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This is to certify that the

thesis entitled

Telecommunication Policy and Service Development

— The Cases of the USA, the UK, and Japan -

presented by

Shingo Kimata

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M.A. degree in Telecommunication

 

 

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TELECOMMUNICATION POLICY AND SERVICE DEVELOPMENT
-THE CASES OF THE USA, THE UK, AND JAPAN-
By

Shingo Kimata

A THESIS

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

MASTER OF ARTS

Department of Telecommunication

1996

ABSTRACT
TELECOMMUNICATION POLICY AND SERVICE DEVELOPMENT
-THE CASES OF THE USA, THE UK, AND JAPAN-
By

Shingo Kimata

The USA, the UK, and Japan have one of the most advanced telecommunication
services and networks in the world. At the same time, however, the service development
of each country shows some of the characteristics unique to each one. This thesis
examines their telecommunication policies in the 1980s and early 19903, as well as their
telecommunication service development, and analyzes how policy factors are related to the
service development. Policy is analyzed in terms of structure and price policy. Also, four
service categories, such as basic telephone service, ISDN, Videotex, and Data and Valued
Added Service development are examined. This thesis uses a case study method, referring
mainly to existing secondary sources. In the general findings, the policy differences among
the countries and several policy factors which influenced the service development are

clarified.

 

 

Copyn'g
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1996

Copyright by
SI-IINGO KIMATA
l 996

To Chi;

To Chizuru and Sakura

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ACKNOWLEDGMENTS

The completion of this master thesis would not have been possible without the
guidance, cooperation, and encouragement of many.

My gratitude goes especially to the three members of my thesis committee- Dr.
Thomas Muth, Dr. Johannes Bauer, and Professor Ronald Choura. Dr. Muth guided me
through the telecommunication policy field, oversaw the administrative procedures, and
gave me encouragement. Dr. Bauer introduced me the theoretical framework of
telecommunication policy analysis. Professor Choura provided me with the latest
information concerning telecommunication policy and the service world.

Also, I would like to thank Dr. Helen Draper. She has assisted me in improving my
academic English skills during my study for the master degree.
Finally, I thank my partner-in-life, Chizuru, for her ceaseless encouragement and

understanding.

 

 

List of

List 0'

Chapt
Mod
1.1 In
1.2 R.
1.3 L;
1.4 R

Telec

TABLE OF CONTENTS

Pages
List of Tables ........................................................................................ x
List of Figures ...................................................................................... xii
Chapter 1
Introduction & Framework of the Study .............................................. 1
1.1 Introduction .................................................................................... 1
1.2 Research questions ......................................................................... 3
1.3 Literature review ............................................................................ 5
1.4 Research Method & Procedure ....................................................... 8
Chapter 2
Telecommunication Policy in the US ..................................................... 10
2.1 Historical Review ............................................................................ 10
2.2 Structure policy ............................................................................... 12
2.3 Price policy ..................................................................................... 15
Chapter 3
Telecommunication Policy in the UK ..................................................... 18
3.1 Historical Review ............................................................................ l8

 

 

Chapt
Basic
5.1 L’
5.1.1
5.1.2
5.1.3
5.1.4
5.1.5
5.2 1}
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5,3 12
5.3.1
5.32

3.2 Structure policy ............................................................................... 20

3.3 Price policy ..................................................................................... 22
Chapter 4

Telecommunication Policy in Japan ........................................................ 25
4.1 Historical Review ............................................................................. 25
4.2 Structure policy ............................................................................... 28
4.3 Price policy ...................................................................................... 30
Chapter 5

Basic Telephone Service ......................................................................... 33
5.1 USA ................................................................................................. 33
5.1.1 Telecommunication Market ........................................................... 34
5.1.2 Rates ............................................................................................. 34
5.1.3 Quality of Service .......................................................................... 37
5.1.4 Traffic ............................................................................................ 40
5.1.5 Summary -policy and service- ......................................................... 41
5.2 UK .................................................................................................... 42
5.2.1 Telecommunication Market ............................................................ 42
5.2.2 Rates .............................................................................................. 42
5.2.3 Quality of Service ........................................................................... 44
5.2.4 Traffic ............................................................................................. 46
5.2.5 Summary -policy and service- .......................................................... 47
5.3 Japan ................................................................................................. 48
5.3.1 Telecommunication Market ............................................................. 48
5.3.2 Rates ............................................................................................... 48

 

 

 

 

 

 

5.3.3 "
5.3.4 i
5.3.5

 

Chapt
ISDN
6.1 L’.
6.1.1

6.1.2 1

Chap
Vide:
7.1 L
7.1.1
7.1.2
7.2 L
7.2_1
7.2.2
73 J;
7.3.1

5.3.3 Quality of Service ............................................................................. 49

5.3.4 Traffic .............................................................................................. 50
5.3.5 Summary -policy and service- ........................................................... 51
Chapter 6

ISDN ......................................................................................................... 53
6.1 US ...................................................................................................... 53
6.1.1 ISDN Development in the US ........................................................... 53
6.1.2 Structure Policy and ISDN ................................................................ 54
6.1.3 Price Policy and ISDN ....................................................................... 57
6.2 UK ....................................................................................................... 58
6.2.1 ISDN Development in the UK ........................................................... 58
6.2.2 Policy and ISDN ................................................................................ 60
6.3 Japan .................................................................................................... 61
6.3.1 ISDN Development in the US ............................................................ 61
6.3.2 Policy and ISDN ................................................................................ 63
Chapter 7

Videotex ..................................................................................................... 65
7.1 US ........................................................................................................ 65
7.1.1 Videotex Development in the US ....................................................... 65
7.1.2 Policy and Videotex ........................................................................... 68
7.2 UK ....................................................................................................... 69
7.2.1 Videotex Development in the UK ....................................................... 69
7.2.2 Policy and Videotex ............................................................................ 70
7.3 Japan ..................................................................................................... 71
7.3.1 Videotex Development in Japan .......................................................... 71

7.3.2 Policy and Videotex ............................................................................ 73

Chapter 8

Data and Value Added Services ................................................................... 75
8.1 US ......................................................................................................... 76
8.1.1 Data and Value Added Services Development in the US ..................... 76
8.1.2 Policy and Data and Value Added Services .......................................... 80
8.2 UK ......................................................................................................... 82
8.2.1 Data and Value Added Services development in the UK ....................... 82
8.2.2 Policy and Data and Value Added Service ............................................ 85
8.3 Japan ...................................................................................................... 87
8.3.1 Data and Value Added Services development in Japan ......................... 87
8.3.2 Policy and Data and Value Added Services .......................................... 90
Chapter 9

Summary & Conclusion ................................................................................ 92
9.1 General Summary ................................................................................... 92
9.2 Research Questions & Answers ............................................................. 102
9.3 Future Policy Implications ..................................................................... 107
Chapter 10

Recommendation for Future Research .......................................................... 115
Bibliography ................................................................................................. 1 17

 

Table
Tablt
Table
Table
Tablc
Tabl<
Table
Tablc
Table
Tablc
Tabli
Tabl<
Table
Tabl.
Tabl.
Tab}.
Tab].
Tabl.
Tabi.
Tab].

LIST OF TABLES

Table 1: Public telecommunication revenue ..................................................... 34
Table 2: Summary of US price changes, 1980-1992 ........................................ 35
Table 3: Quality Of service in the United States ............................................... 39
Table 4: US traffic Growth (increased over previous year %) .......................... 41
Table 5: Index of BT’s price changes adjusted for inflation .............................. 43
Table 6: Service quality in the UK ................................................................... 44
Table 7: Quality of Service in the UK .............................................................. 45
Table 8: Quality of servicezfault incidence and repair time, 1992 ...................... 45
Table 9: Growth rate in telephone call volumes over the previous year ............. 46
Table 10: Telephone service Revenue in Japan ................................................. 48
Table 11: Rate Reductions in Long distance telephone service ......................... 49
Table 12: Quality of service: Fault incidence and repair time, 1992 .................. 50
Table 13: Waiting time for telephone line installation, 1980-90 ........................ 50
Table 14: National Traffic (long distance + Local) ........................................... 51
Table 15: National traffic and network utilization ............................................ 51
Table 16: Installed ISDN lines as of January 1, 1991 ........................................ 59
Table 17: Number of ISDN subscriber lines ...................................................... 61
Table 18: The US Online Service Market 1990 ................................................. 67
Table 19: Growth in Subscribers for Selected Services ...................................... 67
Table 20: Prestel Development ......................................................................... 70

 

 

 

 

 

Table
TableI
Table
Table

Table
Table
Table
Table
Table

 

Table 21: Diffusion of Videotex .......................................................................... 70
Table 22: Number of CAPTAIN subscribers ....................................................... 73
Table 23: OECD basket of leased line charges, January 1994 .............................. 84

Table 24: OECD basket of packet switched data communication

charges, January 1994 ....................................................................... 85
Table 25: Market Size ......................................................................................... 88
Table 26: Number of Type II carrier .................................................................... 88
Table 27: Subscribers of leased circuit (General) ................................................. 89
Table 28: Subribers of leased circuit (High Speed Digital) ................................... 89
Table 29: NTT Packet Service subscribers ........................................................... 90

 

 

 

 

Figt
Figi
Fig
Fig

LIST OF FIGURES

Figure 1: Structure Policy in the USA, the UK, and Japan ................................ 103
Figure 2: Possible Effects of Structure Policy on Service Development .............. 103
Figure 3: Price Policy in the USA, the UK, and Japan ....................................... 105
Figure 4: Possible Effects of Price Policy on Service Development ................... 107

 

1.1 I

 

 

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Chapter 1

Introduction & Framework of the Study

1.1 Introduction

The USA, the UK, and Japan are the countries which introduced telecommunication
deregulation policy in the 19803. The US, which had already gradually opened its
telecommunication market in the advanced form, experienced further drastic structural
change within the telecommunication industry in the Modified Final Judgment. Also, in the
1980s, both the UK and Japan introduced liberalization in the telecommunications market
and, as a result, privatized their national Public Telephone Operators, British Telecom
(BT) and Nippon Telegraph and Telephone (NTT). Thus, through these policies, these
three countries changed their telecommunication industry structure and made the market
more competitive. Now these countries have competitive telecommunication markets and
advanced telecommunication networks and services. Telephone users in these countries
have experienced drastic decreases in telephone rates and also have enjoyed more
diversified services.

However, the development of telecommunication service markets in those countries
also show differences. For example, in the business market, the USA has more diversified
data communication services such as SMDS (Switched Multimegabit Digital Service) than

the other countries, but ISDN in the US has been less successful than in the UK and

2

Japan. Also, in the residential market, the USA has enjoyed more diversified services than
Japan, such as Customer Local Access Signaling Services (CLASS).1

Although those differences may come from several factors, such as economic factors,
technological forces, or the cultural background, policy, which define the legal and
institutional framework of the industry and market have had a significant influence on
service development. Therefore, in this thesis, I will attempt to investigate the relationship
between policy and service development.

Thus, part of this investigation will be an examination of the telecommunication
policy in the 19803 and early 19903, and telecommunication service development within
the three countries mentioned, the USA, the UK and Japan. A3 a result of such
examination, this thesis has significance in the following three points: (1) comparative
analyses of the performance of the telecommunication sector usually rely on aggregate
numbers such as penetration rates, and telephone rates. However, in order to examine the
effect of policy, we need to analyze more specific services since the relationship between
policy and service development has not been investigated in detail, yet; (2) even if a great
deal of study about the telecommunication reform policy in the 19803 among the three
nations exists, not much is available about the comparison of the performance of these
reforms2 ; (3) because, now, policy makers in those countries are working on a new
telecommunication policy for a more competitive and broadband network era, it is

meaningful to review the relationship between the past policies and service development.

 

1 Selective calling, caller ID, automatic callback, etc are the examples of CLASS.

2 Some international organizations, such as OECD and ITU, study the international telecommunication
policy and development.

1.2 Research Questions

Telecommunication service development is influenced by several factors such as
technical improvements, the regulatory policy scheme, the strategies of telecommunication
companies, user demand and social background, etc. Bouwman and Latzer (1994)
grouped these factors into four categories to explain the diffusion pattern of
telecommunication network based services3: technological factors, economic factors,
political factors, and social and cultural factors. These four factors not only influence the
form of service development but also co-relate with each other.

In this thesis, the role of political factors, especially policy factors, in service
development is the main focus. Among these four factors, policy factors make the
framework of the service market and shape the players behavior and performance. Even if
it is difficult to isolate the effect of a policy from the effects of the other factors, some
significant relationship can be seen in service development.

Although the term “policy factors” has several aspects such as regulatory policy,
industrial policy, etc., Noll, R. (1989) pointed out two categories of regulation as the
enduring issue of telecommunication policy. They refer to the two classes of policy
instruments: prices and structure. By price regulation, regulatory agencies examine and
decide the price setting and scheme. For example, the Ministry of Posts and

Telecommunication (MPT) in Japan strictly regulates the prices of telecommunication

 

3 Network-based services (IN S) is defined as all services that combine information production,
manipulation, storage and/or distribution, with the use of telecommunication facilities and software
functions (Bouwman & Latzer, 1994). For more detailed information about TNS, refer to OECD (1989)
and Mansell (1988).

 

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services through the rate of return regulation. Also, Structure policy is a regulatory
scheme which designs the market structure of regulated industry (Okuno & Suzumura,
1993). For example, the MFJ decided upon the separation between the local market and
the long distance market by breaking up AT&T. Also, after 1984, the UK government
chose a duopoly structure by giving licenses only to BT and Mercury. These are the
examples of structure regulation. Thus, the main focus of the paper is to investigate how
these price and structure policies have been formed in the 19803 and early 19903 and how
they related to telecommunication service development.

Also, the term. “service development” can include a variety of telecommunication
services, ranging from basic PSTN (public switched telephone network) services to
broadband multimedia typed services. Although it is desirable to investigate as many
services as possible because the services have their own technical and social context, it is
still valuable to examine selected services. Thus, this thesis will focus mainly on the case of
four services: basic telephone service, Integrated Services Digital Networks (ISDN),
Videotex, and Data and Value Added Services.

Consequently, this thesis addresses the following specified research questions: l-a)
how has structural policy in these three countries been formed in the 19803 and early
19903? l-b) what structural differences exist among the three countries? l-c) how has
structural policy been related to telecommunication service development among the three
countries? 2-a) how has price regulation in these countries been formed in the 19803 and

early 19903? 2-b) what differences in price regulation may exist among the three

countries? 2-c) how has price regulation been related to telecommunication service

development? 3) What are the future policy implications?

1.3 Literature Review

Little comprehensive research has been done yet regarding the relationship between
telecommunication policy and service development. Mansell (198 8) introduced the
concept of telecommunication network-based service (TNS) and suggested the
importance of policy aspect for TNS development. OECD (1988) presents more detail
examination of policy framework for TNS development by using the international
comparative method. Recently, Mansell (1993) explored the consequences of policy
decisions and design choices in the creation of intelligent networks with the international
perspectives.

Also, this thesis will use international comparative framework. Snow’s (1986)
introductory chapter sets forth the conceptual and methodological background for the
international comparative approach. Jussawalla (1993) also discusses the impact of
telecommunication reforms in the 19803 on national and international markets in
industrialized countries. Bemt & Weiss (1993) clearly explain the comparative framework
of international telecommunication although the book was written mainly for professional
use. In addition, the OECD publishes annually statistics about the telecommunication
environment in OECD countries, and it provides valuable information for the comparison.

Although this thesis does not intend to investigate the theory of regulation itself, it is

important to initially understand the theory of regulation. Since the telecommunication

industry has been regulated historically, a great number of economics and public policy
studies about regulation, in addition to pure economic theory of regulation, are available.
In terms of the economic theory of regulation, Spulber (1990) and J oskow and N011, R.,
(1977) provide a clear framework of regulation and market. Nowotny et a1 (1989) provide
overall framework of the public utility regulation. Also, in the field of telecommunication
regulation, Noam (1983) collected a volume of essays concerning the telecommunication
regulation.

Since the thesis will focus more on application of regulation and regulatory activity,
the regulatory schemes and activities among the three countries need to be examined.
Concerning the US telecommunication policy, a great deal of research has been done.
Among them, Bolter et a1 ( 1990) provide a basic framework of analyzing the US
telecommunication policy. Also, Brock (1994) argues about the transformation of the US
telecommunication policy which moves toward alternatives to the Divestiture model.

Also, literature regarding the UK telecommunication regulation can be found in some
amount. Vickers and Yarrow (1988) present basic framework of the UK policy. Beesley
and Laidlaw (1989) review and assess role of competition in the UK Policy. In addition,
Joscher (1986) and Wigglesworth and Barnes (1992) overview telecommunication
liberalization and regulation in the UK.

Although some research concerning Japanese telecommunication regulation had been
conducted, the theoretical research was not investigated enough until around 1990
(Hayashi,K. 1994). The discussion tended to focus on management issues of NTT such as

management inefficiency. Few in—depth discussions from a theoretical perspective such as

economics and public policy were done.4 However, recently some significant research has
been conducted mainly by economics scholars. Okuno et a1 (1993), Hayashi,T & Matsuura
(1992), and Hayashi,T. (1994) present an in—depth analysis about Japanese
telecommunication regulation from economics perspectives. Basically, while they evaluate
the results of Japanese telecommunication reform policy positively, they point out the lack
of a clear policy standard in the MPT’s telecommunication policy.

Compared with policy literature, not much theoretical analysis about the service
development exists. Because some basic but important data are occupied by the industry,
it is difficult to get access data. We need to depend on either public data, which are
published by the government or trade magazines such as “Telephony” and
‘Telecommunications”.

Concerning the US service market, Cole (1991) and Crandall (1991) presented an
examination of the effect of AT&T divestitures on service markets. Basically, they
evaluated its effects positively. Noll, M., A. did various researches on the impact of the
divestiture on R&D activities and long distance telephone rates (1987, 1991, 1994). He
emphasizes less the impact of divestiture and emphasizes more the forces of productivity
and market demand.

The data of the UK market is especially hard to obtain for both geographical and
material reasons. Some information only can be gained from the secondary sources such as

Beesley and Laidlaw (1989) and Ide (1994a).

 

4 Only exception is Nambu (1985). He firstly introduced the economics analysis of telecommunication
industry in Japan.

The literature concerning the Japanese telecommunication market also is limited.
Among academic literature, Nagai (1994b) only overviewed the service market. Japan’s
MPT published the “White Paper” annually, which is the only and most reliable data
source of the Japanese telecommunications market. Also, a biweekly trade press “Nikkei

Communications” presents useful market information.

1.4 Research Method and Procedure

Overall, this thesis is a case study regarding telecommunication policy, service
development, and their relationship, using mainly existing secondary sources (Majchrzak,
1984). By an empirical analysis of telecommunication policy and the development of
telecommunication services, this thesis will make clear the relationship between
telecommunication regulation and services development. It will proceed in its analysis
using the following steps:

Following the introduction chapter, chapter 2, 3, and 4 reviewed the regulation policy
in the 19803 and early 19903 in the USA, the UK, and Japan, selectively. The discussion
focuses on the regulatory schemes in terms of structural and price regulation. Here, each
country's characteristics of the regulatory scheme design and the differences among the
countries will be investigated.

