoh,
Toyota, British Cable & wireless, Pacific Telesis, Merril Lynch and
others entered into the market providing same type of services in
May,\ '89.

W” These; new entrants started offering the diversified services at
over 20 % less expensive charges than the monopoly carriers to
erode their market shares. In order for the existing carriers, i.e., NTT
and KDD to compete with the new service providers, they started
introducing new services and reducing the tariffs.

A similar phenomenon . is observed in Type II
telecommunications market. W' Since enactment of the
Telecommunications Business Law in April, 1985, as of July 31, 1989,
27 companies entered Special Type 11 market and 723 carriers have
submitted notification to operate General Type 11 business.40

The Special Type II carriers include Intec Inc. technically
supported by GTE-Telenet, Japan ENS Corp. partially invested by AT
& T, Network Information Service Co., Ltd. with the capital and
technical cooperation of McDonall Douglas Corp., Intemetwork jointly

established by NTT and major computer companies, and so forth.

Moreover, communications equipment and computer manufacturers

 

401nroCom Research, Inc., ed., 111W (Tokyo: NTT
Publishing, 1989). p. 152.

39

such as NEC, Fujitsu, Hitachi and Oki are also competing in this
market segment. These companies are primarily offering such
services as packet switching and circuit switching for voice, data and
facsimile, PC communications, electronic mail and resale of leased
lines.

In General Type 11 market, a large number of carriers are
providing services such as data processing, database access, PC
communications, facsimile and so on.~It is noticeable that dozens of
foreign-affiliated companies are running business in this market
because of no limitation on entry into the Type 11 market. W

About 70 % of the companies that engage in General Type II
telecommunications business provide data transmission services.“
Typical services of the business category are:

1. to transmit and exchange data for order

placing/receiving between a retailer and a wholesaler,

2. to transmit and exchange transportation/delivery

information for parcel services, and

3. to transmit and exchange sales data between a credit

card company and its member stores.

____,—o—"‘Fr

As we can see above,W; there have been many new entrants in
this field since the revisionW of telecommunications policy in 1985.
Those new carriers are offering their services at approximately 20 %
lower than NTT or KDD. As a result, NTI‘ has had to reduce its charges

in almost every business field. Both monopoly carriers and NCCs

 

41Yusai Okuyama, "Development of Telecommunications Competition and

its Prospects in Japan. " Mundmmmmmumn (January
1987): 3.

4O

conducted charge reduction several times and as of March, '90, the

following effects are obtained:42

Telephone 30% reduction
(3 minutes daytime weekday call between Tokyo and Osaka)

Leased Circuit 44% reduction
(64 Kbit line between Tokyo and Osaka)

Pocket Pager 24% reduction
Mobile Telephone 50% reduction
International Telephone 52% reduction

(3 minutes, direct dial call from Tokyo to the US)

International Leased Circuit 55% reduction
(voice circuit between Japan and the US)

 

42"Current Status and Future Subjects of Telecom Business in Japan"

WWW (January 1990):10-11

Chapter 5
An Optimal Policy; Monopoly or Competition.

As I have mentioned so far, the government selected a policy
of competition as a partner to reach the goal of realizing highly
advanced information society. However, it is questionable whether
the competition is optimal choice because the new policy has both
positive and negative aspects. In this chapter, I would like to discuss
the advantages and disadvantages of both monopoly and
competition, evaluating the current reformation in Japan's

telecommunications.
1. Advantages of Competition.

One of the advantages of the competitive model is that
technological innovations take place as a result of competitive spirit.
Furthermoref‘profit maximization, cost efficiency and othermfactgrs
generally result in low product costs. Therefore, it is especially true
that the introduction of competition 19,192“? terminal equipment
market is very significant. For example, {telephone subscribers had to
purchase the first telephone set in theirW premises from NTT before
the deregulation, but now they become allowed to select various

kinds of equipment with a lower price from other companies.

,._ I

Demand has grown rapidly. The competition to satisfy the consumers'

’1

requirements have improved the reliability of the products and

41

42

extended the range of product lines. This argument was supported
by Langdale to say that introduction of competition in this area in
the USA has facilitated innovation and increased the range of
customer choice.43

W W Moreover, from the industrial perspective, it is very incentive

1 for electronic companies to become able to enter terminal equipment
market in order to develop themselves further because electronic
industry in Japan has already reached maturity. W1

An open door policy to the foreign enterprises could promote,~
the development of the domestic software industry. In spite of the
fact that the hardware in Japan is highly advanced nowadays, its
software is not so advanced as the U.S. Especially AT‘T, IBM and GTE-
Telenet are great threat to the domestic VAN service providers but
there is a possibility that this threat could turn to a good stimulation
for them in developing more sophisticated services. Since a dominant
service provider tends to be insensitive to the demands of the
market, a competitive model can be expected to better contribute to
the social needs.

It should be true that the competitors offer diversified services
which meet the various demands. More importantly, they play a role
to give a monopolistic carrier the threat which forces it to be more
responsible to the diversified needs and be rational in pursuing
business._ This may be proven by the fact that there had been many

inefficiencies associated with bureaucratic nature of NTT before

reformation, however, the policy of competition is operating to

 

43John Langdale, "Competition in Telecommunications,"

WW (December 1982): 260

43

stimulate the awareness of crisis among the NTT personnels after the
privatization.

