Japan’s Big Hang-Up: Phone Costs

At an unused cement-testing lab in this industrial city 30 miles from Tokyo, technicians huddle attentively as a hedgehog-shaped robot lays fiber-optic cable through a 10-inch sewer pipe.

As the robot rotates on its axis laying the rat-resistant lines, however, a plastic pin jams, forcing operators to rock the machine back and forth until its mobility is restored.

“Many objects float through the sewer and things get stuck, so it’s sometimes difficult to get the robot moving smoothly,” explains Takehisa Hatta, general manager at Nippon Hume Corp., the robot’s creator.

Teaching robots to dance through sewer pipes? Such are the lengths--and depths--to which Japanese competitors are going these days in their bid to loosen the powerful grip of the world’s biggest phone company, Nippon Telegraph & Telephone Corp., on troubled Japan.

NTT’s dominance of Japan’s $100-billion telecommunications market, critics say, is choking off the country’s prospects for emerging from a decade of economic stagnation.

“Over the next three to five years, Japan will fall even further behind. I have a real sense of crisis,” said Ryuchi Kinoshita, managing director with DDI Corp., a long-distance and cellular carrier that is struggling to compete with NTT.

One of the most damning criticisms is that NTT’s power has had a chilling effect on the nation’s use of the Internet, so critical to future global competitiveness.

To be sure, there are other reasons why Japan lost momentum as a world economic leader during the 1990s. But as telecommunications and the Internet have grown in importance, critics are zeroing in on clod-footed NTT as a new whipping boy.

High rates, preferential treatment and weak antitrust laws allow the former wholly state-owned monopoly to stave off competition, critics charge, while saddling customers with some of the highest local phone charges in the industrialized world.

The average Japanese family spent a whopping $3,047 on phone bills in 1999, according to Japan’s Management and Coordination Agency.

In the Internet Age, high phone bills mean a lot more than they used to: They restrain the pace of the cyber-revolution, the most important technological event in a century.

In the United States, most local phone rates are the same whether you’re on the line for three minutes or three hours. In Japan, NTT keeps the meter running. The norm is $19 an hour for all local calls--about what Americans typically pay for a full month of unlimited Internet access.

“I use the Internet at work, but it’s quite expensive,” said Masami Tanaka, a 28-year-old employee in a Tokyo-based industry association. “People in the accounting section warn us not to use it too much.”

The result is that about 1 in 6 Japanese use the Internet, for an average of 11 hours a month online, while about 40% of Americans use the Net, averaging 60 hours a month.

“In Japan, if you used the Internet for 60 hours, you’d go broke,” said Susumu Tsubaki, project manager with the Boston Consulting Group.

This, in turn, has left Japan without the lattice of start-ups, Web-site makers and related companies that create value in the Internet economy, said Eric A. Nordin, vice president with Bain & Co. Japan Inc.

“It’s like a time machine,” Nordin added. “You arrive here from the West Coast and say, ‘I remember this. This was the 1980s.’ ”

The ultimate source of NTT’s clout is its control over the so-called last mile to the consumer’s home. That gives it a vise grip on any foreign or domestic challenger. Rivals either must pay exorbitant fees to NTT or find alternative routes at great expense, such as feeding fiber-optic cables through drain pipes.

NTT’s interconnection charges are more than four times those in the U.S. and Britain and 2.5 times French and Swedish levels. NTT sometimes makes more money from its competitors than competitors do. Tokyo Telecommunications Network Co., for instance, charges customers 8.4 cents for a three-minute local call but must give 5.6 cents of that to NTT.

NTT rivals do have a major ally in their fight to get a dial tone: Washington is ratcheting up pressure on Tokyo to sharply lower those interconnection fees, threatening to drag Japan before the World Trade Organization.

Last week, a group of U.S. lawmakers threatened to block NTT’s proposed $5.5-billion acquisition of U.S. Web site manager Verio Inc. unless Japan opens up its telecommunications market.

“Either they are serious about deregulating or we should call a spade a spade,” said U.S. Trade Representative Charlene Barshefsky. “NTT is calling the shots instead of the prime minister, which is a sorry state of affairs.”

NTT defends its practices and its rates, noting that it faces increasing competitive pressure in some parts of its business. It has begun to trim rates on data traffic, where it’s come under so much criticism for impeding Internet development.

“Prices in Japan are expensive,” said NTT President Junichiro Miyazu. “But we’ll continue to make efforts to reduce our costs.”

But Japan’s preference for a telecommunications industry dominated by one clumsy giant threatens to leave Japan playing catch-up for years to come.

Japan has often let vested interests frustrate the broader social good. Group suffering has become less palatable, however, as the economic downturn enters its second decade. In a nation used to speaking with a single public voice on controversial business issues, Japan’s business elite now openly criticizes NTT.

