[IP] Three Lessons Americans Can Learn from Japan's Success in Broadband
http://www.rieti.go.jp/en/special/policy-debate/06.html
Three Lessons Americans Can Learn from Japan's Success in Broadband
<http://www.rieti.go.jp/en/special/policy-debate/06_rd.html>>> to
Discussion Table # 6
Posting 3 comments
<http://www.rieti.go.jp/users/ikeda-nobuo/index_en.html>IKEDA Nobuo
Senior Fellow, RIETI
[]
Recently it is rare to hear news of Japan's success, but the broadband
business might offer an exception. The number of DSL (Digital Subscriber
Line) subscribers tripled within a year to more than 6 million in
Japan(refer to
<http://www.soumu.go.jp/joho_tsusin/eng/Statistics/dsl/>MPHPT's table).
This is the fastest growth of DSL users in the world, leading to a number
of its users second only to South Korea.
On the other hand, the United States is becoming "the Bangladesh of
broadband," according to Gordon Cook, the publisher of the Cook Report on
Internet. Hundreds of CLECs (Competitive Local Exchange Carriers) invested
in DSL during the dot-com boom, but most of them went bust when the bubble
burst. Why did Japan's policy work while the American 1996
Telecommunications Act resulted in the massacre of CLECs? Here are my
tentative answers.
1. Unbundling and co-location are necessary but not sufficient conditions
for the proliferation of broadband.
At the same time the U.S. mandated the unbundling of local loop and
co-location of competitor's equipment in telephone offices under the 1996
Act, Japan's MPHPT (Ministry of Public Management, Home Affairs, Posts and
Telecommunications) enacted similar rules, to no avail. A few startups
tried to begin DSL services, but NTT (Nippon Telegraph and Telephone)
delayed the opening of their lines by "testing" the DSL equipment for more
than a year.
Thus, in 2001, when Son Masayoshi, the president of SoftBank, began a DSL
service called "Yahoo! BB" at the surprising price of 990 yen (2830 yen
including ISP services) per month for a connection of 8 Mbps (Megabit per
second), most people were skeptical about its profitability. However, Son
invested more than 100 billion yen in Yahoo! BB, selling most of the assets
that he bought during the bubble years.
At first NTT resisted the co-location, but Son urged NTT to open the lines
in the governmental IT Strategy Council, where he and Miyazu Jun-ichiro,
the president of NTT, were members. Furthermore, the Fair Trade Commission
of Japan accused NTT-East of unfair treatment of DSL carriers, which was a
shocking event for NTT, a half-national company. So it lessened its
resistance and opened its facilities nationwide.
As a result, in two years, Yahoo! BB became the biggest broadband service
provider in Japan with 2 million subscribers. Because no DSL carrier is
making money in Japan, the prospect of broadband business is uncertain, but
one thing is obvious: if the unbundling policy were not enforced, DSL could
not prevail. Moreover, aggressive entrants and honest incumbents are
indispensable for the proliferation of broadband.
Theoretically, the net effect of unbundling is ambiguous because it
encourages entrant's investment while it reduces incumbent's incentives.
However, from Japan's experience, we can say that unbundling facilitates
investment as a whole if it is enforced adequately. Unbundling invites
entry of new competitors and, eventually, increases incumbent's investment.
Incumbents would not cannibalize their telephone business unless
competitors threatens them to do so.
Optical fiber is expensive and useless for residential users, because 95%
of Internet uses are mail and Web. So the "unregulation" policy of the FCC
(Federal Communications Commission) that encourages facility-based
competition would not work until competitors can arbitrage wired and
wireless connections as a result of opening the spectrum for wireless
Internet. Therefore the FCC's new policy to put an end to unbundling is
likely to make things even worse.
2. The transition to IP networks can be painful for incumbent carriers.
Now Softbank is deploying a VoIP (Voice over Internet Protocol) service
called "BB Phone" for every subscriber to Yahoo! BB. It costs only 7.5 yen
per 3 minutes to call from Tokyo to New York, and it is free if both sides
are using BB Phone. This could become a fatal blow to NTT, because BB phone
is an end-to-end (E2E) system of VoIP that connects telephone terminals to
IP networks through DSL without passing through telephone switches of NTT.
