Competition Policy in the IT Sector and
the Framework for a New Communications Law

As we emphasized in "Preliminary Recommendations on the Restructuring of the Legal System Governing Info-communications to Propel the IT Revolution," published in March 2000, there is an urgent need for a shift from the Telecommunications Business Law, which can be characterized as a "business regulations law," to a system based on a "competition promotion law" designed to foster free and fair competition.

The recently amended Telecommunications Business Law includes some measures to encourage competition, such as regulations on dominant operators. However, it continues to have features that are incompatible with the promotion of competition, such as regulations based on the distinction between Type I and Type II businesses, and the law is still too restrictive to be called a "competition promotion law."

There is increasing vertical and horizontal integration between the telecommunications market and other related markets, leading to what might be called an "IT market." Therefore, the development of competition policy across the IT sector is required, and it is important to restructure IT-related laws as part of this process.

This paper proposes the basic framework for a "new communications law" (as a competition promotion law) designed not to modify the existing regulatory system but to build from scratch a new system geared toward the promotion of competition.

I. Trends and Issues in the IT Market

1. The Telecommunications Market in Transition from Monopoly to Competition

Although the telecommunications business remains subject to regulations with regard to market entry, withdrawal, prices, and other factors, the diversification and increasing sophistication of individual and corporate needs means that all telecommunications services can no longer be regarded as essential to the lives of the people. The need to regulate all services uniformly is rapidly diminishing.

In industries in which competition is introduced and increased, it is generally important to rely on the Antimonopoly Law, which provides general rules for the achievement of fair competition. However, there appears to be room for sector-specific laws to encourage competition in the telecommunications market because of the potential for persistent anticompetitive behavior reflecting the special characteristics of that market. Those characteristics include the existence of dominant operators that own essential facilities for the provision of services.

2. Growing Integration of IT Market

Recently a value-chain has been formed, what might be called the IT market, in which not only computers but also terminal equipment and content are being integrated with network infrastructure. This process will be further accelerated by the development of broadband network infrastructure.

These trends are affecting both the services offered and the networks used to transmit content. As far as services are concerned, information in various formats, including voice, data, and image, is now being conveyed as a package. In terms of network infrastructure, it is now technically feasible to transmit information irrespective of types of infrastructure, such as telecommunications, broadcasting, or cable television facilities. Already there has been a partial shift toward the common use and integration of transmission facilities.

This convergence of services and common use and integration of transmission facilities must be reflected in a new regulatory framework established by sector-specific legislation as a new communications law.

II. Direction of Reform

1. Increased Liberalization of Telecommunications Businesses

To maximize users' interests, it is first necessary to establish a market that is unrestricted in principle by relaxing or abolishing regulations on, for example, entry to or withdrawal from markets and the setting of prices, which hinder rather than encourage competition, so that operators are free to exercise their ideas and creativity.

2. Creating a Common Regulatory Framework for Transmission Facilities

It is necessary to place transmission facilities, which are increasingly being shared and integrated, under the same regulatory system irrespective of the technology used or the type of information conveyed.

3. Redefining Telecommunications Services

In creating a common regulatory framework for transmission facilities, it is necessary to redefine the meaning of telecommunications services so that it does not depend on the transmission facilities used.

With the integration of telecommunications services, including voice, data, and image services, it is necessary to limit the scope of services that are subject to regulations in order to accelerate the expansion of the IT market through unrestricted business development.

4. Focusing Competition Rules on Market Power

In order to ensure free and effective competition between dominant operators and others, it is necessary to establish the minimal rules required to encourage competition.

When undertakings are allowed the market power that they enjoy in the telecommunications market to be leveraged into adjacent or closely related markets, it will distort fair competition in those markets, thereby reinforcing their dominance in the telecommunications market. This is another reason why it is necessary to formulate competition rules for dominant operators.

Such rules should be reviewed in step with the growth of competition.

5. Strengthening Systems for Promoting Competition Policy

It is indispensable to formulate and enforce competition rules based on a new communications law and to enhance systems for the expeditious settlement of disputes. The stringent enforcement of ex-post regulations under the Antimonopoly Law is also essential to ensure the effectiveness of these rules.

The regulatory body responsible for the formulation and enforcement of competition rules must be endowed with expertise on the telecommunications sector. In order to dedicate itself to the interests of users and to make impartial decisions, it must be independent from all interested parties, including operators, in fulfilling its duties. It must also be free from improper political intervention aimed at adjusting short-term interests. To ensure that these requirements are consistently met, the regulatory body must also be totally separate from any functions relating to industry promotion policies that involve budgetary allocation.

