If you've ever made a phone call to Tokyo, a Net query to a URL in Asia, or a stock trade in Taiwan, chances are you've interacted with NTT, Japan's mammoth telecommunications organization. For over 80 years, the Nippon Telegraph and Telephone Corporation has flourished as Japan's undisputed telecommunications monopoly and, until recently, the company has retained a stranglehold on the Japanese telecom market. This month, the monopoly is ending - or at least, that's what NTT would like you to think.

For decades, the telecom industry in Japan suffered under NTT's government-sanctioned monopoly. NTT alone was big enough to handle new R&D and invest in building Japan's infrastructure, and it never hesitated to impede competition. The Japanese consumer ended up footing the bill, paying much higher prices for local and long distance phone services than actually necessary.

But NTT doesn't just have its hands in voice telephone service; it also controls cable operations, data, wireless (mobile), and Internet services, and it influences a large portion of Asia's economy. Roy Neel, president of the United States Telephone Association and former deputy chief of staff under US President Bill Clinton, explained recently that NTT "might actually be the most powerful telecommunications company in the world."

The breakup looms

According to a March 15 report released by Japan's Ministry of Posts and Telecommunications Ñ NTTÕs watchdog ministry Ñ the long-awaited breakup of NTT at last seems to be moving forward. The MPT expects the reorganization of NTT to become official this summer, and the plan calls for major internal changes affecting every aspect of the company and its operations.

The plan mandating the July 1 reorganization is as cumbersome as its title - Implementation Plan Concerning the Transfer of Business Activities and the Succession of the Rights and Obligations of NTT - would imply. The implementation plan anticipates the complete reorganization of NTT and includes provisions for relinquishing telecom market control and creating competitive opportunities for competitors. It also promises to lower telecom costs and enhance services. And true to the plan's intent - and to NTT's credit - the company has in the past few weeks moved ahead with price breaks and new incentives, working together with US-based AT&T.

But industry watchers are questioning the plan's strength. Can the company really resign its monopoly status when it is still working in a rigid, government-controlled industry? Looking past NTT's affected rhetoric, are the internal changes outlined in NTT's new business plan genuine changes meant to help promote competitiveness, or simply new names given to existing departments?

In May, one Tokyo-based Merrill Lynch analyst explained that repercussions of the impending NTT disbandment will reach every computer-user, phone-dialer, TV-watcher, stock-trader, and frequent-flyer having any connection whatsoever with the Pacific Rim. The real question, then, is how much of the "newly open market" will the average consumer or prospective competitor actually realize? Skeptics point out that with weak MPT oversight, a feeble blueprint for reorganization, and no means for enforcement, NTT's breakup this July may prove more beneficial for the Japanese government and NTT executives than for the industry it is trying to serve.

NTT in familiar territory

To understand NTT's pending reorganization, think back to 1984, when AT&T underwent a similar process. After surviving decades of legal challenges and investigations by special interest groups, AT&T eventually proffered a "voluntary" breakup into smaller "independent" companies to promote competition within the telecommunications market ... exactly what NTT is proposing to do this July. AT&T and NTT are similar in size and industry influence. Both organizations faced precedent-setting anti-trust legal probes, both faced a government-mandated reorganization, and both were and are under international pressure to open competition in the long distance arena.

Now take a look at AT&T today, nearly fifteen years later. AT&T is more powerful than ever before, with growing interests in voice telephony, data transmission, bandwidth resale, cellular, cable, Internet, and global telecommunication services. Is this what the future holds for NTT? If so, who really stands to benefit come July? Are the hands of NTT's subsidiaries suddenly going to reach out, embracing competition and providing incentives for consumers? Or, like AT&T, will we find a newly restructured organization - complete with freshly painted company names and titles - whose fists are as clenched now as ever before?