In chapter 5, 6, 7 and 8, the development of service market in the three countries will
be examined. The development of basic telephone services, ISDN, Videotex, and Data and
Value Added services will be studied empirically. In terms of basic telephone services, the

rates, service quality and traffic will be used as the indicators for analysis. ISDN and

Videotex development will be investigated by deployment rates. Also, data and value
added services are examined in terms of service diversity and rates.

In chapter 9, the conclusion chapter, the results of the research will be summarized,
first. Following that, the answers to the research questions are presented. Furthermore, the
policy implications for future service development will be explored.

Finally, chapter 10 presents recommendations for future research.

Chapter 2

Telecommunication Policy in the United States

In this section, the telecommunication policy in the US in the 19803 and early 19903
are examined. First, the policy since 19803 is reviewed, and then, structure and price

policies are overviewed.

2.1 Historical Review

The US has a unique policy history as one of a few nations which has a private
telephone system. The telephone companies have been regulated by both state and federal
agencies. At the state level, public service (utilities) commissions regulate intra-state
telephone service, and have granted local telephone companies a monopoly franchise in a
geographically defined area of operation. At the federal level, the Federal Communication
Commission (FCC) regulates inter-state telephone service, which for years dominated by
the American Telephone and Telegraph (AT&T) company. AT&T had a monopoly on
long distance service and controlled 80% of the local access line through Bell Operating
Companies. The remaining access lines are provided by about one thousand three hundred
independent companies (Bemt & Weiss, 1993).

In the history of US telecommunication policy, the consent decree in 1982 and the
resulting AT&T’s divestiture in 1984 are regarded as the big turning points, although
some deregulation policy in the field of Customer Premise Equipment (CPE) and private

lines, etc. had already begun in the US before the consent decree.

10

11

In 1982, the US. Department of Justice reached an agreement with AT&T on the
terms of modification of the 1956 AT&T consent decree. After the modification of the
agreement by Judge Harold H. Greene of the US. District Court for the District of
Columbia, the Modification of Final Judgment (MFJ) was accepted by the parties and the
antitrust suit was subsequently dismissed in 1982.

The MFJ broke up the Bell system on January 1, 1984, and it created seven Regional
Bell Operating Companies (RBOCs) and a smaller AT&T. AT&T was freed from the
restrains of the 1956 consent decree. In addition, the RBOCs were allowed to operate
subject to the line of business restrictions on the markets in which they could lawfully
operate. Bell companies were permitted by the MFJ decree to offer only exchange or other
basic services, such as information access, yellow pages directories, and provision of
Customer Premise Equipment (Bolter et al, 1990). The divested AT&T is approximately
one-fifth its original size, but RBOCs continue to provide local telephone services to 80%
of the nation’s telephone access lines.

The FCC proceeded its pro-competitive policy further, after the divestiture. Through
several so-called computer inquiry decisions, AT&T and the RBOCs were permitted to
enter new and unregulated markets, such as data processing and computer fields.

Also, FCC rules require that AT&T and the RBOCs provide open network architecture
or comparably efficient interconnection to ensure that competitive services vendors have

access to a bottleneck facility (Crandall, 1991).

12

Further, FCC decided to change the way regulated companies can earn profits from
the rate of return regulation to one of price caps. In 1989, the FCC ratified a price cap
regulation for AT&T, and is proposing similar regulation for local telecos (Brock, 1994).

At the state level, rapid policy change also occurred after the divestiture (Bolter et a1,
1990). Many states have begun to move toward a more competitive market approach. For
example, although most intrastate toll and local exchange service remained tightly
regulated, some states have even begun to experiment with new regulatory approaches,
such as price caps.

In summary, the US telecommunication policy in the 19803 and early 19903 are in a
transition period from regulated industry to a more competitive liberalized market. Also,
currently discussed new telecommunication bill will be a comer stone of
telecommunication reform in the US.5 In the next two sections, more detailed policy

issues, price and structure, are explained.

2.2 Structure Policy
In terms of the US telecommunication service development, the MFJ and FCC’s
computer inquires, which were mentioned briefly in the previous section, have played an
important role.
The consent decree created a line of business restriction on seven new Regional Bell
Operating Companies (RBOCs). First, the RBOCs were allowed to operate in the markets

in which they could lawfully operate. Bell companies were permitted by the MFJ decree to

 

5 This bill was enacted in February, 1996.

13

offer only exchange or other basic services (Bolter et a1, 1990). Local exchange services
were defined as that portion of a call that remains within geographical regions called Local
Access Transport Areas (LATAs). RBOCs are only permitted to carry traffic within
LATAs, and must hand off any inter—LATA traffic to long distance carriers such as
AT&T, MCI, and SPRINT.

The first issue of the MFJ is geographical restriction on telecommunication service
market. Because this restriction permitted the RBOCs do business only in their business
area, the network development in the national level might not work well.
Telecommunication is valuable only when the transmission is available from end to end.
Future service which does not have a precise technical standard will only be available in
the same RBOC service area. Also, the service provision would depend on the area.
Because the US has such large geographical coverage, in the future asymmetrical
development of telecommunication service between the heavy populated region and rural
oriented region would be possible.

The second restriction on RBOCs is the line of business restriction. The MFJ
prohibited the RBOCs from 1) entering into long distance services, 2) engaging in any
manufacturing activities, and 3) offering any information services in which they would
function as content providers. Among them, the restriction on information business could
have an effect on the telecommunication service development.

Since the divestiture, the RBOCs have sought to weaken the restrictions placed upon
activities by assurers of wavier requests and appeals. Also, the Justice Department

changed its initial standing to loosen the restrictions more (Brock, 1994). In 1988, Judge

14

Greene permitted the RBOCs to offer gateway services although they could not offer their
own content. Then, after a federal court of appeals questioned Greene’s maintenance of
the information services restriction on the RBOCs, he lifted the restriction in the summer
of199l.

Another framework of structure of telecommunication market is the FCC’ 3 computer
inquires. In three major inquires, the FCC has attempted to define the conditions under
which regulated common carriers could provide unregulated, “enhanced’ services
(Steinfield, 1992). In computer inquiry I (1971), the FCC decided that common carriers
desiring to provide data processing services to persons could do so only through
completely its separate affiliates (DataPro, 1993a, 1020).

In computer inquiry 11 (1980), the FCC attempted to establish two classes of service:
“basic” and “enhanced” (Datapro, 1993a). “Basic services” were defined as those services
providing only for movement of information, by whatever means. These included
computer-controlled transport, such as packet switching. Basic services would remain
subject to regulation by the FCC. “Enhanced services” were those services providing
anything beyond basic transportation, such that the information reaching its destination
would be different, additional, or restructured, in comparison to the information sent by
the source. The FCC ruled that AT&T, and the divided RBOCs could only offer enhanced
service by a structurally separate subsidiary and that all existing enhanced services were
detariffed.

In the third computer inquiry, the FCC decided to eliminate the structural safeguards

approach, and proposed Open Network Architecture (ONA) and cost allocation rules.

15

Especially, DNA is important because it required carriers unbundle their network services
and offer basic service elements to information providers on a tariffed basis.
These policies play an significant role in the development of enhanced
telecommunications services such as VAN s and data communications, etc.
In summary, the removal of the MFJ information services restriction and the
implementation of the FCC’s Computer III framework eliminated the “MFJ model” of

structural separation between competitive and monopoly services (Brock, 1994).

2.3 Price Policy

The growth of telecommunication service is strongly influenced by price structures.
Pricing policies can encourage or discourage competitive entry. They can create incentives
or disincentives for service provider to offer the telecommunication service (OECD,
1989).

Traditionally, the rate of return regulation was used for pricing telecommunication
service. However, because the rate of return regulation method was developed for
monopoly public utilities, it does not fit in the competitive environment. Thus, the
alternatives have been designed and applied since the late 19803.

At the intrastate level, a number of major alternatives to the rate of return regulation
have been developed since the late 19803. Among them, price cap methods, price
stabilization schemes, and earning sharing schemes are examples (Greenstein et als, 1995).

Under the price cap plan, local exchange rates may only be changed on a

predetermined index. A ceiling on an overall rate of return established under traditional

16

regulation would be abandoned. Also the plan usually includes requirements for high
service quality, and public access to a complement mechanism at the regulatory
commissions. I

Under the price stabilization schemes, the carrier is required to keep the prices of its
noncompetitive services capped at a certain level for a certain period of time (Greenstein
et als, 1995). These plans usually are called “social contract” because they are
arrangements between the state commission and the regulated company. By 1993,
approximately 20 states had adopted price regulation, which includes both price cap
regulation and price stability regulation, (Greenstein et a1, 1995).

The earning sharing scheme requires that commissions continue to establish rates of
return for regulated carriers, but permits the latter to share earnings that exceed
authorized levels with rate payers. Therefore, earning sharing schemes are profit
regulation, and require regulators to monitor the company’s profitability on a continuous
basis (Greenstein et a1, 1995). The similar schemes are combination of price regulation and
earning sharing schemes. By 1993, almost 30 states had introduced earning sharing
schemes (Greenstein et a1, 1995).5

At the interstate level, price cap regulation was introduced in 1989 for AT&T, instead
of the traditional rate of return regulation. AT&T’s services are divided into three
“baskets”; each basket index is to be individually capped. Each basket index level is
permitted to increase by an inflation index less 3% for the expected productivity

improvement (Einhorn, 1991, p7). Price caps allow telephone companies to earn higher

 

5 Many states implemented their regulatory schemes on a firm-by-firm basis. Only a small number of
states have taken a statewide approach (Greenstein, 1995).

l7

rates of return as long as tariffs stay within price cap boundaries, lessening the amount of
regulation to which dominant carriers are subjected. FCC believes that price caps will
allow telcos to realize significant savings, which it turn will be passed on to users.

Several influences of the pricing scheme on telecommunication service development
are possible. The particular problem of the u-aditional rate of return regulation is the so-
called Averch-Johnson effect. The rate of return regulation has the incentives to overbuild
capital because that increases the allowed total profit (Brock, 1994). If this theory is
correct, the rate of return regulation might give telecommunication service providers the
incentive to develop more services.7 Price caps also can provide carriers the incentives to
cut costs and innovate. Price caps provide the regulated firm with some amount of pricing
flexibility and “such pricing flexibility would allow the firm to rebalance its prices to
increase the usage of price sensitive service segments, to appropriately price and introduce
new products” (Greenstein et a1, 1995, 191).

The implication of incentive regulation (profit sharing scheme) for service market is
not clear because it depends on the underlying economic conditions facing the company,
the nature of the rate of return bands, the actual sharing arrangements, and the periodicity
of the profit computation (Greenstein et a1, 1995).

Also, the rate stabilization scheme has some disadvantages, compared with a price
cap scheme. Rate stabilization scheme does not have the flexibility of pricing, while the
price cap scheme can change its price in a flexible way. Thus, the implication of rate

stabilization schemes for service market is not clear, either.

 

7 Some scholar maintain Averch-Jonson approach is not correct (Greenstein, S et a], 1995).

Chapter 3

Telecommunication Policy in the United Kingdom

3.1 Historical Review

The liberalization of the UK telecommunication has taken place under conservative
governments, initially led by Margaret Thatcher, and now by John Major. The
liberalization of telecommunication began with the British Telecommunication Act of
1981. This act has significant meanings in these two aspects (Vickers et a1, 1988). First,
until 1981, telecommunications in Britain were the responsibility of the Post Office, a
state-owned monopoly, but the act established British Telecommunications (BT) as a
public corporation separate from the Post Office. Second, competition in the Customer
Premise Equipment (CPE) market, network operation, and the provision of services were
granted. It also established new responsibilities for the British standard institute (BSI), and
set up a subsidiary of the British electrotechnical approvals board, the British approval
board for telecommunication (BABT). The 1981 act, therefore, opened the way to
competition even if it was to a limited degree.

In 1982, the Mercury consortium received a license to build and operate an
independent network. Mercury was established as a joint venture of Cable and Wireless,
British petroleum and Barclay Bank (Joscher, 1986).

In 1983, duopoly policy was designed by the government. The government
announced an intention not to license further competitors at least until 1990. (A third

public telecommunications operator, the Kingston upon Hill City Council runs its local

18

19

network. However, it does not have significant influence.) The reasons that this duopoly
policy was adopted were: 1) to protect Mercury from the other competitive operators in
order to keep effective competition between Mercury and BT, 2) to promote
interconnection with Mercury (Ide, 1994a).

A second bill which was introduced in 1982 received Royal Assent in 1984 (Bemt &
Weiss, 1994). This Telecommunications Act 1984 established a basic framework of the
UK telecommunication. The importance of this act can be summarized in the following
four points. First, it initiated privatization of British Telecom. BT privatization occurred in
1984 through a public stock offering in which 51 percent of the company was sold for
about 4 billion pounds. BT was split from the PT'I‘ and was granted a license to operate.
Second, it established a licensing system. The act allows any person or company with a
license to operate telecommunication in the UK. Third, the government created the office
of telecommunications (Oftel). Oftel is a non-ministerial government department that has
the authority to make recommendations regarding rates. Oftel also ensures that licenses
meet their obligations and works to promote competition and consumer interests. Oftel is
headed by the Director General of Telecommunications. Finally, as part of the 1984
restructuring of British telecommunications, British policy makers adopted an incentive
regulatory scheme known as price caps.

From 1985 through 1990, policies of further liberalization were introduced: BT-
Mercury interconnection was determined by Department of Trade and Industry (DTI) in
1985, the government provided licensing for value added data services and resale of

international leased capacity (1987), the new BSGL (Branch System General License)

20

permits business users to resell leased capacity on their private networks for telephony
(1987), and simple resell was permitted (1989) (Datapro, 1993b).

The duopoly policy was slated for review in 1990. The advisory document called
“Competition for choice: Telecommunications Policy for the 19903” called for discussion
regarding broad-based changes to regulatory environment. It also called for the end of the
duopoly policy and replacement of that approach with the extensive liberalization, which
would introduce competition into all areas of the network: local, long distance, and
international (Bemt & Weiss, 1994).

Currently, the UK enjoys one of the most competitive telecommunications market.
Public telephone operator (PTO) licenses are given to 23 operators. A130, 125 broadband
cable TV licenses are issued and among them, 64 operators are offering telephony service

(Datapro, 1993b).

3.2 Structure Policy
In terms of the UK telecommunication market structure, duopoly policy played an
important role.
From 1983 to 1991, the UK government took the duopoly policy. Concern over how
a privatized telecommunications company would be constrained to act in the public
interest produced rapid changes in regulation. The duopoly policy was one of the results
(Beesley et a1, 1989). The UK government decided not to license any more network
competitors at least until 1990, and further entry into the voice telephony market has been

severely restricted. Voice telephony services must be provided in conjunction with BT or

21

Mercury. The dominant position inherited by BT means that Mercury and BT operate in a
highly asymmetric duopoly that is immune to entry for time being (Vickers et a1, 1988).

Beesley et a1 (1989) point out the reasons of restricting entry to create duopoly
market structure. First, it allowed Mercury to reap rewards from the considerable
investment in a national public telecommunication network that will be required of it under
a license very similar to that proposed for BT. Second, it gave BT time to adjust its
organization and services towards a competitive future. Third, it husbanded scare radio
resources. Finally, it prevented disruption of the environment by having a number of
operators installing cables in the same area.

However, the purpose of duopoly did not work as the policy makers intended. The
prospects for the competition in the longer run are not so clear. Vickers et a1 (1988, 230)
maintained that conditions in the regulated duopoly are very favorable to peaceful
Coexistence. No more entrants would be licensed at least until the 19903, and there would
be some lag after that before any licensed new entrant could become fully operational. The
two companies would be in a long-running relationship that would be protected from entry
at least for some years. As Vickers et a1 (1988) point out, “they have much to gain from
peaceful coexistence. If and when entry is allowed, new firms will face an entrenched
duopoly” (230).

The UK government reviewed its duopoly policy in 1990 and decided to change its
policy to more competitive liberalization. It licenses new fixed network operators without
formal limit. It has also licensed the unlimited self provision of circuits for private

networks (Weigglesworth & Barnes, 1992). The UK are “moving away from the previous

22

state of highly managed network competition, with regulatory decisions deciding the rate
of entry for new competitors, toward a more open form of competition- when the general
conditions are set and anyone can enter the market on these terms” (W eigglesworth &
Barnes, 1992, p.723).

The questions in terms of telecommunication service development is how the
structural regulation affected the service development. Did duopoly structure increase
competition and lead to better service quality? Did duopoly policy encourage the
development of new network services like ISDN? These questions are examined in a later

chapter.

3.3 Price Policy

In the UK, after a hot discussion of new pricing scheme, price cap regulation was
introduced in 1984 when DTI issued a license to BT (Vickers et a1, 1988). Under the price
cap regulation, regulated firms can set any price which is less than what the formula
decides. The formula is given as “RPI (Retail Price Index)-X”. The idea that price control
should be confined to restructuring the overall level of prices of services supplied by BT
under monopoly conditions.

The BT license deals with the price controls on certain of BT’s services. For a five
year-period the price of an index of BT’s services must not increase in any year by more
than the rate of retail price inflation minus 3 percent (Vickers et a1, 1988).

The price cap regulation is expected to have several advantages for both regulators

and regulated firms (Beesley et a1, 1989). First, by setting an overall limit on the rate of

23

increase of tariffs for voice telephony services, the need for detailed intervention on prices
and profits was removed. Second, by avoiding controls on individual prices, tariff
rebalancing could continue without resulting in a net increase in the real cost of using the
telephone. Third, by linking the price control regime to major extensions of competition,
substantial incentives were set up for BT to adopt a more commercial approach to the
provision of services.

However, a price cap regulation also has some shortcomings. Those are that 1) it
might create incentives for the regulated firm to reduce the quality of service and, thus,
require additional measures of quality regulation; 2) price caps do not provide strong
incentives to reduce prices in non—competitive markets; 3) price discrimination or cross
subsidization within or between markets, especially at prices below the established ceiling,
is still possible, etc.

Actually, since the UK introduced the price cap scheme, its formula has been
progressively tightened. The change was about: (i) to what services should the formula
apply? (ii) what should X be? (Ide, 1994b). Regarding the first criteria, the services
included this formula have continued to expand. At first, local calls, business and
residential rentals, and national trunk calls were included, but public phones, leased lines,
VANS, and international calls were not included. However, gradually the several services
were included the formula, such as operator assisted call (1988) and leased lines (1989)
(OECD, 1995b). In 1993, about 70 percent of BT’s services are subject to price control
(OECD, 1995c). This means the regulation becomes more complicated and the profit of

the operator is decreasing.