Moreover, the policy of competition is likely to work so as to
develop the factors such as innovativeness and improvement of the
services and as a result, it increases the competitiveness in the
international markets. Japan's marketplace success is largely
dependent on its ability to introduce and effectively export high
technology to overseas. Thus, the promotion of international

competitive power is indispensable for the future of Japan.
11. Disadvantages of Competition.

More competition may lead to communication chaos because of
the increase of isolated and incompatible systems which can not
W. communicate to each other.“ Thus, in the competitive model, it is
very difficult to standardize the telecommunications systems. We can
observe this example in the computer industry, therein incompatible
equipment is often made as a competitive devise, so that the
standardization of the systems is almost impossible. Even in the basic
telephone service in which relatively simple technology is adopted,
although the interconnection between different networks is not a
problem technically, the users in the U.S. experienced the following

inconvenience as an extreme case. The telephone subscribers were

fed up with the lack of interconnection between ATT and

 

44I-Ians Bergendorff, Torsten Larsson and Ruben Naslund, "The

Monopoly v Competition Debate," W191 (December 1983):
298.

44

competitors' networks because many people had to equip two
telephones in order to contact all subscribers in a city.45

Thus, competition raises a number of interconnection; problems.

‘_ One of them is the interconnection between a monopoly carrierdand

/ ficompetitive gone. It is one of advantages for monopoly carrier to
restrict competitors to access to its network. This strategy is
especially effective for the business of local services.

Meanwhile, if NTT is exposed to the competition, it will be
forced to devote a tariff reduction. Although this is a positive aspect
for customers, as a result, it might become more difficult for NTT to
invest in a long term R & D. :NTT has been the most outstanding

‘ innovator in Japan's advanced technology. This fact attributes to the

governmental protection and support to NTT in telecommunications.

l
\— W
___J

For instance, NTT has delegated to develop a fifth generation WW
computer which processes information conversationally using voice
recognition. Competitors will not be able to spend huge budget in this
kind of long term technological research.

The investment in R & D is strongly related to the company's
long term viability. A telecommunications operator in a competitive
market is likely to worry about the economic result of foreseeable
years rather than long term viability. Therefore, the
telecommunications market should be regulated to a certain extent
so as to enable operators to have long term viability.

Furthermore, WE price reduction will occur only in the

\
attractive route where communication traffic is quite heavy such as

 

45 John Langdale, "Competition in Telecommunications."

W (December 1982): 288.

45

the route between Tokyo and Osaka. This is favorable for the
subscribers in those area but may possibly force the service
providers to increase prices for other customers li ing less densely
populated areas to balance the total profit margin.

Another argument is that service suppliers operating in
competition may be unable to pursue activities which do not relate to
the profit maximization. For instance, NT‘T has been offering services
such as an automatic dialing telephones with an emergency button,
an amplified receiver telephone for the hard of hearing, and a Braille
dialing plate for the blind. Despite the philosophy that basic
telecommunication services should be equally provided to everyone,
it will be difficult for the service providers in competition to offer
above mentioned services for handicapped people.

Further problem of competitive model exists in the infertility
inequity. The shift of industrialized countries into the information
economy is likely to enlarge the existing level of information
inequity. In a country like Japan of which characteristic is high
centralization, database and other information tend to be converged
in especially Tokyo and a few other big cities. Therefore, individuals
and firms located in rural area are not easily accessible to the
information and telecommunications services. Although
governmental regulation is needed to eliminate this problem, it is
very difficult for the government to regulate plural networks in a
competitive model, so that the information inequity will be further
promoted. Information inequity is the problem of not only the
opportunity or quantity to access to the information but also the

price to get the information. Clearly, the competitive entry is going to

46

concentrate in heavy traffic area such as the long distance telephone
business between large cities because the cream-skimming is the
best strategy for the potential entrants to compete with a dominant
carrier. This type of competition will result in tariff reduction only in
heavy telephone traffic areas. On the other hand, there is a fear that
in a low profit region, telecom operators in competition could go
bankrupt and cease their service as a long term consequence of
competition.

The element of the competitive model is the marketplace, if a
new form of information technology is marketable, it is accepted and
promoted, even though such a marketable technology has a power to
spread social vice. For instance, the competitive model has a
weakness in regard to the privacy issue. In the competitive model,
information policy does not occur until the market place find a need
for regulation, laws and policies regarding access to information files
will not be adopted until privacy issues result in lower profits or

considerable consumer demands for greater protection.46

IIl. Advantages of Monopoly.

A dominant service provider has an advantage that it can offer
diversified services economically in one network because it is less
costly to have different services in one network than to have parallel
networks. This is especially true in a small country such as Japan. As

a matter of fact, Japan utilized the personnels and other resources to

 

46Jerry L. Salvaggio, "Social Problems of Information Societies. The US

and Japanese Experiences," We; (September 1983): 233.

