Japans Telecommunications Deregulation: NTTs Access Fees and Worldwide Expansion

CRS Report for Congress
Japan’s Telecommunications Deregulation: NTT’s
Access Fees and Worldwide Expansion
Dick K. Nanto
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
In July 2000, the United States and Japan reach a negotiated settlement on Japan’s
costly rates for telecommunications companies to hook into the telephone network
owned by the Nippon Telegraph and Telephone Company (NTT), Japan’s dominant
provider of telecom services. Japan agreed that NTT would lower its rates for regional
access by 50% and local access by 20% over two years. NTT also is attempting to
acquire Verio, an Internet service provider in the United States.
Nippon Telegraph and Telephone (NTT), Japan’s former domestic telephone
monopoly, is being privatized, but it still is majority owned (53%) by the government and
charges high rates for foreign telecommunications suppliers (including U.S. Internet
providers) to connect to its telephone network. The United States claims that Japan’s
expensive interconnection fees violate that country’s commitments under the World Trade1
Organization and disadvantage non-NTT Internet suppliers. As part of U.S.-Japan
deregulation talks, the U.S. Trade Representative and others have been discussing the
issue with Japan. Japan had proposed that interconnection charges by NTT be reduced
a total of 22% by 2004, while the United States has pressed for a cut in rates of 41% by
2002. On July 18, 2000, the two sides agreed that Japan would lower its rates for regional
access by 50% and for local access by 20% over two years.2
On July 5, 2000, ten U.S. senators sent a letter to the Ambassador of Japan to urge
a resolution of the telecommunications trade issue before the Group of Eight (G-8)
Economic Summit in Okinawa on July 21-23, 2000. In the 106th Congress, Senate
Resolution 275 (Sense of the Senate Regarding Fair Access to Japanese

1 The annex on telecommunications to the WTO’s General Agreement on Trade in Services relates
to measures which affect access to and use of public telecommunications services and networks.
It requires that such access be accorded to another party, on reasonable and non-discriminatory
terms, to permit the supply of a service included in its schedule.
2 U.S. Trade Representative. United States and Japan Agree on Interconnection Rates. Press
Release 00-55, July 18, 2000. On Internet at [http://www.ustr.gov].
Congressional Research Service ˜ The Library of Congress

Telecommunications Facilities and Services) was passed and engrossed in H.R. 434
(Section 709, P.L. 106-200, signed May 18, 2000).
NTT’s majority owned mobile telephone unit DoCoMo also has been building an
international network primarily by purchasing shares of foreign telecommunications
companies. The company already is moving into Europe and is attempting to purchase a
controlling share of the Englewood, Colorado based Verio, Inc. for $5.5 billion. Verio is
a major provider of Internet services to corporations. The FBI has raised national security
concerns about this planned acquisition.3 Under section 721 (the Exon-Florio provision)
of the Defense Production Act of 1950 (enacted in 1988), the President is authorized to
suspend or prohibit any foreign acquisition, merger, or takeover of a U.S. corporation that4
is determined to threaten the national security of the United States. The committee
reviewing the case has until August 14, 2000, to either have the FBI and NTT’s DoCoMo
reach a satisfactory compromise or to report its decision to the President who than has 15
days to take action. On May 25, 2000, seven Republican members of the House
Commerce Telecommunications subcommittee sent a letter to the USTR citing NTT’s
failure to institute “fair cost based interconnection rates” and criticizing the proposed
Verio purchase.5 It is unclear whether the provisions of S. 2793 (Hollings), which
strengthens the limits on the holding of and transfer of broadcast licenses and other
telecommunications media to foreign persons or governments, would apply to the NTT-
Verio case, since Internet service providers do not need a telecommunications license.
Both NTT and NTT DoCoMo are huge companies. According to a Business Week
ranking of global corporations, as of May 31, 2000, NTT DoCoMo was valued at $247.24
billion which made it the world’s eighth largest company (up from 27th in 1999) by market
value. NTT was fifteenth (down from thirteenth in 1999) at a market value of $189.16
billion. Both NTT and NTT DoCoMo are larger than Deutsche Telekom ($187.25
billion), France Telecom ($148.71 billion), AT&T ($109.10 billion), and British
Telecommunications ($93.70 billion).6 If combined, the two NTT companies would rank
as the second largest company (in terms of market value) in the world behind General
Electric and ahead of Intel, Cisco Systems, and Microsoft.

