IP: NTT Reform and a Network Era in Japan

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

Date: Wed, 21 Feb 1996 13:41:44 +0900
To: Dave Farber <farber () central cis upenn edu>
From: anderson () glocom ac jp (Stephen J. Anderson)


The following was delivered prior to your recent IP postings that confused
some issues.  [All I do is report .. maybe it is confused because it is
confused djf]


The Telecommunications Council report is due out on February 29, but its
details are now being leaked to the press.   Despite the report's
recommendation for three companies--two in East and West, and third to
handle long-distance/international service--no regional breakup of NTT is
likely due to political opposition.




FROM CRISIS TO INFORMATION SOCIETY IN JAPAN: NTT REFORM 


Speech to the American Chamber of Commerce in Japan (ACCJ), 14 February 1996


by Stephen J. Anderson


Professor and Director, International Department
Center for Global Communications (GLOCOM) International University of Japan




Thank you for the kind introduction. It is a pleasure to address so many
friends and knowledgeable colleagues here at the ACCJ.  


Part of the work at my Center places me in the middle of debates about
cyberspace, and wild changes on the Internet. Just last week, new US laws
and an arrest in Japan caused strong reactions worldwide towards decency
laws and excessive regulation.  Home pages even adopted black backgrounds
in protest to US law! I restrained myself, and decided to avoid the black
tie, or black shirt and black glasses today.  Still, I do add my voice to
concerns about overreactions by regulators, and support the need for
openness to encourage commerce and exchange on the Net. Let me now turn to
Japan. 


Let me start by telling you that I think "crisis" in Japan is a myth of
Japanese perception rather than true disruption.  


Consider the PERCEPTIONS of National Crisis. 


Japanese see themselves amid a crisis of national identity and goals.
Popular perception of such crisis were acute in 1995. Japan's Cold War
loyalty to the U.S. became less critical, and business shifted priorities
more overtly to Asian markets as well as broader economic goals. 


Japan is also perceived from outside as crisis-ridden. In one example, the
1995 annual World Competitiveness Report rated Japan fourth and below
leaders of the U. S. and Singapore. 


Critics note that such surveys simply report stereotypes, and even the
report itself said that ''Japan's decline seems to be socially rather than
just economically related, which means that the challenge will lie in the
country's ability to reform itself." 


Some observers hold that "Japan bashing" of a smug leader in Asia has been
replaced by "Japan passing" as global business avoids a lame and hollow
political economy that, in the Economist editor's poignant title is where
The Sun Also Sets.


But is perception of economic-based crisis correct? I think not. I assert
that this sense of crisis is a distraction from reforms using Japan's
fundamental strengths.


Amid the sense of crisis, Japanese policymakers, both in business and
government, are already forging concensus on goals as global economic
leaders.


A key area of Japan's growth will be based on the emergence of information
technology, computer industries, and telecommunications policies. Broadly
defined, these communications and electronics industries are likely to
sustain Japan as a global economic power. 


I know that the degree of success, the rate of economic growth, and the
final shape of these new industries are open questions. But I am convinced
that the fundamentals will be based upon Japan's broad sense of
"informatization" or johoka.


Today, I will summarize just a few developments to set the stage for a Feb.
29 report by the top government commission, the Telecommunications Council,
that will seek reform of Nippon Telegraph & Telephone (NTT).


NTT reform is key to informatization as discussed by the Japanese experts.
NTT controls sectors of the political economy and offers clues about the
direction of economic change in Japan. 


Contrary to the doomsayers in the Japanese media and self-congratulatory
writers in foreign media that amplify Japan's problems, I see growth and
recovery.


Japan is poised to enter the next century with new telecommunications
technologies, restructured economics, and new political concensus among its
educated society.


In short, I have been a CONTRARIAN on Japan's Prospects 


Contrarians see Japanese business as supporting economic growth, the
bureaucracies pursuing new forms of industrial policies, and together these
seek dominance of key technologies. In early 1996, my views about Japan's
strengths are perhaps more specific than others about prospects in a single
key area of growth and change.


