Misapplication of Antimonopoly Law:
Ignorance by People in Charge of Policies Obstructs Growth of Internet

Hajime YAMADA (Deputy Executive Director, GLOCOM, and Professor, Toyo University)

On December 4, 2003, the Fair Trade Commission of Japan (JFTC) rendered a recommendation and warning to Nippon Telegraph and Telephone East Corporation (NTT East) on optical broadband communications services (Fiber To The Home, or FTTH). The Commission claimed that NTT's offering of a cheaper FTTH service to consumers compared to that of other telecom carriers has violated the Antimonopoly Law. NTT East expressed its disagreement, and immediately appealed the issue.

Because laying a network of FTTH would require a huge capital investment, it used to be thought that only NTT East would have the capability to realize it. Under this perception, FTTH has been defined as a special sort of service providing set up, a "Designated Telecommunications Facilities (DTF)", which means other carriers can lease the service at connecting charges explicitly authorized by the Minister in charge, namely, the Minister of Public Management, Home Affairs, Posts and Telecommunications. As such, the proposed sales to consumers of FTTH at prices lower than the price designated by NTT was considered an unfair practice by the JFTC.

But a big question arises when considering the pace of technological development in this field.

A market where leaders are disadvantaged

The telecommunications industry does not follow the general rule by which leaders usually have an advantageous position. This is because with early investment, more expensive and less efficient facilities must be utilized. On the other hand, late comers can procure efficient facilities with small investment, enabling them to provide less expensive services. Leaders therefore must lower service fees, making it more difficult to recover the cost of old facilities.

NTT East obtained authorization of the Minister on the "core line direct connection method", in which one subscriber occupies one optical fiber at an access fee of 5,074 yen. Prices of facilities to enable such a service dropped since the time the original investments were made, and Tokyo Electric Power joined the market at less expensive prices.

As a countermeasure, NTT East acquired another service authorization for a more advanced system by which many subscribers could share a single line at lower service fees -- 2,335 yen when a line is shared by 20 subscribers. NTT East, however, began offering services before the new facilities to enable the service was in place, which in effect would provide a single user per line at a lower price, which the FTC claimed was illegal.

A phenomenon in which leaders become disadvantaged can be seen in the ADSL market. A leader in the field at the dawn of ADSL was Tokyo Metallic Tsushin, but it could not sustain the necessary investment to catch up with the ever-advancing technology and the company was later acquired by Softbank. Most companies that remain in the market are having hard times just keeping up with the progress of technology, making it even more difficult to start recording any profit.

Even so, to an extent the general rule of business still applies, which dictates that leaders of a market can establish an advantageous position, e.g. a brand name. Thus, entrepreneurs and managers keep on striving to find and trace a fine line to succeed.

In fact, whether or not it was a good decision to designate the service as DTF, thus making FTTH the only such service subject to the Antimonopoly Law, is very questionable.

Internet different in design concept from telephone lines

The telephone network across the country had been built by NTT since the days of it being a public corporation, and competition appeared only in 1987. In those days, it was a general belief that a facility, a network, of its own should be laid down by the service provider, the newcomer. But as it became clear that it would be unrealistic to expect such huge investment to materialize by competition, a regulatory framework was created in which NTT is obliged to allow other operators to use its facilities at a price authorized by the Minister.

But little recognized at the time was that the structure of the Internet was fundamentally different from that of telephone lines. The Internet was originally built as a network for researchers by connecting existing networks of each research institution to form the web. It began in the 1970s, but the basic philosophy and methodology have not changed and are still effective.

The Internet does not differentiate between networks of existing and new service providers. Anyone could formulate a network, and it does not matter what sort of technology was utilized to establish that network. The Internet could be resembled by a patchwork of cloths of various sizes, colors and shapes, interconnected to form a large fabric.

If this characteristic is clearly recognized, it is easy to see that FTTH is merely one of many technical components to play its own part in the whole structure. Labeling it as a DTF, a concept adopted in the old days of analog telephone lines, is meaningless in the modern context. Technology utilized to connect terminals and local networks can be FTTH, cable TV, ADSL or Wireless LAN. It would be a worthless, if not harmful, policy to eliminate competitors of FTTH service if it were only to lose the market to ADSL service providers.

Promote free competition

Fixing the fee at a certain level for access to DTF actually hinders competition. If a potential service price exceeds the authorized access fee there will be no new entries to the market because there are no business opportunities. And if there was room for new competitors to appear, their prices would remain close to that authorized level despite the possibility of lowering them.

Indeed, long-distance telephone charges within Japan have declined only very slowly and gradually since 1987. This was due to regulatory control through authorization of fees curbing competition. If FTTH is to be treated in a similar manner, it would inhibit dissemination of broadband services in Japan.

There are two forms of competition in the telecommunication market. One is to compete by a company setting up its own facilities, and the other is by utilizing facilities of other entities. In the case of long-distance telephone service, there used to be, for a short while, a service that would purchase a bulk service from the carriers and resell it after splitting into small allotments to consumers. But eventually it was KDDI and Japan Telecom, who had set up their own facilities, winning the majority share of telephone communication between Tokyo and Osaka, the two largest cities in Japan.

As FTTH is designated as DTF and if fees become under strict control of the authorities, only entities providing retail services by leasing the lines benefit, and hinder competitive challenges of companies attempting to provide services by building and utilizing their own facilities, such as Tokyo Electric Power (TEPCO). A fair playing field can only be achieved by including the capabilities of establishing a necessary facility as an element of competition.

Informal dialogue necessary among related parties

The misjudgment by JFTC was a result of ignorance of technological development and the reality of competition. This, in turn, was caused by alienation on the part of the members of the JFTC and other government sectors from current trends of technology and evolution of the market.

Indeed, there are many communication policy issues that need to be addressed. For example, how should radio frequencies be allocated in the light of growing numbers of wireless LANs, or what would be an equitable and effective copyright framework to distribute intellectual contents utilizing new technologies? What roles should the government and industry play in providing easily accessible services to people with disabilities and elderly?

There are no simple solutions to these issues. Accordingly, active and candid exchange of views among concerned parties and those knowledgeable from a very early stage of planning is vital.

(The original Japanese article appeared in the February 7, 2004 issue of Weekly Toyo Keizai)