The AT&T saga

While the US Telecom Act of 1934 regulated some of AT&T's activity, it wasn't until the first major antitrust suit that its monopolistic practices were brought into the public eye. The federal antitrust lawsuit filed in 1949 ended with an agreement by AT&T not to enter into the emerging computer market in exchange for being permitted to keep its Western Electric manufacturing arm. In the suit, the US Department of Justice alleged that the regional Bell operating companies (RBOCs) practiced illegal exclusion by purchasing telecom equipment only from Western Electric, which was one of the Bell System Holding Company's subsidiaries.

In 1974, a second major antitrust suit was filed by the DOJ, this time targeting the subsidiary/holding company relationship between AT&T and Western Electric, and alleging that AT&T monopolized the long distance market. The DOJ sought divestiture of both manufacturing and long distance from local service. The case was settled when AT&T agreed to relinquish its holding company status, and the RBOCs were made into independent companies. On paper, the RBOCs no longer had a direct relationship with AT&T as a holding company, but "they did retain a regulated monopoly with an exclusive franchise in their region," according to Nicholas Economides of the Stern Business School.

One would think that after years of federal investigations and two full-fledged anti-trust suits, true competition in the US telecom sector could flourish. However, it soon became apparent to US consumers -still paying high prices - and to other competitors trying to enter the market that the post-antitrust reorganization of AT&T was inadequate. It would take an Act of Congress (the 1996 Telecommunications Act) to finally rope-in AT&T's business operations (one obstacle that NTT clearly need not worry about). This legislation aimed to reduce barriers to entry and enhance competition, and provided for cost-base network pricing, prohibited artificial barriers in local voice markets, and mandated interconnection within telecom markets. Keep in mind that comparable regulations in Japan have not yet reached fruition.

Foreseeing a painful forced restructuring should the 1996 Telecom Act come to pass, AT&T in 1995 announced a "voluntary breakup" of services ... much like what NTT has announced for this July. How did AT&T's bold move affect the telecommunications landscape? Most US lawmakers are still trying to figure that out. Measures taken by the US government and AT&T to regulate market control activity made little impact for three simple reasons. First, AT&T retained control over operations by acting as a holding company, cleverly avoiding a forced breakup. It preserved the rights to make key business decisions, hold company shares, and allocate resources from one regional company to assist another.

AT&T also engaged in service bundling, where one of the companies would offer a steep discount on several services if they were purchased together. Robert E. Allen, past CEO and chairman of AT&T, explained that customers "insisted on getting all these services from a single supplier on one bill ... for the same reason they get the services in the first place. They want to simplify their lives, not complicate them." Yet, this simplification comes with an added cost to consumers - creating a vertical price squeeze, which eventually drives up user prices everywhere.

Finally, there is little outside enforcement requiring AT&T to comply with existing and new regulations, although the 1996 Telecom Act that was ultimately passed does limit AT&T's participation in the telecom sector. Legislators and the FCC have been lax in requiring compliance, thus AT&T is bound to succeed again. The Act really forces AT&T to do little more than choose the business practices that AT&T thinks the Act expects. At a speech given to the Economic Strategy Institute last year, AT&T CEO C. Michael Armstrong reminded everyone to "Just give [the Telecom Act] a chance to succeed!" Hardly an act of competitive chivalry considering that, after all, he still controls the industry.

NTT rises to prominence

Keep the AT&T saga in the back of your mind, but replace that "A" with an "N." You wind up with NTT - and a strikingly similar story. During its reign in Japan, NTT has followed the legacy of its brethren American firm. Like AT&T, NTT was formed about 80 years ago and quickly developed into the single dominant operator in the market. Today, Nippon Telegraph and Telephone is a JPY13.6 trillion operation, employing 138,500 people in Japan. In just under 90 years, the company has developed into a successful global multimarket entity, controlling a tight monopoly on local telephone services and de facto control over the expansion and use of any new international data-related services related to Japan.