Contrarians as a group emphasize Japan's strengths. Among these are many of
the "revisionists" first identified by Robert Neff in Business Week..
However, the range of opinion in this camp broadened. The key feature that
many observers agree upon is Japanese dominance in technology. 




Perhaps the single area with the greatest impact of change involves digital
technologies and related changes in infrastructure. The legacies of
Japanese success, the restructuring of the bubble economy, and the focus of
efforts to provide value-added economic activities have been overlooked in
Japan..


DIGITAL TECHNOLOGIES are key to the changes in Japan 


Digital technologies cause rapid change in industry. To simplify, data or
information can be reduced to a common form, sent over electronic circuits,
and recreated with compatible digital technologies. It is these changes,
and de facto standards and infrastructure to handle such technology, that
is starting a global shift in telecommunications. Not the least of such
standards is TCP/IP (Transmission Control Protocol/Internet Protocol) that
allows local networks to interact on the global Internet used by up to 60
million people. 


Social analysts predicted the impacts of digital technology. Daniel Bell
wrote a classic account about the varied elements of post-industrial trends
in knowledge-based society.3  Many others have developed and popularized
such notions; Alvin Toffler is latest and most successful in discussing his
"third wave" technologies that were employed by Republican candidates in
1992 Congressional elections in the United States.4 Yet it is not only in
the United States that these long-term trends were anticipated as changing
industrial societies to new forms. This is not to say that Japan is without
progress. 


Japan Began "INFORMATIZATION" (johoka) in the 1960s 


Service-based and knowledge-oriented economic activity are old hat among
economic planners in Japan. In the 1960s, the Japanese scholar, Mieno
Kazuhisa noted that the roots of theories of "information society" are
found in German economic history as well as various accounts of futurists.5


Then, the Economic Planning Agency proposed the growth of knowledge-based,
information-oriented activities in services and other industries as a
process of "information society" (johokashakai).  


In the seventies, discussions of economic restructuring held that heavy or
hard industries would give way to value-added and soft industries in
"softnomics" based on more varied industrial structure. 


Over the past year, vision statements and rhetorical reports resulted in
many actual plans for software, hardware, and services industries never
before offered in Japan. 


Japan's infrastructure projects, not the smallest of which is a commitment
to have fiber optic cable in every home by 2010, move forward. Nicholas
Negroponte of the MIT Media Lab contends that fiber to the home is crucial
for nationwide service, but even Japan's existing hybrid networks of wire
and fiber may be enough.


In America, many talk about the "last mile" of fiber to the home to give
multimedia services. For me, this American issue is far more of a problem
than in Japan where infrastructure exists to the curb. Now, Japan needs to
contend with the "last 50 meters" to the home, and it is layered in red
tape, but this barrier is not as technically difficult as in more sparsely
populated countries.


In addition, however, another perception of crisis, and falling behind in
telecommunications, has gripped Japanese industry and government. 


Japan as an Economic Follower Tries to Catch Up Again 


Last week in Washington, President Bill Clinton signed the
Telecommunications Act of 1996 which will raise the sense of urgency in
Japan. The rapid movement, even delayed by a year in the United States,
makes action imperative in Tokyo.


In the words of FCC Chairman Reed Hundt, "the Berlin Wall of
communications" has fallen.


Japan does not want to be a laggard, or socialist country of old, in
information infrastructure. The plans to emulate U.S. information
technologies draw on past national patterns as a follower in late
development. The nationalist impetus of having a well-set goal from
overseas, and the common use of foreign pressure (or gaiatsu) at key
junctures in the policy process, are common methods to draw on the social
capital of nationalism in the Japanese political economy. 


Reform will require a telecom coalition seeking change. The roots of such a
coalition date back over a decade ago. Nakasone Yasuhiro first encouraged
administrative reform of NTT in 1985 with steps towards privatization. NTT
stock issues began by 1987 and efforts to introduce competition raised
breakup plans in 1989-90. That breakup attempt failed, and I think the
present one will as well, but regulatory reforms that come as by-products
may be far more critical than changes in a telephone company.


