Creación de un ambiente de pruebas

4.1 Assessment of the 1985 reform

The 1985 reform is the first landmark point of the introduction of competition into the Japanese telecommunications industry. The essential purpose of the 1985 regulatory reform was to transform the industry from a monopoly to a competitive market and to allow new services and technologies to enter and develop. All types of telecommunications markets experienced a surge of new entrants with the cellular phone market experiencing particularly dynamic competition indicated by a six-fold increase in new monthly subscribers in 1995. The effects of the new competitive environment quickly brought their fruits. Prices, often the clearest indicator of healthy competition in a market, have been constantly falling since 1985 whilst in the same time services have been diversifying at a rapid pace. On the down side, experience has shown that it is almost impossible to ignore the fact that the old public monopolies remain dominant on

their markets and are likely to remain so in the near future. NTT is a clear example of this phenomenon as it not only clearly dominates the fixed telephony market with a share close to 90% but also the cellular phone market where new entry is easiest due to the lower costs and barriers to entry.

The regime introduced by the TBL is very much based and dependent on the existing NTT and KDD infrastructure and network facilities which are leased or interconnected to competitors in order for them to provide services to the public. In the short term it is unlikely that many operators will endeavour to assemble the prohibitive costs of building their own comprehensive networks and will therefore remain dependant of NTT. Some competitors are able to create their own network but only for local service and still have to use the NTT network to provide nation- wide service. Experience showed that one of the main reasons why NTT was keeping its dominant position is linked to the crucial issue of interconnection367_{and the way in which it was} provided. Rather than being decided by an independent body such as the MPHPT, as would have been expected, interconnection was left to commercial negotiation between NTT and the new entrant desiring to interconnect with the NTT infrastructure and network facilities. This meant that NTT could control its competitors by agreeing or not to interconnect with them or perhaps agreeing to interconnect but at conditions which were all but prohibitive for new entrants. Experience has shown that unless interconnection conditions are fully transparent and controlled by an independent body it is all too easy for the incumbent to make ‘life difficult’ for the new entrants by, for example, asking for very high interconnection prices, accepting to interconnect but only at points of interconnection which cannot be reached by the new entrant, etc. Since NTT owns the widest and most comprehensive telecommunications network in Japan this is indeed a worrying power.

4.2 Shortcomings of the TBL

4.2.1 State of the telecommunications industry after the 1985 reform

It is clear from the above section of this thesis that the telecommunications environment has changed dramatically since the 1985 reform with a very significant number of competitors entering the market. In that regard the 1985 reform and the key legislation behind it, the TBL, have been a success. However, the following sections will show that the system is not perfect and it has significant shortcomings. In addition, the very rapid pace of technological progress in

367_{Interconnection can be defined as the linking of telecommunications (or other) networks in order to allow the users}

of one organisation to communicate with users of the same or another organisation, or to access services provided by another organisation. See the section of this chapter below on interconnection.

the telecommunications industry means that regulation has to adapt as well. As a result of this constant technological change, further expansion and diversification of the market is inevitable to respond to users needs.

4.2.2 Basic concepts for the promotion of competition

The importance of the telecommunications industry as a cornerstone of the Japanese economy was quickly recognised by policy groups. One such policy group (composed of experts in the area) set up by the JFTC is the Study Group on competition policy relating to information and communication industries (the ‘Study Group’). The function of the Study Group was to evaluate competition policy in the information and communications industries. It produced three reports on this subject in 1988368_{, 1989}369_{and, the most detailed one, in 1996}370 _{which evaluate} competition in the telecommunications sector and give recommendations as to how to improve competitive conditions.

From the competition point of view, competition was formally introduced by the 1985 reform. The JFTC’s observations of specific markets such as long distance telecommunications, mobile telecommunications, and international telecommunications have shown that the introduction of competition has had some effects, such as the increasing share of the market held by the NCCs and the steady lowering and diversification of rates, but in the domestic telecommunications market as a whole, NTT still enjoys a monopolistic position. The JFTC believes that the forces of competition are still not functioning sufficiently, since rates for various services are high in comparison with those of foreign countries and each company generally sets its services in line with those of other companies. To stimulate competition, it is necessary to review government regulations, to equalise the conditions of competition, to study the management form of NTT, to strictly enforce the AMA, and so forth.

368_{JFTC/Japan Views, The Study Group Report on Competition Policy in Telecommunications Services, No.2, April}

1988, p. 25 to 31

369_{JFTC/Japan Views, Issues relating to Competition Policy in the Telecommunications Services, No 8, March 1990,}

p.66 to 80.

370_{JFTC/Japan Views, Issues relating to Competition Policy in the Telecommunications Industry, No.24, March 1996,}

The following sections analyse the competition policy thinking of the JFTC, mainly through the aspects of the Study Group’s 1996 report which focus on promoting access to telecommunications infrastructure and network facilities.371

4.2.3 Study of ideal government regulations in terms of competition policy

(a) The Study Group’s basic viewpoint concerning regulations in telecommunications industry

The Study Group emphasises the need to review drastically regulations in order to promote fair and free competition between companies. Regulations affecting business should be enacted in exceptional cases only when the government cannot achieve its political aims, allowing companies to conduct their business freely. NTT, due to its continuing local monopoly and to the fact that it is the only company that owns comprehensive local communications networks, has justified the creation of legislation that applies to it but that should not apply to its competitors (this concept, studied later on, is known as ‘asymmetrical regulation’). Because the telecommunications market is constantly changing due to rapid technological innovation, it is important to set a term of validity for the regulations and to maintain a system of reviewing the regulations within a certain period after they have been enforced.

