Japan Must Rethink Its Telecommunications Industry--or Lose

Glance up from practically any city street and you’ll spot dozens of little Sony, Maxell and Fujitsu satellite dishes perched on rooftops and peeking through laundry lines. Within a few short years, direct broadcast satellite television in Japan has grown into a cozy little multibillion-yen industry. America doesn’t have a video business quite like it.

On the other hand, there’s nothing in Japan even remotely resembling America’s seven Baby Bell regional operating companies, its cable TV industry or its long-distance networkers such as MCI Communications and Sprint.

The quasi-governmental, quasi-monopolistic NTT--Nippon Telephone & Telegraph--still defines and dominates the country’s telecommunications landscape. Japan has no telecommunications entrepreneurs comparable to MCI’s late William G. McGowan or Tele-Communications Inc.’s John Malone to shake up its regulators or its markets. To nervous Japanese, those satellite dishes as much symbolize telecommunications opportunities and technologies missed as they do the rise of a new medium.

From the Japanese perspective, the changes sweeping through U.S. telecommunications--the proposed mergers of AT&T; with McCaw Cellular and Bell Atlantic with TCI, for example--represent a fundamental and threatening industrial discontinuity.

Yes, a Sony can snap up Columbia Pictures and Matsushita can engulf MCA--and try to synergistically marry hardware and software into new media genres. But content and computers are clearly not enough. If the value-added portion of the new media age is going to come more from the interactive channels of digital distribution, then Japan has to reshape both the structure and regulation of its telecommunications.

Consequently, America’s media quakes have instantly transformed polite intellectual policy discussions here into intensely practical debates about the future of Japanese media. Radical deregulation of telecommunications is now being discussed with a seriousness that was lacking even six months ago.

This is not just the perfunctory echo of the new Hosokawa government’s announced desire to deregulate the Japanese economy. Rather, it is the unsettling recognition that Japan’s current telecommunications structure may not have the dynamic competitiveness that readily translates into global competitiveness. Normally worried about the perils of kyoso kajo --excess competition--Japanese industry and regulators now worry about whether there is enough competition in today’s telecommunications.

“The Ministry of Post and Telecommunications should be abolished,” proclaims one government technocrat.

Modeled after Europe’s Post, Telegraph and Telephone agencies, Japan’s Ministry of Post and Telecommunications oversees both the nation’s postal service and its telecommunications networks. It’s analogous to the U.S. Postal Service determining local and long-distance telephone rates in addition to delivering the mail.

The MPT has long had a reputation for technical stodginess, deregulatory constipation and a knack for blocking foreign participation in Japanese markets. In terms of deregulation terms, Japan today is where America was in the 1970s. There’s a growing belief that the MPT’s overprotective coddling has actually undermined NTT’s ability to compete.

By contrast, America’s Federal Communications Commission and Justice Department antitrust suit that broke up the Bell System have created an industrial structure that, while messy and complicated, foments price competition and innovation in telecommunications services.

While it is undeniably true that NTT spends billions annually to upgrade its networks, a sense of competitive urgency and innovation is lacking. Japan has no creative competition between cable companies and telephone companies. So the bureaucrats at Japan’s influential Ministry of International Trade and Industry and executives at media companies such as Sony understandably worry that innovations in America’s media marketplace are leaving Japanese industry behind.

They are particularly worried because of the politics of telecommunications. Even with the weakened economy, the strong yen would make it easy for a company such as Sony, Toshiba or NEC to make a major investment in a U.S. cable or telecommunications company.

However, precisely because there is no comparable industry in Japan, it would be almost impossible for American companies to make a reciprocal investment. “That imbalance could create political problems,” concedes a senior MITI policy official.

In other words, the closed nature of Japan’s telecommunications markets are likely to politically restrict the investment options of its companies overseas. Picture the Clinton Administration response if TCI said it was merging into NTT instead of Bell Atlantic.

The deeper issue now--as far as MITI and Japan’s media companies are concerned--is how to manage deregulation of Japan’s domestic market. How best to neutralize the MPT? How much competition should be created and how quickly? Should Nintendo and Sega be running video game networks over NTT’s lines? Or should NTT be split up in more creative ways? How do foreign companies such as Bell Atlantic/TCI and AT&T; participate in Japan’s markets? As full and equal competitors? Or in partnership with domestic companies? If so, which domestic companies?

Given history, Americans are unlikely to be happy with the way Japan answers most of these questions. Japan traditionally takes a nationalistic view of global industrial issues.

On the other hand, it’s clear that these questions are being asked precisely because America’s telecommunications industries now pose the sort of combined threat and opportunity that Japan can literally not afford to ignore.