24

Also, in terms of the second Citron, the X has continuously increased against BT. In
1984, X was set at 3%. However, it was raised to 4.5% (1989), 6.25(l991), and 7.5%
(1994). The change of X is decided through evaluating the turnover of each service
basket. This method makes unclear the difference between price cap and rate of return
regulation because it considers the ROR in each services (Ide, 1994a). Further, the scheme
showed that Oftel regulation become bigger and more severe to BT.

In terms of the relationship to the service development, two issues can be raised. The
first issue is, as the theory shows, whether the price cap leads the reduction of the service
quality or not? The second is whether the price cap encourages the development of new

network services like ISDN or not? These questions are examined in later chapters.

Chapter 4

Telecommunication Policy in Japan

4.1 Historical Review

Until 1985, Japan had a monopoly telecommunication system like many other
countries. Nippon Telegraph and Telephone Public Corporation (NTT-PC) supplied the
domestic telecommunication services and Kokusai Denshin Denwa (KDD) provided the
international telecommunication services. NTT and KDD were the sole legal providers of
telecommunications, under the regulation of the Ministry of Posts and
Telecommunications (MPT), which is the regulatory body responsible for the development
of the country’s postal and telecommunications services, as well as radio and television
broadcasting services.

Although minor liberalization policies had begun in the 19703 (for example, connection
of computers, information-receiving equipment, and facsimile equipment are permitted to
connect to NTT's telephone lines), the major change did not occur until the drastic
telecommunication reform in 1985.8 Japan’s telecommunications climate was beginning to
change since the late 19703 due to technological progress, the movement of adrrrinistrative
reform by the Japanese government, and the influence from the liberalization policy in the
other developed countries, such as the USA and the UK (Mastuura, 1992). These
environments lead to the restructuring of the Japanese telecommunication industry in the

19803.

 

.8 For further information about Japanese telecommunication policy before 1984, see Tomita (1984).

25

26

In 1980, discussions about the reform of Japanese telecommunications had taken
place. As a result, two important legislative acts were passed in 1984, the
Telecommunications Business Act and the NTT Corporation Act. The
Telecommunications Business Act decided the Japanese telecommunications market
structure in general, and the NTT Corporation Act dealt with the privatization of NTT. By
the NTT Corporation Act, NTT became a private, shareholder-owned company.
However, because of its status as a dominant carrier, NTT is obligated to provide
universal service and must submit an annual business plan to the MPT. The MPT can then
order to fulfill the terms of this business plan (Bemt et al, 1993).

The summary of the 1985 telecommunication reform is as follows (Koshiro &
Nambu, 1993, p52): 1) NTT was privatized with the provision that the government would
hold one-third of shares. 2) NTT is obligated to provide universal service and must submit
an annual business plan to the MPT. The MPT can oversee the approval of its business
plan, and approval of board members etc. 3) All kinds of telecommunication services,
including local service, were open to competition. 4) The Act designed the two types of
carriers, type I carriers that own facilities and Type II carriers that do not and must lease
circuits from Type 1 carriers.9 The MPT’s regulation to the type I carriers is very strict
and requires both fitness and necessity approvals to obtain operating permission. The
operators have to obtain permission from the MPT to operate and gain approval for its

tariff and service provisions. The regulation to Type H carrier is less strict. The providers

 

9 Two kinds of Type II carriers were created, depending on the size of the services offered: Type
11 general and Type II special.

27

only need to notify the MPT when they initiate their business. No regulation exists in
terms of tariff and new service provisions.

After the telecommunication reform in 1985, many new entrants (New Common
Carriers: NCCS) emerged in both Type I carriers and Type II carriers. By 1991, three long
distance companies such as Daini Denden Inc. (DDI), Nihon Kousoku Tsusin (T eleway
Japan Corp.: TJC), and Nippon Telecom (Japan Telecom Co., Ltd.: IT), seven local
network companies and two international carriers entered the market. Also, more than
990 Type H carriers entered the market (N agai, 1994b, p466). Especially, in the domestic
long distance market, serious competition was promoted. Although the revenue share of
the three NCCs in 1990 was approximately 3.8 percent in the entire domestic market, their
share of long distance market of Japan’s business district, which covers from Tokyo area
to Osaka area, rose to 40 percent (Oniki, 1993). 10 .

Among the issues which existed after 1985, the biggest for the MPT was how
conditions of fair market competition could be achieved (Tomita, 1992). At the initial
stage of competition between the long distance NCCs and NTT, several conflicts occurred
between them in terms of interconnection: interconnection charge issue, point of presence
issues, and deployment of NTT’s local switch which has identification number function.
Therefore, in 1988, the MPT reviewed the deregulation process up until then and
proposed the necessity of breaking up NTT into several companies to promote more
competition. The MPT explained the competition was not substantial yet and was not

occurring on an equal footing -specifically referring to NTT’s network information (Nagai,

 

1° Currently, NCC’s share between Tokyo area and Osaka area is over 50% and they are big threat to
N'I'I‘.

28

1994b). The MPT filed a final report in 1990, which stated NTT should be divested into
three companies, such as a mobile telecommunication company, a long distance company,
and a local company. Since this proposal was opposed by the cabinet, the other ministry
such as Ministry of Finance and Business Circle, the MPT gave up the idea to divide NTT
in 1990 and postponed its final decision to 1995 (Oniki, 1993). However, the MPT
ordered N'I'I‘ to improve business and technical practices that had prevented NCCs from

competition with NTT on equal ground.

4.2 Structure Policy
The Telecommunication Business Law (TBL) plays a significant role in designing the
structure of the Japanese telecommunication market.

First, as mentioned in the previous section, TBL designed the two types of carriers,
Type I carriers that own facilities and Type II carriers that do not and must lease circuits
from Type 1 carriers. Since Type I carriers provide basic telecommunication infrastructure
and need large investments in equipment, they are under severe regulation. Type I carriers
have to obtain MPT’s permission regarding market entry, tariff, investment plan, service
area, and market exit, etc. Thus, the TBL states simply that anyone can enter the
telecommunication market, and the entry (and exit) for Type I carrier is controlled by the
MPT. Regarding Type II carriers, no control in the form of the fee approval and market
entry restriction is present even though the type II carriers need notification to the MPT
for initiating their business. Generally, this structure is evaluated positively because of its

clear definition of type carriers (Matsuura, 1994).

29

Second, TBL, NTT corporation law, and KDD law separate the telecommunication
markets into several submarkets, such as the long distance market, the local
telecommunication market, the mobile communication market, the satellite communication
market, and the international communication market. Operators are required to obtain
permission from the MPT to operate each market. N'l'l‘ is limited to providing “internal”
telecommunications services and KDD is permitted to operate only in the international
telecommunication market. Also, NCCs provide services in each specialized market.
Compared with the USA and the UK, it is unique to divide the markets into several
markets (Matsuura, 1994). In the USA, even though local and long distance markets are
separated by the Modified Final Judgment, AT&T provides both domestic long distance
and international services. In the UK, BT offers local, long distance and international
services.

Finally, the big issue in the structural regulation is the divestiture of NTT (Okuno &
Suzumura, 1993). Since NTT’s market power is still dominant, how to regulate NT'T has
been a continuing issue for policy makers. The MPT thinks the break up of NT'I‘ is an
essential policy in order to make the Japanese telecommunication market more
competitive. The MPT failed to complete NTT divestiture plan in 1991, but began the
discussion in 1995 with the review of NTT corporation law.

Overall, the current Japanese telecommunication policy has several structural
regulation schemes even though the telecommunication market is open on the surface.
This thesis will assess later how these structures affect the development of

‘ telecommunication services in Japan.

30

4.3 Price Policy

When the new Telecommunication Business Law (TBL) was introduced in 1985, the
MPT set new pricing rules. First, the law decided that prices of services which are offered
by the Type I carrier need approval by the MPT, while the price of services offered by the
type II carrier just need notification to the MPT. Compared with the FCC and Oftel, the
MPT has strong overseeing power over the telecommunication operators. The FCC only
has the right to be notified the new tariff. Oftel gave free pricing power to the operators
within the range of a price cap. The power of approval gives the MPT strong regulatory
power over the Type I carriers. Through this power, the MPT can give unofficial guidance
to the operators and manage the competition.

Also, at the same time, the rate of return regulation, which basically followed the
same models of the FCC’s price regulation was adopted as a pricing procedure. The TBA
decides the pricing methods in Article 31: 1) the price is based on the cost which is
calculated by a fair cost plus a fair rate of return; 2) the method of calculating the price has
to be defined clearly and properly; 3) no discriminative pricing is approved.

In the rate of return regulation in telecommunication in Japan, the total cost is
calculated by each service units such as telephone service, leased line service, and
telegram, etc. Also, the cross-subsidization between the service units is strictly prohibited.
Further, the rate of return is chosen by the service providers within certain predetermined
rates. This method is aimed at both permitting the service providers to set prices flexibly,

and avoiding predatory pricing and excessive profits.

31

It has been already seen that the shortcomings regarding the rate of return regulation.
In addition, Ide (1994b) pointed out the several issues concerning the rate of return
regulation in Japan. First, the regulatory agency has used the price regulation scheme to
protect and help the growth of the N CCs. The MPT has kept the 20 percent price
difference between NT'I‘ and NCCs. Because of this, the long distance NCCs could
expand their market share rapidly. Second, although the Type 1 carriers are supposed to be
under the rate of return regulation, the actual operation of the regulation did not always
reflect the actual cost based pricing. For example, even though three long distance NCCs
adopted the different network strategies (i.e., while DDI made the microwave based
network, JT designed the fiber optic network), their prices were the same. Third, the
MPT has not had an aggressive attitude regarding the introduction of new
telecommunication services and new tariffs because it is difficult to predict their future
demand. Thus, the competition between the incumbent carriers and NCCs happened in just
price levels. Fourth, the present regulation system usually takes several months to get
approval of new service provision and modification of the tariff. The average delay is
about 1.5-2 months, but it can be over a year for major new services such as NTT’s
introduction of ISDN (Glynn, 1992). Thus, operators cannot provide new services or
decrease prices on a timely basis.
In summary, the rate of return regulation in Japan is used for flexible pricing scheme
for regulators, by which regulators can reflect their policy intention (Nagai, 1994a). The
tariffmg is handled through informal “guidance” from the MPT rather than formulas

(Glynn, 1992). While the USA and the UK have already moved or have been moving to

32

the incentive regulation such as a price cap, the Japanese regulatory agency still clings to
the traditional rate of return regulation. We cannot find reasonable explanation why the
MPT did not move toward the alternatives from the rate of return regulation, which does
not fit the competitive market. However, at least the MPT makes use of it for its influence
on the regulated company.

In terms of telecommunication service development, several questions can be raised.
How does this Japanese style price regulation affect the actual price reduction? How do
the characteristics of Japanese style price regulation affect the development of new

services? These questions are examined in later chapters.

Chapter 5

Basic Telephone Services

From chapter five to chapter eight, the development of four telecommunication
services in three countries; basic telephone services, Integrated Service Digital Network
(ISDN), Videotex, and Data and Valued Added Services, are examined. In each chapter,
the development of the services are reviewed first, and then, the policy factors which
influenced the service development are analyzed.

In this chapter, I begin with the basic telephone service since the main
telecommunication policy debate usually concerns this service the most. Also,
development of basic telephone service is reviewed in four aspects: 1) public
telecommunication market, 2) rates, 3) service quality, and 4) traffic growth. Although the
first item, public telecommunication market, does not indicate basic telephone service
directly, this item is examined because it gives an idea how the telecommunications market
in general has grown. Also, in many countries, the basic telephone service still occupies
the biggest share of the telecommunications market. The second and the third items, rates
and service quality, are often used as indicators of service development. Finally, the fourth
item, traffic, is an actual indicator of people’s usage of the telephone. Traffic growth can
be said to be the indicator of basic telecommunication service development from the

demand (users) side, while rates and quality service are those from the supply side.

5.1 The United States

33

34

5.1.1 Public Telecommunication Market

Table 1 shows the compound average growth rate (CAGR) of public
telecommunication market revenue in the three countries and the OECD average. As the
table shows, the public telecommunication market in the USA has expanded significantly
since 1982. Although the growth rate is decreased between 1987 and 1992, the number

still show above the UK and Japan.

Table 1: Public telecommunication revenue

Revenue CAGR1982-87 CAGR87-92
USA 10.89 3.34
UK 4.95 1.77
Japan 3.25 1.96
OECD Ave. 7.22 3.44

(Source, OECD, 1995a, p.22)

5.1.2 Rates

Table 2 shows the summary of the US telephone price change. Although it is
dangerous to generalize the price change by only viewing the average indicators because
price changes are not the same among users (residential users or business users) and in the
area (a metropolitan area, city area or rural community, etc), the general trend of

telephone prices can be recognized.

35

Table 2: Summary of US price changes, 1980-1992

Local Interstate Intrastate All tel. All goods

toll toll service & services
1980 7.0 3.4 —0.6 4.6 12.5
1981 12.6 14.6 6.2 11.7 8.9
1982 10.8 2.6 4.2 7.2 3.8
1983 3.1 1.5 7.4 3.6 3.8
1984 17.2 -4.3 3.6 9.2 3.9
1985 8.9 43.7 0.6 4.7 3.8
1986 7.1 -9.4 0.3 2.7 1.1
1987 3.3 -12.4 —3.0 —1.3 4.4
1988 4.5 -4.2 —4.2 1.3 4.4
1989 0.6 -1.3 -2.6 -0.3 4.6
1990 1.0 -3.7 —2.2 —0.4 6.1
1991 5.1 1.3 -1.5 3.5 3.1
1992 0.5 -1.3 —2.4 -0.3 2.9

* Note: consumer price indexes: annual changes in index
levels.
(Source: OECD 1995b; p.36)

As the table shows, major price reduction has occurred in the long distance market,
especially interstate toll market. AT&T tariff rates fell by over 70 per cent in real terms
between 1983 and 1991 (OECD, 1995b; p.16). The rate reduction occurred also in the
other long distance service like WATS. AT&T’s inflation adjusted prices to business
customers for 800 services have decreased 67.9 per cent since 1984 (OECD, 1995b;
p16)

By the divestiture, local rates were expected to gain a great rate increase due to the
difference between local pricing and its actual cost. However, the result was not worse
than expected. Actually, the local rates increased more than price index of all goods and
services between 1982 and 1986, but after 1987, the local rate rose less rapidly than the

index of all goods and services.

36

In all telephone services as a total, it is difficult to say that telephone rates decreased
significantly. In the early and mid 19803, users experienced higher rate increase in
telephone than in all goods and services, but after 1987, rate increase in telephone has
been less than in all goods and services, except in 1991.

How have these price changes been related to the policy factors? In the case of the
long distance market, the FCC’s pro—competitive policy and divestiture can be significant
influencing factors. Also, the primary effect of divestiture and federal deregulation reduced
prices for services that were becoming competitive (Noll, R. & Smart, 1991).

The OECD report (1995c) analyzes the effect of price cap regulation of AT&T on the
long distance rate change (p35-39). The report observes substantial decrease in the real
price of AT&T’S telecommunication services under the United States price cap regime.
Also, by examining the relationship between price cap limits and prices of services in each
baskets, the report concludes that services have generally been kept near the levels
permitted by the price cap limits and that price cap limits were effective in containing price
increase for these services (p35).

However, these policies are not the only factors of rate changes. Rate changes may
come from several other factors, such as technological progress, and demand expansion.
For example, Noll, M.A. (1994) maintains that neither competition nor divestiture has had
real effect on long distance rates. After he exarrrines long term trends in long distance
rates, he explains the rate reduction was caused by technical progress coupled with an

increase in productivity and market demand.

 

37

Also, the change of the cost separation rule with the introduction of subscriber line
charges (SLC) and a series of accounting changes was a big factor of both long distance
rates decrease and local rate increase. During the 19803, the FCC tried to shift non-traffic
sensitive cost from long distance companies to final consumers by instituting fixed monthly
subscriber line charges (SLCs). Also, a series of accounting changes effectively reduced
interstate costs while increasing intrastate costs. The decrease of long distance rates was a
response to lower interstate access rates that are the result of a cost shift (Crandall, 1991,
58, Taylor et al, 1993). Taylor et al (1993) states “Beyond the mandatory reflection of
access charge reductions in AT&T’s rates, interexchange carriers initiated no significant
reduction for toll services” (186-187).

Furthermore, many experts explained the early 19803 rate increase by “regulatory lag”
(Noll, R. & Smart, 1991; Crandall. 1991). The increases in the early 19803 were largely a
reflection of regulated firms catching up with past inflation (Crandall, 1991). On the other
hand, the rate increase in 1984—1986 was probably a direct consequence of divestiture,
competition, and accompanying FCC policies (Noll, R. & Smart, 1991). We can observe
that the mid-19803 increase was accompanied by a rate reduction of long distance rates.

It is difficult to analyze how much each factor influences the price change. However, it
is certain that the competition policy through the MFJ and price regulation has been one of
the big factors. Without competitive pressure, long distance rates would not have been

reduced even if SLC or a new access charge rule was established.

5.1.3 Quality of Service

38

Service quality is one of the issues upon what policy makers put the most priority.
Even if telephone rates decrease or remain stable, the decrease of service quality means a
substantial increase in service price. Thus, regulated companies and regulators have taken
into consideration numerous technical measures related to service quality. However,
problems, which are a lack of consistency in the measures of service quality across the
regulatory agency, company and time, exist (Curry, 1991). Here, I look at the OECD’s
data, which are based on the FCC report, to avoid these problems.

The divestiture of AT&T had the potential to disrupt voice and data communications
throughout the nation and significantly affect the service quality (Curry, 1991). However,
the indicators of service quality show improvement between 1985 and 1990 in almost
every item (table 3). During this period, all segments of users from residential to large
business have showed improved customer satisfaction. Some technical indicators such as
call completion improved, as well. The competition among operators and technological

advancement such as fiber optic deployment may contribute to the satisfactory results.

39

Table 3: Quality of service in the United States

1985 1990
Customer satisfaction
Residential 93.5 94.3
small business 92.1 94.0
Medium Business 91.4 96.2
Large Business 91.5 94.5
Dial Tone Response 97.7 99.0
Transmission quality 91.7 98.3
On time service orders
Residential 98.0 97.6
access 98.2 98.6
Business/Special 97.6 98.3
Call Completion
IntraLata 99.5 99.6
InterLata 97.1 98.9

Note; The data represents all company composites compiled
for the individual Bell Holding Companies by the FCC
(Source: OECD 1995b; p.38)

The introduction of a price cap by the FCC raised the service quality issue. Many state
regulators and consumer advocacy groups argued that the FCC plan to replace the rate of
return regulation with a price cap would degrade the level of service quality because it
encourages reductions in network investment and maintenance expense (Curry, 1991).
Also, since many states currently have begun to adopt incentive regulations, service
quality has become a significant issue at the state level.

The OECD report (1995c) introduces a FCC’s price cap performance review (p.62).
According to the FCC’s review, service quality did not deteriorate under price cap
regulation. The performance standards such as trunk blockage, installation and repair
intervals, and dial tone response times were met successfully over 95 per cent of the time.