3 The FBI reportedly is concerned that its ability to enforce wiretap laws would be compromised
by foreign ownership of Internet service providers. Schwartz, John. FBI Intervenes in Planned
Sale of Internet Service to Japanese. Washington Post, July 7, 2000. P. E4.
4 The security review is conducted by the Committee on Foreign Investment in the United States
(CFIUS), which consists of eleven members from various executive branch departments and is
headed by the Secretary of the Treasury. Once CFIUS has received a complete notification, it
begins a thorough review of the notified transaction. If an extended review or investigation is
necessary, CFIUS must begin it no later than 30 days after receipt of a notice and end within 45
days. For details on the operations of CFIUS, see its Internet site at [http://www.ustreas.gov/
5 Pressure Mounts on Japan on Telecommunications Competition. Inside U.S. Trade, June 9,

2000. Internet edition.

6 The Global 1000. Special Report. Business Week, July 10, 2000. p. 107ff.

In U.S. economic relations with Japan, the United States has pursued a multi-faceted
approach that has included encouraging major structural reform in Japan to open more
sectors to competition. The global Internet revolution has pushed Internet access and the
provision of Internet service in Japan to the forefront of concerns by U.S. companies. This
is an area in which U.S. providers are competitive and offer leading technologies.
Since the Denver G-7 summit on June 19, 1997, the United States and Japan have
been negotiating over various issues under the framework of the Enhanced Initiative on
Deregulation and Competition Policy. With respect to the telecommunications sector
under this initiative, Japan is to undertake specific new measures to introduce more
competition into its $130 billion telecommunications market. Specifically, Japan is to
ensure that interconnection rates – the rates charged competitors of NTT to access the
majority of Japanese customers – are set below retail rates; define measures that will
assure NTT DoCoMo’s (mobile/cellular service provider) interconnection rates are more
fairly priced by being purely based on costs; authorize an inter-connection “clearing-
house” for new entrants in the Japanese market which will dramatically speed market entry
and liberalize the use of flexible network arrangements, thus allowing businesses to build7
out their networks more rapidly and efficiently.
Figure 1. NTT’s Organization and Plans for Future Internet,Over the more
TV, and Other Servicesthan two years that
the United States
NTT Holding Companyand Japan have been
negotiating over
NTT East & West NTT Communications NTT DoCoMo NTT’s inter-
Regional Telephone (Intl. and Long Distance)(Mobile Telecom)connection rates,
Companiesthe Japanese
Universal Service
Voice TelephonePROFIT SEEKINGYEAR TO IMPLEMENTposition has been
ISDN Connectionthat NTT’s pricing
x-DSL ConnectionISDNCurrentpolicies are justified
e-businessASDL Fast Internet
Broad BandServicesVDSLby its costs. The
Super Fast Internet Connection2003U.S. side, however,
Video on Demandhas pointed out that
Interactive TelevisionNTT’s method of
TV Broadcasting
FIBER TO THE HOME (FTTH)calculating costsincludes too many
Super Fast Internet Connection
Video on Demand2006fixed costs that have
Interactive/High Quality Visual TValready been
Medical/Educational/Multimedia Home
incurred rather than
Source: Oriental Economist, June 2000. p. 8.using a meth-
odology (Long Run
Incremental Cost
model) scheduled to be implemented by NTT by the end of 2000 that uses only future

7 U.S. Trade Representative, Government of Japan. Second Joint Status Report under the
U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy. May 3, 1999. On the
Internet at [http://www.ustr.gov/releases/1999/05/index.html].

