Tokyo Forum; November 21, 2002

Keynote Speech: Where Are We Up To?

Shumpei KUMON (Executive Director and Professor, GLOCOM)

Telecom's Present Situation

First of all, as the executive director of GLOCOM, I wish to thank our sponsors and all the participants who are joining us in this important event for GLOCOM today.

Now it is quite obvious that the telecommunications industry in the United States is in a rather miserable shape. According to the chairman of the U.S. Federal Communications Commission, Michael Powell, the telephone industry in the U.S. is in a state of "utter crisis." The former chairman of the U.S. Federal Deposit Insurance Corporation, William Seidman, said that the collapse of the industry would be "probably the largest single meltdown in a defined industry."

In contrast to this, perhaps the situation in Japan's telecommunications industry is somewhat easier. They seem to be more resilient than their counterparts in the U.S. and elsewhere. For instance, even though NTT has about the same amount of debts as Verizon, thanks to low interest rates in Japan it is paying only one third of interest. Also NTT has much larger room than its counterparts overseas for restructuring, particularly decreasing its once very huge capital expenditures.

Fundamental Cause

However, we wonder if tomorrow Japan's telecommunications industry may be like today's U.S. telecommunications industry. Why? The reason is given by a colleague of mine, David Isenberg. In his open letter to FCC Chairman Powell, he points out the following:

"(1) The telecom debacle is not a cyclical phenomenon. The telephone network's technological base, and the business model under which this old technology thrived, are obsolete. Recovery is not an option. (2) The primary cause of current telecom trouble is that Internet-based end-to-end data networking has subsumed (and will subsume) the value that was formerly embodied in other communications networks. This, in turn, is causing the immediate obsolescence of the vertically integrated, circuit-based telephony industry of 127 years vintage. (3) Weak last-mile competition prevents the most powerful technological advances from reaching all but a few customers; this is the largest cause of long-haul over-capacity."

In fact, a sea change is taking place right now. A friend of ours, Andrew Odlyzko maintains that, first, in spite of the bursting of the IT bubble Internet traffic is still doubling every year and, secondly, broadband is spreading more rapidly than cellular telephony in the U.S. Also, according to Michael Lewis, from the end of 1999 to the end of 2001 employment in the top 100 boom year companies, mostly dotcom companies, climbed 26 percent, that is, 177,000 jobs. So that they are still growing and accumulating profits in the midst of telecom predicament.

The Paradox of the Best Network

However, we are facing the "paradox of the best network," according to David Isenberg and David Weinberger, who argue that the best network is the hardest one to make money running. "Communications networks have a more important job than generating return on investment – their value comes from their connectivity and from the services they enable. Therefore, the best network delivers bits in the largest volumes at the fastest speeds. In addition, the best network is the most open to new communications services; it closes off the fewest futures and elicits the most innovation."

So an implication of the paradox of the best network, as I understand it, is that connection service to the backbone is commoditized, whereas most costs come from network management and content production. Therefore, what is important to run the best network is to reduce its cost and make it easy to use for everybody. For this we can perhaps count on wireless LANs. At the same time, we have to look after the possibility of new support businesses, or new applications businesses, that stand somewhere in the middle between infrastructure and content.

Having said that, however, I still have some feeling that there may be some other alternatives. Particularly for big cities, there may be some possibility of intelligent and managed networks for densely populated areas, comparable to Japan's New Truck Line.

A New Challenge to Invent A New Operation Model

For the moment, we, GLOCOM, will concentrate on a new challenge, that is to invent a new operation model, not necessarily a business model. The reason for doing that is that in these days of big technological transition neither the market nor the government is sufficient as a sole solution. Rather, we need a new operation model that complements both the market and the government. And collaborative models among municipalities, firms, and civil society, or netizens, may be the one that we should look forward to.

So, for instance, take a look at Japan's situation. On the map of Hyogo Prefecture, shown here, the colored area is where commercial DSL services are provided, and the white, uncolored, area shows the remaining 60-70 percent of the whole area, in which, if left to the market alone, there will be no broadband services available. But there is a company, called "Kansai broadband," that is trying to provide DSL services in collaboration with municipalities and local residents so that they can cover the whole area in Hyogo by leasing dark fibers and telephone lines, and co-locating DSLAMs. But that is not enough, so they are now considering the possibility of introducing wireless LANs.

Remarkable Potential of Wireless

In fact, wireless seems to be the key for the future. If I quote FCC Chairman Powell again, "we are living in a world where the demand for spectrum is driven by an explosion of wireless technology and the ever-increasing popularity of wireless services."

For instance, in Kochi Prefecture, there has been an attempt to set up wireless LAN networks by a colleague of mine, Professor Imai, as shown in the picture of Nankoku City (http://www.csi.ad.jp/wg/pub). And there are many other cases like this in Japan right now.

So, it seems that wireless has remarkable potential. Wireless LANs offer a low-cost alternative, in which rapid innovation and evolution can take place. And there seem to be three major areas of application of wireless LANs. The first is rural districts, in which some digital divide might develop, if left alone. Second, quite a promising area is condominiums and offices in large cities or in densely populated regions. The third area of application is mobile wireless, combining an ad hoc network, fixed access points and a cellular telephone network.

These are today's main topics to be discussed, and I would very much like to learn from what my knowledgeable colleagues have to say on these topics.