The average unscheduled downtime per loop remained less than 4 minutes per year for

4o

LECs under the price cap. It should be noted that extensive study of this point was not
discovered in the literature on the field.

However, the FCC Observed some decrease of service quality in other indicators after
1991, too. For example, residential service quality complains per million residential
customers rose in 1991, and remained high through the first quarter of 1993, although it
fell in the second quarter of 1993 (OECD, 1995c, p62). Unfortunately this trend still

holds.

5.1.4 Traffic

Traffic is an indicator which shows people usage of telephones. If national traffic does
not show improvement regardless of rate decrease, it means that the telecommunication
service market does not develop soundly. It is useful to compare the trends of traffic
between years and also between countries to understand the characteristics of
telecommunication usage.

In case of the USA, the introduction of competition policy certainly influenced on
telecommunication service usage, and traffic. Table 4 shows the US traffic growth. The
numbers in the table show the per cents of traffic increase over the previous year. As the
table presents, the most competitive market, which is the interstate long distance market,

shows a significant traffic increase in the 19803.

41

Table 4: US traffic Growth (increased over previous year %)

Local Intrastate toll Interstate toll

1980 -- -- --

1981 2 7 8
1982 3 5 7
1983 3 5 10
1984 3 19 23
1985 2 12 20
1986 2 7 8
1987 1 7 9
1988 5 6 9
1989 2 7 7
1990 1 5 3
1991 1 1 4

(Source: OECD 1995b; p.42)

5.1.5 Summary -Policy and Service-

From the above discussion,. it is observable that the USA’s structural change of the
industry, such as new market entry and divestiture, was positively related to basic
telephone service development. The structure change from the monopoly to competition
in the long distance market lead to drastic rate reduction in toll prices. Some price increase
occurred in local service, but the range was not as big as expected. Partly due to this rate
reduction, the toll traffic also has expanded significantly. Also, during 1985-1990, service
quality shows improvement.

The relationship between basic telephone service development and new incentive
price regulations, such as a price cap, needed more sufficient empirical data. However, the
past research see some positive relation between the price cap regulation and rates
decrease, although some other factors are also involved. Further, in the field of service

quality, some negative consequences were found.

42

The new telecommunication act will have significant influence on the US
telecommunication service in the future US telecommunication services, because it might
change the current telecommunication industry structure. Several new services offering

and higher quality of service will be expected.

5.2 The United Kingdom
5.2.1 Public Telecommunication Market

In the previous section (5.1.1), the public telecommunication revenue in the UK, the
USA and Japan were presented. As the table 1 showed, the revenue of the public
telecommunication in the UK continues to grow since 1980. The UK enjoys above
average growth rates since 1985. Although it is difficult to specify whether these data
come from the price and structural policy, the data are partly the results of the British

liberalized market.

5.2.2 Rates

How does the introduction of a price cap and duopoly in the UK affect the telephone
prices? Table 5 shows the movement in BT’s connection charges, exchange line rentals
and call charges from 1984 to 1993. BT’s average prices have fallen by about 26 per cent
between 1984 and 1992, and by 12 per cent between 1989 and 1992 (OECD, 1995c,

p34).

43

Table 5 Index of BT's price changes adjusted for inflation

1984 1985 1986 1987 1988 1889 1990 1991 1992 1993
-85 -86 -87 -88 -89 -90 -91 -92 -93 -94

Connection 91 91 97 102 94 100 100 104 69 68
Charges

Rentals 101 107 107 102 94 94 100 104 108 110
Trunk calls 169 162 140 133 123 112 100 97 96 85
Local calls 120 124 131 125 115 107 100 100 99 88

1. Base year=1990-91.

2. Based on 1989-90 revenue weights.

3. Inflation adjusted using July PRI of rice control year
(price control year runs from August to July).

4. For price control year 1993—94, February 1994 RPI used.
(Source: Oftel cited by OECD, 1995c, p35)

First, the price decrease in trunk calls is significant. The rate has dropped continuously
since 1984, and the price level of 1993-94 was almost half of the 1984-85 level. The price
cap and competition with Mercury could be pressure to decrease the long distance rates.
A price cap made it possible for BT to respond to the competitive environment and to
decrease the long distance price.

On the other hand, concerning the local telephone services, the rental, connection
charges, and average local call rates increased between 1984-87. Also, the table shows an
increase in rental charges existed in recent years. This is because of the “rebalancing”,
which brought prices more closely into line with the costs of providing the different
services, was taking place. Since a price cap made it possible for firms to change their
rates quickly, the significant degree of price rebalancing has taken place under the price

cap regime in the United Kingdom (OECD, 1995c, p43).

5.2.3 Quality of Service

One shortcoming of the price cap system is it might create incentives for the regulated
firm to reduce the quality of service. Unfortunately, BT’s reputation for its quality of
service was not good. A report issued by Oftel showed numerous statistics which
indicated that BT’s service quality was declining (Bolter at al., 1990). The table 6 shows
some results. After the price cap was introduced, all the data pointed to a worsening
situation of service quality. Many believe this is too high a price to pay for price cap

regulation and privatization.

Table 6: Service quality in the UK

Service Worsened 10% 23%

Service Improved 12% 8%

Complains 1985 1986 1987
9,917 15,410 23,264

(Source: Oftel data, cited by Bolter et al., 1990, p349)

Oftel began to publish its survey figures on service quality in order to improve this
situation. Oftel’s service 1990 Annual report noted that increase in percentages of faults
repaired in one day from 65 percent to 86 percent (Oftel cited by Noam 1992). Table 7
shows comparative data about the quality of service in the UK. The numbers show strong

improvement in the service quality.

45

Table 7: Quality of Service in the UK

Network reliability

Local calls failed 1.7

National calls failed 4.1

Network faults per line per annum 0 2

Fault repair

Faults cleared within two working days 87.1 98.5(buss.)
96.8(Resi.)

Installation
Business orders completed on time 60.8 68.6
Residential orders on time 59.4 84.2

Operators services

Inland operator calls answered 85.6 92.2
within 15 seconds
Inland directory calls answered in 76.6 88.1

15 seconds

(Source: OECD, 1995b)

However, some statistics still showed its comparably poor quality of service. Table 8
shows some comparison data. As the table shows, BT’s quality service was still far behind

that of USA and Japan.

Table 8:Qua1ity of service:fault incidence and repair time,
1992

Faults per 100 lines Faults repair within 24H
per year
1990 1992 1990 1992
Japan 2.0 2.0 50 0 100 0
UK 18.0 17.0 92 5 81 7
US n.a 8.0 n a -----

(Source: OECD, 1993, 1995a)

46

Currently, BT has operated a financial compensation scheme since 1989 for an increase
in service quality under the scheme. BT compensates customers if certain nonstructural
standards for services such as installation and repairs are not met. For business customers,
the compensation of 25 pounds per line each day BT falls short of its target. For
residential customers, compensation is one month’s network rental charge for each day
that BT falls short of its installation and repair targets, including weekends. Compensation
can be higher if the customer can prove actual financial 1033 (OECD, 1993).

It is hard to say the price cap or duopoly caused the low level of service quality, but we

can see the competition with Mercury did not work well in regard to service quality.

3.2.4 Traffic

Does the introduction of competition and incentive regulation (price cap) lead to the
increase of traffic? The table 9 shows growth rates in telephone traffic. As the table shows,
the UK shows a significant increase of traffic, even higher than the increase of the US long
distance traffic.

Table 9: Growth rate in telephone call volumes over the
previous year

Call Growth 1991 1992 1993 1994 1995
Domestic 4 1 - 6 7
International 6 4 6 6 5

(Source: BT, 1995)

47

5.2.5 Summary -Policy and Service-

In the field of basic telephone service, certain influence of the UK telecommunication
liberalization policy can be observed. Also, structural policy (duopoly) and price policy
(price cap) supported the liberalization policy as major components, even though it is
sometimes difficult to specify the clear attribution of duopoly and price cap.

Telephone rates are the area which the competition between BT and Mercury have the
most effect. The competitive pressure decreased BT’s long distance rates about 25%
between 1984 and 1990. Also, the price cap made it possible for BT to rebalance its tariff
structure.

Service quality had been one of the big issues in the UK telecommunication. The
introduction of a price cap might have negative effect on service quality. Actually, after
the price cap was introduced, some indictors of service quality became worse. Oftel
responded to this situation by monitoring BT’s service quality more closely, and recently,
the service quality of BT shows improvement.

As the significant expansion of the UK’s public telecommunication market and
telephone traffic during the duopoly era shows, structure and price policy in the UK
succeeded basically. However, the UK government decided on further deregulation by
abandoning duopoly and admitting free entry into the telephone market. It is too early to
evaluate the new structure policy. We need to keep observing the trend of the future UK

basic telephone services

48

5.3 Japan
5.3.1 Public Telecommunication Market
Table 1 (in section 5.1.1) shows, the revenue of the public telecommunication in Japan
continued to grow since 1982. However, the growth rate is clearly lower than that of the
USA and the UK. It is necessary to analyze the market in more detail, but this general
tendency has to be considered seriously.
Table 10 shows the revenue of telephone services. It is clear that the liberalization

policy in Japan did not affect developing the telecommunication market significantly.

Table 10: Telephone service Revenue in Japan

Revenue4,200 4,324 4,503 4,599 4,744 4,884 4,940 4,969
Growth —-- 3.0 4.1 2.1 3.1 3.0 1.1 0.6
Rates

* Units: billion Yen (Revenue), per cent (Growth rate)
(Source, MPT cited by Ozawa, 1994, p.26)

5.3.2 Rates

After the structural change of telecommunication industry in Japan in 1985,
substantial rate reduction was made. As table 11 shows, NTT’s long distance rate in 1992
was reduced to half of the level of 1985. “It can be regarded as a textbook case in which

monopoly prices are decreased by the competition from new

entrants” (Oniki, 1993, 75).

49

Table 11: Rate Reductions in Long distance telephone service

NTT 400 400 360 330 280 240 240 200 180
NCCS ---- --- 300 280 240 200 200 180 170

* Unit: Yen. Tokyo-Osaka (500 Km): 3 minutes, daytime
(Source, InfoCom Research Inc, 1994, p.34)

The table also shows the rates were maintained by the 10 percent to 20 percent
difference between the NTT’s price and NCCs’ prices. As mentioned in the chapter four,
this result implies the MPT used the price regulation scheme to protect and help the
growth of the NCCs.

Also, the one important characteristic of Japanese rates structure is that rate
rebalancing has not been done until recent years, unlike the USA and the UK. This was
because NTT did not separate its accounting sufficiently between local and long distance
services, the MPT thought NTT needed to restructure its management before rebalancing,
and the MPT aimed to protect NCCS (Koshiro & Nambu, 1993). Thus, NCCS could gain
competitive advantage with NTT. The MPT’s price regulation helped NCC to expand its

share in the long distance market.

5.3.3 Quality of Service
In Japan, service quality has not been a big issue. Telecommunication operators
achieved good performance in the quality of service. The table 12, 13 show some

indicators of quality of service including faults per 100 lines, and waiting time for

50

telephone lines. Overall the numbers indicate satisfaction with the performance of

telecommunication operators.

Table 12: Quality of service: Fault incidence and repair
time, 1992

Faults per 100 lines Faults repair within 24H
per year
1990 1992 1990 1992
Japan 2 0 2.0 50 0 100 0
UK 18 0 17.0 92 5 81 7
US n a 8.0 n a n a

(Source: OECD, 1995a, p88)

Table 13: Waiting time for telephone line installation,
1980-90

1980 1988 1990 1992
US 5 n.a. 0 0
UK 3 0 0 8
Japan 1 0 0 0
OECD Ave. 15 7 3 -

* Unit: in months (1980,88,90), in days (1992)
(Source: OECD, 1993, p.72, 1995a)

It can be concluded that the competitive market structure in the Japanese

telecommunication industry has improved service quality.

5.3.4 Traffic

In section 5.3. 1, we observed that the telecommunication market in Japan did not
expand as it had in the USA and the UK. Telecommunication revenue can be affected by
the several factors such as price reduction, and here we see the traffic as a indicator of

service market development.

51

As Table 14 shows, even though NCCS traffic increased considerably, the total
Japanese national traffic did not increase significantly. Furthermore, the statistics show

NTT and NCC are merely competing to get a larger share of the “pie”, not expand the

6‘

pie”. The international comparison describes more clearly the Japanese
telecommunication service market situation. The competitive industry structure did not
appear to contribute to the service market expansion as in the USA and the UK (Table
15). Thus, the low rate of market growth, which was seen in section 5.3.1, was not

because of the rate reduction, rather because of the low traffic growth.

Table 14: National Traffic (long distance + Local)

NTT 71,840(--) 72,610( 1.1) 73,270( 1.0) 72,760(—0.1)
NCCS 1,360(--) 2,450(80.1) 3.600(46.9) 4,490(24.7)
Total 73,200(--) 75,060( 2.5) 76,870( 2.4) 77,250(0.5)
*Unit: million call times, ( ): Growth rate

Source: MPT, 1994

Table 15: National traffic and network utilization

CAGR Total national traffic CAGR total national traffic

(per cent) per mainline (per cent)
UK 9.01(85—89) 4.48
USA 7.20(85-91) 4.20
Japan 6.83(88-91) 2.95

*Note: USA, Long distance call traffic
Source: OECD, 1995b

5.3.5 Summary -Policy and Service-
In the field of basic telephone service, the telecommunication reform in Japan was

basically successful. The structure change fi'om a monopoly to competitive industry

52

contributes to drastic rate reduction. Although some lack of clarity existed in the MPT’s
price regulation and its operation, the policy works effectively in the rate reduction.
However, Japan’s case shows some unique characteristics, too. Even though the long
distance rate decreased drastically due to competition, the service market in terms of
revenue and traffic did not appear to develop well, compared with the USA and the UK.
Although clear link between this situation and MPT’s structural and price policy cannot
been found, the strongly managed competition by the MPT might have a certain effect on
the Japan’s weak market expansion.
Recently, much discussion about further structural change (NTT’s divestiture) is
underway. Also, the call for a new price regulation scheme such as incentive regulations is
increasing. This movement will be crucial for the future development of

telecommunication service in Japan.

Chapter 6

ISDN

ISDN (Integrated Services Digital Network) is a network feature using digital
technology to support integrated voice, data and image services through standard
interfaces. ISDN indicates technical concept, infrastructure, and service. ISDN is a digital,
end to end, public network, which will be integrated into the current analog public
switched telephone network.

In this chapter, ISDN in the USA, the UK and Japan is examined. In each country,
ISDN development is reviewed, first. After that, effects of the structure and price policy

are analyzed.

6.1 USA
6.1.1 ISDN Development in the USA

Since the first ISDN call in North America was placed in 1986, ISDN in the US has
not been developed smoothly. For example, the ISDN access availability is very different
among companies; Bell Atlantic planned about 87% availability until the end of 1994,
whereas Southwestern Bell planned just 23% availability for the same time period.
(Karpinski, 1993, 22). Compared with the other countries, access availability in the US is
lower. ISDN service was available on 60% of the US. circuits in 1993, while availability
of ISDN in France, Germany, and the UK has been 100% for several years (Galvin &

.Hauf, 1994). Critics explained the many factors that have caused the slow ISDN

53

54

deployment, such as standards, equipment, lack of infrastructure, restrictive regulation,
lack of availability, lack of connectability, high costs, lack of application and poor
marketing (Goleniewski & Horak, 1993).

Carriers and vendors have striven for a breakthrough. In 1992, the Corporation for
Open Systems (COS) and the North American ISDN User’s Forum (NIUF) sponsored the
Transcontinental ISDN project 1992 (TRIP 92) and was successfully demonstrated in
ISDN. NIUF also standardizes national ISDN standards (NI). In addition, many RBOCs
pushed forward their ISDN availability.

The future prospects of ISDN in the US. can be termed positive or negative. From
the negative side, detailed standardization and availability are still issues. Also,
competition with the other services such as frame relay and SMDS (Switched Megabit
Data Service) will be severe. “Some argue that ISDN is too little, too late. They contend
other technologies and services now compete against ISDN and will outpace it long
before it has achieved its potential” (Freuck, 1993, 26). On the other hand, from the
positive side, both RBOCs and IXCs have increased their commitments, promising
broader usage, availability, and affordability (Tebes, 1994). Also, several applications,
which fit with ISDN, such as telecommuting, LAN 3 interconnection, and the intemet
access, have begun to emerge (T cbes, 1994). Overall, the enthusiasm has gone but ISDN

will develop its market as real user demand services.

6.1.2 Structural Policy and ISDN Deployment

55

Although it is difficult to see the direct effect of the structural policy on ISDN
deployment, some relation can be found.

First, one of the big stumbling blocks of ISDN development has been its standard
setting. The industry structure imposed by the MFJ had a certain effect on this issue. Prior
to 1984, the US. telecommunication market had been well structured. Bell Laboratories
played the central role in setting the model and developing standard, in which local
exchange carriers and inter-exchange carriers manage their networks. However, the MFJ
structure created seven RBOCs. Without the power of an integrated AT&T to set
standards, standardization could be more a complicated process. Sirbu (1991, 334) said
that divestiture can probably be blamed for a two-year delay in the development of
standards for the ISDN CPE (Customer Premise Equipment) interface with the network.

Also the seven RBOCs’ own business plans affect the adoption of ISDN standards.
Where in the past AT&T may have forced all of the Bell Operating Companies to adopt a
common approach, divestiture has made divergence easier (Sirbu, 1991). For example,
even though, in 1992, the transcontinental ISDN project ‘92 (TRIP ‘92) set National
ISDN standard, US West and Southern Western Bell do not follow this way by their
management decision (Goleniewski & Horak, 1993). As a result, the full ISDN
connectivity to the users is not possible.

Further, geographical separation of the local telephone service has caused geographical
variance in the deployment of ISDN. The differences in the territories served by the
RBOCs have led to differential emphasis on technologies. As mentioned before, Bell

Atlantic planned about 87% availability until the end of 1994, whereas Southwestern Bell

56

planned just 23% availability for the same time period. (Karpinski, 1993). This is because
each RBOC plans its own investment and strategic business plan. The MFJ structure
makes it difficult to develop new infrastructure universally.

Moreover, competitive market structure does not always work for ISDN development.
For example, by network requirements associated with equal access, the RBOCs and IXCs
invested billions of dollars in transport facilities, switches and software rather than ISDN
development. Also, carriers clearly focused on competition for the immediate market,
rather than on rebuilding the infrastructure along ISDN lines (Goleniewski & Horak,
1993).

Finally, the line of business restriction affected the ISDN deployment. Since RBOCs
were restricted in entering in information business, the RBOC did not have a strong
incentive to develop ISDN, whose primary expected application is information service
(Goleniewski & Horak, 1993). Gregg (1992, 427) said the restrictions which the consent
degree impose on RBOCs denied their development of the technology, even though their
contribution was needed.