Japan's deregulation was no doubt slowed by lack of international
precedent. Policymakers noted delays and confusion about the impacts of
U.S. reforms of AT&T. Japan's perceptions of being behind were apparent as
the US Congress debated reforms during 1994-95, and Japanese officials
expressed relief that the US law passage did not occur earlier. Now, US
1996 legal reforms are likely to speed Japanese action.. 


Japan has set goals for its basic infrastructure in telecommunications. The
ministries, and top managers, have set a goal of reaching 60 million
households with fiber optics by 2010, and also continue wireless and other
forms of technical development. To weigh the promise and limits of such a
goal, requires an account of the industries that are organizing in this
area.


The TELECOMMUNICATIONS INDUSTRY should be broadly defined, as in the new U.
S. Law


In Japan, similar success allowed rapid catch-up is possible in a scenerio
where followers range across related industries. 


Digital information technology differs from earlier realities of past
telecommunications in several related ways. First, software rather than
hardware is increasingly critical to the value-added of related industries.
Second, industry standards are increasingly open and uniform around the
world which allows easier market entry and quicker innovation beyond
national borders. Third, global competitiveness and ease of transnational
communications means that products, architectures, and infrastructures
develop with increasingly rapid speed. Fourth, the target of such
technology is increasingly at the level of the individual rather than the
large organization as a whole.


Such technology poses a special challenge to industrial organization in
Japan. But change of large organizations is not impossible: entrepeneurial
American firms such as Microsoft and Apple were imitated by older large
organizations such as Hewlett-Packard and Motorola. 
However, adoption of the new technology will require changes for Japanese
electronics firms such as NEC, Fujitsu, and Toshiba, as well as NTT.
Widespread recognition exists of problems in service sector productivity,
and many Japanese fear an American-style reorganization with higher
unemployment.
.
Multimedia and Networks modeled on Internet are key areas for these industries.


Convergence of audio, video and computing electronics due to digital format
will support new forms of multimedia and networks for producers. In Japan,
related industry will build on the strengths of Japanese microelectronics
and consumer electronics firms, and has already produced products such as
personal computers and hand-held devices that have integrated packages, new
applications, interactive formats, and attractive contents discussed as
multimedia within Japan. 


NTT managers, as a key group, act on a broad working definition of
multimedia. Dr. Tetsuhiko Ikegami when in charge of planning in NTT's
research division said that multimedia is now seen "as a kind of networking
among PCs and workstations" which is a tremendously broad concept. In fact
by fall 1995, the buzzword of "multimedia" began to give way to "Internet"
in the Nikkei publications analyzed by our Center. GLOCOM researchers found
that the network discussion has come to dominate the Nikkei articles with a
peak of 164 articles about the Internet in December 1995. Japan and NTT are
not just about telephones any more. 


In January 1995, NTT announced its plans for multimedia. Four features
included first, joint use with other providers; second, software
development with other firms (such as Microsoft, General Magic, and Silicon
Graphics); third, fiber optics for transmission to urban business, suburban
residences, and all homes over the next ten to fifteen years; and fourth
architectures based on an "open computer network" (OCN) that overcomes
differences of quality, protocol, and capacity. A June 1995 memo clarified
that NTT will construct a new OCN using nodes independent of the existing
telephone network and conventional data networks. 
The OCN concept, where NTT ties into the open data network model of the
Internet, does not mean problems of protocol and standards have
disappeared. Monitoring and effort to create common standards remains key
to opening NTT networks. But these efforts are beginning, and NTT is
key--raising the question:
.
Will NTT Face Radical Change or Breakup?--Not Radical, I think. 


NTT has deep pockets to finance. NTT is the world's biggest company in
market capitalization terms, and NTT's consolidated operating revenues were
7 trillion yen (about US $70 billion) with an increase of 5.8%, or 384.8
billion yen (US $3.848 billion). Note that these revenues were slightly
larger than the nominal GDP of Malaysia, Singapore, the Philippines, and
Russia. The significance of NTT reorganization, division or "breakup"
(bunkatsu) cannot be underestimated. 