In 1995, the long-standing murmur of discontent with NTT's rapid evolution into Japan's telecom monopoly rose to cries of concern from both domestic and international competitors. Here is where AT&T and NTT diverge: while AT&T was presented with antitrust suits and strict legislation, NTT operates under regulations that merely request internal review. The first attempt to ease NTT's tight grip on the telecom market go back to July 1982, when the MPT suggested that the corporation formulate a five-year reorganization plan shadowing the structural changes of the 1995 AT&T breakup. Around that time, the Japan Fair Trade Commission (JFTC) issued a report stating that under Japan's Antimonopoly Law, NTT was hindering the efforts of other companies.

Then, in April 1985, the government called for a second review of the company's status within five years, and NTT went ahead with its first public offering in November of 1986, selling 1.7 million shares. At the time, it was estimated that if the Japanese government had set the share price at the initial planned value of JPY600,000, "the total value of all NTT shares would be about the same as the combined share prices' value of all 427 companies listed on the Second Section of the Tokyo Stock Exchange," according to The Japan Law Letter.

From that point on, NTT grew exponentially, offering new services under the pretense of complying with the government's "suggestions" for reorganization. NTT made new investments and intensified its R&D efforts. It expanded operations in telephony, cable, and Internet services globally while developing domestic cellular services. By 1995, NTT's voice market share had increased to JPY5,211 billion, leased circuit share grew to JPY621.4 billion, and the company held a JPY467 billion portion of the international telecommunications sector. More powerful than ever before, NTT remained unbreakable for the better part of the decade.

MPT - forcing regulations

NTT remained powerful in part because of the heavily regulated industry in which it operates. "Often people just blame the monopoly," Neel explained. "But the monopoly can't exist without a regulator that finds some public benefit in having that monopoly protected." Some blame the MPT's laissez-faire approach to market deregulation, which could have enhanced competition years ago. For many years, NTT was government controlled, and Japanese politicians enjoyed the perks of appointing party members du jour to executive boards and other key company positions. "Regulators are basically politicians, and the reason they sometimes keep regulations in place is because they want to keep rates low and subsidized," according to Neel. "[Regulations are] politically popular, and that distorts the pricing of all kinds of services, particularly now in a marketplace that's become so diverse. It's not just about voice traffic anymore."

Poor planning

In March 1995, the MPT's Telecom Council published a report recommending that NTT begin major restructuring to separate its domestic, long distance, and mobile communication divisions. According to the Ministry, the Council allowed NTT five years to achieve compliance so as "to promote fair, effective competition and improve ... management.Ó Since the start of discussions in 1982, NTT has managed to survive several attempted revisions. However unlike AT&T, no legal precedent was ever enacted or challenged - the government simply expected NTT to comply without a legal framework or penalties. This allowed NTT to freely develop countermeasures against any possible mandated breakup.

Then, in November 1995, news of a forced NTT reorganization resurfaced. MPT officials met and decided to implement a complete NTT overhaul by 1996. But when NTT realized that this time it faced an unavoidable restructuring of operations and certain loss of market control, it looked to the 1995 AT&T example. And in 1997, NTT drafted its own reorganization plan, hoping to retain control. Randall P. Lowe, a partner at Piper & Marbury and council to AT&T in the 1980s, explained to Wired magazine in a recent interview that "this track is the smartest one for NTT to take hold of much of its power. By doing that, they can better preserve their position. If they try to hold off competition, ironically, they will bring on more competition more quickly." As a result, 17 years after the first complaint, NTT will undergo voluntary breakup in July, hoping to allay fears of further market dominance and control. On paper, the reforms seem to be comprehensive (see sidebar), and will see a new NTT holding company created to oversee the new NTT East, NTT West, and NTT Communications (international) divisions. But are they?

Meaningless efforts

NTT's rhetoric concerning the plan strikes a chord similar to AT&T's a few years ago. And like AT&T's proposed incentives, NTT's call to arms lacks the firepower to have any real impact on competition in the telecom sector. According to Merrill Lynch, the transition from a monopoly to a truly competitive market will be slow at first, but it will happen. Foremost, NTT retains control over its subsidiaries. Acting as a holding company, NTT will have the capability to make decisions - NTT Holding controls all investments, all financial interests, and all rights to research and development.

