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(tentative translation)

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

-Further Recommendations on the Restructuring of the Legal System
Governing Info-communications to Propel the IT Revolution-

December 18, 2001

(Japan Federation of Economic Organizations)

Keidanren has been calling for an environment in which a variety of entities can apply their ideas and creativity to compete under fair conditions so that users may enjoy a wide range of low-cost telecommunications services. 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 fact that Japan has lagged behind other countries in the IT revolution is attributable in part to the delay in establishing such a competition policy.

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." Moreover, the regulations relating to dominant operators have just been introduced, so it is necessary to monitor their implementation and make adjustments in response to market trends.

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 reviews the current state of the telecommunications and IT markets and issues affecting these markets and examines the direction of reform. Based on this examination, we propose 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

  1. More than 16 years have passed since the privatization of Nippon Telegraph and Telephone Public Corporation and the introduction of competition. There have been a number of new developments during that time. Numerous operators have entered the market, and there is now increased competition in the long-distance, international, and mobile communications markets. Residential users have benefited from lower prices and an increased range of services. Even in local telecommunications markets, which have been regarded as inaccessible to competition, there have been new developments, including the proliferation of operators that provide services using either their own facilities or the facilities of incumbent operators. These changes reflect growth in the demand for Internet access.

    The increasing utilization of networks has led to the growing sophistication of user needs in both the residential and business markets. It is important to facilitate the provision of services to meet these needs.

  2. Although the telecommunications business is experiencing a transition from monopoly to competition, it remains subject to regulations with regard to market entry, withdrawal, prices, and other factors just like such sectors as power and gas utilities, which are important to national living requirements and industrial activities. However, 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.

  3. 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, and to foster a competitive environment that does not require sector-specific laws. 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 and still enjoy large market shares by virtue of their monopoly status, and the tendency of users to select operators that enjoy the largest market share.

2. Growing Integration of IT Market

  1. Since the privatization of NTT and introduction of competition in 1985, the integration of telecommunications and computers has led to the provision of a variety of value-added telecommunications services. More recently this trend has formed a value-chain, 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.

  2. 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. The factors that make this possible include improved terminal equipment functions, enhanced network infrastructure, the explosive spread of the Internet, and the expansion of transmission based on Internet protocols. 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.

  3. 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

The existing regulatory framework for the telecommunications sector regulates operators on the premise that telecommunications services are public goods in nature. The aim is to protect users through regulations that ensure appropriate and reasonable business operations. However, appropriate and reasonable business operations should really be guaranteed by competition in the market, so the best way to ensure user interests is to encourage competition.

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. This is the first step in the transformation toward a new communications law as a competition promotion law.

2. Creating a Common Regulatory Framework for Transmission Facilities

Despite the vertical and horizontal integration of the IT market, there remain many regulatory systems for individual technologies, such as telecommunications and broadcasting or wired and wireless. This might cause some problems. For example, new businesses cannot be introduced even though the technology is available, and undertakings are forced to compete under different rules in the same market.

To overcome these problems, it is necessary first of all 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. This would allow a more flexible response to the emergence of new technologies.

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.

Also, with the integration of communications 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

As outlined above, the telecommunications market exhibits certain special characteristics. Therefore, to ensure free and effective competition between dominant operators and others, it is necessary to establish the minimal rules required to encourage competition, rather than relying totally on ex-post regulations under the Antimonopoly Law.

Network infrastructure is becoming more open in part because of the application of interconnection rules. However, broadband technology and other changes will lead to continuing expansion in the range of services provided over networks, which means that both content and terminal equipment can be expected to become increasingly network-reliant. This allows the market power that dominant operators enjoy in the telecommunications market to be leveraged into the adjacent or closely related markets, thereby distorting fair competition in those markets and 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

To ensure free and fair competition in the IT sector, it is necessary 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. To prevent any undertaking from leveraging its dominant position in the telecommunications market to distort fair competition in adjacent or closely related markets, fair competition will need to be guaranteed not only by ex-ante competition rules but also by ex-post regulations under the Antimonopoly Law.

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. To remain faithful to its medium- to long-term goal of ensuring free and fair competition, 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

As the market becomes more competitive, some undertakings could be placed at a disadvantage because of the fact that they are obliged to meet the cost of providing essential services at a reasonable price. To ensure fair competition, therefore, it is necessary to share the cost of providing universal services in a competitive-neutral way.