Financing for NTT projects such as networks and fiber optics has limits.
Fiber optic lines will cost at least 16 trillion yen, and perhaps as much
as 100 trillion yen with switching, archtecture, and wiring to the home. To
pursue this plan, the MPT officials arranged a 32.3 billion loan program
under the Japan Development Bank to create fiber optic networks through
NTT, other common carriers, and cable TV operators. The funds are not
sufficient, particularly to meet a target date of 2010, yet momentum exists
for planning and coalition-building. A policy coalition is forming for
later claims on the shortfall.


In the meantime, NTT sees Japanese industry as competitive in many of the
hardware technologies critical to multimedia, including ATM, optical-fiber
transmission, and image data coding technologies. Meanwhile across the
Pacific, U.S. companies are ahead in terms of creating concepts for
multimedia services and developing services combining hardware and
software. Corporate strategy is still able to match these trends, and cope
with the upcoming proposals about NTT reorganization. 


In 1996, NTT will undergo scrutiny and perhaps some form of functional
division. No less than four major deliberative councils offered
reorganizational plans. On Feb. 29, the key report will emerge from the
so-called Telecommunications Council (or Dentsushin). According to leaks in
the media, the report will recommend a breakup into two regional companies
but allow NTT as a long distance company to offer international services.
The report includes a simulation that shows NTT and its New Common Carrier
(NCC) competitors can make a profit in such a reorganization.


However, no final agreement about regional breakup are likely soon, and the
functional definitions about NTT are more likely than breakup into regional
companies. For now, NTT debate has been overtaken by politics. The Social
Democratic Party took control of both MPT and MOF portfolios in the
Cabinet, and can veto any quick reform. In the meantime, LDP politicians
suggest a one-year review which would place Japan exactly a year behind the
United States in major policy reforms. In the meantime, regulatory changes
and infrastructure developments will take shape in Japan.


Other Communications Industries May Allow Japan to Leapfrog into the
Network Era.


Beside NTT, multiple industries are affected by changes in technology. The
classic discussion of an "NTT Family" noted that procurement by the public
corporation supported electronics giants of Fujitsu, NEC, Hitachi, Oki
Electric. Along with Toshiba and Mitsubishi Electric, these firms became
the basis for the Japanese computer industry and for the subsequent
strengths of Japan in microelectronics and hardware. 
The capabilities of these various industries in telecommunications and
products are likely to continue with digital technology. 


Broad impacts on industry will result on other media as well as entry by
start-up firms such as the new common carriers (NCC) in Japan. Among the
three NCC that are NTT's long-distance competitors, MPT has helped DDI
(Daini Denden Inc., or a Second Phone Company) run by former NTT managers;
the Ministry of Transportation has backed Japan Telecom because Japan
Railways (JR) provides a bed for fiber optic lines; and the Ministry of
Construction assists Teleway with its lines alongside national roadways. 
MITI is also backing electric power companies efforts to provide service,
for example, with TTNET emerging from Tokyo Electric Power and Osaka Media
Port emerging from Kansai Electric Power. 


To conclude about industry, Japan holds advantages in its NTT reforms of
the telephone monopoly--the infrastructure now exists that can allow Japan
to leapfrog into the "network era" of computing. A common observation is
that computing began with a mainframe era dominated by IBM, and then
entered a PC era where smaller personal computers became more crucial. If
the industry pundits are correct, the next era depends on networks and
networked computers that make Japan able, if willing, to move rapidly
ahead. In shaping industry, I think that regulatory reforms and policy
changes are now the crucial variable. 


In Japan, the challenge is likely to be met with an emphasis on policy that
allows transitions to greater competition. MITI and MPT officials are
committed to greater openness, even at the expense of firms that refuse to
meet competitive challenges. 


But there should be no mistake that competition is going to be regulated.
Martin Fransman wrote about "controlled competition" in these industries,
but I think we can be even more explicit about the wide range of industrial
policies that will be revisited. Let me give examples of. 


TELECOMMUNICATIONS POLICY shows that policymakers are not just in national
policy anymore..