6. Establishing a Framework for Securing Universal Services

The recent revision of the Telecommunications Business Law resulted in the introduction of a funding mechanism to ensure universal services. Before this mechanism goes into effect, it must be verified whether the net cost of providing universal services forces an undertaking to bear a competitively undue burden.

III. Framework for a New Communications Law

It is necessary to integrate the various laws relating to info-communications into a new legal system designed to ensure free and fair competition in order to maximize users' benefits.

With the growing integration of the IT market, it is especially important to ensure free and fair competition in the area of telecommunications services, which provide the transmission capacity needed for the distribution of content. An urgent priority is to establish an institutional framework that emphasizes the promotion of competition in the telecommunications market.

1. Purpose of Law

Framework 1 The purpose of the law shall be to maximize the benefits for users by promoting free and fair competition as a way of ensuring that anyone can enjoy prompt access to a diverse range of telecommunications services at reasonable prices, anywhere, any time.

2. Definition of Telecommunications Services

Framework 2 Telecommunications services shall be defined as the provision of capacity to transmit information of the user's choosing, between or among points specified by the user, without change in the form or content of the information as sent and received, regardless of the facilities used.

3. Rules for Providing Telecommunications Services
(1) Rules for All Providers of Telecommunications Services

Framework 3(1) Undertakings that agree to market entry conditions, including obligations to ensure the secrecy of communications and provide interconnections and penalties to be applied for infringements of these conditions, shall notify their intention to enter the business to the independent regulatory body. Undertakings that provide telecommunications services to the public shall be allowed to exercise the right of way required for the adjustment of neighboring rights in relation to the deployment of network infrastructure.

(2) Rules for Dominant Operators

Framework 3(2) An independent regulatory body shall determine the scope of the market in which ex-post regulations under the Antimonopoly Law are insufficient and the rules on a new communications law are deemed to be effective to promote competition. The independent regulatory body shall designate as a dominant operator any operator that is able to persistently exert a major influence on the conditions for market entry, such as prices and the provision of services, by taking advantage of its position or its possession of functions that are essential for the provision of telecommunications services. In addition to the provisions of Framework 3(1), dominant operators shall be subject to interconnection rules that reflect trends in technological innovation. They shall also be required to provide access to conduits and other facilities in sections that are essential for network interconnection. Measures shall also be required to separate functions (such as the establishment of separate accounts and firewalls separating personnel and business operations) if a dominant operator has both divisions that provide essential functions to other operators and that provide telecommunications services to users. In addition, price cap regulations shall be placed on retail charges. If measures to ensure functional separation as defined in 3) are applied, it is not necessary to create additional safeguards covering a situation in which a dominant operator moves into an adjacent or closely related market as defined in 1) (such as a content business with the potential to generate linkage benefits with the network). (If measures to ensure functional separation are not established as described in 3), then the establishment of a fully separate subsidiary would be a condition for expansion in such cases.)

4. Systems for Promoting Competition Policy
(1) Establishment of Independent Regulatory Body

Framework 4(1) A regulatory body shall be established to achieve the purpose of the law. The body shall be administratively attached to the Prime Minister. The body shall carry out the following tasks according to transparent procedures: Presentation of requirements for market entry and receipt of new entrants' notifications Management of radio spectrum and numbers Formulation of competition rules (including designation of dominant carriers and cancellation of designation) according to open and transparent procedures (based on the petition system, establishment of laws, court rulings, etc.) Enforcement of competition rules Settlement of disputes on the basis of competition rules Implementation of investigations relating to items (d) and (e) and imposition of penalties Publication of annual reports about the implementation of laws and competition rules and periodic reviews of them The chairperson and the commissioners of the body shall perform their duties independently. The chairperson and the commissioners shall be appointed by the Prime Minister with the consent of both Houses of the Diet. The term of office for the chairperson and the commissioners shall be five years. The chairperson and the commissioners shall be free from involuntary dismissal during their terms of office. A secretariat shall be attached to the body. The body shall submit a report on the enforcement of the law to the Diet.

(2) Functional Reinforcement of the Fair Trade Commission

Framework 4(2) The Fair Trade Commission should functionally reinforce itself by positioning itself under the direct jurisdiction of the Prime Minister. Its human resources should also be expanded.

5. Periodic Reviews

Framework 5 The law and competition rules formulated based on the law shall be subject to periodic reviews.

6. Other Matters

Recommendation Regulations that involve direct intervention in the management of NTT should be abolished immediately, as should any obligations relating to research and development. In addition, the NTT Law should be abolished, and any essential provisions, such as those relating to fair competition and universal services, should be integrated and absorbed into a new law.