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Telecommunications Industry Faces Sweeping Reforms

October 6, 1997

New technologies will lead to price benefits for consumers. (Photo: Kyodo)

Japan's banks and securities firms are preparing themselves for the administration's "Big Bang" financial reforms set to take place over the next four years. Drastic waves of change are sweeping the telecommunications industry as well; legal reforms approved in June will allow domestic carriers to offer international services, facilitate large-scale telecom mergers, and open the Japanese market to foreign companies. This accelerated restructuring of the industry on both the domestic and international fronts should bring about intensified competition in fees and services, leading to prices of long-distance and overseas phone calls one-third the cost of a decade ago and the availability of cheap Internet telephony.

Competition on the Climb
That which showed the course toward industry restructuring to be irreversible was the August tie-up between the largest domestic long-distance and international service providers. This step, taken in preparation for the expected merger between the second- and third-largest telecom firms this October, dealt the industry a shock with the size of the resulting conglomerate.

Japan's telecom industry has traditionally been characterized by a comfortable coexistence of the companies involved, within the Ministry of Posts and Telecommunications' framework of domestic local and long-distance service and international service. But the reforms approved this June are set to turn all this on its ear by removing almost all restrictions on domestic providers' provision of international service and foreign companies' participation in the domestic market. Spurred by this, telecom companies are aiming to improve their managerial efficiency and expand the market through mergers and operational tie-ups going well beyond the former industry framework.

The domestic-international service tie-up will result in a unified billing statement for consumers from October, as well as the offering to individual users of discount programs formerly available mainly to corporate customers. The latter, which was approved as a part of last spring's deregulation, will be accomplished by considering individual customers as a group eligible for a major-customer discount. The firms indicate that rates for international and domestic calls should fall by about 20%. The extent of the tie-up ranges widely, from joint installation of communications infrastructure to mutual link-ups with dedicated lines and high-speed data transmission services. Cost reductions stemming from the sharing of infrastructure and joint business operations should boost the firms' competitiveness. Smaller telecom firms are beginning to worry about the effects of the expected scramble for customers; additional alliances and industry realignments are seen as inevitable.

New Technologies Fueling the Price War
Telephone rates have decreased steadily since 1985, when a number of new companies entered the telecom market. Both overseas and domestic long-distance calls now cost about a third as much as they did 10 years ago. This pricing competition should be further invigorated by the advent of Internet-based international phone service, a ban on which was lifted at the end of August.

As the name suggests, Internet phone service is carried via Internet connections. The provider uses a computer to convert the user's voice into a stream of digital data, which is then sent to a computer near the call destination and translated back into sound. Since service users can go through the provider, they do not need their own computer equipment--just a phone will do.

Most of the major industry players already have their own Internet pipelines in place between Japan and the United States. Because the calls are placed on these lines, the international portion of the call is completed at almost no cost. One large U.S. telecom company has begun offering Internet phone service in Japan with the low price of 99 yen (83 cents at 120 yen to the dollar) for a three-minute call to one of 36 countries including the United States. There are still limitations to this computer-based system: Sound quality degenerates at times of peak usage and the service is only available in major cities for the time being. But the price of the service--less than one-fifth the cost of an ordinary international call--is definitely threatening to the established international service providers. This market is growing fast: Besides the venture businesses already offering Internet telephony, some major domestic concerns are beginning to offer the service on a trial basis.

Toward More Global Competition
Behind the domestic telecommunications firms' decision to implement these new strategies lies their fear that they may be left behind in the competitive global market. The world's telecom firms are beginning to coalesce into three internationally operative groups centered on the largest operators in Britain, Germany, and the United States. These groups are waging a fierce battle for customers in their drive to stake a claim on the business of the globe's multinational corporations. But Japan's providers, having been in comfortable coexistence under the umbrella of numerous domestic regulations, have not been exposed to these waves of international competition.

But as their Japanese corporate customers grow toward multinational status, domestic carriers are finding it necessary from the competitive standpoint to offer a fuller menu of services, including unified domestic and international network service, single comprehensive billing statements, and discounted rates covering calls both within Japan and to other countries. The inevitable market-share struggles between overseas units of Japanese telecom corporations and their foreign counterparts will also reinforce the Japanese firms' competitiveness in rates and services.

The legal reforms will also allow Nippon Telephone and Telegraph Corp., the world's largest telecom company, to enter the international telephone market. This June the giant firm launched a joint experimental group with 17 telecom-related firms across Asia. In doing so NTT is focusing its attention on the Asian market in a bid to firm up its competitive stance vis-a-vis the big three international groups. Booming competition involving domestic and foreign concerns is underway as the telecommunications industry moves toward a global market.

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Trends in Japan Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.
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