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  • 1. Kenji Kushida, “Japan’s Telecommunications Regime Shift: Understanding Japan’s Potential Resurgence” 9/6/04 ver. Japan’s Decline in Telecommunications The 1990s saw a dramatic decline in Japan’s international competitiveness in the ICT industry, as Cole illustrates in the previous chapter. However, since the late 1990s, Japan’s domestic telecommunications industry witnessed several developments which suggest that several fundamental shifts are occurring in the sector. I argue that Cole’s analysis of Japan’s decline suggests that Japan’s telecommunications regime was ill-configured to take advantage of the discontinuous technologies consisting of the Internet, the Ethernet, TCP/IP, the accompanying changes in hardware and software design, and the convergence of IT and communications. Recent developments suggest that Japan’s telecommunications regime is in the midst of a fundamental shift to better take advantage of the new technology. The implication is that Japan may acquire new strengths, or put old strengths to new uses and surprise the world yet again. Unexpected Domestic Developments Japan lagged in landline telephone pricing, Internet usage, and broadband penetration until the early 2000s. Since 2002, however, Japan gained one of the largest installed bases of IP telephony as broadband penetration and Internet usage skyrocketed. The advent of IP telephony gave rise to low fees in landline telephony, and competition between commercial ADSL and Fiber-to-the-Home service providers led to Japan sporting the lowest broadband prices worldwide.1 [chart - landline prices, broadband penetration] In wireless services, Japan lagged in price and penetration of cellular phones vis-à- vis other advanced nations until the mid-1990s, and Japanese users continue to pay relatively high prices for voice communications. However, innovations in mobile internet service business models during the late 1990s rendered the metrics of price and penetration as measure of performance no longer appropriate in capturing the performance of Japan’s cellular industry. Japan developed a mobile environment where the vast majority of cellular phone users are connected to the internet on an always-on basis, and competition between three separate third-generation networks has led to flat-rate, high-speed cellular data services. 1 Cite specifics 1
  • 2. Mobile Internet Subscribers vs Total Cellular Subscribers 90 (* indicates percent of total Japanese population) 62* Millions 80 56* 52* 52* 70 42* 45* 60 36* 50 40 30 Total Subscribers 20 10 Mobile Internet 10 0 01 10 1 03 10 3 0 1 2 3 10 0 02 10 2 04 00 00 0 0 0 0 00 00 20 20 20 20 20 20 20 20 /2 /2 /2 /2 2/ 6/ 2/ 6/ 6/ 2/ 6/ 2/ Sources: Telecommunciations Carriers Association, Japan Statistical Yearbook 2004 Research Questions The questions this chapter asks are threefold. First, how do we understand and explain this shift in the performance of Japan’s telecommunications industry – from one that undoubtedly lags according to traditional measurements, to one whose performance improves dramatically, though not easily measured by traditional metrics? Second, what is the relationship between this shift in performance and Japan’s decline in international competitiveness, as analyzed by Cole? Third, what are the implications of our analysis on future international competition in telecommunications? Under what conditions might we expect a Japanese resurgence? This paper proceeds as follows. First, I present a set of variables that can be traced over time to understand how Japan’s telecom regime has shifted. Second, I show how the interaction between government policy, which created and altered market environments within which firms could operate, and firm-level corporate adjustment strategies in the face of the new, discontinuous technology, altered Japan’s telecom regime. Finally, I examine several hypotheses that set up conditions and variables that are likely to affect whether a Japanese resurgence into world markets will occur, and what it may look like. Operationalizing Institutional Change: A Model of Regimes To understand the observed developments in Japan’s telecommunications regime, we need to identify a set of concrete variables that we can trace over time. The variables I propose as most significant to trace include: significant state actors, key firm-level actors, the mechanisms of state-firm interaction, mechanisms of inter-firm coordination, and the source of standard-setting. When taken together, I label this set of variables as a telecommunications regime. Japan has had at least three distinct telecom regimes since the inception of the sectors in the late 1800s, though this chapter will not treat them in depth. The point is that the current telecom regime in Japan looks very different from that of the late 1980s and most of the 1990s. 2
  • 3. THE REGIMES Regime 1: Regime 2: Regime 3: Regime 4? Bureaucratic Corporatized Controlled Transitional Hybrid Monopoly Monopoly Competition (mid-late 1990s – present) (late 1800s to 19??) (1954? – 1985) (1985- mid/late 1990s) Gov’t Actors Ministry of NTT (State-owned), MPT Cabinet Office, MPT, MPT Communications Diet, MPT Dispute Resolution Commission, (MoC) FTC Industry Actors MoC NTT (domestic), KDD NTT, NCCs, NTT NTT, NCCs, Softbank + other (communications), (int’l), NTT “family” “family” startups, NTT family, non-family OEM cartel equipment manufacturers, foreign firms, etc. (equipment) manufacturers Gov’t Industry Ministry operates Formal oversight by Classic “Industrial New formal institutions for dispute Interactions communications MPT and Diet, but NTT Policy” tools resolution, increased legalization, industry, OEM to mostly controls itself (Licensing authority, attempt to use judicial system to equipment discretionary affect policy. Demise of most manufacturers administrative licensing authority for landline. guidance), MPT as intermediary Intra-Industry Equipment NTT dominance, NCCs carefully NCCs no longer controlled by Interactions manufacturers providing stable controlled by MPT, MPT, NTT no longer controls competing on basis of procurement for OEM NTT dominates interconnection rate policy, NCCs quality, within stable Equipment Manuf’s, competitors with using equipment from outside demand environment Equipment Manuf’s interconnection rates. NTT “family.” Price wars, legal competing with each NTT provides stable battles, use of Dispute Resolution other on basis of quality demand for Equipment Commission Manuf’s, NCCs required to buy from same Manuf’s Standard-setting MoC NTT (nominally MPT) NTT/MPT De facto (internet), MPT, (Cole’s I-net org) 3
  • 4. The Previous Regime: Controlled Competition (1985 - mid/late 1990s) From 1985 until the late 1990s, Japan’s telecommunications regime was best characterized as “controlled competition,” as labeled by Vogel.2 The Ministry of Posts and Telecommunications (MPT) was the principal government actor shaping policy in a sector dominated by the partially privatized former monopoly, NTT. Government-industry relations were characterized by MPT using powerful “industrial policy” tools at its disposal to shape the sector. MPT’s arsenal of policy tools included licensing authority, funds for targeted R&D projects, and the capacity for discretionary “administrative guidance.”3 Using these tools, MPT carefully shaped the market dynamics in the sector, orchestrating the entry of new competitors and micromanaging pricing while weighing the effects of any changes on the competitive landscape.4 The main industry actors consisted of NTT and a set of firms known as NCCs, or New Common Carriers, and a set of equipment manufacturers known as the NTT “family” firms. The NCCs entered the industry after partial liberalization in 1985. They were mostly consortiums set up by large, existing Japanese corporations, such as Nissan, Toyota, Japan Railroad, and major power companies. These large firms often had say in the management decisions of NCCs.5 Thus, although the NCCs were new firms, they were hardly startups in the Silicon Valley sense of the term. The NTT “family” of equipment manufacturers, which included major consumer