(b) The Study Group’s recommendations on regulations for entry into and withdrawal from Type I telecommunications business

 Concept of conditions necessary for adjusting supply and demand;372

 Division of long-distance (inter-prefectural) from local (intra-prefectural);373

 Limitation of areas;374

371_Ibid.

372_{The Study Group recommends that conditions necessary for adjusting supply and demand, which are considered to}

be important for licensing prior to entry into the Type I telecommunications business, should be abolished.

373_{The Study Group recommends that the technical reasons for dividing telecommunications into long-distance and}

local no longer apply and there is no reason to classify inter-prefectural telecommunications as long-distance telecommunications; therefore, the government should take measures to allow the scope of telecommunications services to be freely determined by each company. This would in turn promote local telecommunications competition by giving to local companies a wider business scope.

374_{The Study Group notes that although each local system NCC is developing its business in its own business area,}

 Division of international telecommunications from domestic telecommunications;375

 Enforcement of the AMA.376

(c) The Study Group’s recommendations on regulations for rates and services of Type I telecommunications businesses

 Scope of regulation;377

 Method of regulation;378

 Enforcement of the AMA.379

(d) The Study Group’s recommendations on regulations of types of businesses

In its 1996 report the Study Group repeats what is said in its 1988 report,380_{i.e. that there is no} rationale for setting up different regulations for rates and services between Type I telecommunications business and Type II telecommunications business; therefore, the regulation level should be the same for both the Type I telecommunications business and the

interconnection between local system NCCs. Expansion of the business area of each local system NCC would undoubtedly promote competition in the telecommunications industry, therefore interconnection of the local-area- based NCCs should be freely allowed.

375_{The Study Group believes that there is no rational reason for dividing international telecommunications from}

domestic telecommunications; therefore, the concurrent operation of international telecommunications business and domestic telecommunications business should be authorised if companies so desire. Applying this to KDD, it is not necessary to limit the scope of business of KDD only to international telecommunications, and this division of telecommunications should be quickly abolished. Entry of NTT into the international telecommunications market should be authorised when it is judged that conditions inside and outside of NTT for connection with local communications network can be kept equal.

376_{The Study Group notes that companies which mutually limit their business scope and business area violate the AMA.}

It is therefore necessary to keep a close watch on such actions.

377_{The Study Group believes that it is no longer necessary to regulate services other than the basic service (telephony)}

related to the local communications network which is currently monopolised by NTT.

378_{The Study Group recommends that when NTT’s rate system is regulated, a more flexible control method of}

regulation should be used, instead of authorising a system based on the existing blanket cost method (Full Cost Principle).

379_{The Study Group believes that while the regulations affecting rates are being relaxed or are abolished in the future,}

it will be necessary to be on the watch for and prevent activities that violate the AMA. If NTT sets predatory prices, such activities must be cracked down strictly by the AMA.

380_{JFTC/Japan Views, The Study Group Report on Competition Policy in Telecommunications Services, No.2, April}

Type II telecommunications business. The classification differentiating between Special Type II telecommunications business and General Type II telecommunications business should be abolished quickly.

Further, the Study Group found that when a Type I telecommunications company rents its private lines to a Type II telecommunications company, and the Type I telecommunications company imposes unreasonable restrictions on the services that can be provided by the Type II telecommunications company using the above-mentioned private lines, the activity of the Type I telecommunications company violates the AMA, and such action must be closely watched.

(e) The Study Group’s recommendations on the NTT law and KDD law

NTT law: Universal service can be maintained by taking other supplementary measures, and there is no rationale for setting such regulations only for NTT. Also, the excessive regulations on NTT should be abolished.

KDD law: At the time of the Study Group’s report (i.e. before 1996), the conditions for competition in the international telecommunications market for KDD and the NCCs are considered to be roughly equal. Therefore the KDD law should be reviewed and drastically revised, and its abolition considered.

4.3 Appraisal of the Study Group’s remarks on the TBL

The Study Group’s remarks relate mainly to the law that puts in place the regulatory framework, i.e. the TBL. Although it has been amended, e.g. as a result of the 1985 reform, its basic structure dates back to 1953, when the telecommunications industry was characterised by the two big public monopolies of NTT and KDD. The criticisms of the Study Group are mainly aimed at the structure imposed by the TBL distinguishing between Type I and Type II telecommunications carriers as well as between Special and General Type II carriers. This criticism seems founded as it is generally true that less regulation facilitates new entry which in turn should bring more competition and hence benefit the end users through the introduction of new services, lower prices and a greater focus on their needs.

