NTT Interconnection Rates

Japan's ILEC has been under pressure to lower the fees it charges competitors. In this article, we examine the extent to which fees have been lowered, and the potential for competition in Japan.

by Hugh Ashton
[September 6, 2000]

For what have been vaguely described as "cultural reasons", organ transplants have not been a common practice in Japan. Indeed, they were not even legal until only two years ago. However, there has been a complete change of heart within the telecommunications industry recently, resulting in a more open attitude and what appear to be better deals for all.

Over the past year or so a battle has been fought over the interconnection fees charged by NTT to other companies wishing to provide services to Japanese customers.

(NTT, it should be explained, enjoyed a total monopoly position in the domestic telecom market, with the solid support of the government, and still enjoys a monopoly on the final mile. Strange as this may seem to Americans, this is not odd to Europeans, accustomed for many years to governmental and quasi-governmental telecom monopolies.)

The monopoly remains
Neither is it totally odd to Europeans that after being "privatized" in 1987 in the rush to emulate British Thatcherite policies of shedding governmental assets, that the government should maintain a stake of over 50% in the company. Or that even after being "split" into different companies in one holding group (two geographical splits, and one vertical split), the group should still exercise market dominance.

What is surprising is the way that the tail has wagged the dog over the issue of interconnection fees, the price that rival telcos pay to connect to the NTT switches. The Ministry of Posts and Telecommunications (MPT) theoretically controls the behavior of NTT, through regulations and gentle "guidance" (in fact, Japan appears to be full of "laws" that are non-enforceable, and are obeyed at the discretion of the affected parties). When asked why NTT couldn't be ordered to comply with the requirements of the American companies who wanted to share in Japan's telecommunications revolution, the Minister responsible at the time simply shrugged and smiled.

NTT has been complaining for a number of months that the proposed cuts in interconnection fees would cause severe financial problems. Suddenly the rates dropped in July to the demanded levels, mostly to take place well within the demanded timeframe. Significantly, it appears that the Prime Minister's Office, in an attempt to maintain a good relationship with the US, made an end-run around the defensive line of the MPT. Further deregulation is expected to follow.

This 22.5% rate cut over three years (retrospectively applied from April) has brought a rush of rivals to the gates in competition with NTT.

Are the price cuts for real?
Strangely enough, two of the strongest competitors in the market are the two geographical NTT entities, East and West, who have suddenly announced long-distance rate cuts, which even undercut their long-distance sibling, NTT Communications. Like most "price cuts" announced by NTT, there is a catch involved; in this case, 15%-20% rate cuts apply to those businesses that spend over Y1,000,000 per month on calls (almost $10,000), and a 10% cut for those households that spend over Y1,500 per month (provided that they meet "certain conditions" which I haven't seen explained in full). NTT East expects revenue to fall by 10 billion yen in fiscal 2000 due to the rate cuts, and NTT West anticipates a decline of 7.5 billion.

(NTT Communications is fighting back at its fellow-nestlings with an offer of cheaper DSL connections, but that's another story, and may remain in the nature of science fiction for a while.)

Further cuts are expected to be introduced by NTT East and West, following instructions this week by the MPT to NTT, whereby wholesale prices will be cut, including those to ISPs, making these prices lower than those charged to the usual corporate customer. This effectively means that an ISP can lease optical lines at competitive rates and pass the savings on to corporate and individual customers.

The price of trade
Of course, there is a tit-for-tat involved here. The NTT entities involved are under legal obligation to provide loss-making services to rural areas, etc., and to be responsible for the construction of the physical connections. NTT President Miyazu announced the other day that NTT is seeking relief from some of these responsibilities, and is suggesting that non-NTT Group resources be used for the construction of these facilities.

This comes in the wake of loud calls for reductions in public spending, but also in the context of a nationwide drive for fiber to the home (shades of the "multimedia age" buzzword of a few years back which got dropped when it emerged that no politician knew what he was talking about). Time will tell whether the ruling clique is actually serious about the provision of broadband nationwide, or whether they will stay with the tried and tested ways of gaining votes through the building of superfluous tunnels, bridges, and dams in rural areas.

Even so, there are real changes afoot. Once regarded as an sclerotic bedridden immovable giant, the Japanese telecommunications industry seems to have been one of the major beneficiaries of the major surgery involved in deregulation, and its customers gain along with it.

All of us living in Japan are gaining from this change of heart.

—End