electronics firms such as NEC, Fujitsu, and Matsushita, had long provided equipment on an OEM basis to NTT while it was a state-owned monopoly. These “family” firms had benefited greatly from stable demand at high prices for their products, thanks to NTT’s large procurement budgets which subsidized their R&D activities in other areas.6 The interaction between firms in the sector could be characterized as domination by NTT. NTT monopolized the last-one-mile (also known as the local loop) of landline infrastructure, and in the absence of formal laws and regulations regarding interconnection rules, NTT was able to bully its competitors who had little choice but to rely NTT’s local loop infrastructure. MPT acted as the mediator between NTT and the NCCs in interconnection disputes, but did little more than preside over annual negotiated bargains. Domestic equipment standards were essentially set by NTT, though formally approved by MPT. This made domestic equipment manufacturers hostage to NTT’s product strategy and R&D labs, since NTT was their overwhelmingly large customer. NCCs were also hostage to NTT’s standards, having to rely on equipment manufactured “family” firms, since they were virtually the only providers of equipment that met the domestic quality standards set by NTT. When combined with NTT’s aggressive interconnection fees, NCCs had few means to compete against NTT in landline services . The Present Regime: Transitional Hybrid Compare the regime outlined above to the situation in 2004. Government actors involved in policymaking expanded from almost exclusively MPT to include the Cabinet Office, the Fair Trade Commission, a new Dispute Resolution Commission attached to 2 Cite Vogel 1996 3 Cite Johnson – these are typical “industrial policy” tools. Quick definition of industrial policy. 4 Cite Vogel 1996 5 Quick sketch of NCCs, and who set them up 6 Cite Anchordoguy, Johnson 4
  • 5. MPT (renamed MPHPT – or the Ministry of Public Management, Home Affairs, Posts and Telecommunications, for convenience – in 1999), and possibly Japanese justice system. MPHPT gave up most of its powerful “industrial policy” tools, including its control over market entry, pricing, and even registration, making government-industry interactions more formal and legalized.7 The ministry had less control, let alone information, about the sector than any time before. As a result, they were just as surprised as firms when price wars were unleashed. The “control” which characterized the controlled competition of the previous era remained only in the wireless arena, where spectrum allocation licensing allowed the ministry to retain a fair amount of control. MPHPT retains discretion over spectrum allocation, allowing for the micromanagement of areas such as market entry and how much spectrum to allocate each service. NTT lost much of its dominance of the industry, and the original NCCs are no long only other major actors. New startups firms utilizing new technologies have challenged NTT more fundamentally than ever before. New interconnection rules force NTT to allow access to its unutilized fiber optic networks and last-one-mile, or local loop, infrastructure. As illustrated by Cole, the locus of standard-setting shifted away from NTT with the advent of Cisco’s de facto standards and standards set by [----]. Therefore, domestic equipment manufacturers no longer dominate Japan’s infrastructure as it shifts towards IP-based networks. NCCs and new startup firms were freed from being hostage to NTT’s standards and “family” firm infrastructure as equipment from firms such as Cisco and Jupiter were the de facto standards for IP equipment. Thus, the current situation in Japan’s telecom industry cannot be considered the same regime as the “controlled competition” regime from 1985. Significant changes occurred in all aspects of the regime – the principle government actors, industry actors government-industry interaction, intra-industry interaction, and the source of standard- setting. However, much less has changed in the wireless arena. It may be that a transition may be underway, bringing the wireless arena to a similar situation as landline, or it may be that policy tools in the wireless arena – mainly spectrum allocation – will lead it to diverge from the landline arena. The Regime Shifts – Institutional change Patterns of Regime Shift The discontinuous technology surrounding the Internet, including TCP/IP, the Ethernet, and the convergence between IT and communications provided the impetus for regime change. Established corporate actors were forced to adjust their strategies and behavior, since the new technology did not fit their existing strengths, while new firms saw opportunities to enter the sector. The constraints and opportunities facing state actors were affected by changes in firm-level behavior, as well as the overall decline in the international competitiveness of the sector. This led to policy reform and a new set of state actors involving themselves in telecom policymaking. Firm-level behavior and state behavior were interactive – firms by themselves did not change the regime. The regulatory environment critically affected their profitability and business opportunities. At the same time, policy reform did not consist solely of simple reactions to firm-level behavior, interest group pressure, or lobbying by firms. While some 7 One official conceded that they now had little idea about the number of businesses in their sector. (interview with S. Vogel, Sakamaki.) 5
  • 6. policy reforms were reactions to firm-level behavior, state actors were capable of having their own agendas in reshaping the sector. Diagram: the process of regime change New constraints/ incentives Government Actors Shaping environment Altering Discontinuous Technology incentives and constraints Firm-level actors What follows is the story of how the government played a critical role in reshaping the regime by transforming the environment in which firms acted. Forces for Change First, the advent of TCP/IP and internet-related technologies caught Japanese firms off guard, as shown in Cole’s chapter. This led to a deterioration in the sector’s performance in terms of the trade balance of telecom equipment, as well as indicators for the level of internet penetration in Japan. Decreases in the trade balance of equipment shaped affected corporate strategies. Lagging internet penetration, especially in light of pronouncements of the Information Superhighway in the US, began to alter the political and bureaucratic evaluation of the domestic telecommunications regime dominated by NTT – a regime that had caused Japan to “miss the boat” of the internet. Policy Changes Reshaping the Regime A series of policy changes, which involved new government actors in policymaking, reshaped the sector by providing new opportunities for start-up firms, altering the nature of government-industry coordination, and shifting the mechanisms of how firms coordinated with one another. The policy changes fall into two broad categories; deregulation and reregulation. Deregulation Extensive deregulation in the late 1990s dismantled much of the policy apparatus used by MPT to control the sector under the “controlled competition” regime. MPT had compartmentalized competition in two ways. First, it categorized telecom carriers into three types: Type I, Special Type II, and General Type II. Type I carriers owned their own infrastructure, and consisted of NTT and the NCCs. Type II carriers provided value added services by leasing facilities of Type I carriers. Providers of private corporate lines and Internet Service Providers were Type II carriers. Special Type II carriers provided services to a broad area, usually more than one prefecture, while General Type II carriers limited their operations to local areas. MPT controlled market entry, exit, and prices charged by Type I carriers. A “Supply Demand Adjustment Clause” in the Telecommunications Business Law gave MPT wide discretion over the market entry of firms. This clause allowed MPT to cite factors such as “a mismatch between the business and existing demand in the proposed region of 6