Overall, it is seen that the US’s structural regulation has had a negative influence on
ISDN deployment, generally. The old separated Bell system now has its own strategy of
new service development. Thus, even in the United States, some RBOCs adopt different
technical detail from the other RBOCs and it makes interconnection inconvenient. Also,
the line of business restriction gave disincentive to RBOCs to build the new technology.
ISDN in the US is still struggling and cannot find its clear way even if the continuing effort

for development is continued.

57

6.1.3 Price Policy and ISDN Development

How has the changing regulatory environment affected the ISDN evolution in the
USA? Even though much theoretical research about price regulation exists, little
empirical research is available.

Gregg (1992, 427-428) suggested that the rate of return regulation could be an
impediment to ISDN supply and should be replaced by price cap regulation. He thinks the
rate of return regulation encourages inefficiency because only profits resulting from new
equipment purchase could be kept by the company; all other profits had to be returned to
the customers in the form of rate cuts. On the other hand, by price caps, companies are
rewarded for their efficiency, and services already experiencing competition are not
affected. He also mentioned customers are treated fairly because price caps are determined
using the consumer price index minus a productivity figure.

Recently, Greenstein et al. (1995) examined the investment patterns of local exchange
telephone companies (LECs) in the United States in the post-divestiture era. They used
four measures of infrastructure deployment: Optic cable, SS7, digital stored program, and
ISDN. Also, they used the econometric framework to measure the effect of the local
regulatory structure on long-run infrastructure deployment. The study relates individual
LEC investment patterns to LEC—specific regulatory, demographic, and economic
characteristics. The study is significant in that it tries to isolate the contribution of state
regulatory policies from that of other demographic and economic factors in the

‘ determination of infrastructure deployment at the state rather than at the corporate level.

58

In their conclusion, they found price regulations, which are price cap and price
freeze, greatly increase LEC’s incentives to deploy ISDN lines although they cannot find a
significant difference between the effect of price-cap regulation and price freeze
regulation. They also provide the predicted change over the estimated year of what would
be achieved by imposing an incentive regulation on companies that in 1991 had no
incentive scheme. They find price regulation (price cap or price freeze) provides 114%
increase in deployment of ISDN over the base year, compared with the rate of return
regulation.

However, some critiques to Greenstein’s analysis exist. For example, the type of
regulation probably have no impact on ISDN development. Even if, in Greenstein et al’s
study, price cap scheme, price freeze method and earning sharing scheme was analyzed as
independent variables, the actual difference in its implementation is not clear (We can say
that price freeze scheme is a strict form of price cap method).

Overall, although some research that price cap regulation provides more a positive
effect than the traditional rate of return regulation in terms of ISDN development is found,
the more empirical and theoretical analysis is necessary for a concrete conclusion. In case
of ISDN, other factors such as corporate strategy, users’ demand, availability of

technology may be equally important.11

6.2 The United Kingdom

6.2.1 ISDN Development in the UK

 

1‘ For example, LEC’s aggressive involvement of video dialtone from 1991 might lead to their
disincentive for ISDN investment.

59

ISDN development in the UK has been related closely to British Telecom’s (BT)
activity. BT’s ISDN service started in 1985 with the launch of the single-line integrated
digital access (IDA) service (Griffiths, 1992). The services, Integrated Digital Access, had
limited applications but was aimed at determining user requirements for eventual ISDN
service. Currently, BT offers two levels of ISDN services: ISDN 30 and ISDN 2. ISDN
30, launched in October 1988, offers 64k bps circuit-switched channels with CCI'lT
Primary Rate Access (3OB+D). ISDN 30 is targeted primarily at larger institutions, in
particular those requiring bulk transmission of data and voice. BT upgraded its IDA series
in 1990 with ISDN 2, a CCI'I'T-compatible services offering 2B+D channels. ISDN 2 is
aimed primarily at branch offices and smaller data capacity users. Coverage is over 80% of
both business and residential numbers. BT’s ISDN 2 tariffs, like those in France and
Germany, are priced the same as regular calls but include a one-time connection charge
and yearly rental fees (Noam, 1992).

The deployment of ISDN in the UK is not so quick. Table 16 shows the number of
ISDN lines installed. As the table shows, the UK is behind France and Germany in basic

rate ISDN offering.

Table 16: Installed ISDN lines as of January 1, 1991

Primary rate Basic Rate
UK 1,700* 500
France 500 5,000
Germany 640 7,615

*BT, 1000; Mercury, 700
(Source: Heywood, P. & McMaster, S. , 1992)

60

The main reason of late ISDN deployment is in the BT’s ISDN strategy. In the UK,
ISDN development essentially depend on BT. However, BT does not consider ISDN as
more than a means of data transmission and wants to let the market decide how much and
to what extent it wants ISDN (Arladis, 1994). BT does not intend to have too arbitrary an
approach as far as ISDN concerned. Even though ISDN should allow BT to increase its
supply of enhanced services, the BT will not heavily promote ISDN. BT regards ISDN as
not the kind of service from which short-term benefits are to be gained. However,
Mercury does not seem to be willing to invest heavfly in ISDN, either (Arladis, 1994).

The future of ISDN in the UK is not clear. The Commission of European Union is
proceeding with a policy, in which European wide ISDN (Euro-ISDN) is promoted to
develop aggressively. ISDN Memorandums of Understanding (ISDN-MOU), envisioning
a widespread, interconnected ISDN across European countries, was signed by 20
countries in Europe in 1989 (Fuchs, 1993). In the commission’s vision, ISDN is identified
as a universal access to information society, and many countries such as France and
Germany, are aggressive on ISDN deployment. In the UK, ISDN development depends on
BT’s strategy. Whether BT follows the European trend or go its own way has not been

apparent, yet.

6.2.2 Policy and ISDN DeveIOpment in the UK
Davies (1994) explained that this BT’s passive investment attitude toward ISDN
development comes partially from Oftel’s regulation. BT’s investment strategies are

, governed by the need to recoup fixed costs quickly rather than to expand the capacity and

61

services available over a nationwide network. In the UK, Oftel does not have the
necessary political power to prevent BT from abusing its necessary political power and to
prevent BT from abusing its monopoly position. In June 1992, however, following
widespread public criticism in the press, Oftel was forced to intervene where the market
had failed by requiring that BT build a ubiquitous digital broadband infrastructure to serve
the requirements of British society as a whole (Davies, 1994).

Overall, competition under duopoly did not promote ISDN deployment in the UK.
Competitive market made BT’s strategy focus on more short-term profit origin typed

service.

6.3 Japan
6.3.1 ISDN Development in Japan

ISDN in Japan began in 1988 as N'I'I”s INS-Net services. ISDN was expected to be
a key infrastructure and service in the “Information society”.

Two types of INS-Net services cunently exist: INS-Net 64 and INS-Net 1500. INS-
Net64, started in 1988, is a domestic basic-rate ISDN service providing transmission with
two B channels at 64K bps and one D channel operating at 16K bps. INS-NetlSOO was
introduced in 1989, mainly for large volume transmissions. The primary rate service uses

24 B channels and a D channel, operating at 64k bps.

Table 17: Number of ISDN subscriber lines

1988 1989 1990 1991 1992 1993
INS64 1,198 6,574 27,313 84,139 156,811 234,786
INSlSOO ----- 117 560 1,751 3,109 4,645
Total 1,198 6,691 27,873 85,890 159,920 239,431

(Source: Infocom, 1994)

62

ISDN in Japan has steadily increased its subscribers (Table 17). The main
applications of IN S-Net64 are for data communications and facsimile communication.
Also, INS-Net1500 is used for the corporate internal communication systems such as PBX
(Private Branch Exchange) connection and Video communication such as video conference
(MPT, 1993).

Although ISDN in Japan looks successful compared with the USA and the UK, it has
not developed as N'I'l‘ expected. Also, users complain about the high price of lines and
customer premise equipment, limitation of service area, poor marketing, etc (Mizuno,
1995). NTT’s ISDN unit has continued to have pretax losses since it began operation in
1988. Revenues for the year which ended March 1992 was US$135 million, but prc-tax
losses reached US$587 million due to investment in equipment which amounted to about
US$625.5 million (Dhilawala, 1993).

The prospects for ISDN in Japan are not clear, either. At present, both positive
aspects and negative aspects can be found. The positive aspects are: equipment for ISDN
continue to decrease (Mizuno, 1995); ISDN has gotten a foothold in the corporate
telecommunication (Staal ct als, 1995). On the other hand, negative aspects are emergence
of new competing services, such as framerelay and VPN (Virtual Private Network); few
unique ISDN services exist, etc. Recently, NTT identified the present ISDN as a universal
multimedia network, and began aggressive sales promotion, including announcing new
discount tariff plans and a discount for customer premise equipment such as TA (Terminal
Adapter) (Mizuno, 1995). “ISDN in Japan is no longer perceived as a good in itself.”

(Staal et als, 1995)

63

6.3.2 Policy and ISDN

The telecommunication reform in 1985 influenced significantly Japanese ISDN
development. First, privatization of NTT made it difficult for NTT to implement ISDN as
they first expected ISDN as future universal digital network services. Privatization made
NTT more conscious about its costs. Thus, NTT’s emphasis shifted from universal to
business-oriented services (Konriya, 1991).

Second, introduction of a new entry into the telecommunication market did not
work in terms of ISDN development. Since deployment of ISDN facility needs a great
amount of investment, no strong incentive exists for New Common Carriers (N CCs) to
enter the ISDN market. Although three long distance NCCS provide long distance ISDN
voice service over their trunk lines, local ISDN connections are supplied only by NTT
until now”.

Rather, the MPT expected NTT to play the central role of modernization of Japan’s
telecommunications network and encouraged NTT to promote digitization of its system as
quickly as possible. Thus, the MPT asked NT'I‘ to start ISDN service as quickly as
possible (Nambu, 1994). Here, the MPT’s characteristics of managed competition policy
can be found.

Further, the price of ISDN seemed to be strategically guided by the MPT. At the early
stage of ISDN development, equipment costs for ISDN were significantly large. Thus, if

the price was decided by cost-based pricing as the Telecommunication Business Law

 

‘2 Recently, several new local telecommunication carriers (local-NCCs) announced the plan of ISDN
service. (Mizuno, 1995). This movement will have a significant consequence on ISDN development in
Japan.

64

states, the price should have been set higher. However, the price of ISDN was decided at
a surprisingly low level, despite the fact that NTT preferred cost-based pricing.l3 For
example, charge of INSNet-64 (Basic interface) for business users are 5,400 Yen/Month
(as compared with 2,350 yen/month for analog telephone service) plus usage based
charge, which is the same as the analog telephone service. As Komiya (1991) pointed out,
“the charges were decided by the MPT, and NTT had no choice but to accept them”
(p.262). NT'I‘ lost the strong incentive to promote ISDN by this pricing because the larger
subscribers meant a greater loss for them.

It is hard to say whether the MPT’s policy has a positive or negative influence on
ISDN development in Japan. Also, it is still too early to assess ISDN in Japan. Compared
with the USA and the UK, ISDN in Japan shows solid growth, but that does not mean

sound development. So far, ISDN is dependent on the NTT’S huge loss.

 

‘3 The MPT thought low level of rate could encourage rapid diffusion of ISDN. This stance was

influenced by the European policy of keeping ISDN usage charges at the level of basic telephone services
(Staal et als., 1995)

Chapter 7

Videotex

Videotex is defined by International Telecommunication Union (ITU) as “an
interactive service which, through appropriate access by standardized procedures allows
users of Videotex terminals to communicate with databases via telecommunication
networ ” (OECD, 1988, p.9). Some common characteristics of Videotex include
interactivity, simplicity of use, information retrieval and transaction. Since Videotex began
in the UK as Prestel system, Videotex has been expected to be new interactive media in
every developed country. However, except for the French Mirritel system, the
development of Videotex has not succeeded significantly all over the world.

In this chapter, policy influence on the Videotex service in the USA, the UK and
Japan will be explored. The Videotex deployment has been influenced by several factors, in
addition to policy, such as network architecture, information source, and marketing
approach, etc (Bouwman et al, 1992). However, policy factor also plays an important role

in Videotex development.

7.1 Videotex in the USA
7.1.1 Videotex Development in the US

Videotex in the US has several unique characteristics, compared with the other
countries. First, unlike European countries and Japan, in which PTOs (public telephone

Operators) are the monopolistic service providers, the USA does not have monopolistic

65

66

videotex providers. Generally, since AT&T and RBOCs have been prohibited from
providing information service, the US telephone companies are limited to providing the
transmission service. Instead, many competing service providers are in existence
(Steinfield, 1992).

Second, related to the first point, since no dominant videotex provider exists, no
specific display protocols using special purpose terminals exists. US videotex systems tend
to use personal computers as terminal equipments with ASCII text instead of graphical
oriented displays (Steinfield, 1992). Thus, few strictly defined videotex systems exist in
the USA. Most of the service are videotex like systems, such as on line service.

The US videotex had several pilot projects failed in the early and mid 19803.
Videotex operated by Knight Ridder Newspapers Inc. and Times Mirror Co. are examples
(OECD, 1988). These services are based on NAPLPS (North American Presentation-
Level Protocol Syntax), which AT&T developed for videotex protocol. Over this period,
wealthy suburbs were targeted but only a few subscribers were willing to pay connection
fees of up to $20 a month along with one-time charges for terminals of $400 or more
(Noam, 1992).

Also, on-line services, such as CompuServe, began in the late 19703. CompuServe used
its installed base of mainframe and a widespread packet switching network.

In 1987, restrictions on RBOCs to enter the information market was relaxed and
gateway services, which provide easy connections to any database of enhanced service
provider by offering user-fiiendly menu services, were created. Several RBOCS started

gateway services in 1988 and 1989, but most failed soon after their introduction (Noam,

67

1992). These services required additional cost for subscribers and subscribers can access
directly to information providers without gateway services.

If on-line services like CompuServe are included, the current US videotex market can
be a quite big (Table 18). Although the consumer market consist of only 2.7%, table 19

shows subscribers are increasing.14

Table 18 The US Online Service Market 1990

- 4,200,000 on line service subscribers

- 90% growth rate in revenues from 1986 to 1990
- 1990 revenues of nearly $9 billion

Market Segments

Financial/ Brokerage 49.
Credit reporting/ Verification 18
Financial News/ research 16.
Legal/ regulatory 7
Professional 6
Home consumer 2
Marketing 0

Source: SIMBA Information, Inc. cited in Steinfield, 1992.

Table 19 Growth in Subscribers for Selected Services

87 88 89
CompuServe 340,000 416,000 760,000
GEnie 37,000 85,000 252,000
Delphi 45,000 55,000 80,000

Source: Rlen Communications, March, 1991 cited in
Steinfield, 1992.

 

1‘ The recent data shows drastic expansion of on-line services. Currently, America on line has 4.5 million
subscribers, CompuServe has 4 million subscribers, and Prodigy has 1.5 million subscribers (Ziegler &
Sandberg, 1996)

68

7.1.2 Policy and Videotex
The two structural policy frames in the US, the FCC computer inquiries and the
Modified Final Judgment (MFJ), have had critical influence on videotex development.

Computer inquiries, as mentioned in chapter two, have been the FCC’s effort to
specify the conditions which regulated carriers could provide unregulated information
services (Steinfield, 1992). Especially Computer Inquiry III will have significant effect on
videotex marketplace. District court Judge Harold Greene allowed the RBOCs to enter
the information services via the overturning his previous decision in July 1991. Computer
Inquiry III and its Open Network Architecture may free the RBOCs from having to form
separate enhanced service subsidiaries (Datapro, 1993a).

The MFJ prohibited the RBOCs from offering any information service. Also, Judge
Harold Greene continued to oversee the MFJ and he had to preempt the ability of the FCC
to determine the conditions under which regulated common carriers might provide
information service. Thus, “he has significantly shaped the information service industry in
the US.” (Steinfield, 1992, 160). Although this prohibition was lifted in 1991, this policy
was critical in the formation of the videotex market.

The MFJ’s geographical business restriction was also a negative factor for RBOCs.
Since their business is limited in Intra-LATA transport, they would need to place videotex
access point in each LATA in order to offer videotex service (Steinfield, 1992).
Apparently, it is not an economical approach.

Because of these prohibitions, RBOCs did not have a strong incentive to develop the

videotex market. They have no real interest in seeing the market flourish under the present

69

line of business restrictions. The formation of the US videotex market has been influenced

by these policy factors.

7.2 Videotex in the UK
7 .2.1 Videotex Development in the UK

Prestel was the world’s first public interactive videotex system, developed in the
early 19703 at the Post Office Research Center. The trial service was begun in 1979, and
regular service started in 1979.

The Prestel system has several characteristics (Bouwman et al., 1992): the
consumers need to buy a television-set with a special decoder, a subscription is needed,
the system architecture is complex as is the centralized system, etc. The Prestel system
influenced many other countries’ videotex system such as in Denmark and Netherlands

Prestel service was welcomed by the UK government and BT. The government needed
a highly visible indicator of British scientific and engineering know-how (Noam, 1992).
The government also wanted to capture international markets by speeding up videotex
implementation (OECD, 1988). BT expected revenue increase from traffic rise and
facility charge for information providers.

However, Prestel in the UK could not show significant success. Although Prestel
increased its subscribers in the 19803, the number began to decrease in the 19903 (Table
20). Compared with the other major European countries and Japan, its failure is apparent
(Table 21). The failure may be attributed to several factors such as network design

(Prestel does not use national public packet-switched data network), terminal strategy (the

70

terminal costs expensive), access and billing conditions (users have to pay telephone

charges, Prestel subscription charge, and Prestel usage based charge) (Thomas et a1,

1992).

Table 20 Prestel Development

Subscribers 10,000 47,000 70,000 95,000 fewer than
50,000

(Source: 1980-1986, OECD 1988; 1988, Bouwan et al, 1992;
1991, Bouwan et a1, 1994)

Table 21 Diffusion of Videotex

UK 100,000
France 5,700,000
Germany 260,000
Japan 122,993

Notes: UK, France, Germany; Figures as of mid-1991, Japan;
end-1991)

(source: UK, France, Germany; Bouwan et al, 1994, Japan;
InfoCom, 1994)

7 .2.2 Policy and Videotex in the UK

The policy environment in telecommunication certainly has affected videotex
development in the UK. First, BT’s privatization was a big factor. When Prestel was being
developed, the UK post office had been already transformed from a state agency to a more
market-oriented state corporation. Although Prestel was set up as a separate “profit
center”, the effort to prepare for the competition reduced the effort to development of

videotex (Thomas et al, 1992).

71

The UK’s deregulation policy also worked negatively for Prestel. After the value-
added services liberalized in 1981, the private videotex system went beyond their initial
‘in-house’ uses (Thomas et a1, 1992), and they became strong competitors for Prestel.

After privatization, BT becanre more cost-profit conscious. In order to adjust
competitive environment, BT improved several technical side of Prestel such as the
introduction of mailbox services and the connection of external computers to Prestel via
gateway. On the other hand, BT considered seriously the change of videotex system
design from Prestel to the French Minitcl type design. However, BT eventually dropped
the plan, because “BT did not think that a mass-market service would be profitable
enough to risk the investment, and was worried that the mass distribution of terminals
might lead users to access services run by other organizations” (Thomas et al, 1992).