The Study Group underlined the importance, particularly for the telecommunications industry, of the dramatic changes brought about by technological innovation and the rapid diffusion of information. This is a very important point as technological developments can radically change the competitive situation on a given market. Therefore, the JFTC and the legislator have to stay on top of the technological innovations constantly introduced in high technology areas such as telecommunications. The application of the AMA to the telecommunications sector is encouraged by the Study Group. A realistic approach is taken when putting forward proposals for promoting competition in the telecommunications industry. For example, when it deals with

the ideal government regulations in terms of competition policy the Study Group does not overlook the possibility of ‘back door’ regulation through the use of administrative guidance issued by the various government Ministries. Although the use of administrative guidance has, since 1995, been discouraged by the government, there is still a genuine power play between the Ministries themselves but also, more importantly, between the Ministries and the JFTC. Often, co-operation between the Ministries and the JFTC is not ideal and that is something that has to be addressed.381

In general the Study Group emphasised the weaknesses of the present system but can be criticised in that it fails to propose a viable alternative solution. Moreover, such advisory study groups only have the power to recommend policies to Ministries (which can propose legislation) or the JFTC (which can issue enforcement decisions).

4.4 The Study Group’s recommendations on NTT related issues

4.4.1 Characteristics of NTT’s extraordinary status and ensuing competition issues

Back in 1989, the Study Group was already concerned that NTT, the only carrier in Japan with a nation-wide circuit network, was enjoying an overwhelming advantage in the field of basic telecommunications services vis-à-vis its competitors and might abuse its market power. In that report, the Study Group singled out the following characteristics that illustrated NTT’s extraordinary status:382

 Circuit network;383

 Internal cross subsidy;384

 Information.385

381_{See Chapter 3 of this thesis for a more in-depth analysis of the reasons of this difference in power between the}

MPHPT and the JFTC as well as to its consequences on the interrelation between general competition rules and sector-specific rules with regard to access to telecommunications markets in the EU and Japan.

382_{JFTC/Japan Views, Issues relating to Competition Policy in the Telecommunications Services, No 8, March 1990,}

p.67.

383_{With the exception of exclusive line services, new carriers face difficulty in providing their own circuit exchange-type}

telecommunications services without connection to NTT’s circuit network. The huge costs involved in the construction of new circuit networks are prohibitive for the new carriers that will have to rely on NTT’s network instead.

384_{Cross subsidy within different entities of the same company could amount to unfair competition vis-à-vis new}

entrants. The possibility exists that NTT service divisions are internally providing mutually with economic gains and making mutual use of information.

The Study Group identified possible impediments to free and fair competition in the telecommunications services that could occur should NTT abuse its market power. Translated into competition terms the three characteristics that make-up the extraordinary status of NTT can lead to the following three abuses:

 refusal of request for connecting to the NTT network;

 predatory pricing dependant on internal cross-subsidies; and

 utilisation of intellectual property to eliminate other carriers.

In response to those fears of anti-competitive conduct by NTT, the Study Group studied an effective way to ensure fair competitive conditions in the telecommunications services. The reform of the market structure in the telecommunications services, as outlined below, is one such way.

4.4.2 Proposed remedies

In view of the shortcomings of the 1985 reform and the state of the telecommunications industry in the following years, the Study Group put forward in its 1996 report a series of proposals in order to try and remedy the situation (analysed below). Unsurprisingly, NTT is the central focus of the proposed measures. The more radical measure proposed involved the break-up of NTT into regional entities. Such a break-up can be accomplished through various alternative methods, each with its advantages and disadvantages. Other measures that do not go as far as a break up were also proposed and are also outlined below.386

(a) Break-up of NTT’s activities into a local communications network and a long-distance network

385_{Information is one of the characteristic of NTT’s extraordinary status because:}

 without NTT’s information regarding circuit network and communications volumes, etc., other carriers may face some difficulties in operating communications businesses;

 without NTT’s disclosure of technical information in certain areas, other carriers may face some difficulties in operating communications businesses;

 because NTT is able to use customer-related information obtained form its network divisions in marketing communications equipment, etc., there is fear that NTT may use this advantage to undermine fair competition among the sellers of communications equipment.

386_{JFTC/Japan Views, Issues relating to Competition Policy in the Telecommunications Services, No.24, March 1996,}

Should NTT be broken-up into a local communications network and a long-distance network, the Study Group anticipated the following advantages:

 enhancement of fair competition among all long-distance carriers through the imposition of equal conditions on NTT’s long-distance communication enterprises (post-separation) and other long-distance carriers with regard to connections to local-circuit networks;

 enhancement of fair competition among NTT’s long-distance communication enterprise (post separation) and other long-distance carriers by prohibiting internal mutual assistance between NTT’s local communication service and NTT’s long-distance communication service;

 enhancement of fair competition among NTT’s long-distance communication enterprises (post separation) and other long-distance carriers, by equalising their conditions to access to network and customer information obtained from local-circuit carriers;

 enhancement of fair competition among NTT’s long-distance communication enterprise (post separation) and other long-distance carriers by prohibiting NTT’s long-distance communication enterprise to use information relating to NCC’s customers, servicing plans, etc., which is possessed by NTT’s local-line communication enterprise (post separation).