  • 7. operation…” without any specific criteria on which to base their judgment.8 Likewise, for price changes, no specific criteria existed for MPT to base their approval on. By the mid-1990s, it was not uncommon to hear complaints from carriers that the division between Type I and Type II firms was so rigid that Type I firms could not lease any lines at all, while Type II firms could not own any infrastructure at all, hampering the scope of their activities.9 Second, MPT compartmentalized competition into long distance, local, and international service. They had no legal basis to do this, but in the application form for carrier businesses, they created a “business area” category that needed to be filled in.This led to an unwritten understanding that carriers were not to cross business lines –NCCs engaged in long distance service were not move into international service, and vice versa.10 A sweeping set of policies deregulated these two types of compartmentalization and control. The impetus for the push in deregulation was at least in part from a political initiative. In March 1998, the Cabinet passed a “Three year plan for deregulation” encompassing several industries, including telecom. This made it easier for MPT to push through its deregulation measures. In 1998, MPT made several changes to the Telecommunications Business Law. They removed the “Supply Demand Adjustment Clause,” relinquishing control over entry into the sector. They also gave up their control over the pricing of Type I carriers, shifting the requirement from approval to a week’s notification.11 MPT also allowed Type I carriers to lease lines, and Type II carriers to own infrastructure.12 At the same time, MPT de- compartmentalized long distance and international services by issuing a written statement that such a division did not exist. The fact that several firms immediately crossed these business lines, which had not been crossed before, reinforces the contention that the division had existed, and had been enforced informally by MPT. In 2003, MPT took a further step by abolishing the categories of Type I and Type II carriers. In the summer of 2004, a ministry official noted that MPHPT no longer had any information about how many carriers existed, since they stopped keeping track of the number of carriers in that spring. He joking noted that they only knew if particular carriers had gone out of business if their phones had been disconnected.13 This was a significant change in government-industry coordination, for as many scholars of industrial policy note, dense information exchanges between the lead ministry and firms under its jurisdiction were facilitated by application forms and registration requirements. The ministry knew what was happening in the industry because ministry officials had long lines of firms waiting to see them and confer about their business plans, planned price changes, and even about how to fill out forms for notification.14 Thus, after deregulation, MPT was no longer at the nexus of information exchange as they had been before. 8 Fuke 62 9 cite Fuke 10 Fuke 31 11 cite Fuke 12 cite Fuke 13 interview, Sakamaki 14 Interview, Panya san, cite noted works on industrial policy – Johnson, Okimoto 7
  • 8. Scope of Activity Type of Approval Required After 1998 Deregulation Entry Prices Exit Entry Prices Type I Services owning Permit Approv Permit Notify Notify own facilities al Special Leasing facilities Registration Notify Notify Notify Notify Type II to provide value added network services (VAN), Categories providing services Abolished in to a wide area 2003. General Leasing lines to Notify - Notify Notify Notify Type II provide value added network services (VAN), providing services to a regional area (Fuke, 14, Vogel, page) [revise chart to tighten] Note the increase in long distance and regional carriers after the deregulation in 1997/1998. Also note the increased rate of entry into the sector of Type II firms after 1993 – about the time when ISPs began to enter the sector.   1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Type I Total* 2 7 13 37 45 62 68 70 80 86 111 138 153 153 178 246 342 395 NTT 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 3 3 3 KDD 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - -  Long Distance/ Int’l 3 3 3 5 5 5 5 5 5 5 5 5 5 6 12 21 32 35 Regional - - 3 4 4 7 7 7 8 10 11 16 28 47 77 274 274 330 Type II Total 85 209 356 530 693 841 943 1036 1179 1589 2107 3134 4588 5871 6602 7345 9006 10555  Special Type II - 9 10 1 25 28 31 36 36 39 44 50 78 95 88 101 113 113 General Type II 85 200 346 529 668 813 912 1000 1143 1550 2063 3084 4510 5776 6514 7550 8893 10442 Sources: MPHPT, TCA * Categories of Type I carriers omitted from this chart include satellite carriers and mobile carriers, which appear in a later chart Reregulation – Interconnection Interconnection is one of issues where competitive markets and government intervention are not in a zero-sum relationship; less regulation can easily lead to less competition. Since the last one mile of telecom infrastructure is said to contain over 90% of the total cost of infrastructure, NCCs providing POTS, as well as new entrants providing services such as DSL, require to the incumbent’s infrastructure. They need to be able to connect their own infrastructure to that of the incumbent’s and they require interconnection fees to be set low enough that they can become profitable. Thus, rules governing connections rights, or POI (Points of Interface), and pricing are critical. 15 15 explain POI and business from Thesis 8
  • 9. Until the late 1990s, there were few regulations governing interconnection rules, and MPT enjoyed wide discretion in determining interconnection rules and prices via administrative guidance.16 NTT’s interconnection fees were revalued each budget cycle, leading to bitter contention between NTT and the NCCs each year. The only recourse available to NCCs was to appeal to MPT; the Teleocmmunications Business Law stipulated that carriers could not reach an agreement, the complainant could appeal, and MPT could issue an order for the carriers to reach agreement or engage in arbitration. This allowed MPT to exercise its discretion and carefully weight the effect of every change in prices.17 For 10 years, from 1985 until 1996, NTT and the NCCs reached a series of annual compromises. In 1996 the Telecommunications Deliberation Council issued a report on interconnection rules. In June 1997, revisions in the Telecommunications Business Law created several new rules for interconnection. Among the reforms was the obligation for Type I carriers to engage in interconnection when requested, and that NCC would be allowed to freely choose the level of network at which to interconnect.18 The rules stipulated that NTT must ensure that competitors get equal access to NTT’s local telecommunications facilities vis-à-vis NTT’s own long distance department (which became NTT Communications in 1999, after NTT was reorganized into a holding company).19 At the same time, in terms of pricing, MPT introduced a formula for the first time to calculate interconnection fees. In 2000, this formula was shifted to one that further favored competitors.20 Interconnection and DSL In addition to rules about connection rights and pricing, the nature of DSL technology requires another set of rules before competitive markets can thrive. Since DSL services send a high frequency signal on existing copper lines on top of POTS signals, the physical installation of equipment is needed on both the user’s end and in the incumbent carrier’s switching station. The installation of competitors’ own equipment in the incumbent’s facilities is known as collocation. The incumbent has every incentive to deny DSL providers’ access to its facilities, especially if the incumbent provides DSL services of its own. Therefore, for DSL, rules governing collocation are significant as well. However, in the policy reforms of 1997, rules for collocation were not set; collocation remained unregulated territory. DSL had spread rapidly in many OECD nations by 1998, while it did not exist yet in Japan. In 1999, Tokyo Metallic, a startup firm, was the first company in Japan to begin offering commercial DSL services. However, in the absence of clear collocation rules, NTT, predictably, gave them a hard time. When Tokyo Metallic, as well as another startup, e Access, asked if there was space within NTT’s facilities for them to install DSL equipment, NTT’s investigations took five to nine months. NTT also set extremely high prices for the startups to place equipment within their facilities without provided any information on how those figures were derived. Even after the 16 Fuke 20 17 cite Vogel 18 explain levels, Fuke 43, 45 19 Fuke 2003 177 20 Fuke 2003 177 9