The tools for shaping the range of Japan's technology fall across policy
jurisdictions. This raises speculation that gridlock and bureaucratic
rivalry will slow development of infrastructure. Will bureaucratic battles
slow tech transfer, the growth of industry and its business? In short, I
doubt it.
Local Infrastructure Is Ahead of the National Debate in Cities due to local
industrial policies.


I call your attention to the example of infrastructure already built by
local "industrial policy" in Osaka. NTT already can provide ISDN lines at
64K or 128K to many localities, but Osaka Media Port (OMP) as well is able
to do so for 98% of Kansai residents at half the cost. This OMP venture is
due to its hybrid network built over the past twelve years with 25% of the
capital from both the electric company and the Osaka Municipal Government.
In other words, local industrial policy makes the Kansai region ready to
join the network era, and TTNet offers the same in the Kanto region. This
may be the era of bottom-up efforts, too. 


Jurisdictions may overlap, but the onset of "multimedia wars" by
bureaucrats are not likely to slow the momentum building in Japan. Some
analysts see gridlock in the policy process because agencies seek control
of regulation of areas such as multimedia, but this misses the changes
within organizations and firms.


Bureau struggles do not necessarily lead to gridlock, and cannot stop
industry from pursuing multiple priorities. The evidence of progress comes
from the industries themselves that may cause the growth of industrial
policies after the fact.
.
Japan's national policy for multimedia and related technologies is being
made in several locations, but not far behind in its vision of networks.


MITI has created consortium and bureaucratic alliances such as in support
of JCB in a cardless credit card system of digital cash. 


MPT has filed key reports submitted by the Telecommunications Council and
organized in a headquarters of companies jointly developing multimedia.


Most recently, MPT shifted its public relations away from NTT regional
breakup and towards categories of regulatory changes announced on January
23 that mark a likely definition of the reform agenda. Only broad
categories exist for now, but is this far behind the FCC at present under
new U.S. law?


International and other nation's agreements about these technologies are
further moving Japanese policymakers towards concensus. MPT hosted a major
meeting of the International Telecommunications Union (ITU) in November
1994, at which time MPT first created its home page on the World Wide Web.
However, G-7 meetings provided project-based results as Japan moves on.


Moving Forward Especially In the G-7 Summits Supported Projects 


The G7 process was a key impetus for Japan to form a policy coalition to
support information infrastructure. In such a process, United States'
initiatives sparked debate.


In March 1994, Vice President Albert Gore introduced the framework that
encouraged G-7 activity. In a speech to the International
Telecommunications Union (ITU) in Buenos Aires, Gore set an agenda. 


The G-7 Summits agreed to pilot projects that explore the basis for a
"global information infrastructure" (GII). This GII is a part of outside
pressures that bring competing industries and territory-conscious
policymakers to the table.


The model of a GII remains controversial. In Brussels, Gore first mentioned
in explicit terms that the Internet was likely to be the de facto model.


Indeed, U.S. experts had long suspected and many openly stated that this
model was appropriate for an open data network. 


With the Internet as the de facto standard, the development of the
infrastructure must still define limits and responsibilities of users. 


On 25-26 February 1995, Japan agreed to be among the lead countries in four
of the eleven G7 pilot projects. 


By the time of the Lyon Summit scheduled for 27-29 June 1996, the G7
Projects are expected to develop a basis for international cooperation for
information infrastructure.


I Think a Need Exists for Asia Pacific Information Infrastructure 


Where the European Economic Community started with iron and steel, the next
generation of economic growth in the Asia-Pacific perhaps related to APEC
might start with information infrastructure. Asia-Pacific Information
Infrastructure (APII) agreements are needed a supplementary step for the
building of global standards for commerce and communication. 


Regional and national developments can set arbitrary constraints and
standards for this rapidly developing area. Global efforts among wealthy
countries must be supplemented by efforts between North and South and
within regions.


An example arises from ISDN standards. On 22 May 1995, Japan's Ministry of
Post and Telecommunications held a meeting of the Asian Integrated Services
Digital Network (ISDN) Council in Tokyo. Ministers from APEC member nations
holding telecommunications and information portfolios thereafter convened
in Seoul. 