Further, the new pricing scheme, which was adopted after BT privatization, affected
the BT’s investment attitude. The privatized BT was prohibited from practicing the cross-
subsidization between networks, equipment and service provision. Therefore, BT could
not take free terminal distribution strategy like French Minitcl. Also, videotex unit could
not even count the extra local traffic generated by videotex as part of their revenue, even

though the cost of the Prestel access network is charged (Thomas et al., 1992).

7.1 Videotex in Japan
7.1.1 Videotex Development in Japan
Videotex in Japan is called CAPTAIN (Character And Pattern Telephone Access

Information Network) which was developed by the Nippon Telegraph and Telephone. The

72

introduction of CAPTAIN was carefully planned and. prepared by both the Ministry of
Post and Telecommunications (MPT) and NTT. They conducted CAPTAIN experiments
in 1979 and 1981 with information providers, manufacturers and users groups (OECD,
1988). After the examination of experiment results, CAPTAIN was launched in 1984 on a
commercial basis by NTT. An important characteristic of Japanese videotex system at the
initial stage is the heavy involvement of the MPT. The MPT expected CAPTAIN to be a
leading service in the “new media” era.

The main characteristics of the CAPTAIN system are summarized as follows: 1)
provision of data transmission service to anyone with an appropriate terminal such as
CAPTAIN terminal or decoder and television; 2) users are offered a wide variety of
services at different costs depending on the complexity; 3) Service prices are determined
by information providers, according to the value of information (OECD, 1988).

Other companies besides NTT exists that offer videotex services. They use a different
protocol from CAPTAIN such as the US standard NAPLPS. Most of them provide the
service only though terminals in public places instead of users’ terminals. Their business
turnover is much smaller than NTT’s CAPTAIN (Komiya, 1991).

Since the introduction of service, CAPTAIN has not met NTT’s growth projections,
even though subscribers increased continuously (Table 22). In order to stimulate demand,
NT'T took on several strategies; price reduction of terminal equipment, marketing for
computer adopters, installation of public terminals, etc (OECD, 1988). Also, the MPT
established a group which examined CAPTAIN development. The group recommended 1)

the changes of CAPTAIN tariff structure, such as price reduction and a volume discount

73

for information provider, 2) development of more diversified terminal functions, and 3)
improvement of CAPTAIN information sources, such as indexing, databases and the
information center (OECD, 1988).

Regardless of these efforts, videotex in Japan is far from a success as in other
countries. The reasons include poor information sources, expensive tariff for both users
and information providers, and slow transmission speed. The main challenge for
CAPTAIN today is to foster demand for services among the general public (OECD,

1988).

Table 22: Number of CAPTAIN subscribers

Business 5.1 11.3 22.3 37.1 49.4 53.7 57.8 62.8 68.2
Resid. 0.6 2.1 8.1 25.3 40.0 48.5 53.5 60.2 70.8
Total 5.6 13.4 30.3 62.4 89.3 102.3 111.3 123.0 139.0

Unit: Thousand subscribers
(Source: InforCom, 1994, p.49)

7.3.2 Policy and Videotex
Structure and price policy in Japanese telecommunication in the 19803 have not
played an important role in videotex development, but Japan’s Videotex case presents one
aspect of typical Japanese telecommunication policy characteristics.
While the MPT introduced competitive policy in the long distance telephone market
and regulated NTT heavily, the MPT took a favorable stance to NTT in the videotex
development. This is because NTT’s strong initiative was necessary for videotex

development. Like ISDN, CAPTAIN was the MPT’s main project in the 19803. The MPT

74

guided NTT to activate the market in several ways. Thus, the videotex policy has a strong
industrial policy aspect, rather than regulation on NTT. This government involvement of
the particular telecommunication service is rarely seen in the US and the UK. On this
point, this Japanese videotex policy is similar to the French’s Minitcl case.

However, the market did not respond to this effort. Although the CAPTAIN market
still shows an expansion trend in recent years, the number of total subscribers are small.
While, recently, other on-line computer services (like CompuServe in the US) are
expanding their subscribers drastically15 , CAPTAIN ’3 future does not look so promising.
NT'T is no longer emphasizing the captain service as an information service tool. Instead,
NT'T wants to revitalize the videotex network as a means of low-cost, two-way

communication (Lehmann, 1994).

 

15 Nifty Serve (one. of the leading Japanese on-line service providers) recently increases 50,000
subscribers every month. The company project more than 70,000 new subscribers in 1995 (Nikkei
Communications, 1995a).

Chapter 8

Data and Value Added Services

This chapter explores the development of data and value added services in the three
countries. Since the 19703, the integration of computer technology and telecommunication
has created several kinds of new telecommunication services, such as packet switching
services, electronic mail services, protocol conversion services, and database services, etc.
Many scholars and much literature have focused on these new services and several terms
and definitions have been developed for these new services: Value Added Network
Services (VANS), Enhanced Services, and Telecommunication Network Based Services
(TN 8), etc. However, it becomes increasingly difficult to define these services precisely
because they are complex plus dynamically emerging, and changing.

Noam (1992) presents a conceptual framework of these enhanced services, so called
VANS. He thinks of VAN s as a system of multiple levels of resale and transformation, and
categorizes them into four levels of services: the first level consists of the basic transport
carriers (AT&T, MCI, RBOCs, etc.), which lease capacity to the level two operators; the
second level is basic value added networks, which are operated by network operators,
such as basic packet switched transmission service and some basic protocol conversions;
the third layer is the generic services where additional software and organized features are
added, such as voice mail, electronic mail, video conferencing, etc; the fourth level is

specific VANS applications, which are specified for users.

75

76

In this chapter, following Noam’s framework, the development of data and value added
services are investigated. At the beginning of each section, the general VAN 3 services in
each county are overviewed.“5 After that, this chapter focuses mainly on level I and II
services of VANS, such as leased line, virtual private network, and packet switching, etc,
because these services are important basic data service for business users and common
non-PSTN services.

Due to the vague definition and the complex markets, little reliable and consistent
service and market information exist in this field. Also, little empirical research has been
done (Stoetzer, 1992). Within this limitation, this chapter will attempt to overview the

Data and Value added services in the three countries.

8.1 The United States
8.1.1 VAN Development in the US
General VAN Overview

Since the concept of VAN rarely exists in the US, it is difficult to overview the VAN
market, in general. Dowling et al. (1991) analyzed the US Value added services by
categorizing the suppliers into three groups: 1) Value-added networks (VANS) suppliers,
such as Tymnet and Telenet, 2) long distance carriers such as AT&T, MCI, and Sprint,

and 3) Regional Bell Operating Companies, such as NYNEX and Ameritech.

 

'6 Since the definition of VAN and data services is different among countries, institutes, and articles,
“VANS” service in this chapter does not clarify the definition. However, it includes the all “services
which combine information production, manipulation, storage and/or distribution, with the use of
telecommunication facilities and software functions” (Bouwman & Latzer, 1994).

77

The first category of VANS services is supplied by the Value Added Networks
providers. A variety of value added services are provided by the VANS suppliers, adding
their own functionality. The VAN s suppliers initially promoted the services to connect
users’ facilities over long distance, but have moved into a whole range of applications,
such as electronic data exchange (EDI), electronic mail, transaction processing, etc. It is
difficult to measure the market volume due to little reliable research (Stoetzer, 1992).

The second service categories are provided by the long distance carriers. Long-distance
carriers moved their business to enhanced service like data communications, e-mail, and
facsimile network. Their strategies focus more on responding to corporate user needs
through offering a variety of data communication services and enhanced services.

Also, some VANS are provided by the RBOCS. The seven RBOCs are interested in
expanding their enhanced services offerings. In 1988, Judge Greene allowed them to
transmit information services, and to provide voice massaging, storage and retrieval, and
electronic mail. Among them, audiotext is the most successful service so far (Dowling et
al., 1991).

Overall, value added and data services markets have been formed by several players

under the competitive market environment.

Leased (private) Circuits Services
Leased line service market has been shaped by serious competitive forces. After the
FCC authorized MCI to build and operate a private line system, a variety of new entrants

were allowed to operate private lines. Also, the FCC’S decision in 1976 removed virtually

78

all legal restrictions on the resale and Shared use of common carrier interstate private line
services (Bolter et 313., 1990, P87).

Currently, leased lines are offered at all levels of network-local, intraLATA,
interLATA, and international by various providers. Also, leased lines are available in a
wide variety of transmission rates from 9.6Kbps through T1 (1.544M bps), to T3 (45M
bps), and even to higher levels of the Synchronous optical Network (SONET) hierarchy
which goes to more than 600M bps (Briere, 1995).

The use of leased circuit is growing continuously. Although data are old, a survey by
Communication Week showed that, of 583 users of leased circuits, 49.9% increased their

use by approximately 50% in 1986 over 1985 (OECD, 1989). '7

Virtual Private Networks (VPNS)

The virtual private networks (VPNS) are telecommunication services in which the public
switched network provides capabilities similar to those of private lines, such as conditions,
error testing, and higher speed transmission with a line quality adequate for data (Newton,
1994). It became popular in the late 19803. Originally VPN was developed to meet voice
networking needs associated with large PBXS, but VPNS expanded into data and video for

domestic and select intemational locations (Striplin, 1994).

 

'7 Also, Switched Digital Services are one of the fastest“ growing services although they are not leased
circuits. Switched Digital Services , which are digital service using public switched carrier, provide much
of the same quality as digital private lines but often at a lower cost per minutes for the small users. Both
local and long distance carriers provide the services (Briere, 1995; Briere, 1991)

 

79

Currently, several VPN vendors exist, such as AT&T, MCI, Sprint, Cable & Wireless
and NYNEX. VPNS have showed strong growth so far and the market growth is expected

to top 25% through 1995 (Striplin, 1994).

Packet Switching

The US has developed a variety of packet switching services since the US. Department
of Defense developed it in the late 19603 (Rowe, 1991).

X.25 is a basic type of packet switching service, adopted by the CCTI‘T (Consultative
Committee for International Telegraphy and Telephony) standard in 1976 as a standard
network access protocol. In addition to local and long distance carriers, some VAN s
operators such as Telenet and Tymnet provide the service (Rowe, 1991).

Frame Relay services are the fast packet services. Frame relay services are designed to
handle Speeds up to 1.5M bps. (Actually, vendors are working on speeds up to 45M bps
and down to 9.6K bps). Right now, in many applications, fiame relay services are
replacing private lines because they work like private lines in a more efficient fashion
(Briere, 1995). The number of users in 1994 expanded 4.1 times as big as those in 1993
(W ada, 1994).18

Further, Switched Multimegabit Data Service (SMDS) is growing, recently. SMDS is a
connectionless, cell-switched data transport service designed for high speed
communications, such as LAN interconnection. Typically, speeds of SMDS rage fiem

1.5M bps to 45M bps (Alber, 1993). SMDS becanre available commercially in the Bell

 

‘ 3 According to the North America Frame Relay Forum, the number of users in January 1993 are 171 and
those in January 1994 are 710 (Wada, 1994)

 

80

Atlantic region during late 1991 and 1992, and all RBOCS have either implemented or are
testing SMDS (Striplin, 1994). Recently, some interexchange carriers begin or prepare to

offer SMDS, too (Briere, 1995).

8.1.2 Policy and Data and Valu Added Services

Several points can be addressed regarding the US telecommunication policy and value
added and data services development: market entry by structure policy, tariff polices, and
network interconnection and use policies (OECD, 1989).

First, structure policy is important because structure policy Shapes the Structure of
service market . The 1982 MFJ and several computer inquires have played a significant
role in VAN 3 development. As mentioned in the previous chapters (Chapter 2 & 7),
RBOCS are prohibited from providing enhanced or information services (however, some
restrictions were relaxed in 1988). Several computer inquires tried to specify the
conditions which regulated carriers could provide unregulated information services.
Computer Inquiry III and its Open Network Architecture may free the RBOCS from
having to form separate enhanced service subsidiaries (Datapro, 1993a).

In this policy background, the US’s unique VAN policy characteristics can be seen. In
the US, VANS are merely functional descriptions, while in many other countries VAN s are
regulatory categories. In the US, the regulatory distinction between “basic” and
“enhanced” services serves to prevent the cross-subsidization by a dominant carrier of its

value-added services through revenue gained in dominant activities. All enhanced services

81

in the US are open to competition and are not regulated. The distinction is established to
protect the newcomers from the established carriers (Noam, 1992).

Second, price policies affected the service development. The US had made an effort to
bring the prices for telecommunication services closer to the cost (rebalancing) Since the
19803 (OECD, 1989). This rebalancing made the conditions for a competitive market.
Also, the competitive long-distance market provides leased lines at much lower prices.
This lower tariff provides lucrative incentives for VAN 3 providers. (Dowling & Witte,
1991).

Thirdly, network interconnection and use are the important aspect of VAN 3 service
development. The US has the most liberalized policy on this point. For example, in terms
of leased circuit availability, the US has no policies that limit the use of national leased
circuits and no restrictions limiting resale in all interstate (and most intrastate) exist.
(OECD, 1989). Further, leased circuit in the United States may be interconnected with any
public network. Common carriers are required upon request to interconnect their
networks with other public networks and with private networks (OECD, 1989).

Overall, these US policies are efforts to create fair competitive VANS and data markets.
These policies contributed apparently to the advanced US VAN 3 service development.
Now that the RBOCS are permitted to enter the market, the market may become more

competitive.

82

8.2 The United Kingdom
8.2.1 Data and Value Added Services development in the UK
VAN Overview

Prior to the telecommunication reform of 1984, the liberalization of VANS (Value
added Network Services) began in the UK. In 1982, the beginning stage of the
liberalization, the UK government opened the VANS market and permitted private
suppliers of VANS to receive licenses (Vickers et al, 1988). Furthermore, a new 12-year
class license for the value added and data services was signed in 1987.

However, the government did not permit the resale of leased line capacity until 1989.19
The prohibition of resale worked as an entry barrier of the private circuits market for the
potential providers. Thus, in the 1980s, this policy established duopoly by BT and
Mercury in the leased line market, while it created a completely competitive VAN 3
market.

Due to the liberalization, serious competition existed between BT, Mercury and other
licensed operators, and VAN market in the UK has expanded drastically. The initial
approval of VANS license in 1982 were 40 VANS vendors (Bolter et al, 1990). In
February 1987, 221 registered value added service providers offered 841 services. Among
them, store and retrieve systems were the most popular (112 services) and mailboxes (90),
protocol conversion (90), customers’ databases (66), and deferred transmission (63)

followed. (Noam, 1992).

 

‘9 The major reason of prohibition on resale was that prices of BT’s private lines were set excessively low.
If resale is permitted in this situation, incentives are created to develop private leased circuit networks and
public network can be used inefficiently (Cave & Trotter, 1989; OECD, 1989).

83

Presently, the UK’S data and VAN services market is the largest in Europe. The market

was estimated to be worth 2.5 billion pounds in 1993 (Datapro, 1993b).

Leased Circuits

After the duopoly system was established in 1984, leased circuits services were
provided by BT and Mercury. In 1989, restrictions on simple resale of private circuits was
abolished and simple resale of leased circuits were approved (Cave & Trotter, 1989, 62).

Since BT took a low leased circuit tariff policy in order to encourage their growth in
the early 19803, corporate users in the UK tended to build private network (Datapro,
1994b).

In 1989, the Department of Trade and Industry (DTI) approved an Oftel report that
recommend to allow Simple resale of BT’s leased lines. The UK was the first European
nation to permit leased line resale. The DTI began issuing licenses to private network
operators and lifted restriction on the number of connections to other private network
(N oarn, 1992).

Currently, BT provides a variety of leased circuits: both analog and digital (Griffiths,
1993). “Kilo Stream” offers digital full duplex transmission at up to 64K bps between
main business centers. “Kilostream N” is used nationally in multiple of 64k bps.
“MegaStream” is a range of digital private circuits available nationally at speed of 2M bps
and above.

Also, in terms of the price level of the UK leased lines, table 23 shows a basket of leased

line charges over different speeds and distances. The UK users enjoy clearly the low tariff

 

34

of leased line. Especially, the tariff of high speed digital leased lines, 1.5/2Mbps, is set

extremely low.

Table 23 OECD basket of leased line charges, January 1994

USA(Nynex) 45,542 101 76,565 84 423,435 76
UK(BT) 39,514 86 43,229 48 211,233 38
Japan(NTT) 38,910 86 70,771 78 558,271 101
OECD Ave. 45,297 100 76,565 100 423,435 100

Note: in US$ based on PPPs (Purchasing Power Parities),
excluding tax
(Source: OECD, 1995a, p.65)

Packet Switching

BT and Mercury offer packet-switched data network service conforming to X.25
standard, both nationally and internationally. Also, in the UK, managed data network
services (MDNS) is an important sector. Currently, several companies, such as IBM, BT-
tymnet, and EDS etc. are competing and the market was approximately 0.4 billion pounds
. in 1993 (Datapro, 1993b). Due to the development of MDNS, corporate users began to
move from leased circuits to MDNS (Datapro, 1993b).

However, the packet switch data communication charges in the UK do not look
attractive, yet. An expensive fixed charge makes packet service more expensive than the

USA, Japan, and OECD average (Table 24).

85

Table 24 OECD basket of packet switched data communication
charges, January 1994

Fixed charge Usage charge Total
USA 6,347.73 2,419.23 8,766.96
UK 7,803.61 6,243.06 14,046.67
Japan 1,855.11 10,546.66 12,401.76
OECD 3,053.71 6,107.41 9,161.12

Note: in USS based on PPPs, excluding tax
(Source: OECD, 1995a, p.66)

Virtual Private Network (VPN)

BT provides several kinds of Virtual Private Network (VPN)
services called “FeatureNet”. They include “FeatureNet 1000”, all facilities of a private
network on the Public Switched Telephone Network, “FeatureNet 5000”, a digital
networked centrex service, and “FeatureNet ACD”, a networked Automatic Call

Distribution service, etc. These services started in 1992 (Griffiths, 1993).

8.2.2 Policy and Data and Value Added Service Development

Since VANS market was liberalized in 1981 and 1987, the UK has had a completely
liberalized VANS and data service market with licensing requirements having been
reduced to the minimum. This liberalization policy has had apparently positive effects on
VANS development (Thimrn, 1992). It promotes the competition among the players and
contributes to the growth of VAN and VAN suppliers. Currently, the UK has the biggest
VANS market in Europe.

For example, BT has reacted aggressively to VAN ’s liberalization policy by offering its

. own services. Before 1982 public E-mail was virtually nonexistent. However, BT had

86

two-thirds of the 70,000 users in its customer base by 1986 (Bolter et al., 1990). Further,
BT participates lucratively in joint ventures with providers of information services. BT
provides the communication medium and the partner provides the voice message or other
information (Bolter et al., 1990).