  • 10. equipment was installed, NTT took over three weeks to connect the lines of DSL users that Tokyo Metallic had acquired.21 Overall, the complaints lodged against NTT consisted of: NTT refusing to disclose whether lines were available for use, limiting the equipment installation work within facilities to NTT group firms, high prices, and discrimination between NTT firms and competitors in allowing access to its infrastructure.22 New Actors and policies. In 2000, the Fair Trade Commission of Japan entered the telecom policymaking arena in response to the situation faced by DSL service providers. The FTC investigated NTT on antitrust grounds – the first time the FTC had investigated a public enterprise (although NTT was partially privatized).23 It ended up only issuing a warning, due to the lack of specific rules over collocation, but this administrative guidance was a clear sign to NTT that the FTC was willing to act, even in the absence of specific rules NTT had violated. Later in 2000, MPT (by then renamed MPHPT) revised several of its Ministerial Ordinances to facilitate line-sharing and collocation.24 The ordinances required NTT to clarify the conditions under which it offered collocation, including the technical conditions and interconnection fees.25 It also stipulated that NTT lease its unused fiber optic capacity to carriers.26 In the same year, the Cabinet Office explicitly involved itself as a player in IT policy. It established an “IT Strategy Headquarters” within the Cabinet Office, passing a new IT Law, the “Basic IT Law on the Formation of an Advanced Information and Telecommuncations Network Society (The IT Basic Law)” that year. This law benefited MPT in implementing competition-oriented connection policies because it left specifics to be determined by ministerial ordinances.27 The Basic IT law was under the rubric of what the Cabinet Office dubbed the “e- Japan strategy.” As Tilton points out, the e-Japan strategy laid out its objectives in typical industrial policy terms, starting with the premise that Japan needed to catch up.28 First, the e-Japan strategy identified Japan as being behind in the development of information technology, specifying policy goals as “an ultra high-speed network infrastructure and competition policies.” It even gave a timeline, vowing to establish “one of the world's most advanced Internet networks within five years,” with a short-term goal to “enable all the people to have constant access to the Internet at extremely low rates within one year 21 “Kotori, NTT wo chosa, Kosokutsushin Senryaku misu ustsusu: shinki sannyu gyosha to toraburu.” Nikkei Shimbun Oct 24, 2000, p.3 22 “NTT Higashi Nihon, Kotorii ga keikoku: yuseishou, raishun nimo tsushin kaihou he gutaisaku.” Nikkei Shimbun 12/21/2000 p. 5 23 ibid. 24 explain Ministerial Ordinances as weaker than full-fledged laws, but more than simple orders…the Ordinances included the “Regulations for Enforcement of the Telecommunications Business Law” and “Regulations for Cost Calculation for the Interconnection Charges of Designated Telecommunications Facilities’ “ (Fuke 2003, 179) 25 ITU 28, 29 26 cite specifics 27 cite Nikkei 28 Tilton uses the word “industrial policy” with implicit references to the “developmental state.” 10
  • 11. through the use of fixed-line, wireless and other kinds of networks by promptly taking every necessary measure.”29 As often the case, the sudden specificity of the political initiative has caused some observers to hint at the possibility of a pork-barrel political agenda as well. Yoshiro Mori, who was Prime Minister at the time, was a former college rugby player not known for his intellectual or technologically savvy demeanor, and was one of the most unpopular prime ministers in recent history.30 It may be more than coincidence that his Cabinet identified high speed IT infrastructure buildouts as a policy goal just when the public was loudly criticizing the government’s public works spending in traditional areas such as construction. In fact, during 2000, the Ministry of Construction had shown a keen interest in investigating the possibility of laying fiber optic cables in the sewer system, drawing criticism from the Minister of MPHPT for sticking their head into his jurisdiction.31 A plethora of local IT infrastructure projects sprang up all over Japan, in many regional areas seeming to be aimed at securing public funding more than serving the demands of shrinking, aging, populations for high speed broadband access.32 In 2001, MPHPT set up a Dispute Resolution Commission, designed to handle disputes between carriers. The ministry removed itself from being the go-between in conflicts between carriers, shifting responsibility to what it called an objective third party. The decision-making process of the Dispute Resolution Commission was much more open than when the ministry orchestrated bargained settlements. In its early cases, the Commission addressed several problems brought to it by DSL service providers Tokyo Metallic and E-Access, ruling in their favor.33 Finally, in an example where firms’ actions led to policy changes in favor of them, E-Access and ACCA Networks, among others, began selling ADSL on a wholesale basis in 2000, allowing ISPs without circuits to offer DSL services. Largely in response, MPHPT amended the Telecom Business Law in 2001 to include the concept of wholesale businesses.34 New businesses and the Softbank Shock Softbank, a startup firm outside any of the established Japanese firm networks, has been one of the key firms shaping competition the Japan’s telecom industry. Softbank was founded and headed by Son Masayoshi, a Korean raised in Japan who attended UC Berkeley, whose first claim to fame was to be one of the earliest investors in Yahoo. Softbank BB, a fully-owned subsidiary of Softbank, took advantage of the new regulatory environment conducive to DSL providers to launch price wars. Softbank leased unused fiber optic capacity from NTT to construct a nationwide backbone that was completely based on IP – one of the first in the world.35 When Softbank BB launched an ADSL service called Yahoo! BB in September 2001, they set monthly subscription fees at approximately half of the market rate – about 2400 yen ($22 at 1 USD = 110 JPY) versus 29 cite IT Strategy Council website 30 cite poll 31 “Ministers in Japan disagree over IT strategy” Financial Times, world news: asia-pacific. Aug 2, 2000. p.11 32 note a few regional buildouts 33 cite DRC documents 34 ITU 29, 30 35 cite Softbank Factbook 11