costs in calculating rates.8 NTT’s argument that it requires more costly interconnection
rates has been weakened considerably by the high rate of profit reported by its East
regional telephone company.9
The cost question also is muddied by NTT’s role as a provider of universal telephone
service in Japan. As shown in Figure 1, the NTT Holding Company is organized into NTT
East and NTT West regional telecommunications companies, NTT Communications (long-
distance and International), and NTT DoCoMo (mobile/ cellular telecommunications).
Under the regional telecom companies, NTT plans to offer Internet service, e-business,
and TV broadcasting as profit seeking-activities. An important question is to what extent
NTT should have to provide services to customers in remote areas at the same price
charged those in cities as it has traditionally done for telephone services. The amount NTT
charges other companies to connect to its lines in urban areas determines, to some extent,
the funds it will have available to subsidize high-cost remote connections.
Figure 1 also shows NTT’s plans for future provision of profit-seeking activities in
the Internet and in broadband services (TV broadcasting). This is where interconnection
fees would become critical for foreign companies hooking into NTT’s transmission system.
The company currently offers ISDN (Integrated Services Digital Network) at 128 kilobits
per second, a relatively slow Internet connection. NTT also offers ADSL (Asymmetric
Digital Subscriber Lines) at a few megabits per second, a fast Internet connection that can
handle video on demand. By the year 2003, NTT plans to offer VDSL (Very-high-bit-rate
Digital Subscriber Lines at about 52 megabits per second) technology. VDSL allows a
super-fast Internet connection, video on demand, interactive TV, and TV broadcasting.
By 2006, NTT plans to offer FTTH (Fiber To The Home) technology with transmission
speeds of 1 gigabit per second. It would carry services provided under VDSL, but at a
much faster rate, as well as high-quality visual television broadcasting, medical care and
educational programming delivered to an individual subscriber and other services of a
future multimedia-capable home.10 The market for these telecommunications services in
Japan is large and growing. The U.S. contention is that foreign firms should have access
to this market on an equitable basis and in accord with Japan’s obligations under the World
Trade Organization.
As part of the deregulation of Japanese companies, government-mandated divisions
and government-sanctioned monopolies have been disappearing. In the case of NTT, it
had held a domestic monopoly on the provision of telephone services, but it also had been
barred from doing international business (done by KDD, Kokusai Denshin Denwa).
Among the major carriers in the world, it is the only one that has not developed
international operations. NTT now is attempting to become a global power – hence its
recent deals to acquire foreign telecommunications companies.

8 U.S., Japan Fail to Agree on Telecom Deregulation, Expect New Try. Inside U.S. Trade, March

24, 2000. Internet Edition.

9 Landers, Peter. Japan Signals a Truce in U.S. Phone Spat – To Resolve Trade Impasse Tokyo
Seeks to Speed Cut in Charges by NTT. Wall Street Journal, July 3, 2000. P. A9.
10 For a discussion of these issues in terms of the U.S. market, see CRS Issue Brief IB10045,
Broadband Internet Access: Background and Issues, by Lennard G. Kruger and Angele A. Gilroy.

Table 1 lists foreign acquisitions and the establishment of overseas subsidiaries by
NTT. As is apparent, NTT is attempting to establish a world-wide network through
focusing on Asia and on the more industrialized economies of the world. It is in the U.S.
interest to ensure that U.S. and other companies have comparable access to Japan’s home
telecommunications market as NTT has in U.S. and other telecommunications markets in
the world. Monitoring Japan’s compliance with the July 2000 agreement, pressure on
Japan to further deregulate its telecommunications sector, and if necessary for the United
States to take unsettled issues before the dispute resolution mechanism of the World Trade
Organization is the strategy the United States is now pursuing.
Table 1. Nippon Telegraph and Telephone’s Major Equity Investments in
Overseas Corporations
U.S.Verio ($5.5 billion acquisition, pending)
NTT America (subsidiary)
U.K.NTT Europe (subsidiary)
NetherlandsRoyal KPN NV (15% stake, pending)
FranceDoCoMo Europe S.A. (subsidiary)
NTT France (subsidiary)
GermanyNTT Deutschland (subsidiary)
AustraliaDavnet Telecommunications Pty Ltd.
BrazilNTT do Brasil (subsidiary)
Hong KongHKNet Co. Ltd. (pending)
Hutchison Telecommunications (19% stake, $410 million)
NTT Hong Kong (subsidiary)
KoreaNTT Korea (subsidiary)
MalaysiaTelekom Malaysia Bhd. (pending)
NTT MSC (subsidiary)
PhilippinesPhilippine Long Distance Telephone Co.
Sri LankaSri Lanka Telecom Ltd.
SingaporeStarHub Ltd.
NTT Singapore (subsidiary)
TaiwanNTT Taiwan (subsidiary)
ThailandNTT (Thailand) (subsidiary)
Sources: NTT on Internet at [http://www.ntt.co.jp]. Guth, Robert A. NTT Takes on the Big
Boys. Asian Wall Street Journal, June 5-11, 2000. P. 1, 8.