How the "Japanese Miracle" of Broadband Came About
Nobuo Ikeda (Senior Fellow, Research Institute of Economy, Trade and Industry)
Despite Japan's overall economy being still dreary, one area showing remarkable growth is broadband Internet access. The number of households with digital subscriber line (DSL) was only a little over 10,000 in the beginning of 2001, but is expected to reach 10 million very shortly. The total count of households with broadband Internet access including DSL, cable television (CATV), and optical fiber lines (FTTH) now exceeds 12 million. A little while ago Korea was the focus of attention with the fastest broadband diffusion rate in the world after its recovery from the economic crisis in 97-98, a phenomenon coined the "Korean miracle." But now the speed of broadband proliferation in Japan seems to be exceeding that in Korea, with the "Japanese miracle" occurring in the field of IT infrastructure. How did such a phenomenon come about?
Softbank the price-buster, and the opening of NTT's network
The realization of DSL in Japan is due to mandatory unbundling. Unbundling is a means to allow for connecting household telephone subscriber lines with DSL without passing through a switchboard. But this requires DSL operators to place their equipment in the premises of telephone stations owned by the Nippon Telephone and Telegraph Corp. (NTT), which is inherently a competitor of the DSL operators. Understandably, NTT refused unbundling at first. So in 1997 the Telecommunications Business Law was amended to make unbundling obligatory for NTT. It is interesting to note that similar legislative action was taken in the United States in 1996 and in Europe in 2000, but did not have the expected effect of enhancing competition. Over 90% of DSL in the US and in Europe is still operated by telephone companies. In Japan, however, the top DLS carrier is Softbank Corp. with over 30% of the market, while the share of the entire NTT group combined is under 40%.
The success of a policy objective behind unbundling regulation in Japan owes to the aggressive business strategy adopted by Softbank, which introduced nationwide DSL services at a very low price unseen in other countries. Whereas the conventional dial-up connection had cost users approximately 5,000 yen per month including telephone charges and Internet service provider fee, Softbank provided 8 megabits per second (8Mbps) Internet service for 2,830 yen a month, reducing the actual cost for users by half while multiplying the transmission rate by over one hundred. Softbank, which suffered a severe drop in its market capitalization with the collapse of the bubble to only about 1% of its peak, made an investment of 180 billion yen in an effort to emerge from the abyss into the broadband business. This was considered by some observers to be Softbank's last-ditch attempt to survive. Softbank's DSL business is still in the red by 80 billion yen annually, and it is unclear to what extent its cash flow can tolerate it, but it is clear that Softbank's venture contributed to the rapid development of DSL infrastructure in Japan.
Another element was the obedient attitude by NTT, which diligently allowed access to its facilities by DSL operators in accordance with the new legislation. In the US and in Europe, telephone companies resisted unbundling by making various sorts of excuses. But in Japan, NTT allowed other companies to install DSL equipment in its telephone exchange facilities and opened its subscriber lines and relaying optical fiber lines to operators for fees that are the world's lowest. Even so, at first NTT was reluctant to observe this new regulation and deployed stalling measures such as conducting numerous "tests" upon allowing DSL operators to set up their equipment in NTT premises, which forced some operators to delay commencing services by more than a year. Realizing the situation, the Fair Trade Commission issued an admonition to NTT concerning DSL installations in 2001, and Masayoshi Son, president of Softbank, made strong requests at the government's IT Strategic Headquarter's meetings that NTT open its network. NTT then finally allowed their competitors into their facilities.
Japan's success is an accident: though good for consumers...
The largest factor for NTT to liberalize use of its lines was foreign pressure. In the US.-Japan bilateral trade negotiations of 2000, telephone connection charges became a major issue, and NTT agreed to open its lines as a trade-off to minimize reduction in its connection charges. At the time, NTT was concentrating on ISDN as its key infrastructure and optical fiber network was being envisaged as the next generation technology, while DSL was considered to be only a transitional technique to fill the gap. Back in 2000, the operators of DSL were a few small companies such as Tokyo Metallic Communications (later purchased by Softbank), and it seemed NTT would have little to lose by unbundling in exchange for securing its annual revenue of 700 billion yen from connection charges. But when the groundwork for unbundling was laid, Softbank came storming into the market. In 2002, NTT appealed to the government to allow an increase in connection charges and to abolish obligatory unbundling, but it was too late.
Success of broadband in Japan is thus a result of mandatory unbundling, an adventurous market newcomer and the strategic failure of NTT, an accident comparable to a train market derailment of multiple causes. Although beneficial for consumers for the time being, it is unclear how long this competition of attrition can be sustained at fees 1/30 of those in the US and Europe in terms of bit rate. The situation in which newly established operators have little or no facilities of their own and are building their networks on the infrastructures of NTT is also questionable in terms of fair competition, which should be based upon equitable level of investment on comparable equipment. Such a style of operation would also be vulnerable to changes in regulations and fluctuations of fee income.
The largest concern is that the deterioration of the fixed telephone line network is now at a critical stage. As the volume of communication over fixed lines is already decreasing because of the shift to prospering mobile phones, it is now also greatly impacted by proliferating broadband services and IP telephones. In 2002, NTT suffered a 28% decline in volume of communication and a 20% plunge in revenues. If this trend continues, the fixed-line business will become unsustainable in the near future except in the larger urban areas. Unless sufficient measures are taken, a raise in not only connection fees but also in basic charges will be inevitable. Serious issues such as how a universal service of telephones can be maintained for citizens, and the employment of 200 thousand NTT group workers have now become clear and imminent.