  • 12. 5000 yen ($45). They also mobilized an aggressive sales force to pass out $100 DSL modems for free at train stations to people who signed up. DSL was already growing in popularity by 2001. The regulatory environment had led to a plethora of DSL providers commencing operations, and Japanese consumers were already familiar with “always-on” internet connections via their cell phones. Before DSL, the dominant mode of high-speed internet service was ISDN, in which users incurred fees on a per-minute basis – making it essentially a faster dial-up service.36 The price shock that Softbank delivered caused other carriers to lower their prices, contributing to the explosive growth of DSL. [chart – growth of broadband connections] Thus, the observed growth of DSL was an outgrowth of the regime change occurring in Japan’s telecom industry. Policy reforms, new actors enforcing the policies, and new firm actors, utilizing technology and standards that were outside of the NTT- dominated system of the previous regime. FTTH, Industrial Policy, and Private initiative The rapid growth of commercial FTTH services was the market environment shaped by product of industrial policy initiatives from the previous regime, combined with the new policy changes in the late 1990s that fostered the growth of DSL. MPT and NTT had long set their sights on making Japan a leader in IT by installing fiber optic networks nationwide. MPT had begun implementing incentives to promote investment in fiber networks beginning in 1991. In the fashion of classic industrial policy, it mobilized the Japan Development Bank to provide special 15 year loans for carriers to build infrastructure, based on the Special Measures Law for Development of Social Infrastructure. A 1994 report from the Telecommunications Council articulated a timeframe for completing a nationwide fiber-optic network as 2010. In 1995, MPT created further financial incentives for carriers to build fiber networks, by established a “Special Financing System for the Development of a Subscriber Optical Fiber Network.” In yet another classic industrial policy move, the Telecommunications Advancement Organization (TAO), a semipublic organization with over 90% of its funding from the government, set up a fund to subsidize part of the interest payments on the DJB loans. The total amount of special loans began at 30 billion yen in 1995, growing to 72.5 billion yen by 1999.37 NTT poured its resources into building nationwide networks.38 Unlike its competitors, it had a universal service obligation, though its experience in building nationwide ISDN networks had proved disastrous, as Cole documents in the previous chapter. (chart of buildout) When the IP revolution hit, it became clear that TCP/IP, utilizing routers, would not require anywhere near the number of lines that NTT was building, since NTT had assumed that all connections on the network would be direct. Just as it was accustomed to in the past, NTT had been preparing a proprietary standard for FTTH to offer a service that combined voice, data, and video on fiber cables directly to homes. This required an optical network unit on the end of the cable within households that would connect to telephones, 36 note packages that did offer flat fees during early am hours 37 MPT White Paper, “Communications in Japan.” 1999, 2001. 38 cite industrial policy and buildout 12
  • 13. PCs, and television sets. Unfortunately the cost for these devices was prohibitive39 Therefore, NTT was saddled with an incredible amount of excess fiber optic capacity. This unused portion of optic fiber was known as dark fiber. , was what Softbank and others utilized in creatin In its 2000 policy reforms, MPHPT had made NTT obligated to lease dark fiber in its network. This facilitated DSL providers such as Softbank to construct backbone infrastructure at low costs of building networks.40 MPT’s financial incentives to build nationwide fiber optic networks affected the strategies of firms other than NTT as well. Usen Broadnetwork, originally a cable radio company, was a major shaker in FTTH service. It controlled a nationwide electric-pole network, to which it added optic fiber cables in major metropolitan areas. It started commercial FTTH service in March 2001, setting monthly fees at 6000 yen (approx. 54 USD), for a 100Mbit/s connection (approximately ten times that of downstream DSL). TTNet, a subsidiary of Tokyo Electric Power Company as well as similar subsidiaries of other regional power companies, also begin offering FTTH services with their own infrastructure at slightly higher prices.41 NTT East and NTT West, the two local carrier companies, also began offering FTTH services in August, 2001. FTTH services have not seen the explosive growth of DSL because most users have not found a killer application requiring the higher speed to justify the higher price. [chart of subscriber growth of FTTH] The growth of FTTH services was facilitated by industrial policy measures that created incentives for firms to build fiber networks. NTT’s excess capacity of fiber benefited DSL carriers, especially after regulations were in place to allow them access to NTT’s infrastructure. Firms with FTTH infrastructure began offering services at relatively low prices since the standard for broadband connections was set largely by DSL, leading to Japan sporting the lowest broadband prices worldwide. IP Telephony as a side effect of DSL, with early Government Support IP Telephony in Japan developed faster than the rest of the world, with government policies facilitating the utilization of VoIP as substitutes for conventional telephones playing a large role in legitimizing the technology. In May 2002, the number of IP telephony subscribers in Japan was already growing, when MPHPT announced that it would assign phone numbers with a new prefix – 050 – to IP telephones. This allowed anybody using NTT’s landline phones to call IP phones directly. Until then, IP telephony users could call fixed-line telephones, but not vice versa. Both Type I and Types II carriers were allocated these numbers if they fulfilled service quality requirements.42 This allowed IP phones to become functional substitutes for orthodox telephones, capable of sending and receiving calls without requiring operations on a PC. Softbank, again, was the firm most responsible for the widespread adoption of IP telephony. It included free IP phone subscriptions free, which it called BB Phone, along with its ADSL services. In offering IP phone services, Son consciously delivered several 39 ITU 13, 14 40 cite Nikkei Com 7/1/2002 41 9800 yen, as of March 2003. (ITU 15) 42 “Japanese Govt to Assign New Dial code for Net Phone Service” Asia Pulse (Northern Territory Regional), May 13, 2002 13
  • 14. symbolic price shocks. First, he made calls between Yahoo BB! subscribers free regardless of distance. This was a shock to the Japanese public, to whom the only available alternatives consisted of services in which they incurred fees on distance and duration– unlike in the US, where consumers had a choice of various flat-fee and unlimited calling options. Furthermore, Son set the price of calls to the US using BB Phone at 8 yen per minute, approximately one tenth of the price charged by NTT. This price was set below costs, but in a late night meeting before the announcement, Son insisted that he wanted to break the correlation between distance and price consumers’ minds.43 However, NTT is not in immediate threat of collapse due to IP telephony in Japan. Due to the lack of standardization in VoIP, different carriers use different systems and standards, leading to incompatibility between different VOIP providers. The current ironic solution is to utilize portions of the NTT infrastructure, running the signal through conventional POTS switches to standardize them. This, of course, incurs interconnection fees from NTT, making the pricing for IP telephone services on a per-minute basis. In this context, IP phones are little more than cheaper telephones that cannot be used in times of blackouts. Thus, only Yahoo!BB can enjoy the network effects of having the value of its service increase with the number of subscribers – calls between BB Phone users are free, while calls to and between other IP phone service providers incur per-minute charges. Experience from DSL suggests that the development of VOIP will be critically affected by whether rules are made, and who benefits from them. It may not take too much imagination to predict the possibility of strong political forces at work to try to prevent a collapse of NTT. A new political battle to determine the fate of NTT is imminent, though the timing is likely to be politically determined, as it has been in the past. IP telephony is not going away, however, since even the government is providing lead demand – more of a legitimizing signal than the magnitude of demand – by ordering ministries to study the costs saved by converting to IP telephones.44 Wireless The situation in the wireless arena is worth considering separately from landline, largely because the technology differs, and the tools for regulation differ. The convergence of IT and telecom is less pronounced in the wireless arena, which is dominated by cellular services.45 Effects to the technological paradigm shift were therefore less pronounced. Spectrum regulation is a key tool that governments have at their disposal that they do not have in landline. Japan’s previous regime in wireless, like landline, was a situation where NTT dominated the sector through proprietary standards. Several NCCs entered in the late 1980s and early 1990s, but especially after cellular services shifted to a digital standard in 1994, they were dominated by NTT Docomo, a subsidiary of NTT. Docomo had by far the most R&D resources, having inherited them from NTT when it was spun off in 1991 as the result of an amendment to the NTT Law. Docomo held handset manufacturers hostage to its PDC standard, a proprietary domestic standard, by continuously upgrading it. Family firms were given information before the changes were made public, allowing Docomo to roll out new 43 cite Nikkei Comm 44 note Porter’s point about lead demand 45 add something about wireless LAN not being a full, integrated network covering broad areas - fragmented 14