Further, NTT will offer basic services following the bundling model, like AT&T. Billing will be easier and fees should fall for consumers choosing to use NTT as a single cellular phone, Internet, local, and long distance carrier. For those choosing to use only NTT as a basic local carrier, price discounts will not be as visible. NTT also hopes to enhance its global presence, and its corporate website expresses a global vision for increasing services and development throughout Asia and Europe. Executives are hoping to expand global services under the Arcstar moniker and, also according to the website, "participate in the management of international carriers in other Asian countries, as well as expand connectivity through interconnection arrangements with individual carriers." But Neel explains, "we're not going to see the kind of explosion of new services and competition in Japan like we are now seeing in the US until there is widespread deregulation ... and that's the role of the deregulators." Meanwhile, the new NTT holding company will continue to dictate regional operations as NTT's dominance in the global telecom market expands.

Divide and conquer

While NTT's reorganization will greatly impact the telecommunications sector, it's clear that true competition will not flourish with NTT acting alone. The implementation plan lacks any real bite because there is no enforcement mechanism in place. Without the outside influence of government mandates directed at NTT - or the threat of intervention for noncompliance - why would NTT voluntarily open itself up for more competition? For that matter, why would any corporation invite potential financial losses due to increased entrepreneurial action in the market?

NTT may be reorganizing, but under the ultimate control of the holding company parent. Like AT&T, NTT is "voluntarily" dissolving primarily to avoid government intervention in its operations. But the government, in both cases, has been a terrible steward of market competition, and prospective local carriers can look forward to continuing market barriers. According to April's Wired, NTT's holding company will give "the company the appearance of opening up to competition while still controlling the process." Prices for intra-city services will continue to be quite high, as NTT claims that it is losing money in this sector. Keeping intra-city services high makes it difficult for entrepreneurs to enter the market - effectively preventing competition - regardless of whether or not NTT breaks into two regional companies.

From a legal standpoint, NTT remains in the clear. In AT&T's case, laws were never fully enforced, but in Japan, no laws exist in the first place. Further, there are very few specific laws deregulating the Japanese telecom industry, but a deluge of regulations exist that control outside competition. There is next to no case law: no major antitrust suits have ever been filed, and no one has seriously challenged NTT's existing monopoly. Working without the context of any legal precedents and without established law, NTT stands a fair chance before international committees and Japanese lawmakers. The tide of telecom legislation may be rising in Japan, but NTT is still steering the boat.

Although there is mounting international pressure for the Japanese government to intervene, there has been as yet no move towards further deregulation. During the International Symposium on Information '99 held in Tokyo this past May, talk surrounding NTT's breakup amounted to demands for NTT to relinquish its hegemony and accept an entrepreneurial-lead open marketplace. Again to the company's credit, NTT has promised to do so, using the implementation plan. And with Japan's 1998 accession to the World Telecommunication Organization's relevant protocol, foreign telecom companies have been granted licenses as Type 1 (facilities-based) carriers, directly competing with NTT. "Some of these things become self-fulfilling once you get deregulation and once competitors come in," according to Neel. "And you really can't put that genie back in the bottle."

To wax positive on the July breakup, NTT has publicly acknowledged that it controls an unfair percentage of the telecommunications market. Perhaps this admission is evidence of NTT's attitude towards creating growth in telecommunications; indeed, we have seen some proactive measures in the past few weeks from NTT. But with a government unwilling to force the market open, and NTT still enjoying telecommunications dominance, how could NTT's breakup possibly have enough potency to impact international and domestic traffic? Beyond the MPT rhetoric and NTT's grandiose plans, "business people in Japan will put pressure on [NTT] because they want cheaper rates," says Deanna Campbell Robinson, director of the Pacific Advanced Communications Consortium. "But the companies will do what is best for themselves."

Amy Webb is a freelance writer based in northern Japan. She has contributed to The Ryder Journal and Eye-Ai Magazine. Contact her at amywebb@japan.email.ne.jp.