Just as within APEC, regional agreements must strive for compatibility and
harmony with global ones. As such, the potential friction of exclusionary
pressure from an "East Asian" or "Asian" solution must not exclude
countries or economies. 


Thus an "Asia Pacific" solution under APII is the best solution as it
embraces the 18 members of APEC. Please note--this must include business as
a core member of all deliberations. 


Industry is likely act to improve standards where international
organizations and governments lag behind. 


Equipment makers, communications carriers, users, and others have come
together to form private-sector meetings and organizations to develop and
publicize the standards created under the ITU and other organizations. 




Examples include a 1991 ATM Forum on Asynchronous Transfer Mode (ATM) that
seamlessly connects local networks with networks outside (WAN).. 




Similarly, the Digital Audio/Video Interactive Council (DAVIC) was
established in June 1994 by a group of companies involved in the
interactive services. DAVIC seeks to ensure compatibility of systems
providing interactive video and sound services. 


Industry is especially successful in providing de facto standards for later
approval of government. De facto standards are not usually official, yet
prove themselves by their competitive superiority in the marketplace.


The current trend in de facto standards is for several companies to create
a forum such as with ATM and agree on standards that all will abide by. .


As such, the national, regional, and international coalitions for changes
in public policy, and developments of infrastructure, continue to move
forward.


ALTERNATIVES for the Future


I began by asserting that a key aspect of growth in Japan will be based on
the emergence of digital technology and telecommunications policies
designed to sustain the country as a global power. The basis for
reorganization builds upon the strengths of political concensus, economic
infrastructure, and social capital that will fuel Japan's future economic
growth.


I gave many examples, but let me summarize on the reasons why Japan remains
strong. Each of the basic strengths in Japan will allow for options that
remain for national identity as leader in the world. 


Political concensus is largely based in broad policy coalitions rather than
specific political parties. No matter how the next election goes, decisions
about NTT are likely in the near future. will replace the end of one-party
dominance.


For some observers, the bureaucracy will forge the concensus, while others
watch for business to craft consent. I focus instead on "policy coalitions"
rather than bureaucratic focus or subgovernments, and these may emerge in
areas within Japanese policy processes that are brokered either by a
Hashimoto or an Ozawa.


Japan appears to have nurtured groups that will assure rapid impacts of the
new technology and policies towards telecommunications. 


Economic infrastructure exists to implement such policies due to
flexibility of finance institutions. Even the much maligned Japanese
finance industry uses the continued existence of the tools of national
finance policy in the postal savings system, the Fiscal Investment and Loan
Plan, and the interactions of bureaucrats and bankers. 


Though some observers see small banking institutions as excessively weak,
the political will to finance large infrastructure projects introducing
fiber optics and other aspects of digital technologies are already
occurring. In the meantime, firms and governments spend money on multimedia
and networks that will can be used more easily than ever before. 


Social capital is the basis for action that draws on political norms and
economic coalitions in the Japanese context. Here, the common identity and
civic concensus rest solidly on a basis of Japanese nationalism.


Experts on the country, ranging from Chie Nakane to Kenneth Pyle, do not
question the fundamental sense of psychic distinctiveness and shared
experience that reside in that nationalism.9 


Questions certainly arise about the direction that such nationalism will
take in the future, and this is a vast topic. 


However at the least, I think the perception of falling behind the United
States in telecommunications is likely to act as a spur to action in Japan.


In the next year, new technology will be introduced by competition among
business, policies will be adjusted by bureaucracy, and an impending
election will define the contours of a new political party system. 


Japan's "information future" and the broader national identity will then
begin to take shape and to meet timetables for competition and
competitiveness.


To conclude,


Japan's new effort to have information infrastructure as an "information
society" will follow from NTT reform hastened by a sense of falling behind


I expect Japan to leapfrog into the network era of telecommunications by
the start of the millenium. 


Thank you for your attention today.


**************************************** 
Stephen J. Anderson, Associate Professor 
Director, International Department
Inforum URL http://ifrm.glocom.ac.jp/
Center for Global Communications (GLOCOM) 
International University of Japan
**************************************** 




Head Cheese says on on!