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. This work is crucial to the achievement of general support and understanding not only by operators but also by the public as the users of services.

III. Framework for a New Communications Law

As stated in our March 2000 recommendations, to materialize these reforms, 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. The laws concerned include laws relating to transmission means (Radio Law, Wired Telecommunications Law, etc.), business-related laws (Telecommunications Business Law, Broadcast Law, Cable Television Broadcast Law, etc.), and laws governing specific enterprises (NTT Law).

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.

Since technology, services, and the market environment in the IT sector are changing rapidly, a framework needs to be simple to allow flexible adaptation. Because it is impossible to draft laws that take account of every possible future change, part of the following framework should be reflected in competition rules that are formulated and enforced according to transparent procedures by an independent regulatory body, as described below, with authority granted under the law.

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.

The purpose of the existing Telecommunications Business Law is "to ensure both the sound development of telecommunications and the convenience of people, and to promote the public welfare by ensuring the proper and reasonable operation of telecommunications business as well as promoting fair competition thereof."
The role of a new communications law as a competition promotion law should be clarified by stipulating that the purpose of the law is to maximize the benefits for users and to promote fair competition as a way of achieving this.

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.


  1. Under the present Telecommunications Business Law, telecommunications services are defined as "intermediating communications of others through the use of telecommunications facilities, or any other acts of providing telecommunications facilities for the use of communications of others." However, technological innovation and other factors have led to the common use and integration of transmission facilities, and it is now possible to provide services that are not bound to specific types of facilities. For this reason, the words "regardless of the facilities used" should be added to the definition. In the process of establishing a common institutional framework for transmission facilities, it should be studied based on a national debate on whether the principle that requires an entity which has been granted a license for a broadcasting station to be responsible for compiling of broadcast programs should be maintained or not. The methods used to allocate and use the radio spectrum should also be reviewed. As part of this work, the disclosure of information about the use of the radio spectrum and measures to improve inefficient systems should be introduced.
  2. Under the existing definition, a wide range of services is subject to regulations. Moreover, because of the continuous integration of services, it is possible that the scope of regulation will expand still further under the present definition. To encourage the provision of new services and the emergence of new businesses, we need to create an environment in which operators are free to exercise creativity and innovation. To limit the scope of regulation, therefore, telecommunications services should be defined as the "provision of capacity to transmit."

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.


  1. Under the existing regulatory system, permission is required to operate Type I business. This involves prior administrative checks covering such aspects as the financial prospects for the business and conformity with technical standards. However, it seems unlikely that any problems would arise if these matters were left to the self-responsibility of the operators themselves, who would see them as important management issues and recognize them as essential requirements for the provision of services. In a sector characterized by technological innovation and a rapidly changing market environment, it is not reasonable to expect operators to implement their business activities in accordance with their initial plans.
    However, it is necessary for operators to notify their intention of doing business in accordance with the minimal normative obligations to the independent regulatory body as described below, so that the regulatory authority can promote and monitor free and fair competition in the market. Such information as the name and address of the operator concerned and the description of services provided should also be filed with the above notification.
    The minimal norms to be abided by are 1) the maintenance of secrecy of communications as stipulated in the Constitution, so that users can enjoy the services with confidence, and 2) the provision of interconnections to create an environment in which users can benefit from the ability to connect with anyone, anywhere.
  2. As stated in "1. Purpose of Law," the creation of an environment in which users can enjoy a diverse range of telecommunications services anywhere and at any time will require the ability to exercise the right of way required to adjust neighboring rights in relation to the roll-out of network infrastructure. Therefore, undertakings providing telecommunications services to the public should be able to obtain the right of way.
  3. Withdrawal from business should not be regulated and should be left to the responsibility of operators. In contrast with the time when the business was either a monopoly or services were provided by an extremely limited number of companies, there are now many operators in the sector. Even if one operator suspends or terminates part of its services, it is likely that other operators will offer alternative services. On the contrary, the market is more likely to be distorted by measures that force operators to remain in the market even though their situation demands withdrawal or which force other operators to take over their services.

(2) Rules for Dominant Operators
Framework 3(2)
  1. 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.
  2. 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.
  3. 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.
  4. 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.)