Also, the duopoly structure between BT and Mercury in the leased circuits affected
positively VAN 3 suppliers, which use leased lines as their VAN ’3 access or backbone
networks. Leighfield (1991) stated that the transition from monopoly to duopoly
contributed clearly to the expansion of VANS business, when be reviewed the duopoly
from the VAN supplier’s aspects. He pointed out BT’s improvement of service provisions,
such as dates needed for installation, and users’ demand sensibility.

Further, the effect of price policy on the BT’s leased circuits services tariff can be seen.
In the mid 19803, BT proceeded the rate rebalancing of leased circuits because prices of
BT’s leased circuit were set traditionally under their costs. Also, in 1989, at the same time
prohibition of simple resale of BT’s and Mercury’s leased lines was abolished, and price
cap regulation was imposed on BT’s private circuits. BT was required to hold the real
price of its private services at the level of PRI-4 (Cave & Trotter, 1989). Through this

process, BT rebalanced its tariff structure of leased circuits.

.i_——_

 

87

8.3 Japan
8.3.1 Data and Value Added Services Development
General VANS

Prior to the telecommunication reform of 1985, liberalization of data communication
circuit utilization and introduction of competition in the VAN 3 market had begun in 1982.
Shared use and third-party use of leased circuit, circuit utilization, and interconnections
between private and public networks were liberalized in 1982.20 Also, private companies
could provide partly value-added communication services by utilizing circuits leased from
NTT (Tomita, 1984). Furthermore, the telecommunication reform in 1985 liberalized
completely Japan’s VAN market (Hayashi, K, 1989).

The telecommunication business law in 1985 divided the telecommunication service
providers into two categories: Type I carriers, which own their own transmission circuits
and facilities, and Type II carriers, which do not have their own facilities. Data and VAN
service can be provided basically by both types of carriers, and thus, serious competition
has existed.

Due to user demand and competition, the VANS market expanded drastically in the
late 19803. The market size in 1992 had grown Six times as big as that of 1985 (table 25).
The number of Type H carriers had increased and the total of 1128 Type II carriers

existed in 1992 (Table 26).

 

2° The exception is that connections at both ends of the leased circuits to the public network.

 

88

Table 25 Market Size

Unit: Million Yen
(Source: InfoCom Research, 1994, p199)

Table 26 Number of Type II carrier

Type II Special 9 10 16 22 26 27 34 36
Type II General 200 328 512 668 813 912 1000 1092

(Source: MPT, 1994)

Lemndcheufl

Since the telecommunication reform of 1985, both NT'T and NCCS have provided a
variety of leased circuits services. For example, NTT provides basic leased circuits, high
speed digital leased circuits, video transmission, TV relay, and satellite communication
smwkes

The markets have grown steadily. The basic leased circuit showed an average 10%
growth of subscribers between 1986 and 1991 (table 27). Especially, high-speed digital
private-line services, whose transmission speeds are more than 64K bps, increased
significantly their subscribers. Table 28 shows an average 30 % growth between 1985-
1991. It is remarkable that NCCS have about 25% of the share in this market. In 1994, in
order to respond to the demand of high speed data communication, NTT began to provide

150M high-speed digital private-line services.

89

Table 27 Subscribers of leased circuit (General)

1986 1987 1988 1989 1990 1991
NTT 574,488 644,292 746,844 825,261 901,055 961,848
NCCS 410 1,129 1,603 3,429 5,516 7,976

(Source: InfoCom Research, 1994, p55)

Table 28 Subscribers of leased circuit (High Speed Digital)

1986 1987 1988 1989 1990 1991
NTT 2,125 3,812 5,289 6,644 8,453 11,108
NCCS 100 595 1,165 1,915 2,830 3,967

(Source: InfoCom Research, 1994, p55)

Also, a number of resellers of private line services, which are Type II carriers exist. In
1994, 138 Type 11 general type carriers did resale business (MPT, 1994). They have
expanded their business by offering cheap rates and they became big threats to the both

NTT and Type I NCCS.

Virtual Private Networks

Both NTT and NCCS provide virtual private networks. In 1994, NTT began VPN
service called “Members’ Net”. One year later, NCCS began VPN service, called “VP
Net” (DDI), “J Net” (JT), and “Teleway superNet” (TW J) (Nikkei Communications,

1995b).

Packet Switching
NTT provides three types of basic packet switching services: Digital Data Exchange-

packet services (DDX-P), which use X.25 protocol, Digital Data Exchange- telephone

90

packet services (DDX-TP), which users access via a public switched telephone network,
and INS packet services (INS-P), which use B or D channel of NTT’S ISDN services. AS
table 29 shows, the subscribers of packet switching are increasing steadily. Also, the Type

II carriers offer packet switching services.

Table 29: NTT Packet Service subscribers

1988 1989 1990 1991 1992
DDX-P 33,941 41,031 48,356 47,511 43,669
DDX-TP 87,339 139,993 190,331 288,188 339,408
INS-P N.A. N.A. 4,429 27,809 59,155

(Source: MPT, 1994)

Following the US, frame relay service becarrre available in Japan. The Type II carriers,
Star Net and AT&T Jens, first introduced the service in 1993. NT'T began to provide the
service in 1994. Until the end of the 1994, eight type II carriers and two Type I carriers
provided the service (Nikkei Communications, 1995c, p36).

So far, no service providers provide SMDS in Japan.

8.3.2 Policy and Data and Value Added Services
The liberalization policy to both facilitated based carrier (Type I) and Value added
Network service providers (Type II) brought competition in every segment of value added
and data communication services. Furthermore, the competition provides users many
service options and cheaper rates.
Also, as Matsuura (1994) pointed out, the structural separation of Type I carriers and

Type II carriers is generally successful. The separation is a legally clear concept. Also, it

91

makes it possible for both types of carriers to take several business strategies. Especially,
due to loose regulation by the MPT, the number of Type H carriers have been increasing
and several services have become available. Some advanced services, such as Virtual
Private Network (VPN) services and frame relay service were introduced first by the Type
H carriers and Type I carriers followed them. Therefore, in general, the structural
separation can be evaluated positively.

However, some issues still exist. Compared with the United States, the introduction of
new services, such as VPN and SMDS were late or not available in Japan. Some part of
this reason can be attributed to a policy issue: network inter-connection problem. Since
NT'T still dominates virtually all the local access networks, the other long distance carriers
and Type H carriers have to use NTT local network in order to provide their services to
their customers. Since NTT did not open its Open Network Discipline (OND) until
recently,21 the negotiation about interconnection made it difficult to reach an agreement.
This situation delayed or suspended new service offerings. For example, VPN took five
years to reach an accord between NT'T and NCCS. Also, two years were spent trying to
reach an agreement on frame relay service (Mizuno, 1994).

In the near future, new services using intelligent network function and CATV network
will emerge. Therefore, without presenting a clear policy about interconnection, Japan will

be far behind in terms of developing new advanced services.

 

2' In October 1995, NTT announced its Open Network Discipline (0ND), in which NTT can accept any
interconnection with the other network.

Chapter 9

Summary & Conclusion

First, in this chapter, a general summary of the previous chapters is addressed, and then,
answers to the research questions are presented. Finally the policy implications for future

telecommunication service development are explored.

9.1 General Summary

In chapter 2, telecommunication policy in the US was examined. Historically, the US
telecommunication history has had unique characteristics: it has developed as private
telephone systems; two jurisdictions, the Federal Communication Commission (FCC) for
interstate telecommunication service and state Public Utility Commissions (PUC) for
intrastate telecommunication, have existed for policy making, and courts have strong
virtual policy making power through their decisions. With these characteristics, the US
initiated liberalization of the telecommunication market faster than other countries.

The liberalization policy began in the late 19603, mainly by the courts’ decisions and
the FCC’S policy. Following several deregulation policies, in 1982 the modified Final
Judgment (MFJ) played a decisive role in shaping the present form of the US
telecommunication industry. The MFJ divested the Bell system and created seven Regional
Bell Operating Companies and a smaller AT&T.

In terms Of structure policy, the MFJ and the FCC’S computer inquiries have played an

important role for the service development. While the MFJ gave freehand to AT&T, it

92

93

imposed several restrictions on the RBOCs, such as geographical restrictions of RBOC’S
service area, and the prohibition of long distance service, manufacturing, and information
service. Although this policy was aimed at restricting the exercise of RBOC’S
monopolistic market power, it might have given RBOC disincentive to develop new
services.

Also, the FCC’S several computer inquiries provided structural framework of
telecommunication service. In the inquiries, the FCC attempted to define the conditions
under which regulated common carriers could provide unregulated “enhanced services”.
This policy promoted competition in enhanced services. Further, in the third inquiry, the
FCC proposed an Open Network Architecture (ONA), which unbundles the network
service, instead of structural separation.

In terms of price policy, since the late 19803, the traditional rate of return regulation
began to be replaced by the alternatives in both interstate and intrastate levels. In 1988, at
the interstate level, the FCC introduced a price cap method to AT&T. Also, at the intra-
state level, several states moved to the alternatives, such as price cap methods, price
freeze schemes, and earning sharing schemes. These changes might influence the behavior
of the regulated companies, and would influence the telecommunication service

development.

In chapter 3, telecommunication policy in the United Kingdom was examined. The UK
telecommunication had been operated by the state owned monopoly, the post office. The

liberalization policy began partly in the late 19703, and telecommunication act in 1984

94

played a Significant role in creating a new UK telecommunication system. The reform
privatized British Telecom, and created the licensing system and the regulatory agency,
the Office of Telecommunication (Oftel). In the field of basic telephone service, the new
entry was admitted and duopoly between BT and Mercury was created. Also, besides
basic telephone service, anyone could enter the market. During the late 19803 and the
early 19903, further liberalization policies, such as licensing Value Added Data services
and permission of simple resell of leased circuit were furthered.

In terms of structure policy, duopoly policy fi'om 1983 to 1991 played a major role. The
introduction of competition between BT and Mercury created a competitive marketplace
in a rather moderate way. While duopoly promoted competition, BT could take time to
reorganize its structure for competition. However, after the duopoly policy was reviewed
in 1990, the UK decided to abandon duopoly and introduced a more competitive policy
through approving more entries into the basic telephone market.

Regarding price policy, the UK was the first country which introduced a price cap in the
field of telecommunication. In 1984, a price cap to BT’s pricing, PRI-X formula, was
adopted. Price cap aimed mainly to reduce the detail intervention on prices and profits by
regulators, and to give more managerial incentive to BT. Although some shortcomings,
such as a decrease of service quality and several operational changes existed, a price cap

method has continued to be a basic policy scheme of the UK telecommunication.

In chapter 4, telecommunication policy in Japan was analyzed. Like the UK, the

Japanese telecommunication system was provided by the state owned monopoly, Nippon

95

Telegraph and Telephone Public Corporation. Some liberalization began in the 19703, and
major change occurred in 1985, when Telecommunication Business Law (TBL) and NT’T
corporation Act were introduced. NTT was privatized and all kinds of telecommunication
services were open to competition. Several new common carriers (NCCS) entered into
both the local and long distance market.

Regarding the structure policy, the TBL categorized telecommunication service
providers into two types of carriers: Type I, which owned their own facilities, and Type H
carriers, which leased facility. The Ministry of Post and Telecommunication (MPT),
Japanese regulatory agency, regulates strictly Type I carriers through controlling market
entry and exit, while it regulates much less Type H carriers. Also, the MPT segmented
telecommunication market into several sub-markets, and, at each market, incumbent
carriers (NTT and KDD) ' and NCCS, Specializing in each segmented market, are
competing.

In terms of price policy, the MPT also exercised a strong regulatory power on the type 1
carriers. The TBL states service prices offered by Type I carriers need approval by the
MPT. Furthermore, the law adopted the rate of return regulation, but the MPT used it to
protect and help the growth of the NCCS. The tariff has been handled through informal
“guidance” by the MPT rather than by the formula.

Overall, Japanese telecommunication policy since 1985 can be characterized as
managed competition. The MPT has used both structure and price policy in order to

realize a competitive market.

96

In chapter 5, basic telephone service development and policy in the three countries were
analyzed, in terms of market growth, rates, service quality, and traffic growth. In the US,
it can be observed that the US’s structural change of the industry by deregulation policies
and divestiture had generally a positive impact on basic telephone service. The structure
change from the monopoly to competition in the long distance market became a factor of
the drastic rate reduction in toll prices. Some price increase occurred in local service, but
the range was not as big as expected. Partly due to the toll rate reduction, the toll traffic
has expanded significantly. However, service quality shows some decrease in various
service categories after 1991 under price cap schemes, although it showed general
improvement during 1985-1990.

In the UK, basic telephone service development has Shown some relation with the UK
telecommunication liberalization policy. Telephone rates are the area on which the
competition between BT and Mercury have the most influence. The competitive pressure
decreased BT’s long distance rate about 25% between 1984 and 1990. Also, the price cap
made it possible for BT to rebalance its tariff structure. Service quality, one of the big
issues in the UK, was influenced negatively by a price cap. After the price cap was
introduced, some indicators of service quality became worse. Oftel responded to this
Situation by monitoring BT’s service quality more closely. Recently, the BT’s service
quality shows improvement. As the significant expansion of the UK’S public
telecommunication market and telephone traffic during the duopoly era indicates, structure

and price policy in the UK succeeded basically. Moreover, the UK government decided

97

further deregulation by abandoning duopoly and admitting free entry into the telephone
market.

In Japan, in terms of the field of basic telephone service development, the
telecommunication reform was basically successful. The structure change from a
monopoly to competitive industry contributed to a drastic reduction in the long distance
rate. Although some lack of clarity existed in the MPT’s price regulation and its operation,
the policy helped effectively the rate reduction. Also, service quality has continued to be at
a high level.

However, Japan’s case shows some unique characteristics, too. Even though the long
distance rate decreased drastically due to competition, the service market did not appear
to develop well in terms of revenue and traffic. Although we could not find a clear link
between this situation and the MPT’S policy, the strongly managed competition by the

MPT could be a certain factor in the Japan’s weak market expansion.

In chapter 6, the development of ISDN and policy were discussed. The US has been
struggling with the development of ISDN Since it was introduced in 1986. Currently,
carriers are working on solving the problems of ISDN, such as a lack of availability,
connectability, and applications, but prospects are still not promising.

In terms of policy, both structure and price policy are related to ISDN development,
although some other factors, such as corporate strategies and user demand, are strongly
related to ISDN development, also. The Structural separation of Bell systems by the MFJ

created different technical detail, and line of business restrictions gave disincentive to

98

RBOCS for ISDN deployment. On the other hand, as Greenstein (1995) analyzes, the
movement from the rate of return regulation to a price cap will probably have a positive
effect on future ISDN development.

In the UK, ISDN development has been promoted mainly by BT. Although BT began a
standard ISDN offering in 1988, BT did not promote it so aggressively. The UK’S
installed line of basic rate ISDN is far behind those of Japan and the other major European
countries. Regarding policy, competition under duopoly policy did not promote ISDN
development. The competition with Mercury made BT’s strategy focus on more short-
terrn profit origin type services.

In Japan, ISDN development appears to be the most successful, compared with the US,
and the UK. Since NTT began the service in 1988, the subscribers have been increasing
steadily and by 1993 the service had 240,000 subscribers. In terms of policy, ISDN in
Japan presents a good example of Japanese style of managed competition. However,
introduction of a competitive market structure in 1985, did not play a major function in
ISDN development. NCCS did not have strong incentives to promote ISDN because of the
high cost of equipment. Rather, the MPT expected NTT to play the major role of
promoting ISDN and urged NT'T to be heavily involved. For example, the price of ISDN
was Strategically guided by the MPT to a low level, even lower than the cost, in order to
promote ISDN. However, this policy guidance did not work as well as the MPT and NTT
expected. The subscribers are still under the initial NT'T’ 3 plan and it is difficult to

determine a positive future. Currently, ISDN is dependent on the NTT’S huge loss.

99

In chapter 7, the development of videotex and the policy on videotex were analyzed.
In the US, videotex has developed in a unique way; it was not provided by the telephone
operators, like many other countries. Several kinds of service providers, some from
computer services and some from news industry, emerged. In the US, no strictly defined
videotex have existed, instead many videotex-like services has existed.

This unique development has been largely influenced by structure policy. Since the
consent decree in 1956, AT&T was prohibited from providing information service. Also,
the MFJ in 1982 continued to prohibit the RBOCS from information services. Although
the prohibition was lifted in 1991, it had had critical influence on the videotex
development. Furthermore, the FCC’s Computer Inquiry HI and the Open Network
Architecture (ON A) may give the RBOCS more fieedom to provide information services.

The UK introduced the world’s first videotex, Prestel. The Prestel service started in
1979, but its development did not show significant success even though it was largely
expected by the government and BT; the subscribers were fewer than 50,000 in 1991.

In case of the UK, the policy did not seem to influence directly videotex development,
but the policy environment influenced the development, indirectly. Privatization made BT
more cost-profit conscious, and BT could not invest much into the videotex promotion.
Also, VAN liberalization created competitors for Prestel. Furthermore, a new rule for
pricing, strict prohibition of cross-subsidization, worked negatively for the promotion.

Japanese videotex, CAPTAIN, was launched in 1984 with high expectation of both the
MPT and N'I'T as a key service of the “new media”. Regardless of NT'T’S promotion and

- the MPT’S involvement, videotex in Japan is far form success. The subscribers are

100

increasing, but the number is far from a critical mass. Videotex policy shows both
Japanese style managed competition and industrial policy aspects. The competitive
structure did not help in the videotex development, and the MPT expected only NTT to
develop videotex. However, this industrial policy aspect completely failed and the market
did not respond to the policy. Recent rapid development of commercial on line services is

impressive, compared with a videotex policy failure.

In chapter 8, value added and data services were discussed. Both general value added
services and some specific services, such as leased circuits, virtual private network (VPN)
and packet switching services, were overviewed. In the US, value added and data services
have been supplied by several providers, such as VAN providers, long distance carriers,
and the RBOCS. Due to users’ strong demand of enhanced service and the competitive
market environment, the market has steadily expanded. Some reports stated that from
1988 to 1992, the VAN market showed a compound annual growth rate of 10 %. Also,
the US has been enjoying very diversified services. Leased line, VPN, and packet
switching (X.25, frame relay and SMDS) services have several kinds of services,
depending on speed and capacity. Also, recently new services are dynamically emerging.

These dynamic value added and data service developments are largely related to the US
telecommunication policy. The MFJ and computer inquires have helped to open the all
enhanced service markets and protected new comers from the monopolistic powers. Also,

efforts to rate rebalancing established the basis for the competition. Furthermore,

 

101

liberalized network interconnection and use are important. These policies are efforts to
create fair competition in the value added and data service market.

The UK has a developed value added service market, too. Since the liberalization in
1982 and 1987, the number of VAN operators has increased drastically, and the market,
estimated at 2.5 billion pounds, has become the largest in the Europe. Leased lines
services especially provide low rates. VPN service began in 1992 and several kinds of
packet switching services are available. Since the UK customers use leased circuits
heavily, it still needs effort to market the packet switching services.

The growth of value added and data service in the UK has been partly attributed to the
liberalization policy. It promotes the competition among the players. Even BT reacted
aggressively to the VAN service.

