Diary of a monopoly: why NTT cries wolf--and why it works.

IN mid-May of this year, nearly 100 journalists and seven or eight television crews gathered at NTT's press conference facility, one of the largest in Tokyo, for the telecom giant's profit announcement for the 2003 financial year. Almost immediately, NTT President Norio Wada launched into a gloomy assessment of the outlook for the coming financial year.

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MANY IN THE MEDIA were perplexed. Why would Wada be so intent on playing down the outlook for NTT?

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Nippon Telegraph and Telephone Corporation (NTT) is one of the world's largest telecommunications enterprises. Its apparent self-deprecation (and borderline pessimism) cannot be attributed to the Japanese virtue of modesty. The real reason for Wada's behavior is rooted in NTT's management strategy: to maintain and strengthen its monopoly in the broadband era by securing policy concessions from the Japanese Government.

Reviewing NTT's results for the 2003 financial year, it is difficult to find fault. Group operating profit rose 14.4 percent over the previous year to [yen]1.56 trillion yen--a new record for NTT, and second only to Toyota. One would think a chief executive announcing such glowing figures would be eager to use the media to let investors know in detail just what he was doing right.

However, there was only brief mention of NTT DoCoMo's sales and profit growth, and scant reference to the cost-cutting contribution by NTT East and West, before the topic shifted to the outlook for the next financial year.

The press conference was extraordinary by Japanese standards. When companies announce their results in Japan, top management officials usually provide an in-depth review of the various figures, irrespective of whether the final results are good or bad. Only then would the outlook for the coming year be discussed, and then only briefly.

NTT not only provided such a forecast without being prompted by the press, but the outlook it painted was unremittingly bleak.

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However, this was not the first time Wada has presented a portrait of gloom and doom. He did the same thing when announcing the company's interim results on November 11, 2003. On that occasion, he also chose to focus on the difficulties facing NTT over publicizing its achievements--despite NTT's edging out of Toyota with a higher interim profit.

Most analysts at the time were of the opinion that NTT was back on the road to recovery, yet Wada insisted it was too early to be optimistic. The uniformly negative tone of the headlines the next morning suggests that most journalists believed what Wada told them.

But Wada's pessimism proved to be unfounded. As noted above, NTT set a new record for operating earnings over the full year. In light of his poor track record at press conferences, Wada's pessimism about the 2004 financial year must also be open to doubt.

Long-suffering shareholders

What effect has this habitual pessimism had on the NTT share price?

For the past three years, the price has remained depressed in the [yen]400,000 to [yen]600,000 range, which is considerably below the most recent government offering of [yen]949,000 per share (in December 2000) and the government's highest offering, which was in excess of [yen]3 million during the bubble period.

In view of the depressed share price, NTT's longsuffering shareholders would no doubt prefer that top management use appearances in the media to explain how they will put NTT back on the path to growth, and bring about a recovery in the share price, rather than lowering expectations.

NTT's past behavior reveals its true motivation. Ever since it was privatized in 1985, NTT has tended to use the fiction of "poor performance" to block the introduction of unfavorable competition rules--and to rollback competition rules already in place.

The most recent example of this is its attempt to hinder efforts to lower interconnection rates, which created considerable economic friction between Japan and the US in 2000.

The Japanese government tried to implement the Long Run Incremental Cost (LRIC) method for determining interconnection rates at the Japan-US summit meeting prior to the Birmingham summit in 1998. However, in the fall of 1999, it became apparent that the LRIC model adopted would not result in significant reductions in the interconnection rate.

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The negotiations ran into difficulties when the Japanese government and ruling Liberal Democratic Party (LDP) accepted NTT's assertion that it was experiencing difficulties and opposed the US government's demand for a large reduction.

The impasse finally ended when NTT East and West's results for the 1999 financial year were announced. NTT had predicted a combined loss of [yen]41 billion for NTT East and West, but it turned out that they recorded a profit of over [yen]10 billion instead.

When NTT's claims were revealed to be groundless, the American and Japanese governments were able to agree to a reduction in the interconnection rates in excess of 20 percent over a period of two years.

Demands to deregulate NTT's optical fiber network

NTT wants to revise one competition rule in particular--and it is mobilizing both its president and the politicians to do so.

The rule requiring NTT to make its optical fiber subscriber line network available to the new common carriers (NCC) is the thorn in the giant's side.

In fact, Wada's current attempts to portray NTT as an "underdog" would appear to be directly related to having this requirement removed. NTT is so desperate, in fact, that it embarked on a program of propaganda and disinformation in Japan, disseminating the news that a similar requirement in the US had been removed to create the impression that there is a global trend toward protecting incumbent carriers.

The deregulation of NTT's optical fiber network was first raised on June 11, 2003, by Upper House member Hiroshige Seko (LDP, Wakayama Prefecture). Seko, formerly NTT's public relations manager, stated at a meeting of the LDP's Telecommunications Policy Committee that the US FCC (Federal Communications Commission) had lifted the requirement that regional telephone companies make optical fiber available to competitors, and suggested that Japan should do the same.

Wada followed this up at a press conference the next month, where he sought support for policy changes similar to those in the US. He stated that the US government had agreed not to require incumbent carriers to open up their residential FTTH (Fiber-To-The-Home) networks to competitors in order to promote competition and increase broadband penetration.

In February this year, NTT East stated in a letter of protest to the Fair Trade Commission (FTC) that no obligation to interconnect is applied to residential optical fiber networks in the US, to avoid damaging the incentive to invest.