  1. Since the scope of the market in which an operator can be designated as a dominant operator is clearly defined, every operator knows in advance whether or not it incurs additional obligations as a dominant operator. This provides increased predictability for business activities.
  2. Dominant operators can be identified without reference to whether or not they possess essential functions by means of wide-ranging analyses of their ability to influence access to a particular market through such factors as price and the provision of services. For the time being, however, it seems appropriate, in terms of reducing regulatory costs and avoiding arbitrariness in the designation process, to base the definition of a dominant operator on the possession of functions that are essential to the provision of telecommunications services.
    In markets in which no dominant operator is identified, it is obviously important to enforce the Antimonopoly Law against any operator that engages in anticompetitive behavior. If such behavior persists, it is necessary to take appropriate steps by reviewing the definition to allow the designation of a new dominant operator.
  3. For fair competition to work, all operators must have access to essential functions under equal conditions. If a dominant operator is involved both in the provision of essential functions to other operators and in the provision of telecommunications services to users, it is preferable that the ability of other operators to buy unbundled network facilities from the division of the dominant operator under equal conditions with the service-providing division of the dominant operator be guaranteed by not only interconnection rules, etc. but also the functional separation of the divisions concerned. It is also necessary to apply price cap regulations to retail charges in order to encourage the improvement of efficiency by the division that provides telecommunications services.
  4. In order to prevent the problems of the first market in which a dominant operator is identified from spreading to the second market into which a dominant operator expands, it is necessary to establish rules to prevent the dominant operator from leveraging its market power to distort fair competition in the second market. If a functional separation safeguard is applied, it reduces the incentive to do so, and it may be unnecessary to apply additional rules. Without functional separation, however, there is a strong possibility that its market power will be leveraged into the second market, so it seems reasonable to require a dominant operator to establish a totally separate subsidiary as a condition for its expansion into other markets.
    We would like to emphasize once more that, irrespective of what kind of rules are applied to a dominant operator, the strict enforcement of ex-post regulations under the Antimonopoly Law is essential in order to ensure fair competition in markets outside of the scope of a new communications law, such as a content market.

4. Systems for Promoting Competition Policy

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


  1. During the transition from monopoly to competition, it is necessary to implement competition policy forcefully in line with the purpose of the law in order to encourage free and fair competition in the telecommunications market aimed at maximizing the benefits for users. To this end, it is indispensable to continuously monitor the competitive environment in the market, to establish and enforce rules to promote market competition under transparent procedures, and to settle disputes among operators expeditiously.
  2. The independence of the body that performs these functions must be guaranteed. Therefore, it is inappropriate for the body to be attached to a specific ministry or obligated to report to a particular minister. As the key people in the body, the committee chairperson and the commissioners must have guaranteed positions for specific terms of office. Since the tasks of the body, such as the formulation of rules to be applied to dominant operators, require expertise, the body needs to have its own secretariat.
  3. The decision-making procedures of the independent regulatory body must be open and transparent, and final decisions must be made in a timely fashion. The reasons for the adoption or rejection of opinions must be explained to the public. It is also necessary to reform the judicature so that it can function effectively as a channel for the expression of objections to decisions made by the independent regulatory body.

(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.

This is not a matter that should be stipulated in a new communications law. In order to ensure the effective enforcement of competition rules by the independent regulatory body, however, there must be a common and widespread perception that ex-post regulations under the Antimonopoly Law will be stringently enforced if deemed necessary.

5. Periodic Reviews

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

Because of the rapid pace of change in the telecommunications market, it is impossible to enact a law that takes account of all possible future changes in the sector. The content of the new law must necessarily be limited to provide the basic policy directions. In enforcing the new law, therefore, it must be supplemented by competition rules set out by the independent regulatory body. These rules should be periodically reviewed to adapt to changes in the market environment.

6. Other Matters

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.


  1. The abolition of regulations that involve direct intervention in the management of NTT, including approval requirements for the appointment or dismissal of directors, business plans and new share issues, restrictions on foreign capital, and requirements relating to government-owned shares, would not lead to distortion of fair competition in the market. On the contrary, the existing regulations that allow direct government intervention distort the principle of management self-responsibility and are also obstacles to efficient management in such areas as global business expansion and speedy decision-making. The Promotion of research and development should be left to decisions by the corporate management. If a new law includes provisions securing universal service and fair competition, the NTT Law will be redundant.
  2. An analysis should first be carried out, as described in "II. Direction of Reform," to ascertain whether the provision of universal services would require specific operators to bear undue cost burden.

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