Part of the problem was created by strategic mistakes on the part of NTT.
The "overlay price" to send data through the access lines of NTT has fallen
to 173 yen per month. The wholesale price of dark fiber is 3.9 yen per
meter per month. These are arguably the cheapest wholesale prices offered
by incumbent carriers. Moreover, NTT should interconnect its lines with
those of competitors in all areas in Japan. These bargain prices are the
results of adoption of forward-looking cost estimation that the USTR (US
Trade Representative) demanded in trade negotiations.
In 2000, when the USTR attacked NTT that its interconnection fees for
access lines were too high, NTT was embarrassed because this was a domestic
problem. NTT became preoccupied with this strange trade talks and tried to
avoid the drastic price reduction demanded by the USTR (22.5% in two years
and 40% in four years) at any cost. As a bargaining chip for the
negotiation, NTT agreed to lower the wholesale prices for DSL as requested
by the MPHPT. NTT did not take DSL seriously because it was planning to
migrate from ISDN to FTTH (Fiber To The Home).
This mistake was expensive for NTT because it prevented NTT from making
money with broadband. Yahoo! BB made the most of this opportunity by
connecting their access line directly to the core network of 10-Gigabit
Ethernet over the cheap dark fiber leased from NTT. Yahoo! BB
"disintermediated" PSTN using NTT's pipes.
This year NTT had to raise the interconnection fees for the first time in
its history. However, this measure is far from a cure, because revenue from
PSTN is falling 10 per cent annually. Traditional rivals such as KDDI are
arguing against the price hike, but this can be an incentive for ISPs
(Internet Service Providers) that are going to invest in E2E VoIP services.
Now it is cheaper to interconnect to NTT's switches than to invest in E2E,
but the latter will be attractive if telephone fees go on rising.
3. In addition to facilities, the organization of incumbent carriers must
be unbundled to realize broadband networks.
Kevin Werbach, an Internet analyst, commented to me that the wholesale
prices were reasonable because incumbents had already amortized most of
their assets. He argued that if such prices put incumbents out of business,
that would imply that the incumbents were so inefficient and hidebound that
they must die. That might be true, but they die hard; thus the regulatory
nightmare seen in the U.S.
The unbundling of facilities would not be successful unless it is
accompanied by the unbundling of organizations, because vertically
integrated incumbent carriers would resist the "regulatory takings" that
infringe their property rights. Even if their claim is justified,
deregulation should be limited to new investment in IP networks. Old
telephone swicthes, together with most of their employees, must be
unbundled from pipes and scrapped as soon as possible.
As for NTT, I recommended that the whole NTT group should be reorganized
into three companies; NTT-IP, NTT DoCoMo, and NTT-Telephone. NTT-IP (or
NTT-Verio) would be a facility-based ISP that operates internationally.
NTT-Telephone would be a re-nationalized company whose stocks can be
converted from the 46 per cent stake that Japanese government has in NTT.
Other companies must be completely private.
This scheme divides the problem into two parts: one is the transition from
PSTN to IP networks; another is the liquidation of telephone switches with
as few social costs as possible. The latter problem is far more complicated
and politically difficult. If these two problems are bundled, they are
usually brought to a deadlock as a result of strong resistance from
incumbents with tight grip on facilities, as evidenced in the U.S.
NTT unintentionally made loopholes for others to "skim the cream" which
hastened the end of PSTN. It is partly a result of its honest observance of
unbudling obligation, but partly a result of miscalculation as described
above. This is indeed bad news for NTT, but it might be a blessing in
disguise for Japan, because it will accelerate the migration to the open
broadband networks into which many startups can enter. Such migration is
technically possible but barred by incumbents who monopolize local loops in
other countries. From the banking crisis in 1990s, we learned that, if
Doomsday is inevitable, it is better if it comes earlier.
-------------------------------------
You are subscribed as roessler@xxxxxxxxxxxxxxxxxx
To manage your subscription, go to
http://v2.listbox.com/member/?listname=ip
Archives at: http://www.interesting-people.org/archives/interesting-people/