Like the USA and the UK, Japanese value added and data services were liberalized in
the 19803. These services are provided by both Type I carriers and Type H carriers, thus
severe competition among the players exists. Due to user demand expansion and
competition, some research reported in 1992 the market grew Six times as big as that of
1985. All major data services, such as leased circuits, VPN, and packet switching are
offered by several providers.

The development of the services are attributed partly to the liberalization policies. The
structural separation between Type I carrier and type H carrier made Type H carrier do
business in a flexible way through loose regulation. However, Japanese policy is still

facing a big policy issue in terms of the development of value added and data services;

 

102

network interconnection problem. Since NTT still dominates the local access network, this

problem will be a key issue for the further development of value added and data services.

9.2 Research Questions

This section provides tentative answers to the research questions addressed in chapter
1. To the questions, “How has Structural policy in the three countries been formed in the
19803 and early 19903?”, “What structural differences exist among the three countries?”,
the structure policy of the US, the UK, and Japan are summarized in Figure 1. All these
countries experienced drastic structural change in telecommunication industry in the
19803: The MFJ and the FCC’S computer inquiries established the present US
telecommunication industry structure; in the UK, the telecommunication reform in 1984
liberalized the market and established the duopoly system; also, Japan followed the two
countries by the Telecommunication Business Law and NT'T law in 1985. However, we
can observe difference in the approach to create competitive market structure. In the US,
all markets except the local telephone market, became completely free. In the UK. in both
local and long distance service, a more moderate competition policy by duopoly was
adopted, first, but it changed to more competitive policy in 1991. In Japan, both local and
long distance markets were open to competition, but the MPT still exercises strong entry
and exit regulation to Type I carrier. So, the competition has been controlled by the MPT.

All three countries have a completely free VAN market.

103

Fig. 1 Structure Policy in the USA, the UK, and Japan
USA UK Japan
Legal - MFJ - Telecom. -Te1ecom.
framework - Computer Act 1984 Business Law
Inquires ~NTT Law
Local PC PC->C(1991) C
Long Distance C PC->C(1991) C
VAN C C C
Comments -geographical —BT privatization -NTT privatization
separation -Duopoly -Type I & Type II
-Line of (1983-1991) -Entry & Exit control
business -more open entry to Type I carriers
restrictions (1991-) -NTT for domestic
(RBOCs) KDD for international
-ONA -NCCs serve segmented
market
*PC: partly competitive, C: Competitive

Fig. 2. Possible effects of structure policy on Service Development
USA UK Japan
Basic -rate reduction -rate reduction -rate reduction
Telephone (Long distance) (Long distance) (Long distance)
Services -market & traffic —market & traffic-improve service
expansion expansion quality
-little market &
traffic expansion
ISDN —standard, -BT: no strong -The MPT's
interconnection, incentive, involvement
availability look for short -competition not
problem profit services work
-different RBOC's
strategy
Videotex -RBOCs cannot —BT:wanted to -The MPT’s
provide avoid heavy involvement
-private videotex investment ~competition not
develop -competitions with work
other systems
Value added -promote -promote -promote
& data competition competition competition
services -market growth -market growth -market growth
-a variety of -interconnection

services

issues remain

104

To the questions, “how is structure policy related to telecommunication service
development among the three countries?”, Figure 2 shows the summary of the previous
discussions. The introduction of competitive market structure led to the reduction of long
distance telephone rates significantly in all three countries. However, only in Japan it did
not lead to substantial market and traffic growth, while the US and the UK have grown
significantly. Also, regarding ISDN development, ISDN in the US has been affected by the
structure policy. The US’s divided market by several RBOCS made it difficult for ISDN to
be developed ubiquitously. ISDN in the UK and Japan has not been influenced by the
structure policy. Both countries chose the development by the former monopoly
initiatives, rather than by the competitive forces. However, both of them could not
succeed in its development. Further, structure policy affected the videotex market. In the
US, the prohibition of providing information service by the old AT&T and RBOCS
promoted the development of private videotex systems. On the other hand, the UK and
Japan chose the development by the former monopoly, BT and NTT, but the competitive
structure did not promote videotex development in either country. In the value added and
data services, all three countries have a completely free market structure. This policy
promoted competition effectively and those three countries have the most advanced value
added and data service market in the world.

Overall, the US has experienced the substantial consequences of structure policy. The
MFJ works both positively and negatively, and computer inquiries work positively, in

general. The UK and Japan developed services by both competitive market force and

105

former monopoly driven development, depending on services. In the case of new service,
such as ISDN and videotex, BT and NT'T played an essential role. However, in the field of
basic telephone and value added services, the competitive market structure critically
affected their development.

To the question “How has price regulation in the three countries been formed in the
19803 and early 19903?” and “What differences in price regulation may exist among the
three countries?”, Figure 3 shows the summary. Both the US and the UK moved from the
traditional rate of return regulation to the other alternatives, such as a price cap. In the
US, the FCC adopted price cap regulation in 1989 to AT&T. At the local level, many
states moved to the several kinds of incentive regulations. In the UK, a price cap has been
used since 1984. Although several operational adjustments of the price cap formula
occurred, the system provides the managerial flexibility to the regulated company. Only
Japan still uses the rate of return regulation. However, the operation of the rate of return
regulation is changeable there. The MPT uses this price regulation to achieve its policy

goal with price approval power.

USA UK Japan
-Price cap (Interstate) -Price cap(1984) —ROR to Type I
(1989) -need MPT's approval
-ROR -> price cap,etc. -MPT’s guidance
(Intrastate)

To the question; “How has price regulation been related to telecommunication service

development?”, Figure 4 summarizes the possible points. In the basic telephone services,

106

carriers can react flexibly to the competitive business environment under a price cap. In
the US and the UK, long distance service rates decreased drastically, but local rates
increased because of the effort of rate rebalancing. On the other hand, since the rate of
return regulation in Japan used for MPT’s policy tool, local rates did not increase and the
rate rebalancing could not be achieved. Further, in the UK, the introduction of a price cap
led to a decrease of BT’s service quality, and, in the US, the decrease of service quality
was reported, too. In the case of ISDN development, some scholars reported a price cap
method increased the RBOC’S incentive to invest in ISDN. In Japan, again, the MPT’S
guided pricing operation becomes clear. The price of ISDN was decided by the MPT’S
strategic guide for quick diffusion, not by the actual operation of the rate of return
regulation. However, this guidance could not have significant effect on Japanese ISDN
development. Clear relation between the price policy and videotex development could not
be found, generally. However, in the UK, prohibition of cross subsidization, which is
introduced with a price cap had a negative effect on videotex development. Since almost
of all value added and data services are exempted from price regulation, the effect of price

policy on this market could not be observed.

107

Fig. 4. Possible Effects of price policy on Service Development

USA UK Japan

Basic -rate reduction -rate reduction -rate reduction
Telephone (Long distance) (Long distance) (Long distance)
Services -rate rebalancing -rate rebalancing -No rebalancing

—negative —decreased service

impact on service quality

quality
ISDN -increase RBOC’s - no significant -MPT's

ISDN investment influence Price guidance
Videotex -no significant —prohibition of -MPT’s

influence cross—subside— Price guidance

zation

Value added -a variety of —a variety of -a variety of
& data services & services & services &
services prices offerings prices offerings prices offerings

-rebalancing give
lucrative price
for VAN providers

Overall, the US has made an effort to give telecommunication providers more freedom
to set prices in order to respond to the competitive market. Also, the UK tried to follow
the same way, while it is still observing closely BT’s pricing through checking its
profitability and productivity. On the other hand, in the case of Japan, a clear policy in
pricing cannot be found. In some services, the MPT exercises its regulatory power to set
the strategic price, and this behavior is completely different from the idea of the rate of

return regulation.

9.3 Future Policy Implications
In this section, the future policy implications in three countries are discussed. Currently,

all the countries are facing the need for further telecommunication reform in order to

108

respond to changing technological and market environments. This section overviews
briefly their present policy discussion and explores its implications as to the influence on

service development.

The United States

For several years, the US Congress had attempted to rewrite the Communication Act
of 1934 and had failed, since so many interests have been involved in this subject. Finally,
however, the new telecommunication bill has passed on February 2, 1995. This law will
change drastically the US telecommunication industry and provide a significant impact on
the service development.

In terms of structure, the bill will change the current industry structure fundamentally
(Wall Street Journal, 2/2/96). First, the law opens local phone markets to new competitors
such as long distance telephone companies and cable companies. The law prohibits state
and local governments from preventing any competition. Second, it establishes a
mechanism under which the seven RBOCS may enter other lines of business. The RBOCS
can enter the long-distance market after proving they have opened their local phone
networks to new competitors. Also, they can enter equipment manufacturing business and
information services. Third, the law repeals cross-ownership restriction of the 1984 Cable
Act which prohibited telephone companies from providing cable services within their own
telephone service areas. By these measures, the old structure policy of the US
telecommunication, which was formed by the MFJ, is abolished. The new law will create a

more competitive US telecommunication marketplace.

 

109

The new act will definitely influence service development. First, as a more
competitive local market will emerge, more local service development will be promoted.
Although sorrre are afraid the local telephone price will increase (W all Street Journal,
212/96), advanced services like CLASS will be marketed more aggressively. Not only
RBOCs but also the other telecommunication providers, including cable companies and
long distance carriers, will enter the market by providing user specific type of services.
Second, the abolishment of RBOCs’ line of business restriction and permission of RBOC’S
video market will increase RBOC’s incentive for new services development. Since the
local market will not be monopolized, the RBOC will have to develop new markets.
Overall, the new telecommunication law will help strongly to develop services by the

competitive market forces.

The United Kingdom
The UK continues to seek more a competitive telecommunication market. In its future
plan, Oftel (1995b) stated that Oftel’s goal is “ to provide the best possible deal for the
customer in terms of quality, choice and value for money” and that the best deal for UK
customers will be achieved through a fully competitive market in networks and services.
After the UK quit the duopoly structure in 1991, Oftel has worked on several remaining
issues in order to achieve this goal, such as price controls, interconnection, universal
service, and number portability, etc (Oftel, 1995b).
In terms of Structure, a main structure reform had been completed when the UK

abolished the duopoly and admitted more new entries into the market. As mentioned in

110

chapter 2, after this decision, several new providers entered the market and a significant
competition emerged even in the local market.22 Therefore, Oftel's structural policy
focuses more on conditions of effective competition, rather than on structure regulation
such as entry regulation and line of business restrictions.” In July 1995, Oftel published a
document called "Effective Competition Framework for Action", following the related
consultative document in December 1994. This policy statement considered the path
regulation should take toward the goal of a competitive market place, and Oftel put
priority on interconnection issue for effective competition (Oftel, 1995a).

Since Oftel thinks the price control arrangement will directly relate to the development
of competition in the UK telecom market, pricing is one of the biggest issues in the UK
telecommunication policy (Oftel, 1996). In the document "Effective Competition
Framework for action", policy recommendations that the RPI-2% constrain on on-line
rental price increases should be lifted, and that BT should be encouraged to introduce a
more flexible range of service and tariff offerings to meet the needs of different groups of
consumers, were presented (Oftel, 1995a). Furthermore, since current price controls in
BT's license expire in 1997, a consultative document, "Pricing of telecommunications
Service from 1997", was published in December 1995. This document proposed a new
idea in which Oftel will introduce a network charge cap to act as a broad control on the
interconnection charges which competing operators pay to BT and more to some services
from the controlled baskets where a clear prospect exists that they will be subjective to

competition (Oftel, 1995a).

 

22 Cable telephony is the most developed in the UK because of the cable company’s entry into the local
telephone market (Datapro, 1994).

23 One exception is video service by BT. ET is prohibited from providing video service until 1999.

111

These policies will influence the future service development in the UK. First, the fully
competitive marketplace with a framework of effective competition will give incentive to
new entry. A3 cable companies began to take BT’s customers, local competition will be
more severe. It will lead to the rate reduction of basic telephone services and improvement
of service quality. Also, diffusion of cable telephony may result in the competition in the
field of future broadband services. Second, giving BT more pricing flexibility will increase
BT’s effort for marketing and service development.

Overall, the UK has a balanced policy between competition through a competitive
market force and regulation on BT. However, for a certain period, the BT’s dominant
market power will still exist. How Oftel will deal with the BT’S market power in order to

realize a truly competitive market is a key issue of the UK’S telecommunication policy.

Japan

Since the telecommunication reform took place in 1985, the MPT has tried to establish
a framework of a fair and effective competitive market (chapter 4). However, this attempt
has not achieved Significant results. As seen in previous chapters, the Japanese
telecommunication still has several issues to solve. The MPT published an official
statement in January 1996, titled "Deregulation Package of Telecommunications and
Broadcasting for the ‘second reform of the info-communications system in Japan’". In this
statement, the MPT presented a further deregulation policy package, such as revisions of
the regulations on market entry, revision of the framework on interconnection, and future

status of NT'T and KDD (MPT, 1996a).

 

112

Among the several issues, a key structural issue is on the status of NTT. According to
the government measure in 1990, the status of NTT is scheduled to be reviewed and
decided in fiscal 1995, which ends March 1996. The MPT inquired about NTT'S status to
the telecommunication council in April 1995 (MPT, 1995) and, since then, a hot debate
continued (MPT, 1996b). Generally, while the MPT take a stance which prefers the
divestiture of NTT in order to realize more a competitive market, NT'T and some industry
circles are opposed to the plan. Whether or not NTT will be divested, the conclusion of
this issue will clearly have significant influence on Japanese telecommunication
development.24

Also, the MPT plans some structural modification (MPT, 1996a). The MPT will ease
market entry and exit of Type I telecommunication carriers. Furthermore, the MPT will
clarify the absence of regulation on telecommunication carriers by service classification,
other than for NTT and KDD.25 Although these policy modification is not fundamental
change in market structure, it will give more incentive to telecommunication providers.

Regarding price policy, the MPT has continued to have an ambiguous policy. While the
TBL states the fair rate of return for pricing of telecommunication services provided by
the Type I carriers, the real operation has been intentionally guided by the MPT (Chapter
4-9). In the deregulation package, the MPT stated that deregulation of Type I
telecommunication business rates is planned. It said that the MPT will apply the prior-

notification system by the end of March 1997 to rates charged for mobile

 

2“ In March, 1996, the telecommunication council issued its final recommendation that recommend to
divide NTT into three companies, one long distance company and two regional companies, to the Minister
of Post and Telecommunication.

25Although TBL does not prohibit type 1 carriers from entering the more than one service classification,
the MPT unofficially guided the NCCS to serve in one classification.

113

telecommunications, which are currently subject to the authorization system, and that the
MPT continues to reform the regulation in the case of other rates, paying heed to the
Telecommunications Council's report on the status of NTT (MPT, 1996b). So far, since
the discussion of the council is not fully opened, the new pricing scheme is not been clear
yet. However, a new pricing scheme has to be considered for more effective and fair
competition.

From the previous discussion, it is still not clear where Japanese telecommunication
policy is headed for. Overall, compared with the US and the UK, Japan’s policy effort to
establish the rule for competitive market does not look solid. This lack of clarity will affect
service deveIOpment. First, whether or not NTT will be broken up, the present form of
structural regulation to Type I carriers does not have a reasonable explanation. The
movement toward free competition can be seen in both the US and the UK. The managed
competition by the MPT will hinder the providers' incentive for developing markets.
Second, the new price scheme has to be created for effective competition. The present
rate of return has not virtually worked, and, without clear pricing policy, fair competition

will rarely occur. Japanese telecommunication policy is facing a turning point.

In conclusion, the policy reform in the 19803 entered into another stage in the 19903. In
terms of structure, in 1991 the UK changed their 19803’ duopoly policy, and following the
UK, the US enacted a new telecommunication law, which changed fundamentally the MFJ
structure and approved a wide range of competition. Also, Japan is seeking a more

' competitive and deregulated policy by breaking up NT'T. Regarding price policy, both the

114

US and the UK have adopted flexible pricing schemes and attempted to improve
operations of the scheme in an effective way. Only Japan has not presented a clear pricing
policy scheme, while it still keeps the rate of return regulation.

In the present and near future, conduct regulation, such as implementation of open
access rule, interconnection and number portability will become more emphasized than
structure policy in a fully competitive market. Regarding these upcoming policy issues, the
UK’S Oftel appear to have clear visions, and the US is also working on them since the new
communication law was enacted. Presently, Japan seems to have not reached this stage
yet. Their current discussion still focuses on the market structure (NTT’s status).

These policy changes in 19903 will substantially influence the future service
development as the policy of the 19803 has affected the current service development. The
possible influences are summarized in the following three points: First, the fully free
competitive market structure, which the three countries are trying to achieve, will develop
several new and advanced services. For example, cable telephony, high speed data service,
and video service will be developed even for residential customers, to replace the old
narrow band plain telephone services: Second, a flexible pricing scheme will promote a
service providers’ marketing effort: Third, conduct regulation will set a rule of
competition. Thus, whether a fully competitive market works or large companies dominate
the market will depend largely on how the rules will be set. The rules can give providers
incentive or disincentives to develop services. Thus, in such ways, the current and future

policies will substantially influence future service development.

Chapter 10

Recommendations for Future Research

AS a final chapter of this thesis, limitations of this thesis and recommendation for
future research are addressed.

This thesis has attempted to analyze telecommunication policy and service
development by examining four service areas in three countries. However, this thesis has
some limitations in both the depth and the scope of the research. First, the focus of this
thesis has been on two kinds of policy instruments, structure and price, and some
significant influence of these policies on the services development have been found.
However, the recent policy issues are moving toward further specific conduct regulation,
such as interconnection, number portability, and access charges, etc. Thus, policy analysis
will require a wider scope.

Second, as mentioned in chapter 1, the service development can be affected by several
factors besides policy, such as social, technological and econorrric factors. Overall this
thesis concentrates on policy issues, but some service development is clearly affected by
the other factors. Furthermore, this thesis did not isolate the policy factor from the other
factors.

Third, this thesis selected three countries and four service areas as a case study. Of
course, it is not possible to say that price cap regulation is better than rate of return

regulation and that structural regulation has a negative effect for telecommunication

115

116

service development when only viewed by these results. A further look at service
development in a wider scope is needed in order to reach a general concrete conclusion.

Therefore, responding to the limitations of this Study, three future research
recommendations can be presented. First, the policy factor in future services development
needs to be analyzed in more diversified aspects. Especially, interconnection, numbering,
number portability, and universal service policy will be important policy issues in the
future as a condition for service development. Also, an international comparative study of
these polices will provide some significant insight about service development.

Second, the examination of the other factors on service development, such as
economic, technological, and social elements, will be necessary. Through Studying those
factors and the policy factors, the importance of policy on service development will be
clarified objectively.

Third, the wider ranged and deeper analyzed empirical research is desirable to
generalize about the performance of the policy scheme. Also, more international
comparison would help further to understand the policy factors, and such research will be
necessary in order to look for an optimal policy scheme.

Therefore, from these points, this study can be a beginning step toward further

research.

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