IP: Deregulation, Opening of Networks, and the Break-up of NTT

[Dave Farber <farber () central cis upenn edu>]

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
****************************************