  • 15. handsets as soon as the changes were announced, while imposing waiting periods of up to half a year for family firms to sell the same handset to competitors.46 The system was that carriers provided stable demand to manufacturers by ordering and buying handsets, then selling them to retail firms. Manufacturers therefore had every incentive to pump out new models each time the PDC standard was upgraded, since carriers guaranteed that they would buy them. Docomo’s control of the standard meant that handsets available for its service enjoyed higher performance standards than other carriers, and since carriers heavily subsidized the consumer prices of handsets, Docomo clearly had the upper hand. Cellular carriers did compete with each other to the extent that several price wars occurred. However, this took place within a regulated market. Entry and exit were controlled by MPT, who also had veto power over pricing until 1996.47 The domestic market grew rapidly, but while the domestic standard effectively shut out foreign competition, as illustrated by Cole, it also contributed to Japan’s manufacturers losing world market share. MPT was dissatisfied Docomo’s dominance in the mid-1990s, and was interested in promoting competition. In [date], it agreed to allow two competitors, DDI and IDO, to adopt an alternative standard, CDMAOne. The equipment for CDMAOne was provided by Motorola, and MPT went so far as to use DBJ to help fund the infrastructure for nationwide CDMAOne infrastructure. The lack of rules over interconnection hurt competition in cellular services as well. The Personal Handyphone System, or PHS, a low-cost alternative to existing cellular technology similar to cordless phones, was introduced in 1995 as the product of an industrial policy R&D drive by MPT. MPT was convinced at the time that a low-cost cellular alternative was needed for cellular services to become widely diffused in the population. Its initially projected that PHS would take over as the dominant cellular standard by the turn of the century. PHS infrastructure cost less, it could easily be deployed inside closed spaces such as subways and buildings, its handsets cost less while offering higher voice quality, and per-minute fees were significantly lower. Competition from PHS services led to the rapid decrease in prices, increased network coverage, and handset performance improvements for conventional cellular services. However, PHS was built on top of NTT’s nationwide ISDN network, and the lack of interconnection rules caused NTT, which did operate PHS services, but had a larger stake in the success of cellular services, to be slow connecting the PHS network to fixed- line and cellular networks. It also charged high interconnection fees to competing PHS carriers, driving many of them out of the market. Innovations leading to mobile Internet services came out of this environment. Several PHS carriers had turned to data communications, linking PHS handsets to PCs, and the market for voice-based communications was becoming saturated. All major Japanese cellular carriers were searching for ways to connect cell phones to the internet, and the Wireless Access Protocol alliance was being formed in Europe. In this environment, Docomo’s president at the time, Ohboshi Koji, created an in-house venture, later known as the i-mode team. However, unlike a real startup, the i-mode team had at its disposal the deep pockets of Docomo, which had already built a packet-switched wireless infrastructure, Docomo’s mobile R&D capabilities that were possibly the most extensive in the world, and 46 The FTC issued them a warning for this practice in [---] cite. 47 Cite Fuke 15
  • 16. its domination of handset manufacturers. The i-mode business model had several innovations, such as the pricing scheme and revenue-sharing, but in fact, Docomo was behind its competitors for a significant part of the development stage. Thus, the most innovative service to come out of Japan was ironically a product of its old regime. Perhaps the most remarkable thing was Ohboshi’s ability to protect the in-house venture from assaults within the company, as its business model threatened to cannibalize the existing line of voice communications. [chart – growth of cellular, growth of i-mode] Despite rapid growth within Japan, where Docomo was able to roll out its i-mode service at the same time that it collaborated with handset manufacturers to have i-mode enabled handsets ready for the market, Docomo and other Japanese carriers were unable to translate this profitable domestic business model innovations into international competitiveness. 48 Re-entering the World with 3G… but the World didn’t follow [draft] International talks about a Third generation cellular standard provided MPT with a perceived opportunity to break Japan’s isolation from global markets, as well as Docomo’s stranglehold on the market. Docomo contributed much of the technological R&D for the W-CDMA standard, but it would be a global standard approved by the ITU, ending Japan’s isolation from global markets. Part of the plan was that it would have an advantage because it would have know-how in manufacturing infrastructure and handsets. MPT then caused a consolidation in the market by announcing that it would make only three licenses available. This was the trigger that caused DDI and KDD to merge, leaving Japan with three major nationwide carriers. The license itself cost little, unlike European auctions, because MPT wanted to preserve their cash to build infrastructure. 3G didn’t catch on to begin with, partly due to technological difficulties… However, competition to gain subscribers led KDDI to offer a flat-rate 3G data service. This was a price shock to the price of mobile information. Streaming video could be all the time. However, laptop connections were not allowed at this juncture. Docomo followed. There is critique that it is essentially a cartel, and Japanese consumers do pay the highest amount of money per user. However, the competition did develop in unexpected ways, from firm-level initiative. Had prices been regulated, it is unclear that MPHPT would have granted flat-rate 3G service, over concerns about bandwidth – what if everybody started streaming video all the time? Foreign Entry [draft] Wireless was also the arena for the most significant foreign entry into Japan’s telecom carrier business. Japan’s “controlled competition” telecom regime had several policies closing it off from foreign direct investment (FDI). While Type II carriers, which leased lines, were open to FDI, Type I carriers had an upper limit of 1/3 foreign stake, with the MPT being able to intevene extensively in the operations of violaters.49 After partial privatization if KDD and 48 MPT was not MITI and was very inward-looking with no conception of an international strategy for carriers. NTT also had virtually no int’l experience, and Tachikawa said global markets are just the same as in Japan, and made a series of equity investments that puzzed observers and employees alike, since Docomo got nothing out of them. 49 Fuke 16 16
