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IP: Deregulation, Opening of Networks, and the Break-up of NTT
From: Dave Farber <farber () central cis upenn edu>
Date: Thu, 07 Dec 1995 04:56:34 -0500
November 1995 Summary of NETIZEN-J Forum Debate: Deregulation, Opening of Networks, and the Break-up of NTT The following summary was drafted by co-moderators of the Forum. Takahiko Aoyagi wrote most of the contents, and Stephen Anderson translated the summary with comments. These views are roughly accurate for each named participant, with their addresses at the bottom of the memo, and the reader may wish to pose questions directly to them. See names and affiliations with this material if you wish to seek clarification or have questions on our interpretations of the materials below. A SUMMARY In November 1995, Netizen Forum launched its vigorous debate on three points of ending of regulation, the opening of existing phone networks, and the break-up or reform of Nippon Telegraph & Telephone (NTT). Various participants raised similar points about the three points of debate as regards to the problems of economic scale for telecommunications industry, or the introduction of international competition. To summarize, the following memo covers such points. 1. Deregulation The ending of regulation was agreed upon by all the participants. The use of the word "ending" rather than "easing" (or "abolition" rather than "revising") indicated the aggressive positions of strongly critical opposition taken by participants in the Forum against regulation. However on the other hand, models of deregulation, models of NTT breakup, or opposition to breakup, saw greater differences of opinion. At any rate, Tatsuo Tanaka and Jiro Kokuryo mostly agreed in their views and noted "in the worst case scenerio, regional division of NTT will not cause deregulation, and allow the continuance of intervention methods. This means continuing regional monopolies, and failing to introduce competition. Thus, just like the current regional power companies we will continue regional monopolies." The specific contents about deregulation are as follows (especially in the messages of Tanaka, Kokuryo, and Aoyagi): a. Abolition of division into Type 1 and Type II Providers. b. Abolition of the Divisions between "Long-distance and Local Areas," "International and Domestic," "Systems of Local Licensing," "Systems of Licensing Based on Media." c. Abolition of the Rate-Setting System d. Abolition of the NTT Law e. Liberalization in New Interventions (Necessity for Abolition of Administrative Guidance for the Purpose of Bureaucratic Adjustments of Supply and Demand) f. Phased End or Immediate Abolition of the Regulation of Foreign Investment All participants agreed that these points were extremely important, and equally key for the introduction of competition through the easing or ending of regulation. Next we took up the debate about the retaining or break-up of NTT. First, Tanaka took the view that "NTT break-up would be good for the purpose of creation of a market among industrial players that compete in order to gain competitiveness." With his doubts, Ueda noted "Is this really the only way to introduce competition?" Further Aoyagi said, "There is no reason to introduce domestic competition for competitiveness. This is the age of international rather than domestic competition. For international competitiveness, it is best to oppose break-up." Others went further. Tomoyuki Ohsawa, Yoshio Arai, and Hirotada Ueda noted: "Whether we break-up NTT or not, we must make clear whether this is in the interests of consumers. It is necessary to look from the position of individuals or common user." On this point, Makoto Miyanoo said "since communications is an extremely vital part of the infrastructure provided by the state, on this problem of internationalization, it cannot be judged only from the view of the consumer and general inhabitants," and Tanaka added, "A model of industrial policy is that such policies are in the interests of the citizens." 2. Break-up of NTT On NTT break-up, a larger number of postings expressed the disadvantages in not breaking the firm, and a smaller number noted the advantages of such steps. a. Those posting on the disadvantages of avoiding break-up refuted the basic premises in that: i. With the easing or abolition of regulation, there would be no nurturing of competition because the results would be to imitate the NTT monopoly. (A premise is that there exists economies of scale of equipment, and economies of scale for reasons of externalities of networks.) ii. To provide support for universal service, there are various means to do so such as establishing a fund, and no necessity for NTT to continue such support. iii. For the purpose of serious consideration of international competitiveness, no necessity exists to oppose break-up. In the event that domestic competition is adequate, then strength will exist in international competitiveness. Also, in the event of international competitiveness then economies of scales are not necessary. (In Tanaka's view, foreign countries are not creating large scale facilities, and he see the power of externalities is nonexistent.) b. Those posting on the advantages of break-up refuted the basic premises in that: i. It will increase the competition because of equalizing the industrial concentrations in an equitable way. ii. The firms created after break-up will enter mutually into post-break-up regulation, and thus establish competition not only against the New Common Carriers (NCC) but also against the former NTT. (This is a critical condition in views of break-up to bring the abolition of regulation.) iii. For research and development, the small and medium enterprises are more effective (according to Tanaka). 3. Against the Break-Up of NTT a. Those posting against break-up refuted basic premises showing problems such as: i. There will be an increase in communications charges outside of special regional companies. ii. There will not be an introduction of real competition even with regional break-up. (This point opposes the supporters of breakup who argue that competition will be established by mutual introduction after the abolition of regulation.) iii. There will be a loss of international competitiveness after break-up. iv. Between areas within regional telecommunications and for long-distance telecommunications, there exists economies of scale and will result in a loss due to divisions if there is a break-up. (Tetsuya Tozawa in particular noted this point.) b. The same posting against break-up showed the advantages of: i. The necessity of support for universal service. (Oppose the establishment of an appropriate fund as favored by those advocating break-up.) ii. Opposing break-up on the grounds of support of vital international competitiveness. With the deregulation, further openness to the international economy enables international competitiveness. Consequently for the introduction of competitiveness, there is no need for sacrifice. Not breaking up NTT is a good way to struggle against international competitition. iii. There is a possibility of overseas hollowing. (Because of interdependence, while foreign investment occurs this means that Japan's telecommunications industries wish to compete overseas. To introduce a framework for foreign investment activities quickly, we should immediately encourage international competition. For that reason, we cannot breakup NTT. Ryoji Koike is quoted as saying "For the present, foreign carriers will need a transparent decision if NTT is not broken up." iv. The economies of scale of research and development. 