IP: NTT Break-up in Japan

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

From: kevins () iac co jp (Kevin Scherrer)


Following is an article I wrote not long ago for our homepage here at
the Japan Press Network.  You can view this and other stories about
Japan's high technology industries at http://www.iac.co.jp/~jpn


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Japan's Postal Ministry Prepares to Breakup Telecom Giant NTT


By Kevin Scherrer
Japan Press Network


    The long talked about break up of Nippon Telegraph and Telephone
Corp is drawing nearer as the Ministry of Posts and Telecommunications
prepares to announce plans as soon as next month that will lead to
splitting up Japan's telecommunications monolith, but major political
roadblocks, including opposition from the Prime Minister, still exist.


    Five years ago the Telecommunications Council, the body charged
with making recommendations to the MPT on major policy decisions, put
off judgment on how the telecom giant should be reorganized until the
end of fiscal 1995.  With that date fast approaching, very few
observers, NTT included, hold any hope that a break-up can be avoided.


    The most rational argument against a break-up asserts that it
would seriously hamper NTT's ability to implement plans for a next
generation telecommunications network, which centers on connecting
each home in Japan to fiber optic cables. NTT recently announced that
it would begin procuring cable in order to at least get started on
this endeavor that has been in the planning stages for several years.
It plans to buy 7,200 km of fiber optics to connect existing
underground cables to those strung on telephone poles in the first
year of procurement. NTT plans to complete the project in 2010.


    However, NTT's habit of stalling interconnection negotiations with
new carries feeds fuel to arguments for a breakup. Last year the MPT
had to intercede when the Astel Group of personal handy-phone carriers
was told by NTT that negotiations over interconnection fees would take
until mid-1996 despite the new company's clear intention to begin
services in the Autumn of 1995.


    More recently, NTT's three long distance competitors have reached
an impasse over charges for access to NTT's ISDN network. NTT wants to
charge them 260 million yen a year for upgrading the internetwork
gateway switches, but has delayed providing them with specific costs
for network access.  While NTT is dithering, they are providing the
same types of ISDN-based services that their competitors want to
provide.


    However, according to NTT spokesman Hideki Ohmichi, the new common
carriers complaints are unfounded.  While admitting that it takes time
to negotiate interconnections, he said it also takes time for NTT to
install the new equipment necessary for interconnections with some of
the carriers.  "The shortest period of time it takes to interconnect
with an NCC is one month, and the longest it will take, if we have to
install new equipment, is one year."


    "We do not think that competition will be promoted by breaking up
NTT, we think that our announcement that we would open the network to
all carriers for interconnection is sufficient," Ohmichi aserted.


    While these sorts of abuses have given rise to calls for NTT's
break-up, the issues could be dealt with on an ad hoc basis by stop
gap measures and MPT pressure. However, more fundamental issues, such
as how the carriers set their rates and negotiate their tariffs, are
the MPT's main concern at the moment.


    To be sure, nearly every sector of the industry is calling for
further deregulation and for the MPT to cease micromanaging the way
the carriers do business, but the size and influence of NTT has made
this difficult to do.  All carriers must apply for, and get approval
from, the MPT to reduce rates, although this is set to change to some
extent soon. In what has been called the "convoy system" of setting
rates, by the time a company has applied to reduce its rates, all of
the other have countered with one of their own just as ships in a
convoy accelerate or slow down to match the speed of the leader. The
net effect of this has been to discourage the kind of cut throat price
competition seen in other less regulated markets. But rates are not
the only issue.


    The Ministry announced in January that cellular phone carriers
would need only to submit notification of rate reductions rather than
submit applications. The deregulation will go into effect in the
Spring of 1997, and the ministry expects this to increase competition
in the cellular phone market.  But Mr. Yoshio Utsumi, Deputy Minister
for Policy Coordination at the MPT, told members of the press recently
that such an arrangement was not possible for long distance services
because the market is not yet fully competitive.  NTT's deep pockets
would allow them to continue their dominance in a price war and their
control over the network could be used in anti-competitive ways, he
pointed out.  By contrast the cellular phone market is overly
competitive by some industry insiders' accounts.


    With these structural problems in mind the Telecommunications
Council is considering scenarios for breaking up NTT, and has reached
a basic agreement that the corporation will be divided into three or
four separate units, one long distance carrier and two or three local
carriers.  The actual split will not happen until 1999, according to
Japanese press reports.


    In the mean time, the MPT is proposing the passage of a law that
will allow it to impose specific regulations on NTT to make sure it
did not engage in any anti-competitive practices. Such rules are not
unprecedented, as the U.K. has had special rules on British Telecom
for some time, but they are unusual for Japan.


    The importance of the council's final report, due at the end of
February, is that the MPT hardly ever makes policy counter to what the
council recommends, and Japan's Diet hardly ever makes major revisions
on bills proposed by a ministry.  After the report comes out, the MPT
will include the proposals into a proposed bill that will then be
presented to the Diet.  MPT can not unilaterally break-up NTT.


    But this time, the simple rubber stamping of the proposed
legislation is not assured.  The ruling Liberal Democratic Party, in
particular the current Prime Minister Ryutaro Hashimoto, is on record
as being opposed to the break-up.  In addition the Ministry of Finance
has for a long time opposed the plan because as caretaker of the
government's 60% holding in NTT, they are worried that the value of
the stock will fall.


    So although most of the press here is saying that there will be a
breakup of NTT this Spring, there is also potential for the Diet to
use this issue to both reinvent itself, and put the bureaucracies in
their place.


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Kevin Scherrer is Technology Journalist at the Japan Press Network 
kevins () iac co jp  He hopes to have his web page up and running soon.