  • 17. NTT in 1985, initially, no foreign ownership was allowed until a maximum of 1/5 was introduced in 1991. This situation shifted in Feb 1997, when Japan entered into the WTO Telecom Agreement (offical name?), agreeing to remove restrictions on foreign investment. This eventually led to several major changes. Vodafone bought out Japan Telecom, which owned J-Phone. It then proceeded to sell off Japan Telecom’s landline firm, hanging on to J-Phone – exactly what it said it would not do to JT’s original shareholders, Japan Railroad and Nissan. The effect was that business know-how from Japan as well as some technology, mobile internet and camera-phones, which were pioneered by J-Phone were transferred abroad as the Vodafone Live! service, but with a foreign firm reaping the benefits. The ripple effect of this was that Softbank eventually bought JT, after Vodafone had sold it to the investment fund, Ripplewood. A foreign investment buying a nation-wide network with the objective of selling it off for a profit, and a startup firm buying up an entire nationwide network, was something unthinkable in the previous regime. Vodafone did not immediately bring any shocks or surprises to the sector, though it offered equipment manufacturers a new way to break out from NTT by offering it large global markets to “family” firms that had not manufactured handsets for its predecessor, J- Phone. It also caused stirs when it hired a high-ranking Docomo manager who had been denied the top post due to a power struggle between Docomo and NTT.50 Softbank, the maverick firm more responsible for the low broadband prices in Japan than any other, bought JT with the intention of bringing a price shock to the wireless arena. It applied for a license for a third 3G standard approved by the ITU, the TD-CDMA standard. A TD-CDMA network can be built by essentially placing wireless LAN equipment at the end of an IP-switched network. TD-CDMA is a standard optimized for data communications, with variable downlink and uplink capabilities, unlike the other 3G standards. While Softbank is competing with Tokyo Mobile Research Institute (check name), a new startup created by the same people who founded Tokyo Metallic, which pioneered DSL, it has announced that TD-CDMA would allow it to offer VoIP, bringing dramatically lower prices to mobile communications. MPHPT’s concern is spectrum allocation, since if everybody began streaming video, existing spectrum would be quickly used up. Conditions for a Japanese Resurgence Will the world see a Japanese resurgence? What might it look like? Will recent developments constituting Japan’s regime change translate into a resurgence of Japanese firms on international markets? What will those markets be? Prediction is not the purpose of this chapter. Instead, I offer here several variables to that are likely to affect Japan’s future competitiveness, applying and formulating a few hypotheses regarding those variables. These variables include the future nature of the technological paradigm, the control of standards, Japan’s domestic market conditions, and the functional “fit” between technology and institutional capacities of Japan’s telecom regime. Innovation vs. Implementation Yamamura hypothesizes that if the current technological paradigm moves from an innovation to implementation phase, it will play into Japan’s traditional strengths. 50 details from Nikkei 17
  • 18. Yamamura takes a long historical view, contending that past technological paradigm shifts came in two phases: innovation, followed by implementation. He points out that Japan has a good track record for the implementation rather than innovation stage.51 Yamamura posits that past decade has seen the new technological paradigm in an innovation phase, predicting that we will soon move to an implementation phase. He recognizes that Japan is reconfiguring itself to fit the innovative stage of the new technological paradigm, since the innovation stage does not play to Japan’s strengths. However, he warns that Japan should not reform away its capacities for implementation. Applying Yamamura’s hypothesis to Japan’s telecom industry, we see that there may be an implementation phase for what was discontinuous technology in the 1990s. The possibilities of networking capabilities embedded in consumer electronics devices has excited many firms, as well as government actors. Also considering that Japan’s broadband wireless environment with flat-rate fees may be conducive to innovations in implementation, many research groups are searching for ways to take advantage of network-embedded devices, such as in the medical field. “Ubiquitous networked society” is a phrase appearing with increasing frequency. Though Japan’s telecom regime is changing, its ability to implement IP technology has not been reformed away. NTT and NTT Docomo are cash rich, and MPT still possesses tools to promote infrastructure buildouts. Japan’s ability to implement new technology has probably been enhanced by the institutional environment more conducive to start-up firms – especially if the government steps in to create pro-competitive regulations in new markets. Following recent patterns, it is conceivable that NTT, especially when threatened by services offered by the startups, will reach into its deep pockets and offer comparable services, thereby thoroughly diffusing the technology into the domestic sector. For example, they have begun shifting their backbone to an IP-switched one, they started DSL and FTTH services at competitive prices, and have begun offering IP telephony to firms. Equipment manufacturers, such as NEC and Fujitsu, who gave up global communications equipment market shares after they were blindsided by the IP revolution, have begun shifting production resources around the world to gear up for the production of next-generation routers.52 Were it not for the de facto standard set by Cisco, several industry participants note that Japanese routers and infrastructure equipment such as prisms and fiber optic cable, offer higher reliability at cheaper prices than many of the products manufactured by Cisco, Jupiter, and other American manufacturers. If the technology is in an implementation rather than innovation stage, control of the intellectual property may be less important if value is encapsulated in the production process – though if modularity increases, this may be unlikely.53 On the policy side, MPHPT has given up many of its policy tools for control, but the examples of interconnection, collocation, and IP telephony suggests that the government is capable of creating new regulations in previously unregulated areas without too much difficulty, especially if they coincide with political initiatives. Thus, we can hypothesize that if an implementation phase of IP and internet-related technology occurs, and the Japanese telecom regime retains its ability to implement 51 contention supported by economists Langois and Robertson, for example, in the embedding of semiconductors into consumer appliances such as washing machines. Cite. 52 They have been building cross-national production networks, utilizing modular architecture and outsourcing non-critical elements… cite Nikkei Comm article, Nezu article 53 system on chip example 18