NTT's propaganda campaign was persistent and fairly successful. Masayoshi Son, the president of Softbank, was even seduced into believing that the US had liberalized FTTH. (He actually incurred the wrath of a bewildered FCC executive visiting Japan when he protested about the direction of the US's telecommunications policy.)

However, what the FCC actually did--and what NTT said the FCC did--were two different realities.

In the US, there are two related regulations. What the FCC actually did was relax the regulation based on Section 251 of the Federal Communications Act and leave the other regulation based on Section 271 of the same act in place. As Section 251 imposed an obligation on local carriers and Section 271 imposed an obligation on dominant carriers, the net effect was that dominant carriers were still required to open up their residential optical fiber networks to competitors.

To make matters worse, Seko and Wada stated that the obligation to open up residential optical fiber networks in the US had been relaxed more than one month before the FCC made an official announcement. This attempt to "jump the gun" and expedite a false claim is a measure of the size of NTT's expectations.

However, NTT East's letter of protest after the formal rules had been announced is nothing less than a mistake. (NTT's public relations department would not comment directly on the false claim by Seko and Wada.)

The type of deregulation carried out in the US, where local carriers no longer have a monopoly in the "last one mile," would have been inappropriate for Japan. According to the FCC, almost 60 percent of broadband connectivity in the US is via cable television. By contrast, over 80 percent of broadband connectivity in Japan is via ADSL--with more than 98 percent of the infrastructure owned by NTT East and West.

NTT claims its optical fiber network was built on competitive terms after it was privatized. However, NTT inherited the network from its predecessor, Nippon Telegraph and Telephone Public Corporation, at no charge. The poles, ducts and public utility conduits used to lay its subscriber network, including optical fiber, were part of this inheritance. And NTT continues to monopolize this infrastructure.

According to Konan University Professor Harumasa Sato, an expert in telecommunication economics, it is nonsense to argue that obligations on bottleneck infrastructure--telecommunications facilities provided by dominant carriers that cannot be provided by competitors for economic or technical reasons--should be relaxed or removed when copper cable has merely been replaced with optical fiber.

However, NTT's rivals have learned from experience not to underestimate its political demands, no matter how outrageous they may be. NTT used its political clout to have interconnection rates increased in April 2003. This is now the subject of an administrative suit by five NCCs in the Tokyo District Court. NTT also succeeded in having a parliamentary resolution seeking the earliest possible abolishment of the current interconnection calculation method adopted because "it was forced on Japan by the US." The list goes on.

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NTT's rivals are particularly worried that with no national elections expected for the next few years, Diet members will be able to support NTT's case without being concerned about the media. Further, legislation permitting NTT to transfer funds between NTT East and West without accruing tax fees will expire at the end of March 2005, so the period from fall 2004 to spring 2005 would appear to provide an excellent opportunity for NTT to gain new concessions.

Why Wada is called "The Last Emperor"

The Last Emperor is, of course, the title of a Hollywood movie portraying the life of Pu Yi, the last emperor of China's Ching Dynasty. So why is Wada known as "The Last Emperor?"

NTT was restructured in 1999 into a holding company in an attempt to promote competition. The local telephone service was broken up into two companies, NTT East and West, and the long distance service was spun off into NTT Communications. According to an NTT executive who wishes to remain anonymous, "The Last Emperor" implies that Wada will be the last president of the holding company, which will cease to exist when the group companies created in 1999 are reintegrated.

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However, unlike the Ching Dynasty, which passed into the pages of history, NTT is intent on building an even mightier empire. Rumor has it that a former NTT President, Masashi Kojima, gave Wada the moniker. Currently serving as special counsel to NTT, Kojima opposed the restructuring of NTT in 1999, and remains a hard-line advocate of reintegration. NTT is also said to be considering shifting the Internet connectivity businesses of other subsidiaries into NTT East, to enable easier bundling of bottleneck infrastructure and services.

If NTT is allowed to reintegrate and the rules relating to FTTH are reviewed, Japan's telecommunications market will be ruled once again by a single company. That company will maintain monopoly ownership of the bottleneck infrastructure and the capacity to bundle a variety of peripheral services. Things will be just as they were before NTT was privatized.

What would happen if NTT were allowed to monopolize the optical fiber era? There is no need to look any further than Japan's fixed-line telephone market. According to George Hibbert, vice president of legal and regulatory affairs at Cable & Wireless IDC, data from the OECD (Organization for Economic Co-operation and Development) reveals that Japan has the highest fixed-line telephone charges of all the richer OECD countries.

The reason? High charges for service components not subject to competition.

Japan has only recently succeeded in introducing competition into its telecommunications market with ADSL--so there is no guarantee it will not degenerate into a monopoly market again. Unfortunately, government organizations and consumers in Japan have lowered their guard against monopolies with the rapid spread of ADSL and the success of companies such as Softbank. Many assume that the monopoly era is over in Japan.

But NTT is leaving no stone unturned in its quest to strengthen its monopoly position in Japan, including expanding contracts in the US with former officials of the Commerce Department, the FCC, and various trade representatives, as well as lawyers and lobbyists. Competition in Japan's telecommunications market is now facing its greatest threat since NTT was privatized in 1985.

Tetsu Machida is an economic journalist who turned freelance after a career as a journalist for the Nihon Keizai Shimbun and editor of Sentaku magazine. He specializes in telecommunications & broadcasting, capital markets and journalism theory. His first non-fiction work after turning freelance is: The Original Sins of NTT: The Giant Monopoly (Kyodai Dokusen NTT no Shukuzai), Shinchosha, published in August 2004.