Sony Corp. Chairman Nobuyuki Idei has called NTT’s rates “unbelievably high” and accused the telecom behemoth of acting as if it’s exempt from market competition. Fujitsu Ltd. President Naoyuki Akikusa charges NTT with holding back the nation’s Internet development. And the influential Nikkei business daily says NTT’s fixation on maintaining its huge payroll hampers Japan’s overall job creation. “Lower telecommunications costs are essential to the future growth of Japan’s economy,” it says.

Elsewhere, telecom liberalization has proved a powerful economic driver. Information technology accounted for more than one-third of U.S. economic expansion between 1995 and 1998, according to the Commerce Department. In the rare case where Japan itself has deregulated--by opening its cellular phone market--it created 8,500 jobs and sparked a $2.2-trillion market in less than a decade. Likewise, wireless Internet use has mushroomed lately--but that alone cannot structurally transform the economy.

Nearly everything about NTT is big, including the political power at its disposal to frustrate reform.

It’s the largest telecom provider in the world, with annual revenues of more than $80 billion. It controls up to 98% of the local Japanese market, 50% of long-distance traffic and 65% of the cellular sector.

Between its influential 220,000-member union and the thousands of companies dependent on NTT’s $16-billion procurement budget, the telecom giant’s direct constituency swells to perhaps 3 million people. NTT also hires more ex-government bureaucrats than any other Japanese company, a practice that traditionally ensures favorable regulatory treatment.

Critics say this prodigious arsenal helps explain how NTT successfully fought off a breakup, a step the U.S. took in 1984 with AT&T; Corp. Japan’s tepid moves to introduce competition and roll back NTT’s privileges contrast with those of many other industrialized nations, where regulators have moved aggressively to unleash the industry’s explosive growth potential.

When a reorganization plan finally emerged in July, 14 years after a breakup was first proposed, NTT came away not only intact but arguably stronger.

For those in the reform camp, NTT provides a big target. But its survival as a near-monopoly probably says more about Japan than about NTT.

The real culprit, many say, is Japan’s Ministry of Posts and Telecommunications, charged with overseeing the competitive landscape. The Japanese government’s 59% direct ownership stake in NTT and various political pressures arguably make the ministry more of a protector than an unbiased regulator.

“MPT has announced a policy to deregulate the market,” said Toshiaki Onoda, a telecom analyst here. “But it hasn’t done very well. There is too much pressure to protect the status quo.”

Certainly, competition is growing in Japan.

As the Internet catches on, competitors are struggling to bypass NTT’s grip with cable TV systems, satellite, asymmetric digital subscriber lines and cellular connections. But each of these also faces huge cost hurdles and, in some cases, still depends on NTT’s cooperation.

AT&T;, Microsoft Corp., Cable & Wireless USA, Mitsui & Co., Sony, Mitsubishi Corp. and Vodafone AirTouch, among others, are all fighting for a toehold. In particular, many new players are moving into the cellular, cable and ADSL markets, where margins are higher. And Japan’s affluent consumers and NTT’s high rates promise huge potential margins for those able to scale the ramparts. The cellular market, for instance, is projected to more than triple to $198.1 billion by 2010.

Nor is Japan alone in wrestling with monopolistic behavior. Former telecom monopolies in other countries continue to fight doggedly against upstarts. Mexico’s Telmex, for example, is accused by U.S. trade officials of charging exorbitant access fees to foreign firms such as WorldCom Inc. Even in the U.S., one of the world’s most open markets, the Baby Bells continue to strongly resist competition.

Still, Japanese regulations treat sharks and minnows as equals at best. In response, some of the minnows are practicing their synchronized swimming.

Three of NTT’s largest competitors--DDI, long-distance carrier KDD Corp. and cell phone operator IDO Corp.--plan to merge in October, creating a company with 30% of NTT’s revenue.

“If we don’t, NTT will keep monopolizing the market and end up infringing on consumer interests,” said Yusai Okuyama, president of the new company, which will take DDI’s name.

Meanwhile, back at the robot lab in Kawasaki, technicians say they hope the time has finally arrived for their fiber-optic/sewer combination to catch on. They are trying to create a broadband communication network through Japan’s waste-disposal system that might one day compete with NTT.

The handmade robots, which cost $95,000 to $190,000, have three cameras, weigh up to 130 pounds and are directed remotely from a truck parked over a manhole cover.

Technicians say they’ve never seen an alligator down there but often surprise rats. “Most run away, but occasionally one dashes up and looks right into the camera,” company researcher Masaki Nishiwaki said. “Hopefully, as they see us more often, they’ll get more used to us.”

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Japan’s Disconnect

Competition has been introduced to parts of Japan’s telecommunications market, but NTT retains a monopoly in others. The results are clear:

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Source: Japanese Ministry of Posts and Telecommunications