4. On the Economies of Scale in the Telecommunications Business Tanaka wished to emphasize the following three points on the economies of scale: a. Economies of Scale of Equipment b. Economies of Scale Based on Externalities of Networks c. Economies of Scale in Research and Development Tanaka said that Fiber-to-the-Home was considerably in the future. Wireless has a limit in its bands. Due to externalities of networks, the economies of scale are infinite. With deregulation, NTT is related to the breakup of monopoly. Thus, it is best to end up with a break-up. Further, Tanaka emphasized that "For international competition in the Japanese market, the second and third points above (on networks and R&D) are influential." Tozawa pointed out the so-called "regions" are a combination of administrative activities to support the design and construction of subscribers' access lines and local switching services. There exists strong economies of scale in these administrative activities, and even though local switching has largely the same economies of scale as long-distance (and thus competition is possible), Tozawa emphasized that overall there exists economies of scale in the regions. However at the same time, this type of mechanism is characteristic of fixed radio communications, and suggests signs of change. Aoyagi said that though there exists economies of scale, with the current techonological changes, these economies are less effective. The reasons are that existing equipment is lowering in price. Consequently, NTT is opening on a wide range and there is the necessity to respond to trends of loss to other media of the demand for telecommunications. 5. On Introducing Openness On the economic analysis of opening of network access, Tozawa provided his academic article. The article explains what is meant by the opening of subscriber line access by NTT, and economic considerations of such moves. As for the issue of opening, the participants all agreed that it is an absolute necessity. The following comments were made: Kano and Aoyagi stated that it has significant meanings. Kano noted that opening and easing of regulation are two parts of the same activity. Tanaka and Kokuryo noted that a breakup without opening will create regional monopolies. Provided that there is opening within a breakup, competition will be established. Tanaka noted that confusion exists about creating rules for opening access. It is inefficient if these rules are created willy-nilly. Opening and competition may be put into practise through deregulation. 6. On the Introduction of International Competition Provided that international competition is introduced, the opinion exists that there is a necessity that competition must exist within the country. However, Tanaka takes issue saying that "the very industries that win repeatedly within domestic competition will win repeatedly in international competition." In rejoinder, Tozawa points out that "the current market for telecommunications is increasingly globalized, and a few big players are pursuing a complicated collaboration, thus it is necessary to ensure that a framework to expand competition in various areas including infrastructure." At any rate, all participants shared the opinion that international competition is a necessity. However on the issue of immediate liberalization for international competition, Tanaka and Koike note that "NTT actually does not have international competitiveness. Time is needed for domestic competition. Thereafter, we should abolish regulation of foreign investment." Koike noted that "however, a very fast dynamism must occur where we accept foreign investment." Tanaka recalled that "at the same time, reciprocity with the United States is likely to make these steps impossible and cannot be denied." Once international competition is liberalized, Koike says that "Foreign common carriers will affiliate with Japan's New Common Carriers (NCC) and then use the NTT opening to develop competition. However, if sufficient competition does not develop, and consumers are not satisfied, it would then be good to have a breakup of NTT." Koike continues "US carriers are offering a variety of services. But consumers must change the situation of accepting foreign carriers that offer good and inexpensive services within Japan." Koike also noted "even if right away, NTT (and perhaps also the NCC) should quickly and aggressively open operations overseas. With an introduction of investment within Japan, it will be best if Japan's providers will either go bankrupt or succeed." On the problems of international competition there has yet to be much debate, but Miyanoo said that "Japan should incorporate in collaboration with foreign carriers." IN CLOSING: The above summary is lacking in one area. Aoyagi acknowledges his lack of contribution to refocus, and intends to shift the discussion to remedy the emphasis on traditional telephony. Most of the debate in Japanese thus far has focused on the current conditions based on traditional telecommunications services. In this light, the Information Technology and Communications Policy Forum of Japan (chaired by GLOCOM Executive Director Shumpei Kumon) had its first set of policy proposals released in October (See NOTE). In the third proposal, a central theme of Japan's future commmunications policies will be the building of an efficient "open computer network" and the realization of inexpensive wide area communications services as well as the offering of a variety of communications services to consumers. Tetsuya Tozawa emphasized that the "opening of networks" from the prospective of multimedia must be debated. Consequently, Japanese industry for information and communications areas along many of the points above is yet to be seen in a form that one can consider the "best." We should continue to debate the future of NTT within such a context of overall industry and digital technology. NOTE: Policy Proposals may be seen in Chuo Koron and on the GLOCOM server with Netizen Forum information at: http://ifrm.glocom.ac.jp/ipf/pr1/index.html Participants noted above: Co-Moderators: Takahiko Aoyagi (aoyagi () glocom ac jp) Tatsuo Tanaka (tatsuo () glocom ac jp) Stephen J. Anderson (sja () glocom ac jp) Participants in order of mention: Jiro Kokuryo (JBA02356 () niftyserve or jp) Tomoyuki Ohsawa (ohsawa () csg sony co jp) Yoshio Arai (yarai+ () pop pitt edu) Hirotada Ueda (hiro-u () po iijnet or jp) Tetsuya Tozawa (ttozawa () msp hqs ntt jp) Makoto Miyanoo (miyanoo () itjitnet or jp) Ryoji Koike (koike () panix com) Sadahiko Kano (KANO.Sadahiko () nw hqs ntt jp) **************************************** Stephen J. Anderson, Associate Professor Inforum Project Director <http://ifrm.glocom.ac.jp/> Center for Global Communications (GLOCOM) International University of Japan ****************************************
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