47

achieve maximum economy for establishing the existing
communication networks. The country in a competitive model
admitted this strength of monopoly with the fact that in the
negotiations of the INTELSAT arrangements, the USA strongly
advocated the monopolistic character of INTELSAT. Taking this
advantage into consideration, NTT is planning to establish INS in a
nationwide scale as explained in the former chapter.

Another great advantage of monopoly is that monopolizing
carrier is able to introduce innovations rapidly and compatibly with
existing services and systems. This is also true in ,2 small and densely
populated country like Japan. WlTIICI'CfOI'C, monopoly is likely to work
more effectively in Japan thanWWa widespread country such as the U.S.
or Canada in terms of penetration of innovations.

In countries with a public utility model in which
telecommunications services are likely to be provided by the
government controlling entity, telecommunications administrations
may find easier than others in a competitive model to agree on
internationally applicable standards. This is because they are not
tempted to resort to setting their own exclusive standards in order to
lock in customers. The networking in a worldwide basis is especially
beneficial for transnational corporations because they wish to link
their intraorganizational communication systems in order to extend
the ability of the firms to collect, store and analyze information on a
worldwide basis.

As we can see in Japan and Europe, MPT or PTT has very
strong power over telecommunications to make drastic changes

happen when a social problem is perceived. The severity of these

48

problems can be minimized because the policy making body guides
the introduction of new technology, the market place and the
information infrastructure.“ Although this strong power might
result in an unexpected failure, we can expect that it works as a

safeguard to eliminate social problems.

IV. Disadvantages of Monopoly.

Monopolized market allows a dominant service supplier to
eliminate all competition in the areas where it is exposed to
competition by using the profits from its protected markets to
subsidize activities in competitive markets. In such a case, separation
of dominant supplier's profitable sector from the parameter may be
able to solve this problem.

Bergendorff, et al. pointed out the weakness of the monopoly
existing in accessing to external sources of finance to say that there
have been cases where financial restriction on the public telecom
service provider combined with political control of its day-to-day
operations has had a detrimental effect on the development of
telecommunication.48

Furthermore, there is a tendency that monopoly carriers are
unlikely to respond adequately to the demand for business

communication services. Monopoly suppliers have traditionally

 

47Jerry L. Salvaggio, "Social Problems of Information Societies. The US

and Japanese Experiences." W1 (September 1983). 241.
48Hans Bergendorff, Torsten Larsson and Ruben Naslund, "The

Monopoly v Competition Debate," Telemmmnnjcafigwm (December 1983):
306.

49

provided a basic telephone service. However, users are increasingly
segmented in their use of communications according to size of firm
and type of industry and each user has an individualistic demand.
Monopoly carriers may be unwilling to offer services for only a small
group of users. Thus, monopoly carriers have inflexibility in
providing those services.

Considering the both positive and negative effects of the
policies, the following conclusions are regarded as a optimal policy.

It seems that at least in terms of basic telephone service, the
government should maintain a policy of NTT's monopoly. Because the
basic telephone service is highly related to the people's daily life, in
other words, this service has a strong public nature, the service must
be assured a certain quality and avoid partiality among people, i.e.,
people living in urban area and those who in rural area, or the rich
and the poor, etc.

As to the non-telephone services, a policy of competition seems
to work better, because the services are strongly related to the
business activities, therefore, we should look at an advantage of
innovative power by a competition rather than its disadvantages in
order to promote Japan's industrial development.

Although the policy of competition is introduced, it is required
for the government to control over the tariff and the elimination of

excessive competition.

Chapter 6

Conclusion.

In the former chapter, I supported a public utility model in the
basic telephone services and a competitive model in the non-
telephone services. This is because monopoly provision of services
may have been reasonable in such a field as the basic telephone
service where telecommunications technology is relatively static. On
the other hand, there is a rapid increase of telecommunications
services, many of which are derived from the growing importance of
computer-communications network. In such environment,
competitive carriers are more responsible to the diversified
demands.

Since the government adopted the policy of competition, it has
to create an environment in which the new entrants will be
protected and fostered so as to compete with a dominant entity in
order to fully utilize the benefits of competition. It is apparent that
the monopoly carrier has the resources to crush small competitors.
Thus, government regulation must restrain any unfair competitive
tactics employed by the dominant carrier and give the new entrants
a chance to develop their business.

Japan is introduced a policy of competition in both basic
services and non-telephone ones, but it seems that the ideal is a
policy mix, which will make the best use of the advantages of both

monopoly and competition, rather than going towards either one.

50

51

After the principle of competition was introduced, the
telecommunications market has become quite active, and business
volume expanded rapidly. WTherefore, it can be said that the current
stage of Japan's liberalization in this field has been basically
successful.

With regard to the media integration, INS should be a system
which will obtain social acceptance. The relationship between
technological possibility and social needs is crucial to the acceptance
of a new system in the society. For example, the development of the
telephone network was achieved based on the good balance of
technologies and social needs. W:

After the compliance to! the social needs of prevalence of the
telephone, technological feasibility has grown rapidly, so that they
have exceeded the social needs. Such technologies may become a
threat to change the pattern of human communications. Therefore,
well balanced relationship between technological capabilities and

social needs is indispensable to form the advanced information

society.

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