  • 19. innovations, then the world may see a Japanese resurgence as the current technology is implemented into existing products and technologies. Shift in the “Fit” between Technology and Governance Systems Yamamura’s conception is mainly about changes in technology. Other frameworks consider the “fit” between characteristics of technology and capacities of a governance system. The case of Japan’s telecommuncations suggests that a dynamic model, where both technology and governance systems can vary, is most appropriate. In the language of Vogel and Zysman, national governance systems are the “institutional arrangements that structure national political-economic systems and the market dynamics those arrangements induce.”54 The variables included in my model of regimes can be thought of as specific variables in a governance system. One wave of scholarship has examined the fit between national governance systems and technology. However, the ideal-typed national governance system was usually an extrapolation from select industries that did not apply to all sectors.55 A separate wave of scholarship recognized that the properties of technology could vary across sectors, as could the nature of governance systems. This allowed scholars to explain differences in performance across sectors through the variation in fit between national governance systems and the properties of technology.56 Vogel and Zysman cut the issue in a different way, positing that the fit between governance systems and technology can be differentiated according to function. For example, when comparing the US and Japan, US governance systems are better at fostering labor mobility, financing new ventures via equity markets, producing entrepreneurs, promoting competition, supporting basic research, and generating breakthrough innovation. On the other hand, Japan’s governance systems are better at forging labor-management cooperation, providing stable finance via the banking system, training engineers, managing competition, and achieving incremental improvements in production.57 The experience of Japan’s telecom regime suggests the need for a more dynamic model. Both the properties of technology and sectoral governance systems need to vary, since the regime shift occurred as a response to technological change that led to a misfit between functional capacities of the preexisting governance system. It also makes explicitly shows a case in which a shift in sectoral governance systems can lead to a change in the functional capacities of the sector. For example, functions shifts from managing competition to promoting competition occurred on a sectoral basis. This being said, we also need to recognize that many functional advantages of sectoral governance structures are embedded in national governance systems – for example, the legal framework affecting start-up firms may apply at a national level, but the government may set up a host of regulations designed to protect start-up firm in telecom against the incumbent. The implications of these additions to the concept of “fit” between properties of technology and governance systems are that we must look at changes in both variables in order to predict a Japanese resurgence. Yamamura’s hypothesis is more about a technological shift given relatively constant governance systems, but we need to analyze whether Japan’s functional capacities of the new regime have changed. While a systematic 54 Vogel and Zysman, “Technology” in Vogel ed., …. p.240 55 See Aoki - explain 56 Zysman, Kitchelt 57 cite 242 19
  • 20. study is beyond the scope of this chapter, the examples above suggest that there have been some changes. Given that the technological paradigm shift came out of the functional capabilities of US political economic institutions, it is not realistic to ask whether the Japanese governance systems will converge on those of the US. What we should look for is a point in between the governance systems where shifts in technology may meet new functional capabilities of Japan’s new telecom regime. 20
  • 21. Some conceptualizations: Explanation of Japan’s loss of international competitiveness due to discontinuous technological innovations, using framework of Vogel and Zysman Functional Advantages of Functional Advantages of Japan’s Governance US Governance System System Former properties Properties of of technology in technology in telecom telecom after discontinuous innovations Yamamura’s hypothesis applied to the framework above: as the technology moves from an innovation stage to an implementation stage, properties of the technology “fit” the functional advantages of Japan’s governance system Functional Advantages of Functional Advantages of Japan’s Governance US Governance System System Properties of Properties of technology in technology in implementation innovation stage stage The implications of the regime change we see: we may see shifts in both the functional advantages of Japan’s sectoral governance system. They may meet much sooner, and with less technological change that Yamamura’s hypothesis expects, and shifts in the sectoral governance system need not converge with the US. Functional Advantages of Functional Advantages of Japan’s Sectoral US Governance System Governance System Properties of Properties of technology technology 21
  • 22. Who Controls What Standards Another variable that may determine Japan’s fate lies in international developments with respect to standards and infrastructure. Japan, South Korea, and China have been engaged in government-level talks to standardize next-generation internet standards. The next generation standard, known as IPv6, deals with the limits of allocation – since the finite number of current generation IPv4 addresses are disproportionately allocated to the US and European countries. Of course, this is a future problem for China. Japan’s interest in IPv6 is that it does not require a physical location for an IP address, giving rise to the potential for assigning IP addresses to devices of all sorts. Given Japan’s highly developed mobile IP environment, this has excited consumer electronics manufacturers, startup firms, and the government, which is sponsoring research in this area. In any case, as Cole notes, the standards for something like IPv6 can be written to favor certain firms over others, and Japanese firms have been reworking their global strategies to aim at taking global market shares with next-generation routers. This may be one form of “implementation” cited in the argument above. In the wireless arena, if many other advanced industrialized countries adopt 3G wireless networks, Japan’s equipment manufacturers consider themselves to have an advantage. The three separate 3G networks in Japan have given Japanese firms the opportunity for to release several generations of handsets, improving the performance of W-CDMA standard handsets in particular.58 Equipment manufacturers are gearing towards retaking global markets as 3G is adopted elsewhere. The questions, of course, are whether European and American carriers will roll out 3G networks on any meaningful scale, and whether future discontinuous technologies such as long range Wireless LAN (WiMAX) will render costly 3G technology obsolete. However, if countries do migrate to 3G, Japanese equipment manufacturers are ready to reenter the market.59 Domestic Developments Domestic developments may push Japanese equipment firms abroad as well. Cellular equipment manufacturers have been in an environment that landline equipment manufacturers were in before the regime shift, where carriers provide stable demand by buying their handsets and using commissions to retails networks to subsidize consumer prices. This system allowed Japanese handset manufacturers to pursue performance improvement rather than low cost through mass production and scale economies. However, as the profitability of carriers declines as the domestic market nears saturation, the amount of subsidies paid to retail networks is decreasing. Some forecast that equipment manufactures may soon need to sell directly to consumers, without carrier first buying their handsets. This would lead to a situation similar to Korea, where government policy prohibiting carriers to pay subsidies led to equipment manufacturers pursuing global markets rather than be content with the low volume, high profitability domestic market. Of course, the Japanese market is much larger than South Korea. However, the demise of stable, profitable domestic market conducive to small volume and frequent upgrades, may lead to handset manufacturers to aggressively pursue global markets. 58 cite zasshi, cite Cowhey article pointing out that W-CDMA had technological problems pointed out by Qualcomm president, making handsets difficult to attain high performance. 59 Cite Nikkei Comm article 22
  • 23. It is still unclear if and how Japanese firms might translate the widespread diffusion of mobile internet services into international competitiveness. Vodafone provided an example where benefits were carrier through foreign firms buying into Japanese firms. [point out several factors?] [conclusion] 23